Starting a business takes work. There’s no way around it. However, knowing what’s needed and being prepared can help you avoid a lot of the stress and hurdles that slow you down.
This guide is meant to remove the guesswork and lay out a clear and simple plan for you to follow to smoothly start and operate a successful business.
Your business model should ideally be rock solid from the beginning. It is the foundation of your company, and you will likely spend countless hours working to bring it to fruition. This is why it’s imperative that you spend time on the frontend assessing your business’s goals and challenges.
It’s recommended that all would-be business owners create a complete business plan prior to starting a business. This is more than a simple thought exercise. A business plan summarizes the business’s mission statement, goals, product or services strategies, marketing strategies, financial projections, regulatory requirements, and exit strategy. It also usually analyzes its market and industry including the likely competitors.
If you want to iron out your business plan, check out our free business plan builder . However, if your business plan is already complete, then you’re ready to move on to the next step: choosing your legal structure.
The next step is to choose the type of business entity that best matches your specific needs. The most common choices include a sole proprietorship, general partnership, LLC, corporation, and nonprofit. To help you choose, here’s a simple breakdown of the differences between each of these structures:
A sole proprietorship is an enterprise owned by a single individual, known as the “sole proprietor.” A sole proprietorship automatically arises anytime a single person conducts business. It does not need to be registered with the government in order to be official. The name of a sole proprietorship is simply the name of the owner. If a sole proprietor wants to do business under a different name, they must file a “Doing Business As (DBA)” with their state government.
There is no legal distinction between a sole proprietorship and the individual who owns it. As such, sole proprietors are personally liable for their business’s debts, losses, and contractual obligations. This means that if a sole proprietor fails to repay a debt or to fulfill a contract, then a court may hold them personally legally responsible. This can result in having to file for bankruptcy or pay a garnishment drawn out of any regular income they receive.
Sole proprietors simply file their taxes on their personal annual tax returns each year in the same way as most individuals. This is known as “pass-through taxation,” because the responsibility for paying taxes passes through from the business to the individual owner. However, since they do not have taxes withheld from their business income, they must pay their taxes quarterly. The quarterly taxes include income taxes and self-employment taxes for medicare and social security. As you will see, this is different from income received by corporations, which is taxed twice: once at the corporate level when the corporation pays its taxes and a second time at the individual level on any personal income received from the corporation. This is known as “double taxation.”
Sole proprietorships are easy to maintain, as the owners have no special requirements to meet other than keeping records of their dealings and paying taxes. Note that certain types of businesses, such as those in the food, hospitality, construction, liquor, or firearm industries, may be required to obtain government permits or licenses in order to be allowed to conduct business.
A general partnership is the same as a sole proprietorship in nearly every way except that it has multiple owners. Like a sole proprietorship, a partnership is automatically formed whenever two or more people carry on the same business together.
Like a sole proprietorship, partners may be held personally liable for the partnership’s debts and other legal obligations. However, if one of the partners does not actually help run the business, that partner is considered a “silent” or “passive” partner and will not be held personally responsible. This situation results in a different business entity, called a “Limited Partnership,” and often occurs when one of the partners is simply an investor and does not participate in managing the partnership’s day-to-day operations.
Like a sole proprietorship, partners file their annual taxes on their personal tax returns and are responsible for paying quarterly taxes to the IRS and their state tax authority.
Like a sole proprietorship, general partnerships are easy to form and maintain compared to other entity types.
LLCs may only be formed by registering with the appropriate state government office. The owners of an LLC are called “members,” and an LLC may be formed with only a single member or with many. The law provides members with great flexibility in how they choose to structure their ownership rights and responsibilities.
As implied by its name, an LLC “limits” its owners from personal liability for the LLC’s debts and legal obligations. For example, if an LLC is sued by creditors and a court holds that it is liable to the creditors, then the LLC itself will be responsible for repayment out of its own assets, not the personal assets of the members. This is one of the huge advantages of forming an LLC compared to a sole proprietorship or partnership.
The IRS allows LLCs to choose whether they want to be taxed like a sole proprietorship with pass-through taxation or like a corporation with double taxation.
While LLCs require some initial effort to be set up and registered with their state, they require much less ongoing work than maintaining a corporation.
Corporations may only be formed by registering with the appropriate state government office. The owners of a corporation are called “shareholders,” and a corporation may be formed with only a single shareholder or with many. Corporations have to follow more ownership rules than LLCs. However, one major advantage of forming a corporation is that they are allowed to sell ownership shares (called “stock”) publicly so long as they follow the federal Securities and Exchange Commission (SEC) rules regarding public stock offerings. This can help corporations raise capital faster than other entity types.
Like an LLC, shareholders are protected from personal liability for the corporation’s debts and legal obligations.
Corporate income receives double taxation. The income is taxed when the corporation pays its quarterly taxes and then again when the shareholders pay their individual income taxes.
Corporations must meet various state requirements in order to continue doing business. These include filing annual reports, creating bylaws, holding regular board meetings, and issuing stock. Compared to other entities, these requirements are usually more time consuming and costly.
Types of Corporations
Everybody weighs the factors differently in terms of what is important to them and their business. Some business owners favor entities that are easy to start and manage, while others prioritize limiting their personal liability or reducing their tax burden.
With that said, many business owners these days find that an LLC offers the best all-around option for their needs. This is because LLCs combine the pass-through taxation associated with sole proprietorships and partnerships with the limited personal liability advantages of corporations. LLCs are flexible enough to adapt to a small business with no employees as well as the needs of a larger company with hundreds of employees and contractors. They are inexpensive to start and maintain compared to corporations and have relatively few ongoing requirements that must be met. Lastly, should you decide down the road that a corporation is more beneficial, you can always change your entity type by filing an application with your state office.
