Everything you need to know about launching a new business
Whether you’ve got an innovative new product or an in-demand service to sell, launching your business will require a tremendous amount of planning, and a number of essential legal steps. From choosing a business structure and choosing a business name to finding the right location for your company, there’s a lot you need to do. Business startup is a complex, multi-pronged process that requires focus, attention to details, and knowledge of the regulations and requirements of your targeted industry. However, when it’s done correctly, these efforts can set the stage for seamless operation, reliable revenue, and ongoing success. When you know how to launch a business properly, you can avoid serious missteps and expedite your move to profitability.
Choosing a Business Structure
One of the first and most important steps in launching a business is choosing a business structure. This is the legal structure that will determine how taxes are paid and how much personal liability you’ll assume. It also determines which paperwork needs to be filed and whether or not you’re able to raise money for your startup. You’ll need to commit to a business structure before taking any other startup actions. This includes getting the necessary permits and licenses, and applying for a tax ID number.
When selecting a structure for your business, take the time to carefully consider your options. Although you may be able to convert to a different business structure later on, some locations have restrictions on these conversions. There can also be tax consequences and many other unforeseen problems and restrictions, including unintended dissolution. This makes it best to consult with a business attorney, your accountant, or a trusted business counselor to get help in choosing the right structure for your company at the very outset.
The primary business structures are:
- Sole proprietorship: For total control over your business, you’ll want to choose sole proprietorship. You are automatically considered a sole proprietor when operating a business without registering your company under any other structure or designation. However, with this structure, the obligations and debts of your business can affect your personal assets. This structure leaves you exposed to the greatest level of personal liability. Moreover, given that sole proprietors are legally unable to sell stock, raising money can be a challenge. Due to the considerable amount of risk that this structure entails, many traditional lenders are also reticent to offer funding to sole proprietors.
- Limited Liability Company (LLC): In most cases, having an LLC will keep owners and many of their personal assets protected from lawsuits and bankruptcy. This typically includes their savings accounts, homes, and vehicles. With an LLC, profits and losses are passed through personal income and thus, corporate taxes aren’t imposed. One drawback of an LLC is that in many states, this business structure has a limited lifespan. If a member leaves a company, the LLC will need to be dissolved and then reformed to represent its new membership group. However, this may be avoidable in certain instances if there’s an existing agreement within the company pertaining to the transfer of ownership. This structure is often ideal for companies that are relatively high in risk as owners have a fairly solid opportunity to both protect their personal assets and limit their tax obligations.
- Corporation: For the greatest possible protection against liability, business owners can choose to become corporations. A corporation, often referred to as a c corp, can be profitable, is subject to taxes, and can additionally be held financially responsible for its own debts and liabilities. Corporations also have the ability to raise money by selling off stock. Although establishing a corporation will keep your personal assets reliably protected, the process of forming one is significantly higher than those of all other business types. Moreover, the profits that are generated by c corps are sometimes taxed twice. Profits can be taxed as they’re made, and then again as they’re distributed to shareholders in the form of dividends.
- Cooperative: Cooperatives or co-ops are organizations or businesses that are owned by those who use their services. Earnings that co-ops generate are distributed to user-owners or co-op members. Cooperatives are generally run by a board of directors that’s been elected. The direction of these businesses is determined by both the board and its regular members. Those who use co-ops as customers can become user-owners by purchasing shares. However, the weight of an individual’s vote is not determined by the amount of shares that he or she owns.
- Partnership: When two or more parties wish to hold joint ownership of a business, partnerships are the most straight-forward business structure. Business partnerships can be either limited liability partnerships (LLPs) or limited partnerships (LPs). With LPs, a single general partner has unlimited liability. Everyone else partnered with this individual under the partnership agreement has limited liability. They also have limited control over the business. Though similar to LPs, LLPs offer limited liability to all owners so that everyone is equally protected from debts against the partnership. This is often the ideal business structure for organizations and companies with several owners who are simply seeking to test their ideas out before establishing more formal structures.
Choosing a Business Name and Registering it Correctly
Another important step in your business startup is choosing a business name and registering it correctly. A significant amount of thought and research should go into naming your business. After all, you’ll want this to accurately reflect your brand identity, your mission, and your values. You business name should suit the services or products you provide, and it shouldn’t have any unfortunate double meanings. Another important consideration to make before committing to any name for your business is whether or not there are companies within your field or within related fields that have similar names. To distinguish both your business and your brand from the competition, and ensure that your company stands out, your business name should be both meaningful and original.
After finding a name that meets all of this criteria, you’ll need to take steps to legally protect it. You can register a business name in four ways. Each method of business name registration has its own purpose and benefits. More importantly, depending upon how you structure your business and where you choose to locate it, certain forms of business name registration could be legally required.
- Doing Business As (DBA): There are no legal protections that come with registering a DBA business name, but in certain locations, doing so is legally required.
- Trademark: Trademarking your business name provides federal level protection.
- Entity Name: Registering an entity name gives you protections at the state level.
- Domain Name: By registering their domain names, companies can stake their claims on unique, brand-specific website addresses that make it easy for their clients and prospective clients to find them online.
These four registration types are all legally independent of one another. Thus, although it’s common to register the same name in each way, there isn’t a legal requirement to do so.
Choosing a Business Location
If you intend to conduct business out of a physical, brick-and-mortar establishment, one very important factor to assess about any location is whether or not the local market is already saturated. With access to a limited number of consumers in any geographic region, companies must assume that there are only so many of their service or product types that can be sold over any set period of time. When markets are saturated, choosing to set up a new business in these areas is a fruitless effort. Beyond this, however, there are countless other details to review, including any restrictions that may be imposed by local government entities. Where you choose to locate your business is where you’ll need to apply for your license, pay your taxes, and register your business name. Be sure to consider local zoning ordinances, business expenses that are region-specific, state and local taxes and incentives, potential for growth, accessibility, and competition.
Applying for your Business License
As a small business owner, simply registering your business name with local and state governments could be all that’s required. However, when your business operations or activities are regulated by any state, local, or federal authority, you’ll need to obtain licensing through the proper agencies. The costs and requirements for business licenses are always determined by the agencies that issue them, and by the nature of the industry or commercial activities being performed. Keep in mind that a much broader range of business activities is managed at the state level in comparison to those that are managed federally. Take the time to research city, county, and state regulations to learn more about what’s required. You can find the exact list of licenses and permits required for your business by searching the related state’s website.
Starting a new business can be a complex and highly detailed endeavor. By carefully considering your options in business structures, business names, and business locations, you can avoid making potentially costly mistakes early-on, and can ultimately set the stage for success. With the right structure and the necessary licensing, you’ll have the best ability to protect your personal assets and avoid preventable fines and other penalties.