The paperwork, licenses, and filings required to start your business are a necessary evil — it’s a tedious process but getting everything set up correctly means avoiding costly and frustrating headaches down the road.
Gaining an understanding of which filings are required for your business can set a strong foundation for your business.
Choosing a Business Entity
A “business entity” is an organization created to practice a trade or business. Entities refer to the type or structure (a corporation, for example), not what the business does (such as pet care). Entities are formed at the state level and may need to pay taxes and file tax return(s).
The type of entity you choose for your business will have long-lasting effects on important aspects like ownership structure, organizational hierarchy, and tax implications. Though it’s possible to change the structure of your business after it’s been filed, it’s wise to understand the details of each type of entity before your initial filing.
What is Personal Liability and Why Does It Matter?
A factor to consider when choosing a business entity is personal liability. Personal liability in business operations means that you may be responsible for financial obligations that result from conducting business. For example, if your company is sued, your degree of personal liability is what determines if your non-business assets are eligible to be payment. Different entities have varying degrees of personal liability. The less personal liability, the more you’re protected as an individual.
What Are the Types of Business Entities?
What is a C Corporation?
C corporations (C corps) are business entities that pay their own taxes. Unlike an S corporation, C corps have no restrictions on who can be a shareholder, and shareholders have limited liability, which generally means the financial obligations of the business can’t become the owner’s personal debt. Be aware that there are circumstances where the business owners can be personally liable; for example, if they have done something negligently or tortious, or if they have given a personal guarantee.
While not all C corporations are funded by 401(k) business financing (also known as Rollovers for Business Start-ups or ROBS), ROBS-funded businesses must maintain C corp status, due to the differences between who can be a shareholder with other entity types.
C corps saw the largest tax benefits as a result of the 2018 tax reform including a corporate tax reduction.
What is an S corporation?
S corporations (S corps), as well as Sole Proprietorships, Partnerships, and LLCs are pass-through entities, which means the business itself isn’t taxed, instead income and losses are reported on the owner’s personal tax return. This tends to make S corps popular because personal tax rates may be less than corporate tax rates.
As aforementioned, S corps do have restrictions on who can be a shareholder, unlike C corps. Among the restrictions are that there can be no more than 100 shareholders, and all shareholders must be US citizens or resident aliens.
What is an LLC?
A Limited Liability Company (LLC) is a pass-through entity, so it’s not subject to double taxation. It also has the benefit of limited liability — members are not personally responsible for the company’s financial obligations.
While the limited liability of LLCs makes them an attractive choice, this type of entity cannot issue stock. This can be a disadvantage depending on your ownership structure preference and in some cases, funding.
What is a PLLC?
A Professional Limited Liability Company (PLLC) is a specific type of LLC that is only available to certain types of professionals practicing out of their own business — accountants, doctors, and lawyers for example. Regarding taxation, ownership structure, and other entity rules, LLCs and PLLCs function similarly. While PLLCs do have the same limited liability for owners as an LLC, that doesn’t protect individuals from malpractice claims.
If you’re unsure whether your profession requires the PLLC designation, check with the office of your Secretary of State. Each state has varying requirements for which practice groups are required to form a PLLC instead of an LLC.
What is a P Corporation?
Professional Corporations (P corps) are also known as Professional Service Corporations (PS corps). They are very similar to PLLCs – they allow for practicing professionals such as lawyers, doctors, and engineers to operate a company under a corporate entity structure, but don’t protect individuals from financial obligations resulting from malpractice claims. Taxation for a P corp is dependent on what general category of corporation they file as (such as a C corp or S corp).
What is a Sole Proprietorship?
A sole proprietorship is very different from the other business entities discussed here because it’s not technically a legal entity type. This ‘structure’ allows someone to perform business with only the necessary licenses in place and no additional required filings. For example, many freelance contractors perform work as sole proprietors without filing an entity with their state.
The most important thing to know when working as a sole proprietor is that there is no limitation for personal liability. This means that any professional financial obligations are also personal obligations. There’s also no separation for taxation. Income and expenses for work in a sole proprietorship are considered personal, and they are reported on the owner’s personal tax form.
How to File Your Entity
- Choosing a Name. The name will need to be available and follow any rules set up by your state.
- Formal Paperwork. Paperwork can usually be filed online and includes providing information about the owner(s), officers, DBA info, and registered agent.
- Notice of Intent. If it’s required in your state, you’ll have to agree to publish a notice of intent to form an entity.
- Filing Fee. If you need to pay a fee to file and the amount of that fee will depend on your state.
A business trademark is a unique, recognizable symbol, logo, or slogan that represents a business. Some trademarks become so commonplace that we hardly remember they’re representing a specific brand. For example, you might say you need a Kleenex or a Band-Aid, no matter which brand of tissue or bandage you’re describing, but both of these terms are trademarks.
Trademarks are different from 1) patents, which protect the intellectual property of designs for inventions and 2) copyrights, which protect original works of authorship such as literary, dramatic, musical, and artistic creations.
Benefits of Trademark Federal Registration
- Exclusive right to use your trademark nationwide.
- You become the legal owner of your trademark.
- Your mark is listed in the federal database.
Filing a New Trademark
You’ll probably need at least one type of business license or maybe even several. Licensure requirements vary by state, but there are also some activities and industries regulated at a federal level. It’s prudent to check with both your Secretary of State office and perform some broader research to ensure you’re fully licensed before opening your doors.
A Few Business License Categories:
- Federal. Certain industries are regulated by federal agencies and need specific licenses to operate legally. Some federally-regulated industries or business activities are agriculture, firearms, alcoholic beverages, and television broadcasting.
- Sales Tax License. Anyone selling goods or services should check to see if their state requires a sales tax permit or license.
- Home-based. Even if your business is home-based, you’re not exempt from licenses and permit requirements. Additionally, if your home-based business involves preparing, making, or selling food, there are specialized requirements you need to meet to operate legally.
- Professional. The same groups of professionals filing for PLLCs and P corps (doctors, lawyers, engineers, accountants, etc.) also need to obtain professional licenses for their businesses.