The beginning of a new business venture is filled with excitement and the promise of opportunity. The ability to design your own brand, create a product or service, write a business plan, and build a corporate culture are a dream come true for many.
However, there’s a good deal of legwork that needs to happen behind the scenes in order for those dreams to become reality. In order to be successful, businesses must have a solid framework to support them. That means determining things like business structures, federal and state tax requirements, and employee status upfront.
By determining the optimal setup for your business first, you’ll provide your company, yourself, and your employees (if you have any) a layer of protection. Think of it as an insurance policy: if your business is playing by the rules, you’re free to go out and dream big without worry.
Here’s a brief checklist to make sure you’ve got all your bases covered. And to make things easier, we’ve created a printable version of this checklist here.
Select a Business Structure (Also Known as Entity Type)
The type of business structure you choose determines a number of major factors: tax payments, filing requirements, your own personal liability related to your business, and even the ability to fundraise. It’s critical to review all entity types before making a decision.
The most common entity types available are:
- Sole Proprietorship
- Limited Liability Company (LLC)
- Corporation (C-Corp, S-Corp, B-Corp, Close Corporation, Non-Profit Corporation)
Each entity type is targeted at specific types of businesses, but it’s common to find more than one entity that’s a fit. For example, a sole business owner might choose between a sole proprietorship, an LLC, and an S-Corp. An LLC provides more protection from personal liability than a sole proprietorship, while an S-Corp provides unique tax benefits.
Make sure to evaluate all your options before making a decision. And consider any changes you might like to make in the future, as certain entity types have restrictions that could prohibit businesses from converting to a new entity.
Register Your Business With Appropriate Government Agencies
Whether or not you need to register your business with any government agency will depend on what you do and what types of needs you have. However, it’s an important factor to know, as you could miss out on key benefits provided with registration.
That means checking with both federal and state agencies. Registration requirements for state agencies will vary by state, but they generally include a series of forms and some nominal fees. Federal requirements are fairly standardized and straightforward. For business trademarking, file with the U.S. Patent and Trademark Office. Tax-exempt status for non-profit corporations goes through the IRS.
In order to register, you’ll need access to a registered agent in your state to receive critical documents for your business. Business owners can do this themselves or outsource the work to an existing registered agent.
Apply For Federal And State Tax ID Numbers
A federal tax ID number, also called an Employer Identification Number (EIN), identifies your business to the federal government. It also enables businesses to pay taxes, hire staff, set up business bank accounts, and request permits. EINs are fairly easy to request on the IRS website with this EIN assistant.
State tax ID numbers are only required if a business has to pay state income taxes. Check your state’s tax requirements to determine if your business needs one or not.
Request Any Necessary Licenses or Permits
Depending on the line of business you’re in, you may need some combination of federal, state, city, and county licenses and permits. Federal permits are required for any industry regulated by the federal government. The U.S. Small Business Administration (SBA) offers a comprehensive list of industries regulated by the federal government – and their corresponding agencies.
State, city, and county licenses and permits will depend on what industry you’re in and the regulations specific to your local area. Be sure to research licenses and permits required at each level.
Download a printable version of our new business checklist.
Start your business off on the right foot.
Create a Business Bank Account
After you have the federal EIN associated with your business, you can decide on a bank for business banking purposes and open an account (or multiple accounts).
Managing your business’ income and expenses will be much more straightforward if all transactions go through specified accounts. And business bank accounts generally come with benefits not available on standard personal accounts.
Here are a few things to look for when evaluating banks and types of accounts:
- Interest rates
- Transaction fees
- Minimum balances per account
- Lines of credit available
- Protection for personal assets
- Connectivity with technology
These inputs will likely vary based on the type of account (checking, savings, merchant services, etc.), so make sure to clearly weigh the pro’s and con’s of each account type and bank. For instance, a small local bank or credit union may provide excellent service but it may not connect easily to accounting software or even help from an outside CPA firm.
Ensure Employees Fill Out Tax Forms
In order to comply with federal requirements for both you and your employees, you’ll need to have them fill out the appropriate forms. The current federal tax forms for employees are form I-9, which verifies an employee’s identity and authorization to work in the U.S., and form W-4, which gives employers the ability to withhold federal taxes.
State tax forms will vary by state and depend on whether or not your state collects income tax (7 states don’t). Check with your state’s department of taxation to determine whether you need to file employee tax forms.
Designate A Tax Year
A business’ taxable income is determined based on its tax year, which is usually some portion of the year it starts operating. It’s the period you pay taxes for accounting purposes.
The options are a calendar year (January 1-December 31 of any given year) or a fiscal year (12 months ending on the last day of any month except for December). So if you start your business on May 1, 2017 and you want to use a fiscal year, your end of the fiscal year will be April 30, 2018.
One key caveat: the fiscal year designation is immediately available to corporations, but only available to sole proprietorships, partnerships, and LLC upon request from the federal government.
Determine Which Taxes Your Business Needs To Pay—And When
Tax payments required for your business will depend on the entity type you choose (for federal taxes) and the local requirements (for state taxes). The major types of federal taxes paid by businesses are:
- Income taxes (required for all businesses except partnerships)
- Self-employment taxes (Social Security and Medicare taxes paid by people who work for themselves)
- Employment taxes (income tax, Social Security, and Medicare taxes paid on behalf of employees who work for you)
- Excise taxes (paid on a specific good, one of the major components being fuel purchases)
Employment taxes are paid in a pay-as-you-go format, so they’re withheld from employee paychecks for each pay period. Self-employment taxes are generally paid quarterly in the form of estimated taxes, where self-employed individuals estimate what their tax payments will be and file accordingly.
Understanding Entity Types
It’s not as hard as it seems. Get the free guide.
Decide How You Will Manage Your Business Accounting Needs
If you look at the list above, it would seem that the only task that requires ongoing maintenance is paying your taxes. But that couldn’t be further from the truth.
In order to conform to be informed about the health of your business, you’ll need to have a system for tracking outgoing invoices, incoming customer payments, payroll costs, business expenses, and financial changes such as funding infusions and large purchases. The tracking of incoming and outgoing flows of cash are the lifeline of your business.
Fortunately, there are multiple options available to businesses. You can evaluate accounting software and purchase access with the plan to manage it all on your own. You can hire an accountant and have them manage your books using the software you purchased (or one they recommend), with high-level input from you. Or you can even outsource the process entirely to an accounting platform that provides software plus accounting support.
The choice depends on how much of your own internal resources you want to allocate to accounting needs (versus using outside resources).
For more advice on starting and growing your business, check out the ScaleFactor blog. And click below to download a printable version of this checklist.