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Originally Posted On: The step-by-step guide to registering your business | QuickBooks (intuit.com)
If you’re planning on starting a business, you’ll need to register the business with the IRS. If you’re not quite sure what that means or how to do it, we’re here to help.
This guide will discuss the reasons to register a business, the benefits of registration, and provide a step-by-step guide to registering your business.
Why should you register your business?
Registering a business isn’t difficult, and the benefits far outweigh the time and effort it may take to do so. Registering your business separates your personal assets from your business, so they’re protected if your business is sued or you encounter financial difficulties. You’ll also be protected from personal liability, which means you won’t risk losing your personal assets if something goes wrong with your company. Furthermore, if you intend to open a business bank account, you’ll need to provide proof that your business is properly registered with the state.
The registration process involves sending a detailed account of the type of business you’re opening, including the business name and location, to various government agencies. This officially indicates that your business is ready to operate.
There are plenty of legal and tax reasons to officially register your business, but there are some real benefits for business owners as well:
- Registering helps you build your brand’s reputation because potential customers will see you as a legitimate organization.
- You can hire employees and pay them per your state’s laws. When you register your business with the state, you’ll receive a state identification number that allows you to collect state taxes for your employees.
- Registering comes with its share of financial benefits, including tax benefits and the ability to officially apply for loans and other funding. Investors prefer to work with registered businesses. And registered businesses earn insurance premium deductions, deferred tax payments, and more.
What happens if you don’t register your business?
If you don’t register your business or you operate as a sole proprietor, you can still conduct your day-to-day business activity as you see fit. However, choosing not to register your business comes with restrictions.
Most notably, you’ll be held personally liable for your business finances — and you’ll have little legal protection in facing other liabilities. For example, if your business goes bankrupt, you’ll be held liable for that debt.
What types of business registration are available?
There are many types of registrations available, depending on the type of business you’re running. The most common business registrations include:
This is the most common type of business designation. It doesn’t require formal registration. However, you may still need to obtain the necessary licenses and permits, which vary by industry and state.
As a sole proprietor, you use your own name (or “doing business as” name) to conduct business. You use your Social Security number as your tax ID number. To pay taxes, you’ll file a Schedule C with your annual 1040 form claiming all business revenue and related deductions. Your business is not taxed separately.
Sole proprietors have complete control over their business decisions and enjoy some of the lowest tax rates of the business structures. But there are some downsides to operating as a sole proprietor. Because you and the business are the same entity, you can be held personally liable for the debts of the business. You may also find it difficult to appeal to lenders or investors.
“Doing business as” simply allows sole proprietors to operate under a name other than their own. For example, if John Smith started a plumbing business, he could file to do business as Smith Plumbing. The DBA designation, like any sole proprietorship, doesn’t offer the liability protection of other business designations, but it’s still valuable for marketing and credibility purposes.
A partnership is a business with two or more owners. The most basic type of partnership is a general partnership, in which owners divide all profits and liabilities equally. General partnerships are much like sole proprietorships. A general partnership typically operates under the partners’ names or their DBA name.
Additionally, like sole proprietors, partnership owners share personal liability for any issues that may arise. For this reason, many general partnerships eventually register as limited liability companies to protect their personal assets.
A partnership may also be called a:
- Limited partnership: In this type of partnership, one partner has liability exposure, while the other has limited liability.
- Limited liability partnership (LLP): In such a partnership, all business owners are safe from the debts of the business.
Unlike sole proprietors, partnerships need to apply for an Employer Identification Number (EIN) from the IRS. They can use this number to open a business bank account and pay business taxes. When it’s time to pay taxes, a partnership must file an information return, Form 1065.
Any partnership should have a formal partnership agreement, although this isn’t legally required.
Limited liability company (LLC)
An LLC combines the simplistic tax laws of a partnership with the limited liability protection of a corporation. An LLC can have one or more owners (referred to as “members”). As a member of an LLC, you file taxes as if you were a sole proprietorship or partnership: All of your income and deductions “pass-through” to your personal tax return. However, the LLC is a separate entity, so members can’t be held personally liable for the company’s debts or liabilities.
LLCs are cheaper and easier to run than corporations, making them a popular choice for new small businesses. There’s no minimum or maximum limit to the number of members an LLC can have, and members can determine how to best run the business. All members can share equal responsibility for the day-to-day operations, or members can designate other members to manage the company.
However, LLCs may find it difficult to appeal to investors, especially venture capitalists, who prefer to fund corporations.
Because of its complexity, a C corp typically is appropriate only for medium to large ventures. A C corp’s income is reported on a separate tax return—and owners, or “shareholders,” are taxed separately.
Shareholders hold stock in the company, and formal company proceedings (such as electing a board of directors and assigning board duties) are required. C corps have tax advantages that other entities do not, but they are more expensive to set up and more complicated to run.
A C corp is required to hold annual meetings for shareholders and directors and to share annual financial statements. For this reason, shareholders within a C corp hold less control over their business. However, C corps limit the shareholders’ personal liability—the legal obligations of the business cannot become personal debt.
