Whether you’re starting a new business or running an established organization, the definition of “a business” in the US is surprisingly simple: one or more people engaged in some activity to earn a profit.
That’s it. If you engage in any activity with the goal to earn a profit, you have a business.
Of course, that simple definition raises a number of questions.
Do you have to register a business if you’re self-employed? What does registering a business mean? Do you have to pick a business structure—like an LLC or a corporation? What about state and federal laws? And, how should you manage taxes and liabilities?
Suddenly, what was simple becomes complex. To conquer that complexity…
Here are five steps to register as a self-employed business owner:
- Determine if you need to register as self-employed
- Identify the naming, licensing, and permitting requirements
- Choose a business entity structure and register the necessary forms
- File tax documentation at the local, state, and federal level to get an EIN
- Know the tax benefits of being a registered self-employed business owner
Let’s begin with the big picture.
1. Do you have to register a business if you are self-employed?
Short answer: No… with a “but.”
If you are self-employed, meaning you run an unincorporated business by yourself, you do not generally need to register your business.
In that situation, the IRS considers your business is considered an extension of you. In other words, you are personally responsible for your business’ taxes, liabilities, and everything else.
Now, for the but.
Unofficially, self-employed means different things to different people: freelancer, contractor, business owner, entrepreneur, the list goes on.
But officially—from a governmental, legal, and tax perspective—it all depends on the steps the business owner takes to organize the business.
Play it safe by following the IRS definition. Call yourself what you want when chatting with friends and family. When paying your taxes, classify yourself correctly.
The IRS considers you self-employed if any of the following apply:
- You carry on a trade or business as a sole proprietor or an independent contractor.
- You are a member of a partnership that carries on a trade or business.
- You are otherwise in business for yourself (including a part-time business)
If you don’t find the IRS guidance particularly precise nor even helpful, you aren’t alone.
While loaded with muddy legal terms, it does help clarify one point. Self-employment is a broad category for tax purposes, and it includes freelancers, many independent contractors, sole proprietors, and others.
Let’s get a little more specific to help you figure out if you are self-employed.
Other than taxes, have you ever filed any paperwork with your state or federal government related to the basic operation of your business?
If you answered no, you are most likely self-employed.
If you are self-employed and you don’t have to register your business, you may ask, “Should I register my business? And, if so, how do I determine the name, licenses, and path that’s right for me?”
The answer depends on what you mean by register. Let’s tackle that next.
2. Choosing and registering a business name: Hint, it’s about licenses
Similar to self-employed, registering a business means different things to different people.
If you talk to a marketing guru, registering a business might mean trademarking your business name and killer logo. If you talk to a CFO, registering might mean filing your articles of incorporation to make sure ownership stakes are all legally taken care of.
Before jumping into intellectual property and shareholder rights, consider the narrow set of circumstances when a certain type of registration might be required to operate your business, even if you are self-employed.
Professional license requirements
Does the nature of your business require a certain license or education? If so, you will likely need to register your business, even if you are self-employed.
Businesses that require licenses or educational requirements are often referred to as professional businesses. Professional businesses cover a wide range of industries from medical offices and law firms to home inspectors and non-profits.
If you run a professional business, you need a license or permit from the federal, state, and/or local government.
If you have any suspicion that your business might require a license, do some research. Google: “[your industry] + [licenses and permits].”
In addition, the SBA provides a good list of industries that generally require licenses or permits:
- Alcoholic beverages
- Firearms, ammunition, and explosives
- Fish and wildlife
- Commercial fisheries
- Maritime transportation
- Mining and drilling
- Nuclear energy
- Radio and television broadcasting
- Transportation and logistics
This list is a good start, but even the SBA hasn’t covered everything. Here are some others that require licenses or permits:
- Legal services
- Medical and dental services
- Pest control
- Real estate
- Financial services
You may be required to pay one time or recurring fees to keep your license or permit, depending on your industry. If your Google search and the SBA site doesn’t uncover whether you need a license or permit, look to others in your industry. Many professional business industries meet as industry groups to discuss licenses, permits, and other government requirements.
