Chances are good that if you own a business — any kind of business — you need to register it in some way in order to comply with local, state, and federal laws.
Here’s what you need to know about business registration.
What is business registration?
When you register your business under certain designations — LLC or C Corporation — it becomes a entity separate from you. As such, the business can enter into contracts, purchase assets, file lawsuits, and become the target of litigation. Its assets are considered distinct from yours, which shields you from personal liability — in most cases.
What are the types of registration?
Sole Proprietorship — This is the most common type of business designation and does not require formal registration. You simply use your own name to conduct business and your Social Security Number as your tax ID number and file a Schedule C with your annual 1040 form claiming all business revenue and related deductions. Because you and the business are the same entity, your personal assets are at risk should someone sue your business.
Partnership — A partnership is a business with two or more owners. The most basic type of partnership is a general partnership, in which owners divide all profits and liabilities equally. General partnerships are much like sole proprietorships in that the owners can be held personally liable if someone sues the business. Any partnership should have a partnership agreement, although usually this isn’t legally required.
Limited Liability Company — An LLC combines the simplistic tax laws of a partnership with the limited liability protection of a corporation. An LLC can have one or more owners (referred to as “members”). As a member of an LLC, you file taxes just if you were a sole proprietorship or partnership: All of your income and deductions “pass through” to your personal tax return. However, the LLC is a separate entity, which shields your personal assets in most cases.
C Corporation — A C Corporation is typically only appropriate for medium to large ventures because of its complexity. A C Corporation’s income is reported on a separate tax return. Shareholders hold stock in the company, and formal company proceedings (such as electing a board of directors and assigning board duties) are required. C Corporations have tax advantages that other entities do not, but they are more expensive to set up and more complicated to run.
S Corporation — An S Corporation isn’t an actual business entity; it’s a tax treatment assigned by the IRS, says Roberto Neuberger, CEO of ActiveFilings. An S Corporation is taxed like a partnership or sole proprietorship. In other words, income passes through to the shareholders’ personal tax returns. S Corporations are more expensive to set up than LLCs or partnerships, and they come with all of the formalities and professional appearance of a C Corporation. Some states require additional filings for an S Corporation, but most accept the IRS’s classification.
DBA — “Doing Business As” simply allows sole proprietors to operate under a name other than their own. For example, if John Smith started a plumbing business, he could file to do business as Smith Plumbing. The DBA designation, like any sole proprietorship, does not offer the liability protection of other business designations, but is still valuable for purposes of marketing and credibility.
How do I register my business?
Business registration happens at the state level, but
city and county filings are often required, too. You can check the requirements for your state on the Small Business Administration’s website. To find city or county requirements, call your city or county government office or visit businesslicenses.com.
Neuberger says, “It’s likely that you will also have to register with the IRS. The vast majority of businesses, even sole proprietorships, will need to register in their state, with the IRS to obtain a federal Employer Identification Number, and their city or county to obtain a business license.”
Do I need a lawyer?
If you are registering an LLC, a partnership, or a DBA, you may not need help. For corporate entities, a business registration service or an attorney may be necessary, because the application process is more complicated.
According to Neuberger, “The business registration process varies state by state, and some states are friendlier than others. However, even when errors can usually be fixed, they normally cost time and money, and that can justify the assistance of a business incorporation company with experience.”
Where can I find more information about business registration?
The best place to obtain more information about business registration is at the SBA’s website, which offers in-depth guides to various procedures.