Starting a new business is exciting as you pursue your passions and establish a company that supports your dreams. However, it can be overwhelming to navigate the legal and administrative tasks necessary to ensure proper formation and protection. We have created a simple checklist to walk you through the basic steps of making your business official. While this is not a substitute for legal or tax advice, we hope this mini-guide will help you understand what needs to happen and provide some education so you can best discuss with your professional advisors.
Choosing The Right Business Structure
The business structure you choose affects everything from day-to-day operations to taxes and the level of risk to your personal assets. You should choose a business structure that provides the right balance of legal protections and benefits. Deciding on the right business structure is an important step that you should discuss with your attorney and accountant. Let’s look at the most common business structures:
Limited Liability Companies
An LLC combines the advantages of both the corporation and partnership structures. It generally offers personal liability protection, safeguarding your personal assets. LLCs can be a good choice for medium- or higher-risk businesses, owners with significant personal assets they want protected, and owners who want to pay a lower tax rate than they would with a corporation.
Corporations (C Corps and S Corps)
“C” corporations are those taxed by the Internal Revenue Service as regular corporations and pay income tax based on corporate tax rates. “C” corporations may issue shares of stock. An “S” corporation is a “C” corporation in structure and is registered with the state as a corporation, but elects to be taxed as a small business with the IRS. Sole proprietorships can be a good choice for low-risk businesses and owners who want to test their business idea before forming a more formal business.
Sole Proprietorships
A sole proprietorship doesn’t create a separate legal entity for the business. This means your personal assets and liabilities are combined with those of your business. As a result, you may be personally responsible for the business’s debts and obligations. Sole proprietorships are often suitable for low-risk ventures or for owners looking to test their business idea before establishing a more formal structure.
General Partnership
A general partnership is created when two or more persons associate to carry on a business for profit. A partnership generally operates under a partnership agreement, but there is no requirement that the agreement be in writing, nor is there a state-filing requirement.
Checking Business Name Availability in Your State
Confirming that your business name is available is one of the first steps in making your company official. You’ll want a name that is available in your state and, ideally, available as a domain for your online presence. The state will run a name availability search to check for conflicts with existing entities and to ensure your proposed name meets its uniqueness rules. Keep in mind that name availability only reflects that the name is open on that specific date and time and does not reserve it for future use. Also note that certain words and phrases may require additional approval from other state agencies, such as education or banking regulators.
When selecting a business name, it’s important to consider its impact on sales and marketing, particularly your domain name. This is often overlooked by many entrepreneurs. For instance, if you want to name your business Pizza by Fred LLC, you should verify whether the domain pizzabyfred.com is available, or vice versa. Typically, domain names are much harder to secure and may require variations in the corporate name you choose to more closely match the domain name. These two searches should happen simultaneously.
Preparing and Filing Your Articles of Incorporation or Organization
The articles of incorporation for corporations or the articles of organization for LLCs are the documents that legally create your entity when filed with the state. Once the filing is approved, your business is recognized by the state, and certain details become part of the public record. Be sure to follow your state’s specific requirements and engage with a professional filing company if you need assistance. Keep a copy of the filed documents with your permanent business records for safekeeping.
Drafting Your LLC Operating Agreement
The operating agreement is an internal document detailing how the LLC is owned, managed, and run on a daily basis. It simply outlines:
- Who the members are
- How profit and loss are designated and shared
- How significant decisions will be made, such as adding a new member, dissolving the entity, and approving major expenditures
If your state does not require a formal operating agreement, having one can help avoid misunderstandings or conflicts.
Choosing a Registered Agent for Your Business
A registered agent is an individual or entity designated by a corporation, nonprofit, or LLC to receive service of process, tax notices or information, and other necessary correspondence. The registered agent must maintain a physical address in the state where your entity was formed and be available to receive process or correspondence during business hours. Selecting a reliable and experienced registered agent ensures your good standing and helps prevent missed notices or deadlines.
Obtaining an EIN
An Employer Identification Number (EIN), sometimes called a Federal Tax Identification Number, is the unique number the IRS uses to identify your business for tax purposes. It functions like a Social Security Number for your company and is required for bank accounts, payroll, and business licenses. You can apply for an Employer Identification Number if you are a U.S. citizen with a Social Security Number or a foreign citizen with proper identification.
The importance of a Corporate Kit
A corporate kit is a physical or digital binder that keeps all of your entity’s key records in one place. It typically includes a labeled binder or folder with your business name, along with sections for formation documents, ownership records, meeting minutes, and resolutions. Having a central repository is especially important for corporations and LLCs as they grow and begin working with banks, lenders, and other legal or financial partners. When your records are organized and up to date, it’s much easier to respond to audits, lawsuits, banking questions, disputes, or unexpected events such as the death or disability of an owner. Building an annual habit of reviewing and updating your corporate kit, often around tax time, helps keep the business running smoothly and can make a real difference in how well you withstand a crisis.
Starting a New Business? You Don’t Need to Be Overwhelmed
Taking your first step to start a business doesn’t mean you have to navigate the legal and administrative details on your own. With the right guidance, these tasks become clear, manageable steps instead of stressful hurdles. While we cannot provide legal or financial advice, we can draw on our decades of experience to work with you on this checklist, discuss your specific situation, and tailor the services you need to form your new business. Contact us to schedule a one-on-one call to get started.
This article and website are for informational purposes only. Please get in touch with an attorney or accountant for legal and financial advice.
Resources: SBA.gov, Texas Secretary of State