Choosing a Business Structure
The business structure you choose influences everything from day-to-day operations to taxes, to how much of your personal assets are at risk. You should choose a business structure that gives you the right balance of legal protections and benefits.
Review common business structures
Sole proprietorship
A sole proprietorship is easy to form and gives you complete control of your business. You’re automatically considered to be a sole proprietorship if you do business activities but don’t register as any other kind of business.
Sole proprietorships do not produce a separate business entity. This means your business assets and liabilities are not separate from your personal assets and liabilities. You can be held personally liable for the debts and obligations of the business. Sole proprietors are still able to get a trade name. It can also be hard to raise money because you can’t sell stock, and banks are hesitant to lend to sole proprietorships.
Sole proprietorships can be a good choice for low-risk businesses and owners who want to test their business idea before forming a more formal business.
Partnership
Partnerships are the simplest structure for two or more people to own a business together. There are two common kinds of partnerships: limited partnerships (LP) and limited liability partnerships (LLP).
Limited partnerships have only one general partner with unlimited liability, and all other partners have limited liability. The partners with limited liability also tend to have limited control over the company, which is documented in a partnership agreement. Profits are passed through to personal tax returns, and the general partner — the partner without limited liability — must also pay self-employment taxes.
Limited liability partnerships are similar to limited partnerships, but give limited liability to every owner. An LLP protects each partner from debts against the partnership, they won’t be responsible for the actions of other partners.
Partnerships can be a good choice for businesses with multiple owners, professional groups (like attorneys), and groups who want to test their business idea before forming a more formal business.
Limited liability company (LLC)
An LLC lets you take advantage of the benefits of both the corporation and partnership business structures.
LLCs protect you from personal liability in most instances, your personal assets — like your vehicle, house, and savings accounts — won’t be at risk in case your LLC faces bankruptcy or lawsuits.
Business Name
Register your business name and protect it
You’ll want to choose a business name that reflects your brand identity and doesn’t clash with the types of goods and services you offer.
Once you settle on a name you like, you need to protect it. There are four different ways to register your business name. Each way of registering your name serves a different purpose, and some may be legally required depending on your business structure and location.
- Entity name protects you at state level
- Trademark protects you at a federal level
- Doing Business As (DBA) doesn’t give legal protection, but might be legally required
- Domain name protects your business website address
Each of these name registrations are legally independent. Most small businesses try to use the same name for each kind of registration, but you’re not normally required to.
4 different ways to register your business name
Entity name
An entity name can protect the name of your business at a state level. Depending on your business structure and location, the state may require you to register a legal entity name.
Your entity name is how the state identifies your business. Each state may have different rules about what your entity name can be and usage of company suffixes. Most states don’t allow you to register a name that’s already been registered by someone else, and some states require your entity name to reflect the kind of business it represents.
In most cases, your entity name registration protects your business and prevents anyone else in the state from operating under the same entity name. However, there are exceptions pertaining to state and business structure.
Check with your state for rules about how to register your business name.
Trademark
A trademark can protect the name of your business, goods, and services at a national level. Trademarks prevent others in the same (or similar) industry in the U.S. from using your trademarked names.
For example, if you were an electronics company and wanted to call your business Springfield Electronic Accessories and one of your products Screen Cover 5000, trademarking those names would prevent other electronics businesses or similar products from using those same names.
Businesses in every state are subject to trademark infringement lawsuits, which can prove costly. That’s why you should check your prospective business, product, and service names against the official trademark database, maintained by the United States Patent and Trademark Office.
Doing Business As (DBA) name
You might need to register your DBA — also known as a trade name, fictitious name, or assumed name — with the state, county, or city your business is located in. Registering your DBA name doesn’t provide legal protection by itself, but most states require you to register your DBA if you use one. Some business structures require you to use a DBA.
Even if you’re not required to register a DBA, you might want to anyway. A DBA lets you conduct business under a different identity from your own personal name or your formal business entity name. As an added bonus, getting a DBA and federal tax ID number (EIN) allows you to open a business bank account.
