Starting a business is not a walk in the park for many. It is often not clear what to do and what not to do to start off your business from the ground up. You will need to get an entity structure in place, get the necessary registration and permits, and start off your business entity. Let’s look at that and many other things you need to know when starting a business in details.
Deciding on the kind of entity to form
There is a myriad of entities you can start. The kind of business entity to choose will depend on your financial muscle and interests. The entities are set apart on the liability protection needed, the number of owners, possible investors, business activity, state and local laws, as well as the impact of taxation.
Some of the entity options include sole proprietorship, single member limited liability companies, as well as other complex entities. You can combine efforts with another person in a partnership to start a partnership, S corporation or partnership. Here is more information about the types of companies that exist.
1. Sole proprietorship
When it comes to a sole proprietorship, the owner cannot be separated from the business. Owners of a sole proprietorship business are liable for anything that happens within the business. It does not require many legal conditions to be met to start it. However, if you’re considering that type of business, you want to follow the right procedure, such as registering the business name and make sure the name is not taken. It is the simplest form of a business entity and an owner can file tax returns under a personal tax return.
Two partners can decide to start a partnership business and share responsibility. It is started with a partnership agreement in place similar to an LLC operating agreement. The downside of a partnership type of business is the responsibility for the business’s liability as well as debt incurred by it. To go around the shortcoming, you can also go for a limited partnership. Either way, it is a good idea to get liability insurance when operating this kind of business.
3. Limited liability company
It entails a formal business structure. A limited liability company is separate from the owner. If the company is owned by one member, it is called a disregarded entity and the owner is responsible for paying taxes. The tax cuts, as well as jobs acts, came with great tax benefits for these kinds of entities.
A corporation is a business entity with more strict requirements and regulations. The owners of a corporation are shareholders and they regularly receive dividends. It is subject to a lower corporate tax rate of about 21% and it comes with some tax exemptions.
5. S Corporation
It comes with a special tax status which allows for pass-through taxation. It can sell its stock to raise money while owners have protection against liability. It is limited to up to 100 shareholders.
Picking a business entity
Deciding on the business entity can be an uphill task when starting a business. You will need to choose a business entity that meets your business needs to increase your chances of becoming a millionaire. Self-made millionaires aim for success by making the right decisions and embracing change. If you have embarked on an entrepreneurship path to become a millionaire, you should consider tax implications, how your business will operate, liability protection, as well as whether you need investors when picking a business entity.
The nature of the business you plan to start will majorly determine the business entity that will best suit your needs. Sole proprietorships are often suitable for a small business with a single owner. If your career orientation is around the medicine or law fields, you will want to form an LLC or corporation. In case you have liability concerns, an LLC will suit you.
Procedure for forming a business entity
The regulations of forming a business entity vary with states. These businesses are subject to federal taxes and relevant laws. It will be helpful to get a professional tax advisor to have accurate as well as up-to-date information. The following are the basic steps of forming a business entity.
- Select a name
You will need a unique name for your business. You will want to choose a name that has not been taken to ensure brand growth.
- Choose a legal structure
Consider all the relevant factors to come up with the right legal structure for your business.
- Select a location
Decide on whether you need a physical location and select a strategic location for your business.
- Set up financing as well as taxes
Make sure you separate yourself from the business by keeping separate records. It is time to set up a payroll system.
- Hire employees
When starting a business, hire employees who are competent and qualified enough to handle the tasks assigned to them. You will be provided with an Employer Identification Number by IRS to identify your business and be used in various entity forms.