By default, businesses are considered sole proprietorships, operating under the owner's name.

Starting a small business can be a straightforward process involving the sale of products or services to customers. By default, businesses are considered sole proprietorships, operating under the owner's name. However, if you want to establish a separate legal or tax entity for your business, follow these steps to form your small business:

Steps to Starting a Small Business

1. Choose the Business Entity:

Small businesses can take various forms, each with its own legal and tax implications. Common business structures include Limited Liability Companies (LLC), Corporations (C corps), and S Corporations (S corps).

• Limited Liability Company (LLC): This structure separates personal and business assets, protecting personal assets from business-related liabilities. While LLCs require self-employment tax payments, they avoid corporate taxes on profits and losses. However, some inflexibility may arise in certain situations, like adding or removing members.
  
  
• Corporations (C corps): C corps face double taxation, paying income taxes on profits when earned and when distributed to shareholders. Setting up and maintaining C corps can be more costly, demanding extensive record-keeping. However, they offer strong personal liability protection and facilitate raising capital through stock issuance.
  
  
• S Corporations (S corps): S corps allow profits to pass through to an owner's personal income, avoiding double taxation. Taxation rules vary by state, and eligibility requirements must be met, such as the type of shareholders and a limit of 100 shareholders. Only one type of stock can be issued in S corps.
• Seek guidance from professionals or business formation services to determine the most suitable business structure for your needs.

2. Select an Available Business Name:

• Choose a business name that is available in your state and not trademarked by another national company. Verify name availability through your state's secretary of state website and the U.S. Patent and Trademark Office.
  
  
• You can typically reserve your business name online through your state's official website for a specified period, often around 120 days, for a fee ranging from $10 to $50.

3. Designate a Registered Agent:

• A registered agent is a helpful resource for forming your company with the Secretary of State.  Some services even offer to form the LLC or S Corp for you and provide you with a templated operating agreement.  This can save considerable costs starting up.  Just be sure to read the operating agreement well to make sure it fits your needs. 
  
  
• A registered agent accepts legal notices on your business's behalf. While you can serve as your own registered agent, many small business owners opt for professional registered agent services due to the time-intensive responsibilities.
  
  
• Benefits of acting as your own registered agent include no additional cost and direct document delivery. However, professional registered agent services offer benefits like keeping personal information private, assistance with document management, and tracking filing deadlines.

4. Create an Operating Agreement (if applicable):

• Although not mandatory in most states, it is advisable to create an operating agreement. This document acts as a contract among members, outlining important financial and operational aspects. It helps protect personal assets in the event of legal issues and ensures clear communication among partners.
  
  
• You can find free templates for operating agreements from companies like Rocket Lawyer and Northwest Registered Agent, but it's wise to consult a business lawyer for customization.
  
  

5. File Articles of Incorporation or Articles of Organization:

• To formally establish your business in your state, complete and submit the appropriate form: articles of incorporation for corporations or articles of organization for LLCs. These documents include essential business details like the name, registered agent, and purpose.
  
  
• Filing can typically be done online through your state's secretary of state website. Fees vary, ranging from $40 to over $500, depending on the state and business type.
  
  
• Alternatively, consider using a business formation company like Rocket Lawyer or ZenBusiness to assist with the process.
  
  

6. Obtain an Employer Identification Number (EIN):

• An Employer Identification Number (EIN) is a business's tax identification number, essential for hiring employees, opening a business bank account, and obtaining necessary licenses. You can obtain an EIN quickly through the IRS website.
  
  

7. Acquire Business Licenses & Permits (if required):

• Depending on your business's nature, you may need licenses or permits from local, county, or state authorities. For instance, food service or healthcare businesses often require specific licenses. Determine the necessary permits using online resources provided by your state.
  
  

8. File Annual Reports:

• Most states require businesses to file annual reports, often accompanied by a fee. Deadlines vary, so check your state's secretary of state website for details. Failure to file annual reports can lead to penalties.

Understanding Small Businesses

• The Small Business Administration (SBA) defines small businesses based on factors like revenue, employment, independence, and profit-seeking. Revenue and employee limits for small businesses vary by industry, but typically range from $1 million to $47 million in annual revenue and up to 1,500 employees.
  
  
• While the SBA's criteria are expansive, most people perceive small businesses as local, relatively unknown enterprises. Sole proprietorships and partnerships are common small business structures, and they often fall below the revenue and employment thresholds set by the SBA.

Funding Options for Small Businesses:

• If you lack sufficient capital to fund your small business, several financing options are available, including:
• Small Business Administration (SBA) loans, which offer government guarantees and guidance.
• Credit cards, both personal and business, although they may have high APRs.  Be careful with this route as we all know the trappings of high interest rates.
• Online business loans, providing quick access to funds.
• Crowdfunding platforms like GoFundMe, Kickstarter, and Indiegogo, where you can raise capital from a broad audience.

Choosing the Right Location:

• To simplify the registration process, it's generally recommended to register your small business in the state where you live or operate. While states like Delaware, Nevada, and Wyoming are often considered business-friendly, registering in your own state offers cost advantages and avoids additional legal requirements and paperwork associated with operating in other states.

Tips for Starting a Small Business with Limited Funds:

• If you're launching a business with minimal funds, consider these strategies to keep costs down:
• Purchase refurbished business items for quality equipment at lower prices.
• Establish a budget and adhere to it, avoiding unnecessary expenses.
• Monitor income and expenses with accounting software.
• Explore cost-reduction measures in your business practices.
• Utilize free or low-cost business formation services, legal templates, and registered agent services to minimize initial expenses.

Starting and managing a small business involves careful planning, legal compliance, and effective financial management. Seeking professional advice from attorneys, accountants, or business consultants can be invaluable throughout this process.