Dealing with paperwork can be frustrating, particularly when you form a new company. The task is more difficult if you’re trying to decide on a particular business structure. Follow these steps to set up your company, regardless of which business structure you choose.
1. Choose a Fictitious Business Name
The fictitious name of your business is different from your personal name. This name is also called a “doing business as”, or DBA name. You need to choose a fictitious name, and use the name on all government forms and applications, such as your employer tax ID and any licenses that your business requires.
Check with your county or state government to determine how to file your fictitious name. In many cases, a state’s secretary of state’s office handles this task.
2. Register for an Employee Identification Number (EIN)
The IRS issues employee identification number (EIN) numbers. This number is used on federal and state tax filings, including payroll tax reporting documents. You can apply for an EIN through the IRS website. You’ll need to register your fictitious name first so that the name can be used to apply for an EIN number.
3. Create a Business Checking Account
Once you register your fictitious name and get an EIN number, you should set up a business bank account. No business owner should operate a company using a personal checking account even if their tax liability passes through their business structure. There are several reasons why:
- Financial reporting: If you don’t separate your business and personal bank transactions, it’s difficult to track your company activity and generate financial statements. Also, it’s much more likely that you’ll make a mistake and include personal transactions in your business records.
- Legal liability: If your business is sued, it will be more difficult to prove that your business is a separate entity from you personally. If you handle business and personal transactions through the same bank account, you may be putting your personal assets—like your home and retirement savings—at risk if your business is sued.
- Additional capital: At some point, you may need to add new owners to your firm to raise more capital. Keeping your business records separate demonstrates that you take your business seriously. An investor is more likely to purchase ownership in your business if you keep company bank activity in one unique account.
Set up a business bank account and keep your company records separate from personal transactions. Do this right from the start.
4. Get Your Documents and Licenses in Order
You may be required to create a number of other documents, depending on what type of business you form:
- Article of organization, operating agreement: LLCs are required to file these documents, which explain who the LLC members are, and how the LLC will be operated. Partners create a partnership agreement that is used to operate the entity. Both forms are filed with taxing authorities and regulators.
- Choose tax status: Some business structures require the company to choose how the entity will be taxed. An LLC, for example, may be taxed as an S corporation with a pass through tax structure.
- Licenses and permits: Finally, you need to apply for any licenses or permits required by your industry. A homebuilder, for example, needs city permits to renovate a home or build an addition. Attorneys and accountants must be licensed in their state to do business. Check with your city, county, state and federal authorities to determine the licenses and permits you need to operate.
Completing these steps is important, because these issues will have an impact on your business for years into the future.