Like Rome wasn’t built in a day, establishing a business entity doesn’t happen over a short span. It involves complex considerations.
There are several steps involved in setting up a business. But first, you must decide the type of business entity and know about legal entity formation.
There are several entity types like a sole proprietorship, LLC, partnership, or corporation. Depending on what liability protection you need or how many owners are there, you can choose and establish your business entity.
But do you know why entities exist? Why does a business need a legal structure?
That’s because the type of entity you choose decides your tax implications, financing, ownership, control, and legal compliances. Also, the local and state laws will affect the process because they will determine which permits, registration, and licenses you will need to run your business.
Now that you know why creating a business entity is necessary, let’s get to the ‘how,’ that is, how to set up a business entity.
But before getting into the steps of establishing a business entity, let us tell you that you can also use EOR or PEO solutions.
Using PEO solutions, you can avoid creating a business entity. The PEO will hire employees quickly and legally for your business. Hence, you need not take the burden of setting up a corporate entity.
Now, let’s get into the steps involved in setting up a business entity.
How To Establish A Business Entity: Get Started With These Steps!
The steps of how to form a business entity might vary by state.
Though we will detail the basic steps of legal entity formation, we recommend consulting a professional for accurate and updated information on taxes and legal aspects.
Here are the basic steps of establishing a business entity.
1. Choose a legal structure
When it comes to legal entity formation, first off, you must choose the legal structure.
What type of business entity would you prefer? Which one would be the most advantageous?
It’s quite a task to respond to the above questions because several factors are involved.
Each state offers different pros and cons for the legal structures. While some states charge an annual fee, others might levy additional taxes on certain business structures. Generally, you might consider,
- business needs and goals;
- degree of liability protection;
- number of owners;
- tax benefits; and
- investor requirements
to determine the right business structure. Then, you can decide to establish the business entity as a sole proprietorship, partnership, LLC, corporation, or S corporation.
2. Pick a location
One of the key considerations in starting a venture is selecting an ideal location. If you need a physical location for your business, make sure you choose the right place to impact your sales.
Further, depending on the location of your business, you must obtain the required additional permits, approvals, or even a city business license.
It is essential to choose the business location before moving ahead with the other activities. Each state has specific regulations and laws for different businesses. Hence, you must check out the location-specific guidelines.
You might need to file articles of incorporation and comply with other legal aspects.
3. Pick a name
The third step of the ‘how to create a legal business entity’ process is to pick a suitable name. Choose a name that indicates your business status or what services/ products you offer.
Here are certain aspects of naming a business that you must consider depending on the type of business entity.
- Sole proprietorship – For a sole proprietorship business, one can choose the owner’s name or a fictitious name. To run the business under fictitious names, file Doing Business As (DBA).
- LLC – When it comes to LLCs, your business name must end with the words ‘Limited Liability Company’ or ‘LLC’. You can also use abbreviated forms like ‘Co.’ or ‘Ltd.’
- Corporation – Some states place restrictions on the naming of corporations. Typically, the name must include ‘incorporated’ or ‘inc.’ or something else that indicates that the entity is a corporation.
Before you choose a name, search your state and country directories to ensure that your business name is unique. You can also protect your business name by filing a federal trademark.
4. Carry out the necessary paperwork
Once you decide the legal structure for your business, you can file the necessary documentation. Depending on the business entity type, you might need to register the business and get licenses and permits.
The paperwork for your venture might differ according to your location. For instance, in most states registering a sole proprietorship is not mandatory. But it is in some states. Similarly, for LLCs and corporations registering the business is a must.
A few states also require certain business entities to submit partnership agreements (in case of partnership businesses), articles of incorporation (for LLCs and corporations) and operating agreements (mostly for LLCs, partnerships).
Some states also require additional paperwork – like obtaining the EIN (Employer Identification Number) from the IRS and submitting it.
EIN is necessary for LLCs, partnerships, and corporations for taxes.
5. Decide finances and taxes
One of the most vital decisions of creating a business entity is capital structuring or financing. How to collect the funds, where to take payments, tax forms, are a few of the complexities involved here.
In a sole proprietorship, there is no separate entity concept. But you might set up a business bank account separate from your account for better tracking of expenses.
Further, be aware of the revenue streams like business income, rent, dividends, etc., so that you can calculate your taxes well. You might need to pay the taxes quarterly or annually. Plus, you might also have to pay estimated taxes on federal taxes, and state and local taxes as well. Tax rules vary by state. So, make sure you are up-to-date with the taxes information to avoid penalties.
For instance, you can report your business profit or losses through your tax returns in sole proprietorships and LLCs. You simply need to fill out an attached Schedule C along with personal income tax.
Further, a business with employees must also be ready to withhold and pay payroll taxes. For everything related to taxes and financing, you must ensure setting up accounting systems for proper recording and tracking of transactions.
6. Get your insurances
You might (or might not) miss out on business insurances when planning the whole ‘how to become a legal entity’ process.
But protecting your business, assets, and image is necessary. For that, getting the right insurance policies is a must for entrepreneurs.
Among the several insurances to choose from, the ones listed below are essential.
- General liability insurance – protects your business from claims like it caused property damage to third-party property, personal injury like slander, and physical injury to someone else.
- Commercial property insurance – protects your owned or rented property or equipment that you use for your business.
- Professional liability insurance – Protects from claims and lawsuits filed against your business for errors in your services.
- Workers’ Compensation insurance – Provides employee benefits like paying for their medical bills, paying for ongoing care, replacing lost wages if they miss working to recover, etc.
So, choose the perfect insurance for your business and ensure that everything is well-protected.
7. Hire Employees
Done establishing a business entity?
Well, then you can start planning your employee hiring process.
The hiring process involves obtaining certain necessary requirements. For instance, you must get your EIN from the IRS. It helps in identifying your business. You will need the EIN for several legal entity formation forms.
However, EIN is not required for sole proprietorships as sole proprietors can use their Social Security number or tax identification number.
Once you have completed the necessary requirements, start hiring your employees. Also, keep your Workers’ Compensation insurance ready along with up-to-date information on payroll taxes.
Simplify Payroll for Global Business Entities with Multiplier
Are you planning to set up a global business entity? Well, let us warn you about all the hustle coming your way. Instead of over-complicating it, you can use a SaaS-based onboarding tool called Multiplier.
Multiplier will simplify your journey of setting up a business entity and help you with the following:
- Generating compliant business contracts
- Onboarding international employees, independent contractors, and freelancers quickly
- Managing multi-currency payroll
Want to explore more? Book your free demo now!