Professional licenses and permits are pretty straight forward. The trickier exception to no need to register your business rule is the location exception.
Business licenses by location
Have you ever been asked, “Is your business licensed to do business in [insert location]?”
Unfortunately, this is another loaded question. This could be similar to the business registration question. Or, it could be asking about a professional business license or permit.
But often, this vague question really means are you authorized to conduct business in this particular location.
Local and state governments often require location-specific licenses and permits to operate a business. To complicate matters further, the same governments often require additional licenses and permits to operate a certain kind of business in a certain location.
Governments impose such regulations for a few reasons. The primary reason is tax-related. The state where you operate a business wants its share of your income. So, every state with a sales tax will require your business to register with the revenue agency, or taxing authority, of that state to ensure you are collecting and paying sales tax.
For the few states that don’t collect sales tax, your business may need to register for other tax purposes (e.g., property taxes).
Taxes are just the beginning of local and state licenses and permits. Local governments want to ensure the safety and feel of their region.
For example, local regulations may permit you to operate a mortuary outside the city limits, but not within the city limits or next to a residential area. To protect this interest, the government will require a permit if you want to run a funeral home in this area.
Local ordinances can be tricky. Dealing with local regulators can be even trickier. Start asking land developers about their rezoning experiences, and you will hear some red tape horror stories.
Two government resources that can help you better understand local government licenses and permits include:
These tools let you select your target state and location, and filter down by industry. Spend some time with these tools, and you will uncover basic business license requirements in your area.
While online tools are helpful, the best way to understand local business regulations is to ask local business owners. They have been through it before. Ask them what worked, what didn’t and what to keep an eye out for.
Other business registrations
Beyond professional licenses, tax registrations, and location-based licenses and permits, other registrations exist.
These touch on business organization, employees, insurance, and other operations. Examples include:
- Articles of incorporation
- Articles of organization
- Equal Employment Opportunity Commission
- Copyright or trademark
These type registrations depend on your business type and business size. If you are self-employed, you may hire employees, but at certain levels of revenue and/or employees, you may cross a threshold that requires you to pay into government-backed programs.
The best place to identify these type registrations is with your state-level Department of Commerce or Secretary of State.
3. Business structure types and what you need as an owner
If you are self-employed, meaning your run an unincorporated business by yourself, you are a sole proprietor by default. You have not filed any organizational documents with your state government, and you have no business partners.
If you run your unincorporated business with one or more additional co-owners, you operate your business as a partnership by default.
Both sole proprietorships and partnerships are useful business models.
They take no paperwork to get started, and they act as an extension of yourself. You can mix your personal and business funds. You file your business tax returns as part of your personal tax returns. You and your business are one in the same from a liability perspective.
Sole proprietorships and partnerships are great for simplicity, but that simplicity comes with personal risk. Since your business is an extension of yourself, you are personally responsible for your business liabilities. That means your personal assets are potentially at risk if something goes wrong.
For example, if you default on a business loan, the bank can foreclose on your home, car, investments, and anything else you personally own. From a tax perspective, your business income is taxed as ordinary income to you. For partnerships, your taxable business income is relative to your ownership interest.
If the risks of sole proprietorship and partnership are too high for your comfort, you have options. The two classic business models that help separate business liability from your personal liability include the corporation and the limited liability company (LLC).
A corporation is (1) owned by shareholders, (2) controlled by a board of directors who appoint officers to manage the day-to-day business, and (3) governed by the corporate law of the state where the business is incorporated.
Of all business entities, corporations have the most legal requirements. Exact requirements depend on the state where you incorporate but generally include…
Typically titled the articles of incorporation or certificate of organization, these are standard state forms that you must complete and file with basic information like the corporation’s name, a registered agent, business purpose, total number of stock shares and associated value, business address, and other basic information.
The organizational documents also require a filing fee and are the most expensive of all the business entities available.
Report state-specific corporate tax returns and IRS Form 1120 for federal tax returns.
