Your Comprehensive Guide to Business Formation & Compliance
Starting a business is an exciting venture, but it requires careful planning, legal considerations, and ongoing compliance to ensure its success. Understanding the steps involved in business formation and compliance can save time, reduce risks, and position your company for growth. This comprehensive guide walks through each key phase, from selecting a business structure to maintaining compliance with regulatory requirements.
Of course, Propel is there for you every step of the way. With our team of dedicated small business formation and compliance gurus and decades of hands-on experience, we can walk you through the complete process of registering and getting a business off the ground. Let’s take a look at how that process evolves.
Idea & Business Planning
The first step in business formation is turning your idea into a concrete plan. This involves outlining your vision, mission, and goals, but it also requires a deep dive into the logistics, market, and strategy.
Conduct Market Research
Before anything else, research your target market, identify competitors, understand customer needs, and evaluate demand for your products or services.
Draft a Business Plan
A solid business plan serves as the foundation of your company and includes sections such as:
- Executive summary
- Market analysis
- Business model and structure
- Products and services
- Marketing and sales strategy
- Financial projections and funding needs
- Operational plan
A well-crafted business plan not only helps you stay focused but is also crucial if you’re seeking investment or loans.
Choosing the Right Business Structure
The type of legal structure you choose for your business will affect your tax obligations, personal liability, and ability to raise funds. Each structure has its advantages and disadvantages:
- Sole Proprietorship: This is the simplest form of business ownership where one individual owns and operates the business. There is little formal paperwork involved, but the owner is personally liable for all business debts.
- Partnership: A partnership involves two or more people who agree to share profits and responsibilities. There are general partnerships (GPs) where all partners share equal liability, and limited partnerships (LPs) where some partners have limited liability.
- Limited Liability Company (LLC): An LLC provides liability protection like a corporation, but with the tax advantages and operational flexibility of a partnership. It’s a popular choice for small to medium-sized businesses.
- Corporation: Corporations are separate legal entities from their owners (shareholders) and offer significant liability protection. There are two types:
- C Corporation (C-Corp): Profits are taxed at both the corporate and personal level (double taxation), but this structure is ideal for companies seeking to raise significant capital.
- S Corporation (S-Corp): Avoids double taxation, as profits and losses pass through to shareholders’ personal income. It’s limited to 100 shareholders and is subject to certain IRS regulations.
- Nonprofit Organization: Nonprofits exist to serve public or charitable purposes. They are exempt from federal income taxes if they meet IRS requirements, but compliance with strict regulations is necessary.
Key Considerations:
- Tax implications
- Ease of setup
- Liability protection
- Investment needs
Consulting with an attorney or accountant is highly recommended at this stage to make sure you’re selecting the most suitable structure. At Propel, we can also guide you into selecting the business structure that best aligns with your future goals – all while making the most sense for your bottom line.
Registering Your Business
Once you’ve decided on your business structure, the next step is to register your business with the appropriate federal, state, and local agencies.
Register the Business Name
This process varies depending on your structure and location. Ensure your business name is unique by conducting a search with the U.S. Patent and Trademark Office (USPTO) or your state’s business name database. For added protection, consider trademarking your business name, logo, or slogan with the USPTO.
Obtain an Employer Identification Number (EIN)
An EIN, or Federal Tax Identification Number, is used to identify your business for tax purposes. This number is required for LLCs, corporations, and partnerships and can be obtained for free through the IRS website. If you’re operating under a name different from your personal name or legal entity, you’ll need to file a DBA or trade name registration.
State Registration & Licenses
Some businesses may need to register with their state’s secretary of state office, particularly if forming an LLC or corporation. Depending on your industry and location, you may need to obtain specific business licenses or permits, such as zoning permits, health department permits, or industry-specific certifications.
Filing Formation Documents
For businesses like LLCs and corporations, formal documents must be filed with the state to legally form the entity.
Articles of Organization (for LLCs)
This document includes essential details about your LLC, such as its name, address, registered agent, and members. Filing fees vary by state.
Articles of Incorporation (for Corporations)
Similar to the LLC’s articles of organization, this document officially creates the corporation. It outlines information about your company’s shares, directors, and purpose.
Key Steps:
- Draft and file these documents with the state.
- Pay the required filing fee.
- Designate a registered agent to receive legal notices.
Creating Internal Documents
Even though these documents may not need to be filed with the state, they are critical for organizing the business internally and legally binding the members or shareholders. These documents clarify roles and expectations, minimize disputes, and provide guidance on how the business will operate.
An operating agreement (for an LLC) outlines the ownership, roles, and operational procedures of the LLC. It’s particularly important for multi-member LLCs. Corporate bylaws (for a corporation) governs how your corporation will operate, detailing shareholder meetings, voting rights, and the roles of officers and directors.
