Business Setup Overview – United States

This is an overview of the basic steps that will help assure that you are working within the US legal boundaries so you don’t get any surprises later. This is for informational purposes only and in no way constitutes legal advice. You should always consult with your lawyer or your accountant to decide what best fits your needs.

Sole Proprietor or LLC?

Choosing the structure of your business depends on a couple of factors, the first being, what the limits are in your state.  Most small business begin as a sole proprietor, because it is the least expensive route to starting your own company.  For those who work as a sole proprietor, all that needs to be done tax-wise is a Schedule C on a personal return.  The reported business income goes into your personal taxes instead of a separate entity as a corporation.

While it may be less expensive to start as a sole proprietor, there is a legal aspect to consider.  Those who work solo have no legal protection over personal assets.  This translates to you being liable from a personal standpoint for actions that occur within your work – so if someone wants to sue you, your assets (home, car, savings, etc) are at risk. Even though a LLC or corporation may be a little more expensive to start, they do give you the protection over personal assets.

Here is a comparison between a Sole Proprietorship (DBA) and a LLC (Limited Liability Company):

Advantages of a Sole Proprietorship

Lower start up costs
No annual compliance
Ease of accounting
Ease of tax preparation

Disadvantages of a Sole Proprietorship

Personal liability exposure
It may limit ability to raise future capital
It may limit the transferability of business assets

Advantages of a LLC

No double taxation
Can have multiple members
Personal liability insulation
Can be broken into shares

Disadvantages of a LLC

Subject to self-employment tax
Lack of uniformity among limited liability company statutes


Do You Need A Business License Or Permit?

You should check with your local city or county government to make sure you are in compliance.  Some home businesses are exempt, but most businesses do need a license. This helps with planning for tax reasons and the county growth. Permits are required for certain occupations or businesses.

What Corporate Forms Should You Use?

There are three primary forms used for businesses.  You should consult with your lawyer or your business accountant to decide which form is best for your business.  Most small businesses choose either a “S” corporation or LLC (Limited Liability Company) since these two forms put a limit on your personal liability, yet still allow the profit and loss statements to be filed under the individual returns.  There is also the “C” corporation form.

Special Tax Numbers

Having a special tax number is safer for sole proprietors than giving out your social security number, so even with the smallest business it is advisable.  To get your EIN or employer ID number, all you have to do is call the business line with the IRS and you can have it assigned over the phone or you can visit the their website to apply for it as well.

If you are a corporation or have employees that are on your payroll, you will need an Federal Employer ID number. This number is assigned and puts your business on the IRS’s books. State ID numbers may be assigned, depending on the laws in your own state.  The best way to figure out if you need a state number is to visit for a quick reference and further directions on what to do.

Other License/Permits

Depending on your business, if you are going to be reselling goods purchased, you will need to sign a resale license or statement of intent.  This states that the end consumer will be paying the sales tax and you will be exempt as the “middleman”.

If you are not using your name for your business you will need to file a DBA so people will know who owns the business.  You can also often open a separate checking account under the DBA name, which will allow you to write checks with your business name printed on it.

Starting a business takes a lot of planning and hard work, but with the right steps planned ahead, you can avoid a lot of tax and legal issues at the end of the year.  Make sure you are working with a good accountant and remember it’s fine to start small.

Helpful Links
Small Business Administration USA
Legal Forms

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