The not-so-romantic part of a starting a new business is all the paperwork and legal activities. This includes things like determining the legal structure of your business, nailing down your business name, registering with the government, and – depending on your business structure and industry – getting a tax code, a business license, and/or a seller’s permit.
Furthermore, businesses are regulated on the federal, the state, and sometimes even local level. It’s important to check what’s required on all three of those levels. When you register your business with the government, be sure you’re covering registration on all the levels required for your business’ location. Your business won’t be a legal entity without checking these boxes, so stay on top of it.
Clearly, it can be overwhelming to figure out what legal steps you need to take for your particular case, so let’s break it down in this step-by-step guide. Below, you’ll find a brief explanation of what goes into each one of these steps, along with links to helpful resources where you can dig in to the details. (Note: These steps are for starting a business in the U.S. only.)
Determining the Legal Structure of Your Business
The 4 Most Common Business Structures
The legal structure of your business will determine what you need to do to register with the government, how you’re taxed, what risks you need to take on, and so on.
The four most common business structures are the sole proprietorship, the partnership, the limited liability company (LLC), and the corporation. Each legal structure has its pros and cons, and it's worth understanding every one before you make a decision. Many people starting a business will choose to register either as an LLC or a corporation, for example, because those two structures will give owners limited liability protection. But on the other hand, there’s a lot more paperwork and expense associated with a corporation or LLC.
Click through the tabs below to learn about each of these four business structures in more detail, including what they are, the pros and cons, and how taxes work for each one.
Example: Freelance graphic design.
What it is: A sole proprietorship is a business that’s owned and run by one person, where the government makes no legal distinction between the person who owns the business and the business itself. It’s the simplest way to operate the business. You don't have to name your business anything other than your own, personal name, but if you want to, you can give it its own distinctive name by registering what’s called a Doing Business Name (DBA). (We’ll get back to that in the "Choosing & Registering Your Business Name" section.)
Pros: It’s easy and inexpensive to create a sole proprietorship because there’s only one owner, and that owner has complete control over all business decisions. Tax preparation is also pretty simple since a sole proprietorship is not taxed separately from its owner.
Cons: It can be dramatically more difficult to raise money and get investors or loans because there’s no legal structure that promises repayment if the business fails. Also, since the owner and the business are legally the same, the owner is personally liable for all the debts and obligations of the business.
How taxes work: The individual proprietor owns and manages the business and is responsible for all transactions, including debts and liabilities. Income and losses are taxed on the individual’s personal income tax return at ordinary rates. In addition, you are also subject to payroll taxes, or self-employment taxes, on the money you earn. (More on self-employment taxes later.) Find IRS tax forms here.
Example: Multiple doctors maintaining separate practices in the same building.
What it is: A partnership is a single business where two or more people share ownership, and each owner contributes to all aspects of the business as well as shares in the profits and losses of the business.
Pros: It’s generally pretty easy to form a business partnership, and it doesn’t tend to be super expensive, either. Having two or more people equally invested in the business’ success allows you to pool resources. It also means you have access to more than one person’s skill set and expertise.
Cons: Just like a sole proprietor, partners have full, shared liability if the business goes south. That also means that partners aren’t just liable for their own actions, but also the actions of their partner(s). There is a variant on partnerships called a limited liability partnership, or LLP, that protects against that -- which is how most law firms are organized, for example.
Finally, when more than one person is involved in decisions, there’s room for disagreement -- which means it’s important to have an explicit agreement over how the obligations and earnings will be split, especially if/when things go wrong.
How taxes work: To form a partnership, you have to register your business with your state, a process generally done through your Secretary of State’s office. Find IRS tax forms here.
Limited Liability Company (LLC)
Example: A small design firm.
What it is: LLCs are a type of business structure that's more complex than sole proprietorships and partnerships, but less complex than corporations. They are called “pass-through entities” because they’re not subject to a separate level of tax. Most states don’t restrict ownership on LLCs, and so members can include individuals, corporations, and even other LLCs and foreign entities. Most states also permit “single-member” LLCs, those having only one owner.
Pros: As the name suggests, owners of an LLC have limited liability, meaning that they personally are not responsible for any financial or legal faults of the business. This reduction in risk is what makes an LLC a very popular business structure.
Cons: LLCs are often more complex than sole proprietorships or partnerships, which means higher initial costs, and certain venture capital funds are hesitant to invest in LLCs because of tax considerations and the aforementioned complexity. That being said, they’re simpler to operate than a corporation because they aren’t subject to as many formalities.
