Form A Business Entity

What kind of business entity?

You should take the time to determine what kind of entity you want to form.  It should be determined by what kind of business you're starting, how many people are involved, and the parameters of how the business will be run and managed.

Basically, in the US, there are two types of structures:  S Corps and LLC's.

S Corp

An S corporation is named for Subchapter S of Chapter 1 of the USA Internal Revenue Code. It has elected to be taxed under this provision of the IRS code. S corps are also known as S subchapters.

An S corporation protects the personal assets of its shareholders. ... In a sole proprietorship or general partnership, owners and the business are legally considered the same—leaving personal assets vulnerable. Pass-through taxation. An S corporation does not pay federal taxes at the corporate level.

LLC

Limited liability companies are corporate structures in the United States where owners are not personally liable for the company's debts or liabilities. ... LLCs do not pay taxes—their profits and losses are passed through to members, who claim them on their tax returns.

Avoid Sole Propriorship

Even though a sole proprietorship business may offer an easy formation process, it becomes hardly impossible to avoid possibly being personal liable for anything resulting from running the business under that legal designation.

Once you decide on a business structure consider using a service such as Legal Zoom (https://www.legalzoom.com/) to actually form the entity.

 

What State To Incorporate In?

Choosing where to incorporate can be as important as choosing what type of business entity to form. While there’s no legal requirement as to where your small business must incorporate, choosing the right jurisdiction is definitely a strategic issue that can provide benefits in the long run. If your business engages in business across state lines, you should take certain factors into considerations such as how corporate taxes and laws vary between jurisdictions.

Home State
If you own a local small business and do not have plans to expand outside of your home state, incorporating at home usually makes the most sense. Generally, for every other state that you do business in, you will have to register and pay substantial fees as a foreign corporation. That means that if you incorporated in a different state, but only do business in your home state, you will likely be paying registration fees in the incorporating state as well as foreign corporation fees in your home state. In addition, you will likely have to hire a registered agent for service of process in every state that you do business.

Tax-Friendly State
Choosing a tax-friendly state can lead to huge potential savings for your small business. Nevada often tops the list as places to incorporate for tax considerations given that it has no taxes on corporate income, corporate shares, franchises, or personal income. Be aware though that most states require you to pay taxes on any income generated within that state. That means that if your small business was incorporated in Nevada, but you do business in both Nevada and New York, you will still have to pay New York taxes and fees. 

Corporate-Friendly State
You’ve probably heard the term “a Delaware corporation” before. Why do so many companies choose Delaware as a place to incorporate? It is because Delaware is widely known as the jurisdiction with the best business laws in the country. In addition to Delaware laws being very corporate-friendly, the court system, known as the Court of Chancery, is very sophisticated in business issues and is very effective in resolving issues. That means less legal costs for litigation that might take years longer elsewhere. Interestingly enough, many investors won’t even invest in a company that isn’t incorporated in Delaware or will require the company to reincorporate in Delaware. 

Regardless of where you ultimately decide to incorporate, check out your local economic development corporation or chambers of commerce for information on certain benefits your small business might be eligible for when you do business in that state. For example, small businesses in New York City can apply for tax benefits if they meet certain criteria. Finally, check out these other considerations when choosing a location by the Small Business Administration.

Permits And Licenses

Where ever your business has a point of presence (physical location, sales reps, etc.) you will need to confirm what, if any, permits, licenses, sales tax collections and possibly other conditions to be satisfied by that govenrning agency.

For example, say you're located in California and have sales reps in New York and Oregon.  Then you have points of presence in CA, NY, and OR.

Trademarks

If your business involves brands, you will want to obtain trademark(s) for your brand to protect it.

There are several types of trademarks so determining what suits your particular need will warrant researching.

For instance, if you want to sell on Amazon, Amazon requires a particular type of trademark to go through their brand registry.

Here is a link to the USPTO (United States Patent and Trademark Office) search page.  The first step is to confirm your sought after trademark has not already been granted:

https://www.uspto.gov/trademarks/search

Note obtaining a trademark is a complicated and legnthy process.  You may want to consider consulting with a trademark attorney to ensure the process is completed correctly.

Taxes

Depending on what business entity you form, and what state you are incorporated in, how you pay state and federal income taxes  as well as sales tax payments will vary. 

Consulting with a CPA that is licensed in the state you are incorporated in is recommended.

If you have employees retaining a payroll service is recommended (or at least looking into) to avoid fines and penalities in late payroll tax payments.

Insurances

Depending on what state you are incorporated in, where you have points of presence in, what kind of business you are in and what you are selling (products or services) will dictate what kind of insurance(s) you will need.

And if you have employees, workers comp insurance can be difficult to obtain.  Consult a compentent licensed business insurance broker that is licensed in the state you are incorporated in.

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