Whether it’s a new recipe, a cutting-edge patent, or the dream of running your own construction company, every small business starts with a big idea. Smart entrepreneurs know they’ll need a good business plan, some expert help, a little start-up money, and a lot of dedication.

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And of course, a small business owner will need legal help too. Whether it’s picking a name, choosing your business structure, obtaining permits, or hiring employees, understanding the legal implications up front will help you protect your personal finances and your business’ overall health. Don’t let paperwork be the reason your business doesn’t succeed.

You can either start now or you can read our article below for research before incorporating or forming an LLC. And good luck!

Picking a Name

One of the most important components of a business is its name. It’s how your customers will refer to you, what you’ll hang above your door, and how you’ll be known on the web.

If you’re planning on starting a business, you may already have a name in mind. Hopefully, it’s original. After all, you can’t just name your business “Microsoft.” Among other reasons, a unique name allows you to obtain trademarks and copyrights more easily, differentiates your business from competitors, and makes your brand more memorable.

The first thing you should do once you’ve decided on a name is check the U.S. Patent & Trade Office’s database. Look for your exact name, misspellings, or similar names. If you find a similarly named business, you should consider whether your business could be confused with theirs. If you’re going to be selling totally different products, you could avoid confusion. If a similarly-named business will be your direct competitor, you should probably go back to the drawing board.

Next, check with your county clerk and your Secretary of State to make sure your business name is unique. If your business is going to be a corporation, LLC, or limited partnership, you will have to register your name with your Secretary of State as well. (We’ll get into incorporating in our next section.)

When selecting a business name, many entrepreneurs also check to see if the potential name is available as an Internet domain.  If yourbusinessname(dot)com is available, it’s a good idea to secure it as soon as possible.  If your chosen domain name is not available, you might to reconsider your name and find one that's available, as it’s better to have your website reflect your exact business name if possible. If you’re going to use social media, such as Twitter and Facebook, check to see if you can register your name with those sites as well. These steps will prevent people from squatting on your business name online and asking you for payment.

Finally, you may want to file a DBA (“Doing Business As”) depending on the kind of business you’re opening. DBAs are generally cheap, costing between $10 and $50. For further information, read “What is DBA or Doing Business As."

From an intellectual property perspective, keep in mind that you can trademark your business name now or retroactively, after you’ve been using it. When to trademark your name is up to you, but it’s generally a good idea to secure your mark as soon as possible to prevent infringements and preserve your brand.

Choosing Your Business Structure


Although choosing a business name is an incredibly important and visible step, there’s probably no bigger choice for your business than the legal structure you choose. There are several business structures to choose from and each has its own distinct advantages and disadvantages. For example, often, lawyers will recommend you form an LLC, as it protects you best from liability. An accountant might suggest an S-Corp, however, as the taxes are generally lower.

Our Incorporation Learning Center can help you choose the best business structure for you. We’ll also take care of all the costs, minus your state filing fee. But it’s always a good idea to learn about the process first so you can make an educated decision.

Here are the most popular structures you can choose from when you’re starting your business:

Sole Proprietorship


A sole proprietorship is the easiest business structure to set up. However, it provides the least amount of financial and legal security compared to other business structures. A sole proprietorship does not pay taxes as a business and any debts your business incurs would be your personal debt as well. Since it’s a “sole” proprietorship, you should not have employees.

And while some states require you to register a sole proprietorship and get a business license, other states confer this status on certain businesses automatically (freelance writing, construction, or photography, for example).

  • Advantages: Little to no paperwork, little to no business taxes
  • Drawbacks: No limited liability, creditors can go after personal assets for business debts

Partnerships


Partnerships are more complicated than sole proprietorships. Most simply, a partnership is a collection of two or more people who are each owners and share profits. Partners generally share profits and losses equally and do not get a salary from their partnership. Interestingly, forming a partnership does not require a formal, written Partnership Agreement, although it’s recommended.

There are three main types of partnerships:

  • General Partnership: Partners share profits, management, losses, liability, and responsibilities
  • Joint Venture: Similar to a general partnership, except a joint venture exists for a specified amount of time (be it months, years, or on a project by project basis
  • Limited Partnerships: This type has the most rules, as it has at least two tiers of partners. Think of these as “passive” and “active” partners. This means that some partners will simply invest money, while others will be active in the management and day-to-day functions of the partnership.

Partnerships are more like sole proprietorships than corporations. In fact, they have very similar advantages and drawbacks.

  • Advantages: easy to start, little to no business taxes, no formal agreement needed
  • Drawbacks: no limited liability, creditors can go after personal assets for business debts, no paperwork required between partners can lead to problems down the road

Corporations


Some business structures require more paperwork to maintain and, additionally, pay more taxes. But they also shield their owners from liability and personal tax implications, as well as providing infrastructure for corporate stocks. No business is too small to incorporate and the time it takes to form a corporation, LLC, or non-profit is minimal.

Even if you have no employees, it can be smart to incorporate your business for tax and liability reasons.

