Are you deciding if you want to start a side hustle? Or, maybe you have an idea for your main business that you want to get off the ground. No matter what your reason, there are some steps you must take when creating an official business. There are different business structures from which you can choose. Each one has its own benefits. This guide provides helpful information about all the steps you can’t ignore.
1. Deciding on a business structure
One of the first and most important decisions you must make is what type of business structure you want. The options include a limited liability company (LLC), a partnership, or a corporation. There are distinct benefits to each. How you run your company typically dictates which one is right for you.
An LLC is a business structure that protects owners, even if it is just you, from personal responsibility for liability or debt. This lack of responsibility is one of the largest benefits of an LLC. If the business is sued, your personal assets are typically not in danger. This type of structure is considered a hybrid of a sole proprietorship and a partnership. You do not have to hold any shareholder meetings. Regarding tax liability, the profits from an LLC do not face corporate taxes. They are, however, considered personal income for the owners.
A partnership is a formal and legal arrangement created by two or more people to operate a business and share the profits. There are multiple types of partnerships, but the two main options are a general partnership and a limited partnership. In a general partnership, all of the partners have an equal share in the profits and liability. A limited partnership is when some of the partners have a say in the day-to-day business while others are silent. The silent partners typically invest in the business but do not play a role in the management. A partnership is a default when you start a business with another person. Taxes tend to be easy for a partnership as the profits from the business is divided between the partners. There is some additional paperwork needed for a limited partnership. It must be a registered business, whereas a general partnership does not have to be registered. This is a great option for those who want investors while keeping the business simple. There are not the same type of protections for partnerships as LLCs.
A corporation is a business that is separate from the owners. A corporation has responsibilities and rights similar to a person. A corporation can agree to contracts, borrow money, hire employees, pay taxes, be sued, and own assets. Therefore, some think of a corporation as a legal person. However, each individual shareholder is not responsible for the corporation’s debts.
An S corp combines an LLC’s benefits with a corporation’s benefits. Similar to an LLC, the business owners are not legally or financially liable for the business. Therefore, they have flexibility when paying dividends and salaries, which can reduce tax liability for the owners. However, an S corp is more expensive to form and maintain. They also have board meetings, processes, and procedures they must follow.
This type is often referred to as a corporation. This is the most complex and expensive type of business you can form. However, it provides the most significant separation between the business and owners. Most companies that are publicly traded are C corporations. This is the only business entity that can offer stock options. However, this entity does have double taxation. The business has corporate taxes, and the owners have income tax on the dividends they receive.
2. Selecting Your Tax Status
The type of business entity you select determines your tax filing state and the claims and deductions you can take. If your business is an LLC, the owner counts business profits as income. As a result, you do not have to report your business taxes separately. This is beneficial because you avoid the double taxation that corporations face. As a corporation, the business is taxed, and then you are taxed personally for the dividends you receive. You can designate profits as salary and dividends when you have a corporation. As a business, the profits dedicated to salary are taxable as payroll tax, but dividends are not taxed.
3. Having a registered agent
Any type of business entity, no matter what type, must have a registered agent (across all states). A registered agent is an individual or group that receives legal documents for the business. These documents may include correspondence, subpoenas, or tax notices. In most states, specific documents must be served in person. Having a registered agent makes that process simple and clear. The registered agent’s name and address will be public knowledge, allowing people to know who receives the documents for each business entity. This is a simple but crucial job. Most legal documents have deadlines to which you must adhere. Your registered agent must have clear direction as to who should receive notification about these documents.
4. Deciding on the management structure
LLCs have more flexibility and freedom than other business entities. With an LLC, you can choose to run the business yourself or hire someone to manage the business for you. You do not have to worry about someone else or a group of shareholders telling you what to do with your business. With a corporation, you do not have that same flexibility. There are rules that corporations must follow. There is a requirement for the shareholders to elect a board of directors who, in turn, is responsible for hiring a general manager to oversee the business’s daily operations. With a corporation, you must get permission or approval from the board to make decisions about managing the business. They can also choose to replace you. If you are looking for complete control of your business, then an LLC may be the ideal path.
5. Annual state requirements
Every state, with the exception of Ohio (and a few other states), requires businesses to file some version of an annual report. The deadlines and requirements for the report vary by state. If you do not file your reports timely, you could face penalties and fines. In addition, you must file this report with the Secretary of State in the state where the business operates. Annual reports include comprehensive financial information, including financial activities and the performance of your business. Also included are a balance sheet summary, cash flow, capital investment information, income statement, and profit and loss details. These documents may also be referred to as yearly statements or statements of information.
Some states also require franchise taxes. These are taxes charged by the state for allowing you to operate within the state. They are also referred to as privilege taxes. These taxes are not a tax for franchises but are paid separately from state and federal income taxes.
6. Qualifying for a business loan
When it comes to obtaining a business loan, the business entity is typically not responsible for the loan because it falls to the business. However, if the business does not have an established financial record, the owners of the business may have to sign a personal guarantee. As a business owner for the loan, this means that you are personally responsible for repayment. In many cases, when the business is not a corporation, the owners of the business have to show the creditworthiness of the business and each of the owners. No matter what type of business entity you have, you probably have to provide a fair amount of documentation for a business loan. This could include but is not limited to, one year of business bank statements, projected cash flow, and personal financial statements from each of the owners.
While you have a few options when it comes to creating a business, there are benefits and negatives to each option. Most likely, you will not find one to be a perfect fit. Whichever one you select for your needs, cover all the steps listed in this guide. Remember, you do not want to skip over any of the steps.