To register or not to register — it is a common question small-business owners have, especially if they are 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 is 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 is an overview of the steps needed to get started.
Why should I register my business?
When starting, if you are not looking to hire employees or open physical locations immediately, a business registration is not 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 is time to consider incorporating. In doing so, you can take advantage of the following benefits.
Build credibility and gain access to funding and resources
Seeing LLC or © after your business name looks impressive. It shows customers and clients that you are 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 there is no need to have a perfect personal credit score.
You also gain wider access to suppliers — some wholesalers require you to have a registered business to place orders — to stock your shelves more affordably.
Increase funding with stock incentives
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 attract and retain talent.
Sell your company one day
As a solopreneur, you are operating under your own name and brand. So selling your business is next to impossible since it is not transferable. It is easier to sell a business not 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.
Limit your personal liability
It happens — customers and clients sue sole proprietors for various reasons. And when this happens, you are 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 would not fall on your shoulders as an individual, as it is 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, it would not touch any of your personal assets.
If you signed a personal guarantee (as the LLC owner), you would bear personal responsibility over business debts, so be careful.
Reduce the taxes you owe
As a solo founder, you are automatically a sole proprietor until you register as a business. When you stay a sole proprietor, you are 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 taxations. For example, you can pay yourself a salary subject to payroll and income taxes. However, any profit you take beyond your salary will only be subject to income taxes, not payroll taxes.
How to register a business
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.
1. Choose your business structure
You have many options to choose from for your business structure. The most common ones include:
- Sole proprietorship: Default business structure for solo business owners (business and personal assets and liabilities aren't separated)
- Partnership: When there are two or more co-founders (various types of partnerships exist, like Limited Liability Partnerships and Limited Partnerships)
- C corporations (C corp): Separates the owners' and shareholders' assets and income from the business, making the company its own entity for taxation and liability
- Limited liability company (LLC): Protects business owner's personal assets from business liabilities
Factors to consider before deciding on a business structure
Choosing a business structure can impact your company's long-term future. Here are a few things to keep in mind:
- Taxation: Are you okay with paying both self-employment and income taxes as a sole proprietor, or do you want to reduce self-employment taxes with an S corp election?
- Flexibility: Does your business plan align with the business structure? For example, a sole proprietorship makes little sense if you want to sell your venture one day.
- Liability: Are you willing to remain a sole proprietor knowing your personal assets are on the line during litigations?
- Complexity: Are you comfortable incorporating yourself, or do you prefer to use legal assistance?
- Control: Do you mind splitting business control with shareholders and partners?
This is only the tip of the iceberg — consult with a business lawyer to see areas you are 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."
2. Pick your state of domicile
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 do not need 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 will pay when deciding your state of domicile, such as:
- Sales and use tax
- State income and franchise tax
- Employment taxes
- Local taxes
Few states have no sales tax (e.g., Delaware, Montana, and New Hampshire), but some states, such as California, charge an $800 minimum for an annual franchise tax.
Once you know where you want to register, it is time to file with the secretary of state. The formation paperwork will ask who your board of directors is and bylaws outlining how you run your business.
But you do not need to write everything yourself. There are templates available on most secretary of state websites, or you can use a lawyer.
3. Register your business name
Do not register your business name before checking to see if it is available.
"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 is time to decide how you will register it. You have four options:
- Register as a trademark : Protects the name of your business, services, and goods nationally
- Register as DBA (doing business as): Protects trade names, assumed names, and fictitious names in the state of the business
- Register as entity name : Protects and identifies your business name on a state level (based on local laws)
- Register as a domain name : Protects your URL/domain name from being purchased by another entity or person
4. Register for taxes with the IRS
Once your business is incorporated, you will need to apply for an EIN (employer identification number) for your tax forms. When filing taxes, you will use the EIN in place of your Social Security number since it is the business paying the taxes.
But if you are a single-member LLC that does not elect to be taxed as an S corp, you will file taxes with your Social Security number.
5. Apply for licenses and permits
Your industry and intended operations depend on the licenses and permits you need. For instance, you need special licenses for a CBD business based on how you handle the product. For example, you need a different permit 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.
Do you need a lawyer to register a business?
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."
Where to register a business?
There are three ways to register a business with a state:
- Online: Visit your secretary of state's website to see if it is possible to complete your application online
- In person at city hall : Complete all of your forms and bring them to the office of the secretary of state
- By mail: Print out and complete the forms, then mail them to the secretary of state office
However you decide to register, make sure to submit documents to the office in the state you chose to register your business.
How much does it cost to register a 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:
- Online: $100 filing fee using an approved credit card
- In person : $110 ($10 filing fee)
- By mail: $110 ($10 filing fee added) by either check or money order
Then if you want to expedite registration, you will pay:
- $100 (two business days)
- $250 (one business day)
- $1,000 (one hour)
How long does it take to register a business?
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 is a backlog of business registrations to wade through, t expect delays.
During normal circumstances, it should take a week or two at maximum. Using our Georgia example, you will find that processing times differ based on how you apply. According to Georgia's website:
- Online registration: 7 business days
- In-person registration: Varies
- Mailed registration: 15 business days
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 will feel confident you made the right choices for your company's future.