There are several different kinds of business structures that provide liability protection and more tax flexibility, each with their own advantages and drawbacks. They are as follows:

  • S Corp
  • C Corp
  • Limited Liability Company (LLC)
  • Nonprofit Organization (NPO)

S Corps & C Corps


S Corps and C Corps are the most common business structures. They have a number of important similarities:

  • Liability: Generally, the shareholders (owners) have no personal liability
  • Structure: Both have shareholders, officers, and directors. Shareholders choose the board of directors, the board of directors chooses the officers, and the officers manage the business’ daily affairs
  • Management: A board of directors is responsible for overall management, while delegated officers control day-to-day activities
  • Documents: Both require Articles of Incorporation, Stock Certificates, Bylaws, and Organizational Board Resolutions

Here are some of the key differences between S Corps and C Corps:

  • Ownership Rules: A C Corp can have unlimited shareholders and unlimited stock classes; an S Corp can have a maximum number of shareholders (usually 100) and only one stock class.
  • Taxes: A C Corp is separately taxable. This means a C Corp files taxes at the corporate level and that individual dividends to shareholders could also be taxed. S Corps, meanwhile, are considered “pass-through” tax entities. This means that no taxes are paid at the corporate level and, instead, tax is paid individually by the owners.
  • Documents: An S Corp will need to file a special IRS Form (IRS Form 2553) to gain S Corp status.

In the end, S Corps and C Corps are more similar than they are different. Importantly, both shield owners from liability and require more documentation than the other structures we’ve mentioned so far.

  • Advantages: generally no personal liability, pre-set corporate structures
  • Drawbacks: tax structures can be complicated, profit is based on investment and shares, highest amount of required documentation

LLC (Limited Liability Company)


An LLC’s structure is generally less rigid than either an S Corp or a C Corp. There is far less paperwork and record keeping required and the management of the business is not required to contain directors and officers.

Unlike partnerships or sole proprietorships, LLCs generally protect personal liability of LLC members. This no maximum number of owning members and both profits and losses are passed to the members unless the entity chooses to be taxed. That said, most LLC members’ earnings are often subject to self-employment taxes. In some instances, this can be quite costly.

Importantly, an LLC can distribute profits in the manner it sees fit, whereas an S Corp or C Corp distributes profit based on investment. In other words, in an LLC, if one member does more work but invested less, they could choose to have a 50/50 profit split. In an S Corp, profits are strictly based on investment and shares owned.

  • Advantages: generally no personal liability, less rigid structure, malleable profit distribution
  • Drawbacks: taxes can be higher, less structure could lead to problems down the road

Nonprofit Organization


For certain types of businesses, especially those who aim to do public good over simply turning a profit, incorporating as an NPO (or “Nonprofit Organization”) is a great option. Nonprofit status, like other corporate formations, provides limited liability protection. Moreover, your nonprofit could qualify for tax exempt status, access to grants, and receive tax deductible donations.

Like other entities, there are drawbacks. For one, there is far more paperwork and scrutiny for NPOs. A nonprofit’s finances are open to public inspection and it is not owned by its founders; if an NPO dissolves, its assets are usually given to another NPO. If assets are used for private benefits, they can be seized.

If you’re thinking about starting your business as a nonprofit, it’s generally a recommended to find a seasoned attorney. There are certain, major tangible benefits and detriments to incorporating as an NPO and, depending on your mission, you’ll need to figure out if your company is eligible in the first place.

  • Advantages: limited liability, possibility of tax exemption, serving the greater good
  • Drawbacks: far more paperwork, required transparency, less control as a business founder

Now What?


Every business needs a name and a structure, be it as informal as a sole proprietorship or as rigid as a non-profit. After you’ve set up this foundation, your next steps will be dependent on your state and local laws and the kind of business you want to run.

Here are a few things to keep in mind:

  • Insurance: If you’re set up as a sole proprietorship or partnership, it might be a good idea to get liability insurance. If you’re going to need buses, vans, or cars, you should insure those too. And looking into general business insurance is always a smart choice.
  • Federal ID number (EIN): Partnerships, corporations, and LLCs with employees will need a federal ID number (it’s like a social security number for your business). Learn How to Apply for an EIN and fill out an EIN form when you're ready.
  • Other Permits and Licenses: Depending on your state and local laws, you might need a seller’s permit. If you’re selling food, you’ll need a health inspection. But every locality is different; contact your local chamber of commerce and ask them what you need in order to be fully compliant.

If you’re hiring employees at the outset, you should make sure you have the proper paperwork for them as well. Examples include:


You can visit the Employment Legal Center for more help on hiring employees or contractors.

Small businessesare the lifeblood of the American economy. They make up 99 out of every 100 businesses, employ half of all private sector employees, and have generated two thirds of new jobs in the last two decades. Each day, thousands of Americans embrace their dream and start their own company. Visit our Incorporation Learning Center to get started.

Get started Incorporate Your Business Answer a few questions. We'll take care of the rest.

Get started Incorporate Your Business Answer a few questions. We'll take care of the rest.