How To Setup A Business

My friend is about to retire, but he's much too young to stop working. So he turned to me for help with the basics of setting up a business. One of the first things he wanted to know was, "What do I have to do — legally — to set up a business?"
So let's start with some fundamentals:

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1. Do you need to incorporate to start a business? No. You can begin as a "sole proprietor." To do so, you just start doing business (following any legal requirements of your city or state — see below).

The upside of being a sole proprietor is it's easy and cheap. You just file a "Schedule C" on your personal tax returns to report business income.

The downside is there's no legal protection for your personal assets — you have no limit to your personal liability for business failures or mistakes. To limit liability, you have to choose a formal "corporate form."


2. What's the best corporate form? There are three main types of corporate forms for businesses — "C" corporation, "S" corporation, and LLC or Limited Liability Company. Most small businesses choose to be either an "S" corporation or an LLC because these forms limit personal liability while still allowing profits and losses to be passed through to the owners' personal tax returns.

Talk to your lawyer and/or accountant to see what corporate form is right for your personal situation.


3. What's a Federal Tax ID number and do I need one? If your business has employees, is a corporation or LLC, you'll need a Federal Tax Identification Number. This is referred to by a number of initials — EIN (Employer Identification Number) or FEIN or FIN (Federal Employer Identification Number).

Even if you're a sole proprietor, you may want to get an EIN. You'll be asked for a tax ID number by companies you do business with, and it may be safer and more professional to give them your EIN instead of your personal social security number.

It's easy and FREE to get an EIN. Go to irs.gov, put "EIN" in the keyword search box. Or call the IRS Business Line at 1-800-829-4933. The IRS can assign you an EIN over the Internet or the phone.


4. Do I need a STATE IDENTIFICATION NUMBER? States may assign you an identification or account number for various reasons. The usual are: corporation number, employer account number, certificate numbers for specific licenses.

Check with your Secretary of State's office. A directory of all state websites can be found at StateLocalGov.net.


5. Do I need a BUSINESS LICENSE or PERMIT? Most cities and counties require businesses to have business licenses. You may not need one for a home-based business. Check with your local city and county governments.

States also require licenses or certification to engage in certain types of businesses or professions, such as contractors, real estate agents, beauticians, optometrists.

Permits are required for particular actions, such as construction and building permits and permits for special events. Permits are usually granted by local or county authorities.


6. What's a RESALE LICENSE and where do I get one? A resale license enables a company to purchase goods or materials for manufacture or resale without paying sales tax — because the ultimate consumer pays the tax. Each state has its own requirements and terminology. 

Some states don't require a license — just a signed statement of intent to resale goods.


7. What's a "DBA" or FICTITIOUS BUSINESS STATEMENT and do I need one? If you use any name other than your own name, you'll need to file a "doing business as" or fictitious business statement, usually with your county government. This enables the public to know who's actually operating a company.

In other words, if I own a flower shop called "Blooming Nuts," I have to file a DBA, so the public will know I'm the nut behind Blooming Nuts. But you also have to file a DBA if you're Chris Jones doing business as The Jones Group.


Don't be overwhelmed by these issues. Just check with an attorney or a local Small Business Development Counselor about the requirements for starting a business in your community.