The corporation laws of most states require that your company adopt corporate bylaws within a certain amount of time after you create your corporation. Bylaws include procedural information that governs your business: voting procedures, types of officers, board resolution procedures, record keeping, and other basic information.
This may be an initial meeting of shareholders but more likely an initial meeting of the board of directors. If it is a shareholder meeting, the shareholders elect a board of directors. If they have already been elected, the directors meet to adopt bylaws, board resolutions, appoint officers, and set all the groundwork for your business moving forward.
The above list only includes requirements for corporations to get off the ground. Once your corporation is launched, corporation law requires ongoing obligations including:
- Annual reporting requirements
- Board of directors quarterly meetings
- Annual shareholder meetings
- Company minutes
Corporations are the most formal business entity available. There are a lot of hoops to jump through to get a corporation compliantly started. But, once you have some basic infrastructure in place, most of the ongoing requirements become part of your business schedule and culture. These requirements exist to protect shareholder interests and employee interests.
Along with shareholder and employee protection, the corporate form completely separates business liability and personal liability.
If you take out a business loan under a corporate form, and your business defaults, the bank can only foreclose on business-owned assets. Your personal assets are shielded from the bank by law. The separation between the business and the owner is called the corporate veil.
If corporate requirements seem too burdensome for your business, the limited liability company (LLC) might be a good alternative. An LLC provides all the protective benefits of a corporation, with fewer administrative requirements.
Similar to a corporation, LLC requirements vary by state. But generally, you need two documents to register your LLC:
- State filing: Depending on your state, this is probably called articles of organization or certificate of formation
- Operating documents: Similar to corporate bylaws, the LLC governing document is typically called an operating agreement or an LLC Agreement
Along with simplicity, another benefit to the LLC is its flexibility.
If you want to add more requirements to your LLC for built-in checks and balances (e.g. board resolutions, shareholder agreements, bylaws, shareholder meetings, board meetings), you can. But, it isn’t required.
An LLC is simple and accessible by default, but it can grow in complexity as your business scales over time.
Ongoing LLC requirements are also minimal. You need to pay your taxes, and that’s about it. By default, LLCs adopt the partnership method of taxation. Unless you expressly elect a corporate tax structure, you add business income to your personal tax return in proportion to your ownership of the LLC.
If you don’t want to pay taxes in this manner, you can elect a corporate tax structure by filing IRS Form 8832. If you want to dive deeper into corporate tax strategy, you can elect S-corp tax structure by filing a Form 2553.
Annual reports are typically not required for LLCs (unless you have elected a corporate tax structure), neither are quarterly or annual meetings.
LLCs separate your personal risk and your business risk, without all the fuss required by a corporate structure. At the same time, if your business grows in needs and complexity, the LLC permits you to evolve in its business formalities as you see fit.
Corporations and LLCs are the two most common business structures that serve as alternatives to the sole proprietorship and partnership models, but plenty more exist. Examples include:
- Limited liability partnership
- Limited partnership
- Professional association
- Professional corporation
- Nonprofit corporation
Each business structure type has its unique elements and requirements. Such requirements are determined by state law, except for B-corporation, which is a non-governmental certification. Check out your state’s options to learn more.
4. What is an EIN and how do I get one?
An EIN (sometimes referred to as a FEIN) is a Federal Employer Identification Number.
The IRS uses your EIN for tax administration purposes. It is a number unique to your business, and if you don’t register one, your personal social security number will be used for tax administration.
There are a host of reasons why you don’t want to do business with your social security number instead of an EIN, but an obvious one is W-9 representation.
If your business is paid by a third party for goods or services, they may ask you to provide them a W-9, which allows that third party to show that you are an independent contractor of their business and not an employee.
The W-9 requires a tax identification number. Do you want to give those third parties your social security number? Probably not.
How do you get an EIN for your business?
