|In order to legally operate a
business you will need to be a recognized entity in your state, have a federal tax ID, a
local tax ID, and a business license.
You will need to start with your legal business status. While you can run your
business as a sole proprietor or a partnership, there are benefits to incorporating that
makes it worth a bit of extra effort. Regardless of how you plan to run your
business, you will need to file with the state corporation commission using the
appropriate paperwork for the type of business you plan to have (including a sole
Why should I incorporate?
will give you the benefit of having your business as a separate entity from you
personally. This gives you a higher level of legal protection than some other forms
of business where your personal assets can be liable for any business liability. It
also allows more room for growth if you later want to raise money and have shareholders.
Although sole proprietorships and partnerships have a more favorable tax
treatment than corporations, filing for an "S" corp tax status will give you a
status which is almost as favorable since your corporate earnings are only taxed once you
receive them as a shareholder (and will therefore be taxed according to your tax bracket).
Additionally, it allows you to deduct all your "S" corp. losses
against your personal income, which can be very useful in the first few years of business.
What should I do first?
Regardless which form of company you want to have, you will
need to get in touch with your "State Corporation Commission" to get the
required paper work and to file it with their office. Go to http://www.statelocalgov.net/index.cfm
find your state, click on it and look for a link to your State Corporation Commission.
Go to their website, then call or e-mail them and request the proper forms.
You can, of course, get someone to help you incorporate but why pay someone when it is
such an easy thing to do?
How many shares should I authorize?
If you do not expect many future shareholders, and it is
going to be a small family business then authorize the lowest amount of shares. It
will be the cheapest way to file and the cheapest to renew. If you anticipate
reasonably fast growth, then go with a decent amount of shares to accommodate future
shareholders. Don't authorize a huge number of shares, since this can be costly,
unless you are sure of the kind of growth you will experience. You can always
authorize more in the future (although it costs some money) instead of paying year in and
year out for shares you will never need.
Where should I incorporate?
Most states have adopted the Uniform Commercial Code (UCC)
and for the most part have adopted reasonably similar corporate laws. In many cases
incorporating in the famous Delaware is not significantly better for your business, and
may be a bit of additional work since you will need to file at your locale as a foreign
(Delaware) company operating in your state. You will also have to file every year
with Delaware, as well as with your state to keep up your good standing.
What information will I need to file?
Aside from the name of the company and the amount of shares
you wish to authorize, you will need the business address, your name, and the names of
anyone who will be a co-owner of the business. You (all of you if more than one)
will be both the initial director(s) and Incorporator(s).
How long will it take and what's the next step?
Once you have mailed in your forms, you should have your
legal documents in about 3 weeks. The next step is to get an Employer Identification
Number (EIN) from the IRS. Check this page, http://www.irs.gov/smallbiz/newbusiness/einnext.htm
or this page if you are taking the corporate route, http://www.irs.gov/smallbiz/newbusiness/changing.htm.
There you will find both form SS-4 (for the EIN) and form 2553 used when filing for
"S" corp. tax status. Fill out and submit.
Now you will need to go back to http://www.statelocalgov.net/index.cfm
and find the link to your state's taxation and revenue department. Find out what the
requirements are for registering a business in your state, one of these will include
getting a state tax ID. You must have a federal EIN in order to get a state tax ID
so make sure you have one before applying. Also, don't forget to find out what local
city/county you should get a business license from.
All this should not take more than a total of 8 hours of work and possibly
half a day of legwork. So go ahead and get started.