Multiple businesses can go by the same DBA in one state, so you’re less restricted in what you can choose. There’s also more leeway in the clarity of business function. For example, a small business owner could use Springfield Electronic Accessories for their entity name but use TechBuddy for their DBA. Just remember that trademark infringement law will still apply.
Determine your DBA requirements based on your specific location. Requirements vary by the business structure as well as by state, county, and municipality, so check with local government offices and websites.
Domain name
If you want an online presence for your business, start by registering a domain name — also known as your website address, or URL.
Once you register your domain name, no one else can use it for as long as you continue to own it. It’s a good way to protect your brand presence online.
If someone else has already registered the domain you wanted to use, that’s okay. Your domain name doesn’t actually need to be the same as your legal business name, trademark, or DBA. For example, Springfield Electronic Accessories could register the domain name techbuddyspringfield.com.
You’ll register your domain name through a registrar service.
Business Registration
Register with federal agencies
If you want to trademark your business, brand or product name, file with the United States Patent and Trademark office once you’ve formed your business.
If you want tax-exempt status for a nonprofit corporation, register your business as a tax-exempt entity with the IRS.
To create an S corp, you’ll need to file form 2553 with the IRS.
Register with state agencies
If your business is an LLC, corporation, partnership, or nonprofit corporation, you’ll probably need to register with any state where you conduct business activities.
Typically, you’re considered to be conducting business activities in a state when:
- Your business has a physical presence in the state
- You often have in-person meetings with clients in the state
- A significant portion of your company’s revenue comes from the state
- Any of your employees work in the state
Some states allow you to register online, and some states make you file paper documents in person or through the mail.
Most states require you to register with the Secretary of State’s office, a Business Bureau, or a Business Agency.
Look up your state
[table id=5 /]
Get a registered agent
If your business is an LLC, corporation, partnership, or nonprofit corporation, you’ll need a registered agent in your state before you file.
A registered agent receives official papers and legal documents on behalf of your company. The registered agent must be located in the state where you register.
Many business owners prefer to use a registered agent service rather than do this role themselves.
File for foreign qualification
If your LLC, corporation, partnership, or nonprofit corporation conducts business activities in more than one state, you might need to form your business in one state and then file for foreign qualification in other states where your business is active.
The state where you form your business will consider your business to be domestic, while every other state will view your business as foreign. Foreign qualification notifies the state that a foreign business is active there.
Foreign qualified businesses typically need to pay taxes and annual report fees in both their state of formation and states where they’re foreign qualified.
To foreign qualify, file a Certificate of Authority with the state. Many states also require a Certificate of Good Standing from your state of formation. Each state charges a filing fee, but the amount varies by state and business structure.
Check with state offices to find out foreign qualification requirements and fees.
File state documents and fees
In most cases, the total cost to register your business will be less than $300, but fees vary depending on your state and business structure.
