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How to Legally Set Up a New Small Business

— April 18, 2022

Consumer protection laws require you to make an official record of your business.

It seems like everyone’s starting a home business these days, and it appears the trend will continue. However, twenty percent of startups don’t last a year because of poor planning. Some businesses aren’t even legally set up. We’ll tell you what you need to do to set up a well-planned, legal home business.

Do Preliminary Planning

During the planning phase, you may need to conduct market research so you’ll know whether your business idea is a good one. You’ll need to come up with a business name that is unique, relevant, positive, short, and easily spelled. If you’re not doing business solely online, you’ll need to determine the optimum location for your business after considering many possible details that the location would affect. If you plan to get a business loan, attract investment capital, or attract strategic business partners, you’ll need to write a formal business plan. The Small Business Administration can help you write it.

Legally Set Up Your Business

You’ll need to decide on a legal structure for your brand new business. Will your business be a sole proprietorship, LLC, partnership, C corporation, S corporation, B corporation, close corporation, cooperative, or nonprofit corporation? This choice affects your taxes, personal liability, and business registration requirements. Choosing to be a sole proprietor is common for one-person businesses, however, the correct choice for 80% of small businesses is a limited liability company (LLC). An LLC entity type would limit your liability for company debts because it legally separates the owner’s personal assets from the business’ assets.

You’ll need to register your business with your local, state, and federal governments. Rules regarding this vary from state to state. If certain conditions apply to your future business, you may need to apply for an Employer Identification Number (EIN) on the IRS website before you go to the next step in the process. Some people argue that all businesses need an EIN number even if the business doesn’t have employees.

Consumer protection laws require you to make an official record of your business. Therefore, if your business will be a sole proprietorship, you’ll need to file a notarized Doing Business As (dba) certificate at your county courthouse and at your state’s business registration department. When you go to a bank to open a business checking account, you’ll need to have your dba (or your business registration form) with you.

You’ll want to register your business with your state to ensure other people won’t use your business’ name. You’ll also want to hire somebody to register your brand’s trademark with the United States Patent and Trademark Office. That will protect your brand identity from being stolen, as your dba registration only gives you protection from intellectual property theft within your state and industry. Register your web domain name so that only you can own the web address you created. Registering the domain name also helps potential customers find your business.

Depending on the kind of business you’ll be running, you may also need to obtain special licenses and permits. Particular products and services would require you to collect and pay sales taxes to your local and state governments. There are many other taxes that may apply to your business as well. Do your research and do what’s needed.

Deal with the Finances

Photo by Bench Accounting on
Photo by Bench Accounting on

You need to open a business checking account before you borrow money. Remember to bring your dba or business registration form with you to the bank. Keep your personal finances in a personal checking account and record the checks you write to yourself out of the business account as “Owner’s Draw.” Having a dedicated business checking account, you and the IRS can easily track your profits and expenses. Your business account will likely have access to much more credit than you could get personally or with your transactions mixed in with the business ones. A separate business account would also help protect your personal assets from some liability risks.

A home business can give you control over your financial future, as well as your personal time. Set up your business legally to avoid penalties. Take the extra steps to protect your business and your personal finances. A well-thought-out and executed home business can give you the kind of money you desire.

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