Start by visiting the IRS’ EIN application site, then click on the “Apply Online Now” button and “Begin Application”:
- Select your entity type (sole proprietor, partnership, corporation, LLC, estate, trust, additional) and hit the Continue button
- Depending on your selection, you may be asked for more specific details—corporation will give options for C corporation, S corporation, personal service corporation, REIT, RIC, and settlement fund
- Select your reason for requesting an EIN—new business, new employee(s), banking purposes, changed type of organization, or purchased an active
- Enter the responsible party information, this includes the first name and last name, and his or her social security number and select the responsible party’s role (corporate officer, or third-party applying on behalf of the business)
- Complete the business information and submit the application
Once you have completed this process, you will be given the option to save and print a temporary record of the EIN. This isn’t the official record, but you can use it to open bank accounts and begin transacting business with this EIN.
An official EIN record will be mailed to the address you provided on your application.
Applying for your EIN is free, and it is a quick process so long as you have all the information listed above on hand.
5. Tax basics for registered self-employed business owners
You’ve registered your business, you have an EIN. How should you structure your business from a tax perspective?
First, you need to pick a tax structure for your business. There are two basic models for business taxation:
- Pass-through taxation
- Double taxation
In a pass-through taxation model, your business does not pay taxes on its income.
Instead, the income is passed through to the business owners who pay taxes on that income as part of their personal tax returns. The term pass-through is used in sole proprietorships, partnerships, and LLCs that elect a partnership taxation model.
The pass-through model is the only tax method available for partnerships and sole proprietorships. If you are a sole proprietor, you report your business income on Schedule C of your personal 1040 (individual tax return).
If you are in a partnership, your partnership must file Form 1065 with the IRS to report its business income. Your individual partners all receive Form K-1 from your business to report their portion of the business income on their personal tax returns.
LLCs have the option to choose corporate taxation or partnership taxation.
If your LLC chooses partnership taxation, your business must file the same forms with the IRS that a partnership files. Additionally, the individual LLC members will receive form K-1s and file them with their personal tax returns.
Corporations are taxed under a double-taxation method.
The corporation pays taxes on the business income, and the shareholders and employees pay taxes on the personal income paid out by the corporation. Taxes are paid at two levels.
Corporations report their business income on Form 1120. Employees report their W-2 wages or income received from the corporation on their personal tax returns (Form 1040).
Shareholders report any dividends paid to them by the corporation on line 3b of the shareholders’ personal tax returns. To inform the shareholders of the dividends they received, the corporation must issue the shareholders a form 1099-DIV.
Plenty of reasons might compel you to choose a partnership tax model over a corporate tax model, but an attractive benefit for many business owners is the ability to write off certain business expenses. You do not have the ability to do this in a corporate, double taxation model.
If you want to write off your business expenses, run your business as a sole proprietorship, partnership, or LLC with partnership taxation model, and keep reading for additional small business tax tips.
Small business tax tips
As a small business owner, you’ve no doubt heard of wonderful opportunities for tax deductions. It is true, but you need to be careful to follow certain rules so you don’t inadvertently break tax laws.
First, what is a tax deduction? A tax deduction is an amount that the IRS allows you to subtract from your taxable income, which then lowers the amount of taxes you pay.
What kinds of expenses are eligible for tax deductions?
In short, a lot. But, each comes with its own set of rules and caveats. Take a look at some of the general business expense areas that might be eligible for a tax deduction:
- Travel expenses
- Home office expenses
- Meals on business travel
- Professional education
- Business equipment
- Gas and mileage for business trips
- Business legal costs
These are just the start. For a more in-depth look at business tax deductions, take a look at our ultimate guide to tax deductions for the self-employed.
How to register as a self-employed business owner isn’t an easily answered question
Before answering it, you must identify what you mean by register. There may be one particular registration you need to identify or there may be many. It may take time to find the registrations applicable to your business.
Search the web and ask others in your industry about registrations specific to your business.
Most importantly, get started early.
The sooner you get started with registrations applicable to your business, the better off you will be. You will uncover the information you need to gather and be prepared if an issue comes up.
Business registration can be complicated. But, it’s manageable and necessary to successfully run a compliant business.