The information you’ll need typically includes:
- Business name
- Business location
- Ownership, management structure, or directors
- Registered agent information
| Business structure | Document | Description |
|---|---|---|
| LLC | Articles of organization | Articles of organization is a simple document that describes the basics of your LLC. It includes business information like the company name, address, member names, and the registered agent. |
| LLC | LLC operating agreement | An operating agreement describes the structure of your company’s financial and functional decisions. It defines how key business decisions are made, as well as each member’s duties, powers, and responsibilities. It’s widely recommended to create one to protect yourself and your business, even if your state doesn’t mandate it. |
| Limited partnership | Certificate of limited partnership | This simple document describes the basics of your limited partnership. It notifies the state of the partnership’s existence and contains basic business information like the company name, address, and partner names. Not all states require it, and some states call it by a different name. |
| Limited partnership | Limited partnership agreement | A limited partnership agreement is an internally binding document between all partners that defines how business decisions get made, each partner’s duties, powers, and responsibilities. It’s widely recommended to create one to protect yourself and your business, even if your state doesn’t mandate it. |
| Limited liability partnership | Certificate of limited liability partnership | This simple document describes the basics of your limited liability partnership. It notifies the state of the partnership’s existence and contains basic business information like the company name, address, and partner names. Not all states require it, and some states call it by a different name. |
| Limited liability partnership | Limited liability partnership agreement | A limited liability partnership agreement is an internally binding document between all partners that defines how business decisions get made, each partner’s duties, powers, and responsibilities. It’s widely recommended to create one to protect yourself and your business, even if your state doesn’t mandate it. |
| Corporation (any kind) | Articles of incorporation | The articles of incorporation — or a certificate of incorporation — is a comprehensive legal document that lays out the basic outline of your business. It’s required by every state when you incorporate. The most common information included is the company name, business purpose, number of shares offered, value of shares, directors, and officers. |
| Corporation (any kind) | Bylaws or resolutions | Bylaws (called resolutions for nonprofits) are the internal governance documents of a corporation. They define how key business decisions are made, as well as officer and shareholders’ duties, powers, and responsibilities. It’s widely recommended to create one to protect yourself and your business, even if your state doesn’t mandate it. |
- Number and value of shares (if you’re a corporation)
Federal Tax ID, How To
Your state tax ID and federal tax ID numbers — also known as an Employer Identification Number (EIN) — work like a personal social security number, but for your business. They let your small business pay state and federal taxes.
Get a federal tax ID number
Your Employer Identification Number (EIN) is your federal tax ID. You need it to pay federal taxes, hire employees, open a bank account, and apply for business licenses and permits.
It’s free to apply for an EIN, and you should do it right after you register your business.
Your business needs a federal tax ID number if it does any of the following:
- Pays employees
- Operates as a corporation of partnership
- Files tax returns for employment, excise, or alcohol, tobacco, and firearms
- Withholds taxes on income, other than wages, paid to a non-resident alien
- Uses a Keogh Plan (a tax-deferred pension plan)
- Works with certain types of organizations
Apply for an EIN with the IRS assistance tool. It will guide you through questions and ask for your name, social security number, address, and your “Doing Business As” (DBA) name. Your nine-digit federal tax ID becomes available immediately upon verification.
Your requirements will depend on your business structure and the kind of change that occurred. Check with the IRS to determine exactly whether you need to change or replace your EIN.
Get a state tax ID number
The need for a state tax ID number ties directly to whether your business must pay state taxes. Sometimes, you can use state tax ID numbers for other functions, like protection against identity theft for sole proprietors.
Tax obligations differ at the state and local levels, so you’ll need to check with your state’s websites.
To know whether you need a state tax ID, research and understand your state’s laws regarding income taxes and employment taxes, the two most common forms of state taxes for small businesses.
The process to get a state tax ID number is similar to getting a federal tax ID number, but it will vary by state. You’ll have to check with your state government for specific steps.
State income and employment taxes for businesses
Seven states have no income tax, and another two only impose tax on income from dividends. States that do tax income will determine figures based on business structure.
Taxes also vary by state on employment insurance and workers’ compensation insurance. Understand these and other implications in calculating startup costs and choosing a business structure.
Visit your state’s website to identify whether you need to get a state tax ID number in order to pay state taxes.
Opening a Business Account
Open a business account when you’re ready to start accepting or spending money as your business. A business bank account helps you stay legally compliant and protected. It also provides benefits to your customers and employees.
Benefits of business bank accounts
As soon as you start accepting or spending money as your business, you should open a business bank account. Common business accounts include a checking account, savings account, credit card account, and a merchant services account. Merchant services accounts allow you to accept credit and debit card transactions from your customers.
You can open a business bank account once you’ve gotten your federal EIN.
Most business bank accounts offer perks that don’t come with a standard personal bank account.
