Taking the time to follow the right legal steps from the start will spare you costly fines and other issues down the line.
There are a lot of important steps you need to take before you open a new business, and that’s still true when you plan to run it out of your home.
Operating a home business spares you the hassle of a lease or mortgage, but you’ll still need to register as a business before you can operate legally. Here are 9 steps to take to get your legal ducks in a row.
Step 1: Register your business with your state.
Registering is a smart idea even if you’ll be conducting business under your legal given name, as doing so allows you to apply for tax benefits and legal protection you won’t be eligible for otherwise.
There are three ways to register your business: a U.S. trademark, an entity name at the state level, and a DBA name. Trademark registration isn’t legally required, but can protect your business from infringement and prevent other businesses from opening under the same name.
Registering your entity name with your state is more important, and is a necessary step for all small businesses. Depending on your city and county’s rules, you may also be required to register a Doing Business As (DBA) name.
All business names must be unique. Before you decide on a name, check the U.S. trademark database, as well as your state’s business registration records, to make sure it’s not already in use.
Step 2: Get an Employer Identification Number.
An Employer Identification Number (EIN) is necessary if you want to open a business bank account, hire employees, or apply for required permits and licenses.
You can get an EIN free through the IRS EIN Assistant. The guided tool will ask for your business structure and DBA name, so make sure you’ve solidified these details before you start.
Step 3: Get a state tax ID number.
If you’ll be hiring employees or selling taxable goods, you’ll need a state ID number. The specific rules and application process vary from state to state.
If you’re from New York, South Carolina, or Massachusetts, you can register for both your state ID and EIN in one session through this portal. For other states, check with the SBA or your local Chamber of Commerce for details on whether you need one and how to apply.
Step 6: Designate a registered agent.
Businesses operating as a partnership, corporation, LLC, or nonprofit will need to have a registered agent before filing with the state. The registered agent receives all the official mail for the business, and must have a mailing address within the state where you’re filing.
You can designate yourself the registered agent, and in many states your business can be its own registered agent. This is usually the easiest option for brick and mortar businesses with a single location, or home businesses with a single owner.
Some small business owners prefer to hire a registered agent service to keep track of legal notices and deadlines. This is also a good solution for web-based businesses if you don’t want to register it under your personal address, or if you plan to do business in multiple states and need a mailing address in each.
Step 5: File the documents required for your business structure.
The specific documents you’ll need to file depends on whether you’re forming an LLC, partnership, or corporation. There will be fees associated with filing these documents but they’re not substantial (usually $300 or less).
For an LLC, you’ll need to file an operating agreement and articles of organization. For a partnership, you’ll file your partnership certificate and agreement. Corporations will need to file articles of incorporation and bylaws (or resolutions, if you’re a nonprofit).
Like with state tax ID numbers, the process varies depending on where you live. Check your state’s government website to find out which documents you’ll need to file.
Step 6: Open a business bank account.
A business bank account keeps your personal assets separate from your company’s, and makes it much easier to keep track of your profits and file taxes accurately. Business bank accounts also offer perks like purchase protection and make it easier to take out a line of credit from the institution, in larger amounts than may be available to personal banking customers.
At minimum, you’ll want to open a dedicated checking account. If you want to accept credit card transactions from customers, you’ll need a merchant services account.
The same documents you file to register your business will be required to open a business account, including an EIN, formation documents, and ownership agreements, so you’ll want to complete those steps first.
Step 7: Determine if you need permits or licenses.
Federal licensing is only required for a handful of industries. Most of the permits and licenses you’ll apply for will be at the state level.
While you won’t be able to apply for licenses until after you’ve registered, you should check your state’s requirements before finalizing your business documents to make sure you’ll be able to comply.
This is particularly important if you plan to make and sell food. States that have cottage food programs allow the sale of baked goods and shelf-stable foods, with 28 allowing online sales. If you want to open a home cupcake bakery in a state like New Jersey with no cottage food program, you’ll need to plan a workaround like renting a commercial kitchen space.
Step 8: Set up any necessary inspections.
Filing an application is just the first step in obtaining most licenses and permits. An inspection by a licensed representative of the associated regulatory agency will usually need to happen before the license is granted.
The inspection timeline can be long for some industries, so you’ll want to schedule this well in advance of when you plan to open.
Step 9: Obtain business insurance.
Most states require businesses to have workers’ compensation insurance if they have employees. Other types of insurance, like commercial vehicle insurance or professional liability insurance may be required depending on your state and industry.
Other types of business insurance are simply a good idea, even if they’re not required, protecting you and your business in the case of damage, injuries, or lawsuits.
Many insurance providers offer bundles for small businesses which include a combination of coverages like property insurance and liability insurance. For a home business, you may also want to speak with your homeowners insurance provider to find out if you can expand to include other coverage.
Not every business will need to take every step listed above. For instance, if you started a blog or some other virtual business model, you may not need to get any permits or licenses. In fact, depending on your industry and business structure, starting your business could be as simple as registering with your state. Taking the time to follow the right legal steps from the start will spare you costly fines and other issues down the line.