To register or not to register — it’s a common question small-business owners have, especially if they’re new or operating solo. The nature of the company and your future plans will determine if and when to incorporate your business.
Deciding to register a business is only the first step. Next, it’s time to choose your business name and business structure. Doing it right the first time can save a lot of headaches down the road, so here’s an overview of the steps needed to get started.
When you’re first starting out, if you’re not looking to immediately hire employees or open physical locations, odds are business registration isn’t on your mind.
Plus, freelancers, gig workers, and remote contractors are automatically deemed as sole proprietors, allowing them to file taxes under their Social Security number using Form 1040.
However, as your business grows and onboards workers, it’s time to consider incorporating. In doing so, you can take advantage of the following benefits.
Seeing LLC or © after your business name looks impressive. It shows customers and clients you’re a legit entity, which builds trust.
Plus, you can now apply for business lines of credit and loans to help fund your growth — and these fall under business credit, so no need to have a perfect personal credit score.
You’ll also gain wider access to suppliers — some wholesalers require you to have a registered business to place orders — to more affordably stock your shelves. By learning how to start an LLC, you can further safeguard your business.
Incorporating your business opens the door to stocks and stock options, allowing investors and venture capitalists (VCs) to purchase shares of your company. The additional money will allow you to make new hires, expand to other locations, and invest in R&D.
Having a stock structure will also allow you to issue stock incentives to your executives and employees, which can help with attracting and retaining talent.
As a solopreneur, you’re operating under your own name and brand. So selling your business is next to impossible, since it’s not transferable. It’s easier to sell a business that isn’t tied directly to the owner's face, name, and reputation. By incorporating, your name is on the paperwork, but you can transfer the company to a new owner anytime.
It happens — customers and clients sue sole proprietors for various reasons. And when this happens, you’re responsible for the costs — even if it means losing your house, car, and other personal assets. By incorporating, you protect nonbusiness assets from liability caused by business litigation.
And in case your venture fails, debt owed to landlords, banks, and investors won’t fall on your shoulders as an individual, as it’s your business that is liable.
According to LegalZoom, you can file for Chapter 7 bankruptcy, which will require you to sell all LLC assets to creditors. Afterward, any remaining debts disappear, and your LLC business no longer exists. However, none of your personal assets would be touched.
Now, if you signed a personal guarantee (as the LLC owner), then you’ll bear personal responsibility over business debts, so be careful.
As a solo founder, you’re automatically considered a sole proprietor until you register as a business. When you stay a sole proprietor, you’re responsible for paying both self-employment taxes (a federal payroll tax) and personal income taxes on your company’s profits.
Business structures like an S corp could save you some of the double taxation. You can pay yourself a salary, which is subject to payroll taxes and income taxes. However, any profit you take out beyond your salary will only be subject to income taxes, not payroll taxes.
But while anyone can be a shareholder in an LLC or C corp, a non-US resident cannot own a stake in an S corp, so it’s only a possible choice for companies with domestic investors.
There are about five major steps and dozens of little steps to registering a business. So make sure you do your due diligence and consider working with a lawyer to prevent costly mistakes.
Here are the basics to get started.
You have many options to choose from for your business structure. The most common ones include:
Choosing a business structure can impact your company’s long-term future. Here are a few things to keep in mind:
This is just the tip of the iceberg — consult with a business lawyer to see areas you’re overlooking that can come back to bite you.
Company structure is one of the top mistakes new business owners make. According to Steven M. Katz, Esq., from Katz, Pryor & Dicuccio, LLP, many companies also fail to properly document ownership.
“For example, most tech startups should be formed as corporations. With all the information available on the internet, I still see people set these companies up as LLCs. Converting an LLC to a corporation can be very expensive,” says Katz.
“The second most common mistake is stopping at the point of registering the business, and not creating an operating agreement — for LLCs — or board resolutions and stock purchase agreements — for corporations. Having ownership and the management structure properly documented is what completes the company formation process, and what protects you as you operate your business.”
This is simple — unless you operate a business in multiple states (e.g., restaurant chain, auto dealer, etc.). The state you register your business in will become the “home state,” or state of domicile. Note that you don’t have to incorporate it in the state you live in.
Some business owners choose Delaware as their state of domicile because it has business-friendly laws and regulations. Others opt for Nevada because it has low business taxes.
Also, consider other taxes you’ll pay when deciding your state of domicile, such as:
Few states have no sales tax (e.g., Delaware, Montana, and New Hampshire), but some states, such as California, charge $800 minimum for an annual franchise tax.
Once you know where you want to register, it’s time to file with the secretary of state. The formation paperwork will ask for information like who your board of directors is, and bylaws outlining how you’’ll run your business.
But you don’t have to write everything yourself. There are templates available on most secretary of state websites, or you can use a lawyer.
Don’t register your business name before checking to see if it’s taken.
“You have to formally register your business name before you can register your business,” says Mark Pierce, CEO of Cloud Peak Law Group. “This also applies to sole proprietors who don’t want to use their personal name for the business.”
“Each state offers an online tool to look up business names to check availability. If it’s already taken, you’ll need to make a modification to your name before registering your business," adds Pierce.
Another option is to use LegalZoom’s online tool to check if an LLC already exists with your desired business name.
Once you choose your business name, it’s time to decide how you’ll register it. You have four options:
Once your business is incorporated, you’ll need to apply for an EIN (employer identification number) for your tax forms. When filing taxes, you’ll use the EIN in place of your Social Security number, since it’s the business paying the taxes.
But if you’re a single-member LLC that doesn’t elect to be taxed as an S corp, you’ll file taxes with your Social Security number.
The licenses and permits you’ll need depend on your industry and intended operations. For instance, for a CBD business, you’ll need special licenses based on how you handle the product. A different permit is required for a CBD company selling imported oils than one that grows and transports hemp.
So clarify your business operations to get all the licenses needed to operate legally.
Is it required to have a lawyer to register a business? The short answer is no, though you may want to consult one to cut down on time and potential mistakes.
“I usually tell people they can register their LLC without a lawyer if they’re willing to do the research into what the entities actually mean and are choosing the right one — unless they have more than one owner," advises Kelli Jones from Kelli Jones Law. “Then I always recommend a lawyer because you need a solid operating or partnership agreement, depending on what entity you’re choosing.”
There are three ways to register a business with a state:
However you decide to register, make sure to submit documents to the office in the state you chose to register your business.
The costs to register a business will vary, according to Katz.
“Cost depends on the company (LLC vs. corporation), the number of shareholders, and the state where you’re forming the company. For example, the filing fee in Ohio is $99, and the filing fee in Texas is $300,” he says.
In Florida, the initial registration of an LLC costs $125 and then $100 to renew it annually.
The method of registration also plays a role. For example, Georgia’s business registration fees look like this:
Then if you want to expedite registration, you'll pay:
You completed the paperwork and paid the fees — how long will it take to become officially registered? It depends on the state’s processing time and bandwidth. For instance, if there’s a backlog of business registrations to wade through, then expect delays.
During normal circumstances, it shouldn’t take longer than a week or two. Using our Georgia example, you’ll find that processing times differ based on how you apply. According to Georgia's website:
The journey to incorporation may seem complicated, so take your time and learn the best options based on your goals. Once you have your business registration in hand, you’ll feel confident you made the right choices for your company’s future.