- Protection. Business banking offers limited personal liability protection by keeping your business funds separate from your personal funds. Merchant services also offer purchase protection for your customers and ensures that their personal information is secure.
- Professionalism. Customers will be able to pay you with credit cards and make checks out to your business instead of directly to you. Plus, you’ll be able to authorize employees to handle day-to-day banking tasks on behalf of the business.
- Preparedness. Business banking usually comes with the option for a line of credit for the company. This can be used in the event of an emergency, or if your business needs new equipment.
- Purchasing power. Credit card accounts can help your business make large startup purchases and help establish a credit history for your business.
Find an account with low fees and good benefits
Some business owners open a business account at the same bank they use for their personal accounts. Rates, fees, and options vary from bank to bank, so you should shop around to make sure you find the lowest fees and the best benefits.
Here are things to consider when you’re opening a business checking or savings account:
- Introductory offers
- Interest rates for savings and checking
- Interest rates for lines of credit
- Transaction fees
- Early termination fees
- Minimum account balance fees
Here are things to consider when you’re opening a merchant services account:
- Discount rate: The percentage charged for every transaction processed.
- Transaction fees: The amount charged for every credit card transaction.
- Address Verification Service (AVS) fees.
- ACH daily batch fees: Fees charged when you settle credit card transactions for that day.
- Monthly minimum fees: Fees charged if your business doesn’t meet the minimum required transactions.
Payment processing companies are an increasingly popular alternative to traditional merchant services accounts. Payment processing companies sometimes provide extra functionality, like accessories that let you use your phone to accept credit card payments. The fee categories that you need to consider will be similar to merchant services account fees. If you find a payment processor that you like, remember that you’ll still need to connect it to a business checking account to receive payments.
Get documents you need to open a business bank account
Opening a business bank account is easy once you’ve picked your bank. Simply go online or to a local branch to begin the process. Here are some of the most common documents banks ask for when you open a business bank account. Some banks may ask for more.
- Employer Identification Number (EIN) (or a Social Security number, if you’re a sole proprietorship)
- Your business’s formation documents
- Ownership agreements
- Business license
Insurance
Business insurance protects you from the unexpected costs of running a business. Accidents, natural disasters, and lawsuits could run you out of business if you’re not protected with the right insurance.
Pick the type of business insurance you need
The protections you get from choosing a business structure like an LLC or a corporation typically only protect your personal property from lawsuits, and even that protection is limited.
Business insurance can fill in the gaps to make sure both your personal assets and your business assets are fully protected from unexpected catastrophes.
In some instances, you might be legally required to purchase certain types of business insurance.
The federal government requires every business with employees to have workers’ compensation, unemployment, and disability insurance.
Some states also require additional insurance. Laws requiring insurance vary by state, so visit your state’s website to find out the requirements for your business.
Six common types of business insurance
After you purchase insurance that’s required by law, you can find insurance to cover any other business risk. As a general rule, you should insure against things you wouldn’t be able to pay for on your own.
Speak to insurance agents to find out what kinds of coverage makes sense for your business, and compare terms and prices to find the best deal for you. Here are six common kinds of business insurance to look for.
[table id=6 /]
Four steps to buy business insurance
- Assess your risks. Think about what kind of accidents, natural disasters, or lawsuits could damage your business. If you need help, the National Federation of Independent Businesses (NFIB) provides information for choosing insurance to help you assess your risks and to make sure you’ve insured every aspect of your business.
- Find a reputable licensed agent. Commercial insurance agents can help you find policies that match your business needs. They receive commissions from insurance companies when they sell policies, so it’s important to find a licensed agent that’s interested in your needs as much as his/her own.
- Shop around. Prices and benefits can vary significantly. You should compare rates, terms, and benefits for insurance offers from several different agents.
- Re-assess every year. As your business grows, so do your liabilities. If you have purchased or replaced equipment or expanded operations, you should contact your insurance agent to discuss changes in your business and how they affect your coverage.