How taxes work: LLCs have the benefit of a “flow-through” tax treatment, meaning that the owners – not the LLC – are the ones who are taxed. Having only one level of tax imposed makes taxes easier. Find IRS tax forms here.
Example: Microsoft, Coca-Cola, Toyota Motor, and almost all well known businesses.
What it is: A legal entity that is separate and distinct from its owners, and has most of the rights and responsibilities that an individual possesses (to enter into contracts, loan and borrow money, sue and be sued, hire employees, own assets, and pay taxes.) It’s more complex than the other business structures, and it’s generally suggested for larger, established companies with multiple employees.
Pros: They make seeking venture financing easy. They also provide the best protection for personal assets, as the founders, directors, and stockholders are (usually) not liable for the company's debts and obligations – only the money and resources they've personally invested.
Cons: Because they’re much more complex than other business structures, they can have costly administrative fees, and more complicated tax and legal requirements.
How taxes work: Corporations are required to pay federal, state, and in some cases, local taxes. There are two different types of corporations: "C corporations" and "S corporations." C corporations are subject to double taxation – so any profit a C corporation makes is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as dividends. The corporation does not get a tax deduction when it distributes dividends to shareholders. Shareholders cannot deduct any loss of the corporation, but they are also not responsible directly for taxes on their earnings – just on the dividends they give to shareholders. S corporations, on the other hand have only one level of taxation. Learn more about the difference between "C corporations" and "S corporations" here, and find IRS tax forms here.
Choosing & Registering Your Business Name
Establishing a business name is a little more complicated than making a list and picking your favorite. You’ll use the legal name of your business on all your government forms and applications, including your application for your employer tax identification number, licenses, and permits.
If you’re using a name other than your personal name, then you need to register it with your state government so they know you’re doing business with a name other than your given name.
First thing’s first: Before you register, you need to make sure the name you want is available in your state. Business names are registered on a state-by-state basis, so it’s possible that a company in another state could have the same name as yours. This is only concerning if there’s a trademark on the name. Do a Trademark search of your desired name to avoid expensive issues down the road.
Speaking of who’s using which names online, see if your desired domain names are available by doing an online domain search. Do the same with your desired social media handles. If the domain name and/or social media handles you want aren’t available, then some of you might consider changing your business name.
For new corporations and LLCs: Your business name is automatically registered with your state when you register your business – so you don’t have to go through a separate process. There are rules for naming a corporation and LLC, which you can read about here.
For sole proprietorships, partnerships, and existing corporations and LLCs (if you want to do business with a name other than their registered name), you’ll need to register what’s called a “Doing Business As” (DBA) name. You can do so either by going to your county clerk office or with your state government, depending which state you’re in. Learn how to do that here.
Want to trademark your business name? A trademark protects words, names, symbols, and logos that distinguish goods and services. Filing for a trademark costs less than $300, and you can learn how to do it here.
Selling Your Products or Services
When you’ve started generating interest for what you’re selling, there are two big question marks: What’s your sales process supposed to look like, and who’s going to sell it?
When you’re starting your business, it might be you, as the multiple-hat-wearing business owner, or a dedicated sales rep or two. Scaling fast with such a lean team can be difficult, but here are some best practices for getting your sales operations going on a limited budget and with limited resources:
Set up your sales infrastructure.
By taking the time to set up your sales process from the get-go, you’ll avoid painful headaches that come with lost data down the line. Start with a CRM, which is a central database where you can keep track of all your clients and prospective clients in one place. There are loads of options out there, and you’ll want to evaluate the CRMs that cater to small businesses. (Excel doesn’t count!)
Identify your sales goals.
Don’t get intimidated by sales lingo such as KPIs and ROI. All this means is that you need to figure out what you need coming into your business to make ends meet and grow: how much revenue do you need, and how many products do you need to sell to hit that target?
Hire a sales rep.
When you’re starting your business, it’s tempting to do everything yourself, including taking on sales. However, making that first sales hire is crucial to scaling – you need someone dedicated to understanding your buyer and selling to them full-time. When looking for that first sales hire, seniority should be less of a priority than how much sales experience they have on the front lines and whether they understand your business’s target buyer.
Get more out of your sales activities.
