6 Key Steps to Formalize Your Business
These 6 key steps to formalize your business can benefit you greatly in the form of legal protections, and so you can easily get financing.
Congratulations! You have a great idea for a business. It’s important to understand the steps to formalize your business, before moving ahead to hustling, hiring, and selling your goods and services. Don’t let these formalities kill the honeymoon stage of your business; performing these duties can benefit you and your business greatly in the form of legal protections, and in having everything you need in place so you can more easily get financing and government support.
These steps are listed in order because there are good reasons why you will need to perform one task before the next. Here are the 6 key steps to formalize your business.
1. Write a Business Plan
A business plan outlines the goals you have for your business and how you aim to achieve them. In other words, it’s a guide for how to set up your business and run it on a daily basis to help you reach your long-term goals. Writing a business plan is a worthwhile investment of time and effort, even if you don’t need to present it to potential investors. If you are going to apply for a business loan, a business plan is a must-have. Read more about different types of business plans and how to create them.
You might choose to create a mini-plan for now so you can get started with formalizing your business, with the intention of creating a more robust business plan down the road if you choose to apply for financing. Writing a business plan will help inform the next step, which is choosing a legal entity or structure for your business.
2. Choose a Legal Structure
The next step you’ll take is deciding what type of legal structure your business will have. There are several different ways to set up your company, and each will have varying implications as far as size, level of complication, stocks, paperwork, taxes, financing, and personal liability.
The different legal business structures you can choose from are as follows:
- Sole proprietorship
- S Corporation
- Limited Liability Company (LLC)
Read more about the definitions of the legal structures and to get a better idea of which you might choose. Which type of structure you choose will vary depending on the goals of your business. With your business plan in hand, meet with your lawyer or accountant for advice on which structure will be most advantageous.
3. File a Doing Business As (DBA)
A DBA is an operating name that a company uses to conduct business, which is a separate and distinct name from the formal legal name of the company. A DBA can serve different purposes, depending on your business structure.
When you’re running a sole proprietorship, your personal name and your business name are legally the same. The same principle applies to businesses run as a simple partnership. In these instances, using a DBA allows you to conduct business under another name rather than just using your personal name(s) and identity as the “face” of your business.
Filing a DBA for your small business can help you with your small business banking and accounting. Your DBA will be assigned a federal tax ID number which permits you to open a business bank account under your DBA. Filing a DBA as a sole proprietorship or simple partnership makes it possible for you to open bank accounts and receive payments in the DBA name of your business.
Note that if you plan to get a bank account for your DBA, many banks won’t allow you to open a business bank account without verifying a copy of your filed DBA. Your bank may require you to provide a DBA certificate at the time of your account opening.
4. Small Business Taxes and Your EIN
Based on your business’s legal entity, filing taxes may differ. Read about the different taxes a small business pays, and how it varies depending on your business’s legal structure. You should also consult a tax pro to learn more specifically the ins and outs of paying taxes, whether your business is a corporation, partnership, S-Corp, LLC, or sole proprietorship. Your accountant can help you understand whether you are responsible for paying taxes annually or quarterly.
You should also apply for an Employer Identification Number (EIN) or Tax ID Number, which is how the government recognizes your business for tax purposes. You can apply for an EIN online and receive it almost instantly. Technically, if you’re a sole proprietor, you don’t need an EIN for taxes, but to establish business credit, you will. Your personal credit is connected to you by your Social Security number or Individual Taxpayer Identification Number (ITIN). Your business credit history is linked to you by your EIN.
5. Set Up a Business Bank Account
Now that you have a DBA and an EIN, it’s time to open a business bank account. You should plan to keep your business’s money separate from your personal accounts. There are many reasons for keeping the money separate, from protecting your personal assets should your business get sued, to keeping your accounting clear and easy, to having your business’s accounts separate should your business ever have the misfortune of being audited by the IRS.
Certain services should be expected from all banks. At a minimum, you should look for your bank to provide the following Business Account Services:
- Checking account
- Savings account
- Credit card/debit card
- Checks and a checkbook
- Deposit-only card (so employees can make deposits on behalf of your business without the ability to withdraw money)
- Online business banking
- Employee checking accounts
Find out the details on each of these business banking products, as well as any fees or requirements. Checking account fees are still common, but some banks offer free business checking accounts with no minimum balance as an enticement. Fees and requirements (minimum balance, checking fees, monthly required use of a debit card) vary widely, so take time to comparison shop and look at the details of each bank’s offerings.
If you have other business banking needs, such as opening a line of credit, ask about it upfront. You don’t want to sign up for business checking and find out that they can’t give you a loan when you need it.
6. Register for Business Permits or Licenses
If your business activities are regulated by a federal agency, you’ll need to get a federal license or permit. Check to see if any of your business activities are listed on the SBA website, and then follow the links to the federal agency to see how to apply.
Some states or municipalities may require you to register or become licensed depending on what type of business you have. Industry requirements often vary by state. Visit your state’s website to find out which permits and licenses you need. You’ll also have to research your own county and city regulations.
Don’t be discouraged by these actions. They might sound complicated, but they can all be accomplished quickly and easily in a matter of days. Don’t put off these crucial first steps to establish and formalize your business, and most importantly, don’t let the formalities dull your enthusiasm for being a brand new business owner.