However, if you know that your business will need to attract a lot of initial capital quickly by offering shares to many investors, then a corporation might make sense. Corporations can also make sense for tax reasons depending on the type of business involved or because investors are more comfortable with the structure.
Normally every business entity needs to register with their state office in order to be legally formed. The registration process involves preparing a document to be filed with the state that includes all the necessary information required by the state office. In most states, the document that LLCs are required to file is called articles of organization, while corporations file articles of incorporation. These documents are usually prepared for you by attorneys or services like LegalNature with specialists that can ensure that the documents conform to the state’s requirements. This is because trying to learn and navigate the registration process can be very time consuming and is usually the last thing you want to worry about when trying to focus on starting a business.
The only businesses that sometimes do not need to register with the state are sole proprietorships and partnerships. The default business name for these entities is simply the name of the owner or owners. For example, if a person named Samuel Harrison starts a sole proprietorship, then the name of the business is automatically just “Samuel Harrison.” However, if Samuel wants to name the business something else, then he is required to register the trade name with the state by filing a Doing Business As (DBA) form. The same applies to partnerships.
After your business is legally registered, you need to ensure that you have met a few other requirements. For instance, you may need to apply to the IRS to get an Employer Identification Number (EIN). An EIN is the tax number the IRS uses to identify your business. If you own a corporation, own a partnership, or have employees, then you will need to obtain an EIN. There are a few other instances where an EIN is required, but these are the most common. LegalNature is here to help you obtain an EIN for your business.
Depending on your industry and where you are located, your business may also be required to obtain licenses and permits in order to operate. For instance, these are common for businesses in the food, hospitality, liquor, medical, and firearms industries. When you use LegalNature to register your business, you can also choose to have one of our experienced partners perform a license and permit check for you. This saves you from having to research your local city and state requirements.
Next, you should determine whether you need to purchase business insurance. Most small businesses will at least need to obtain a minimum amount of business insurance though a Business Owner’s Policy (BOP). These normally cover the business in the event that it suffers a loss due to damage to the business’s physical property or losses due to liability claims against the business. They also cover you if you lose out on income due to such property damage or liability.
All businesses need to obtain a business bank account in order to keep the business’s financials separate from its owners. This is important for maintaining the separation that allows owners of LLCs and corporations to limit their personal liability for the business’s debts and legal obligations.
Lastly, complete your foundational legal documents needed to protect and operate your business. For instance, a general partnership needs to create a written partnership agreement to spell out the terms of each partner’s rights and responsibilities. Similarly, members of an LLC need to create an LLC operating agreement and member admission agreement. Shareholders of a corporation need a shareholder agreement and corporate bylaws. Corporations are also required to hold their first board meeting and record the meeting minutes, pass corporate resolutions, and issue stock. These documents are required in many states. Even when they are not strictly required by law, failing to have these foundational documents will expose your business to unnecessary liabilities and owner conflicts that are often devastating for young companies.
Great businesses are built on the shoulders of great people. Consider the types of positions and skills needed to help your business thrive. Business owners are notorious for trying to take on too many responsibilities themselves. This can be a recipe for disaster. Besides managing its day-to-day operations, a business needs people to coordinate on sales, marketing, human resources, and administration. Stretching yourself too thin often means that nothing gets done as well as it should. Try to avoid this by attracting talented people who can support you.
If you do not have enough funds to pay employees at the beginning, keep in mind that many people may be willing to help you for little or no pay if they receive an ownership interest in the company. This is known as “sweat equity,” and it can be a great way to attract initial support.
When you are ready to hire employees and contractors, be sure to get your agreements in writing. Failing to do so is almost always a mistake, and anyone not willing to sign a contract is not worth doing business with.
As you assemble your immediate team members, also begin to identify suppliers, vendors, distributors, and other third parties that you will need to run and grow your business. Making these contacts early can help you avoid running into dead ends down the road. Learn about their needs and what they expect from their business partners.
Now for the fun part. Help yourself do what you do best by setting up efficient operations from the very beginning. The first few years are the most difficult time for any new business but are also the most rewarding. While you might not see profit for a while, know that hustling to create a successful business model is going to pay off in the long run. Eventually, your business can become a well-oiled machine requiring only as much time as you want to invest. But for now, it’s time to roll up your sleeves and think creatively about growing your business.
This can take many forms. For instance, often it’s a good idea to collaborate with other established brands that can help boost your visibility. Get out in front of people as much as possible, using both digital and non-digital marketing strategies. This takes a consistent, sustained effort, not just a weekend at an industry show or a few local ads. Building a brand takes time, so stay positive and know that there WILL be many setbacks along the way. Keeping your company’s mission in mind will help you stay motivated.
Here at LegalNature we understand that starting a business from scratch can be a daunting proposition for anyone. Thankfully, you do not have to navigate it alone. LegalNature is a comprehensive, one-stop shop for every stage of starting and running a business. We are here to save you from having to learn all the nitty gritty requirements that often overwhelm entrepreneurs so that they can spend their time more effectively focusing on actually running their business. Here’s a list of our services and products that will save you an immense amount of time, energy, and money:
Just complete a short questionnaire about the type of business you want to start and we will handle the rest.
We provide you with a secure and personalized dashboard that helps you review and manage your company at a glance and to create, edit, and store your legal documents at any time and from any device.
Gain access to our entire library of legal documents. This can save you from having to hire an attorney every time you need a contract.
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