As you begin the process to become a business owner, there are certain steps all new owners must follow to be compliant with the local, state and federal government. How do you legally start a business? There are three main aspects of legally starting a business:
- Corporate Structure
- Tax Identification Numbers
- Entity Registration
The corporate structure you choose can influence everything in your business from day-to-day operations to business taxes (and personal) and the level of risk you face personally as the owner. When considering your corporate structure there are quite a few options, so you will need to weigh the legal protections with the benefits that are right for you and your business from these structure options – Sole Proprietorship, Limited Liability Company, C Corporation, S Corporation and Non Profit Corporation.
To legally set up your company, you will also need two tax identification numbers, your federal tax identification number or employee identification number (EIN), and your state tax identification number. These tax id numbers are required to complete a number of business operations. The EIN number is used to pay federal taxes, hire employees, open a bank account, and to apply for licenses and permits. The state id is used to pay state taxes and to protect against identify theft for sole proprietorships.
The final piece to setting up your business is to register your entity name, your doing business as name (DBA), your domain name, and file for any intellectual property, trademarks, patents or copyrights. Aside from registering your domain name with companies like GoDaddy, all of these items can be completed through your local and federal government. A good business attorney can help with these steps, too.
What are the options for entrepreneurship?
Option 1: Starting a Business. There are pros and cons to starting a business that, depending on your goals as an owner, will play out differently. With a startup you get the opportunity to pursue a business you’re passionate about or solve a problem. A startup also offers a lot of opportunity for control from choosing the corporate structure to planning the entire business plan from scratch. On the flip side, starting up a business is a big capital investment. There are a lot of start-up costs and there is no guarantee for success. The failure rate of a start-up is over 50% within the first few years and is often because of business incompetence, lack of capital and/or management experience.
Option 2: Buying an Existing Business. A business acquisition is a great option to own a business while also limiting the risk involved. An established business has already been set up from a legal standpoint, it has cash flow, a reputation and a proven business model. The business will have employees, vendors, and a customer base which eliminates a lot of time intensive processes, like hiring the right people. Another great benefit of buying a company that a start-up lacks is ease of financing. Because the business has history and has been able to prove itself, it will be easier to acquire capital to purchase the company as well as fund cash injections later on. The main disadvantage to purchasing a business is the limited control over the setup and operation of the company. While there will always be room to make changes later on, immediately after acquisition it is best to limit changes made.
Option 3: Buying a Franchise. Buying a franchise is a similar opportunity to buying a business with a few key differences. Franchisors offer support to franchise owners in the form of training, education and advertising to name a few. Franchise companies have higher success rates than start-ups because of their already proven business model, brand recognition and the training and education resources in place. Because of this success, lenders and finance partners are much more willing to extend a loan to a franchise buyer than to an unknown start-up concept. Similar to buying an established business, buying a franchise does limit the control you have over the business, with one caveat. All franchises are different, and their business model, the initial franchise fee and all other investments are outlined in the franchise disclosure document or franchise agreement which will explain the level of control you will have over your business.
Transworld Business Advisors is passionate about small business owners, and we want you to become a successful business owner in your own right. We help people find their own version of the American Dream! Are you ready to buy a business and become boss free? We would love to help make it happen for you and we can schedule a free consultation below with one of our trusted staff.