Efficiency is key. Put together a sales process, such as this helpful 7-step sales process framework, which works regardless of your business size. You'll also want to automate sales tasks (such as data entry), or set up notifications when a prospective customer takes an action. That way, you spend less time poring through records and calling the wrong prospects and more on strategy and actual selling.
Keeping Your Customers Happy
Getting net new customers in the door is important, but retaining them is just as important. You can’t ignore customers once you’ve closed them – you have to take care of them, give them stellar customer service, and nurture them to become fans of (and even evangelists for) your business. While inbound marketing and sales are both critical to your funnel, the funnel doesn’t end there: The reality is that the amount of time and effort that you spend perfecting your strategy in those areas will amount to very little if you’re unable to retain happy customers.
This means that building a model for customer success should be central to your organization. Think for a second about all the different ways reviews, social media, and online aggregators spread information about your products. They’re all quick and effective, for better or for worse. While your marketing and sales playbooks are within your control and yours to perfect, a large chunk of your prospects are evaluating your company based on the content and materials that other people are circulating about your brand.
Here are some tips for how to keep your customers happy and stand out as a stellar business:
People expect fast resolution times (some faster than others depending on the channel), so it’s essential to be nimble and efficiently keep up with requests so that you’re consistently providing excellent service to avoid losing trust with your customers. Pay attention to the volume of your company mentions on different channels. Identify where your customers spend the most time and are asking the most questions, and then meet them there, whether it’s on a social network, on Yelp, or somewhere else.
Keep track of touchpoints with individual customers.
Interactions with your customers are best informed by context. Keep track of all the touchpoints you’ve had with individual customers because having a view into their experience with your company will pay dividends in the long run.
How long have they been a customer? What was their experience in the sales process? How many purchases have they made? Have they given positive/critical feedback about your support experience or products? Knowing the answers to these questions will give you a more complete picture when you respond to inquiries and will help you have more productive conversations with customers.
Create feedback loops.
From the moment you have your first customer, you should be actively seeking out insights from them. As your business grows, this will become harder -- but remember that your customer-facing employees are a valuable source of information because they are most in tune with your buyers and potential buyers.
Create a FAQ page for your website.
Give customers the tools to help themselves, and scale this program as you grow. When you’re starting out, this might take the form of a simple FAQ page. Over time, as your customer base grows, turn your website into a resource for your customers and enable them to self-service – such as evolving that FAQ page into a knowledge base or library that answers common questions and/or gives customers instructions.
Small Business Loan
If you have a really rock-solid plan for how you’ll spend the money in place, then you might be able to convince a bank, a lender, a community development organization, or a micro-lending institution to grant you a loan.
There are many different types of loans, including loans with the bank, real estate loans, equipment loans, and more. To successfully get one, you’re going to need to articulate exactly how you’ll spend every single penny -- so make sure you have a solid business plan in place before you apply. You can learn more about SBA.gov’s loan programs here.
You might ask yourself, what about companies that get funding through platforms like Kickstarter and Indiegogo? That’s called crowdfunding, which is a newer way of funding a business.
More importantly, it typically doesn’t entail giving partial ownership of the business away. Instead, it’s a way of getting funding not from potential co-owners, but from potential fans and customers who want to support the business idea, but not necessarily own it. What you give donors in exchange is entirely up to you -- and typically, people will come away with early access to a product, or a special version of a product, or a meet-and-greet with the founders.
When you crowdfund your business, you open an account on those platforms and publish a detailed description of your business, your goals, and how much money you need and why. From there, anyone with an internet connection can contribute money toward helping your business via an online donation. The better story you tell in your crowdfunding campaign website, the more likely you’ll be to get donations.
Venture Capital Financing
Only a very small percentage of businesses are either fit for venture capital or have access to it. All the other methods described earlier are available to the vast majority of new businesses.
If you’re looking for a significant amount of money to start your company and can prove you can quickly grow its value, then venture capital financing is probably the right move for you. However, even though venture capital financing is fashionable, it’s rarely available to startups. In fact, many people believe it should be avoided altogether unless you’ve got a billion dollar business idea.
Venture capital financing usually means one or more venture capital firms make large investments in your company in exchange for preferred stock of the company -- but, in addition to getting that preferred return like they would in series seed financing, venture capital investors also usually get governance rights, like a seat on the Board of Directors or approval rights on certain transactions. VC financing typically occurs when a company can demonstrate a significant business opportunity to quickly grow the value of the company but requires significant capital to do so.
Now it's up to you.