Opening a Business Bank Account
It’s essential to separate personal and business finances, especially for LLCs and corporations. Opening a business bank account can help streamline tax preparation, accounting, and financial reporting.
Most banks require your EIN, formation documents, and operating agreement or bylaws to open a business account. In addition to a bank account, obtaining a business credit card helps build credit for your company and keeps expenses organized.
Setting Up Accounting & Financial Systems
Proper bookkeeping and financial management are crucial to the success and longevity of your business. Setting up accounting systems helps you track expenses, prepare for tax season, and make informed financial decisions.
Choose an Accounting Method
Cash basis (income is recorded when received) or accrual basis (income is recorded when earned).
Select Accounting Software
Use tools like QuickBooks, FreshBooks, or Xero to track income, expenses, and invoices.
Hire an Accountant
Consider working with a professional accountant to handle your tax preparation, payroll, and financial reports. Propel can handle all of these things for you, eliminating the hassle and stress of staying on top of important financial disclosures.
Tax Compliance
Complying with tax regulations is one of the most important and ongoing aspects of business ownership.
- Income Taxes: Businesses must pay federal income taxes, and depending on the state, state income taxes as well. Corporations may be subject to double taxation (corporate and individual), while pass-through entities like LLCs and S-Corps report profits and losses on personal tax returns.
- Employment Taxes: If you have employees, you are required to withhold income taxes, Social Security, and Medicare taxes from employee wages. You will also need to pay federal unemployment taxes (FUTA).
- Sales Tax: Businesses selling goods or services may need to collect sales tax. The requirements vary by state, so ensure you register with your state’s tax department if applicable.
- Self-Employment Taxes: Sole proprietors, independent contractors, and partners are responsible for paying self-employment taxes, which cover Social Security and Medicare.
Obtaining Necessary Business Insurance
Business insurance is critical to protecting your company from unforeseen risks. There are several types of insurance policies that may be required or advisable, depending on the nature of your business.
- General Liability Insurance: Protects against claims of bodily injury or property damage caused by your business.
- Professional Liability Insurance: Also known as errors and omissions insurance, this is essential for service-based businesses to protect against claims of negligence or malpractice.
- Workers’ Compensation Insurance: Required in most states if you have employees, this insurance covers medical expenses and lost wages for employees injured on the job.
- Property Insurance: Protects your business’s physical assets, such as equipment, furniture, and real estate, from damage or loss due to fire, theft, or other disasters.
Hiring Employees & Ensuring Labor Law Compliance
If your business requires employees, hiring is a critical next step. Compliance with labor laws is essential to avoiding penalties and ensuring a fair work environment. Here are a few things to keep in mind when you start growing a team.
Create clear job descriptions, advertise your openings, and screen candidates to find the right fit for your business. Use formal employment contracts or offer letters that outline salary, benefits, work hours, and employment terms. Set up a payroll system to pay employees on time and withhold taxes. Ensure you file required payroll tax forms with the IRS.
Most importantly, familiarize yourself with labor laws, including:
- Minimum wage requirements
- Overtime regulations
- Anti-discrimination laws
- Occupational safety standards (OSHA)
- Family and medical leave policies
Marketing & Promoting Your Business
With your business now legally formed and compliant, it’s time to attract customers and clients. First, develop a marketing strategy. Build a marketing plan that targets your ideal customer. Consider using a mix of digital marketing (social media, SEO, content marketing) and traditional advertising (print, radio, TV).
Then, build a website. Your business website serves as the digital hub of your marketing efforts. Invest in user-friendly design and SEO to ensure your site is visible in search engines. Don’t forget to also join local business associations, attend industry events, and leverage professional networks to spread the word about your new business.
Ongoing Compliance & Maintenance
Once your business is operational, you must maintain compliance with state and federal regulations.
Annual Reports
LLCs and corporations are often required to file annual or biennial reports with the state to keep their business in good standing.
Renew Licenses & Permits
Ensure that all business licenses and permits are kept up to date.
Tax Filings
Prepare and file your business’s taxes each year, and make sure you’re withholding and paying payroll taxes if you have employees.
Business Growth
Continue to review your business structure, financial performance, and operational strategy. As your business evolves, you may need to adjust your compliance efforts, apply for new permits, or seek additional investment.
Make It Even Easier: Start with Propel
Business formation and compliance is a detailed, multifaceted process that requires attention to both legal requirements and long-term operational strategy. While the steps can be overwhelming, carefully following them will help ensure that your business is built on a strong foundation. Additionally, seeking professional legal and accounting advice throughout the process can provide peace of mind and help avoid costly mistakes.
That’s where Propel comes in handy! We can guide you through each of these steps and, in many cases, complete them for you – so you can focus on doing what you do best. We’ll handle the rest. By understanding and implementing these critical steps, you’ll position your business for ultimate success. Simply say hello to get started.