Starting a business requires more than just the motivation and funds to make it successful. Business owners must register their companies in order to operate legally, even if it’s a sole proprietorship. In this guide, you’ll learn about the steps you can take to ensure that your business is properly registered for success. From acquiring business licenses and registering for tax obligations, this guide covers everything from the initial planning stages all the way to the ongoing accounting and bookkeeping duties that must be completed in order to maintain a legally compliant business.
This the most essential steps you can take to create a strong base for your business. Let's get started.
Reasons for Registering a Business
Business registration is essential for establishing your business’s legal status and is just one of several steps towards success. Proper registration allows business owners to acquire tax identification numbers, secure business licenses, open a bank account and much more. Throughout the process, business owners take advantage of the legal protection that corporate entities provide, allowing them to limit personal liability while sharpening their competitive edge. Furthermore, a business’s legal registration confers respectability by effectively demonstrating that the owner has met all of the necessary regulations and paperwork.
Choosing a Business Entity Type
When registering a business, the first decision to make is selecting your business entity type. Choosing a suitable form of business entity can prove to be a tricky decision, as the entity type you select will impact several areas of your business operation over the long term. The entity type you choose will also determine what corporate filings you must submit to the government and the type of legal protection your business will receive. Popular business entity types include sole proprietorships, partnerships, limited liability companies (LLCs), C corporations, and S corporations.
Limited Liability Company (LLC)
A limited liability company is an entity type that shields the owner’s personal assets from debts and legal proceedings that the business may face. LLCs are quite popular among small business owners, as they are relatively inexpensive to form and have less stringent reporting requirements compared to other business entity types. Unlike partnerships and sole proprietorships, LLCs have a distinct legal status, meaning they are distinct legal entities, separate from the person or persons who own them. Furthermore, LLCs have registered agents to help owners with their filings.
Fundamental Differences Between Business Entities
All business entity types have distinct characteristics that must be considered prior to choosing the ideal structure for your business. Depending on the business entity type you choose, your business may be taxed differently and be subject to various filing requirements. Additionally, the legal liability protection that each entity type offers varies significantly.
- Sole proprietorship are the simplest business entity type and do not require filing with the state. Sole proprietors have complete control over the business and all decisions.
- Partnerships give co-owners equal control and tax implications, as well as shared liability. However, they require filing and custody of business records.
- An LLC shields owners from personal liability and affords owners great tax and management flexibility. LLCs must appoint an registered agent and comply with all the regulations in the state where the company is incorporated.
- S corporations are corporations that adhere to a special designation that allows for limited liability for the owners and can be elected for certain tax advantages.
- C corporations pay income tax on their profits and shareholders pay taxes on dividends from the profits. C corporations are generally larger and more complex.
Registering for an Employer Identification Number (EIN)
After selecting your business entity type, the next step is registering for an Employer Identification Number (EIN). This 9-digit number is assigned by the Internal Revenue Service (IRS) to identify businesses for tax filing and reporting; individuals may also need an EIN if they are in business as a sole proprietor. EINs are also used to open business bank accounts and apply for business licenses.
Definition of an EIN
An Employer Identification Number (EIN) is a unique number assigned to companies by the Internal Revenue Service (IRS). The EIN is used by the government to identify a business for tax purposes and to track their taxes owed. EINs are also used by businesses to open bank accounts and apply for business licenses.
Steps to Register for an EIN
The process for obtaining an EIN is simple and straightforward; here are the steps:
- Go to IRS.gov and click the “Apply for an Employer Identification Number” link.
- Select the type of business entity (corporation, LLC, partnership, etc.) and enter the corresponding information.
- Provide details such as the principal business activity, business address and contact information.
- Answer yes or no to the set of questions that follow.
- Check the box to verify the information you’ve provided.
- Choose to receive your EIN either via mail or email.
- Once your application is approved, you and all associated business partners should receive an EIN from the IRS and can use it to open bank accounts, register for business licenses and more.
Business Licenses and Tax Registrations
Businesses must register to receive specific permits and licenses in order to operate legally, depending on the form of business entity. This is true for LLCs, corporations and sole proprietorships. The process for obtaining the necessary business licenses can vary from state to state, and can become complex when a business has operations in multiple states. Furthermore, business owners must register with the IRS and other government agencies to pay applicable taxes.
Federal and State Tax Registrations
Before a business can begin to generate revenue, they must register with the IRS. This requires an Employer Identification Number (EIN). You may also need to register with your state or local government, depending on the nature of your business. Additionally, determine what taxes your business may be subject to, such as sales tax, unemployment insurance tax, employee withholding, etc. As the number of taxes vary from state to state, it is crucial to familiarize yourself with the regulations so that you can comply with the applicable laws.
Local Business Licenses and Permits
Depending on the nature of your business, you may need to register for certain local permits. Some businesses, such as restaurants and retail stores, require specific licenses before they can legally open their doors. Before commencing operations, businesses need to look into whether they need a business license or permit in their state and local area.
Advantages of Proper Business Registration
When a business is registered correctly, they have access to numerous advantages compared to companies that are not properly registered. Adhering to the regulations surrounding business registration demonstrates a business’s credible nature, allowing them to stand out from competitors. Business owners should take advantage of the benefits of proper business registration.
Access to Resources
When a business is properly registered, they can access certain resources that might be inaccessible if the company were not properly registered. For example, many banks require a company to be properly registered before they will open an account. Furthermore, registered businesses can access to resources such as investments, grant programs, and a variety of other services.
Improved Reputation and Credibility
A properly registered business is more likely to be taken seriously by banks, customers and suppliers. Furthermore, having a registered business can establish a business’s credibility. Potential customers and clients will see a legally compliant company as a professional, trustworthy organization that is equipped to handle their services or products.
Personal Liability Protection
Business owners who operate as sole proprietors are personally liable for any debts, obligations or legal actions taken against the company. This is why registering your business as an LLC, corporation or partnership is essential. Doing so will protect the business owners from any debts taken against the business, as well as any legal actions that the business may face.
Formalizing your business by properly registering for all business licenses, permits and federal, state and local taxes is an essential part of owning a business. The steps outlined in this guide can help business owners understand the process and ensure that they are properly registered and compliant with all the necessary laws and regulations. Proper business registration is a key step towards business success.