Like C corps, S corps offer limited liability protections. However, an S corp is taxed more like a partnership or sole proprietorship. In other words, income passes through to the shareholders’ personal tax returns. However, the IRS is more likely to closely monitor S corps’ taxes, and tax mistakes can result in the termination of your S corp.
Additionally, S corps are more expensive to set up than LLCs or partnerships, and they have all the formalities and professional appearances of a C corp. Some states require additional filings for an S corp, but most accept the IRS’s classification.
How to choose the right registration for your business
There are many factors to consider when choosing which designation is right for your business, but here’s some general advice on which type of registration to use. Always speak with a lawyer or business advisor when making important decisions.
- If you plan to operate under your own name and don’t plan to hire employees just yet, a sole proprietorship may be right for you.
- If you intend to open a new small business with a partner, a general partnership may be the right call.
- If you’ll hire employees to help you run your business, an LLC is likely the best option.
- If you’re a medium or large business and you plan to raise venture capital or equity debt, consider a C corp or S corp.
How to register a business
Even if you’re not obligated to register your business, there are still benefits to doing so. In most cases, registering is inexpensive, fast, and painless. Here’s how to do it.
1. Choose a business structure
Your business structure affects how your business is run in all matters, such as taxes, handling personal assets, and even its daily operations. There are many types of business structures, so it’s important to choose the one that best suits your organization.
Knowing which type of registration to pick can be tricky. Some of the most common entity types for new businesses include:
- Sole proprietorship: This is what your business structure will be considered by default if you don’t pick a specific business structure.
- Partnership: If you co-own a business, you’ll likely have a partnership business entity.
- LLC: The most common small business entity, this separates personal assets from business liability.
2. Find a location
After choosing the structure, it’s time to settle on a location for your business. Even if your company operates mostly online, you still need to register a location for operations like receiving government documents, filing taxes, and more.
You can use a PO box to communicate with customers and suppliers, but some government agencies require a street address to do business. Many lenders and suppliers also prefer to work with businesses that have a street address.
When researching potential locations, keep in mind the costs and taxes you’ll have to pay for filing at that address. If you work from home, ensure your business is allowed to register at your home address. Some states won’t allow you to use your personal address as your business address.
3. Register your business name
Next, you’ll want to register your business name to prevent other businesses from using it now or in the future.
If you’re registering a separate entity, like an LLC or corporation, registering your business name is part of the registration process. These entities can be registered through a lawyer or online with services like LegalZoom or Rocket Lawyer.
If you’re a sole proprietor or partnership operating under a different name from your legal name, you’ll need to file a DBA. In some states, business owners have to file DBA registrations with the state agency in charge of business filings (usually the Secretary of State’s office).
While you’re at it, you should also trademark your business name to protect it from being used by any other company in the future. However, if you choose a name that’s already trademarked, you’ll likely get a cease and desist from that business if they learn about your company. So do your research beforehand and choose a name that’s not in use.
4. Register with the IRS
Registering your business with the IRS will give you a federal EIN. This is essentially a Social Security number for businesses (sometimes referred to as a tax ID). EINs are necessary for things like filing taxes, opening business bank accounts, and hiring employees. With the IRS registration, you’ll be able to report income tax, sales tax, franchise tax, and other business taxes.
5. Register with state and local agencies
You’ll need to register separately with some of your local government agencies, like the Department of Revenue. This is so you can do things like run payroll. The reason you need to register with your state and local agencies is so you can be compliant with state and local laws. Each type of entity has its own requirements that must be followed, so it’s worth working with an attorney to get things done right.
6. Apply for a business license and permits
Specific licenses and permits are required to run different businesses — these vary by industry and state. It’s a good idea to have any necessary licenses or permits before you start your business to avoid future problems. If you want to know what licenses and permits are needed for your business, you can contact your local branch of the Small Business Administration.
7. Start conducting business
Now that you’ve got your business registered successfully, it’s time to get your operations on the ground. Get out there and bring your organization to life!
At this point, you’ll want to ensure you have digital and physical copies of your registration information. Work with a lawyer to collect all the information you need so that you can draw up contracts, begin marketing, and prepare for tax filings. For tax filing, work with a CPA and track your expenses and general accounting with software like QuickBooks.
Registering a business FAQs
New businesses have a lot of questions about how to register their organization. We’ve compiled some of the most common questions and answered them below.
How can I register my business?
Register your business by following this simple, six-step process: (1) Choose your business entity and (2) a business location; (3) register your business name; (4) get registered with the IRS and (5) local government’s agencies; and (6) apply for necessary licenses and permits!
What are the steps to register a company for a startup?
Registering a startup follows the same procedure as any other business. You follow the same process of choosing what your company entity will be and where it will be located. Then you register the name and get it registered by the IRS and your local government’s agencies before. Finally, you apply for any necessary licenses and permits.
Do you need an LLC to own a business?
No, you can use other legal entities to own a business, such as sole proprietorship, non-profit, C corp, or partnership. There are advantages and disadvantages attached to every business structure, so take the time to figure out what works best for you.
Onward and upward
Registering your business can only benefit you, and it’s not that difficult to do. Follow the above process one step at a time, and start by determining which structure is best for your new business. Before you know it, your business will be registered, and you’ll enjoy all the benefits that come with it!