You have an idea, and you’re ready to turn that idea into a source of income by starting a business. Now what?
One of the first steps when setting up a business is choosing the type of business entity, which is an important decision from both a tax and a legal perspective. When choosing the type of entity your business will be, you’ll want to ensure that it suits both your short-term and long-term needs.
An entrepreneur can choose among corporations, partnerships, limited liability companies, and sole proprietorships as a form in which to operate the business. Limited liability companies have evolved into the most popular entity choice as these entities combine the limitation on liability associated with corporations, and the benefits of flexibility and single level of tax associated with partnerships. Certain business activities may be more suited to other entity forms. It is advisable to discuss your planned business activity with your tax advisor in order to select the appropriate entity.
Almost all new entities must be formed with the Secretary of State. There is no requirement for an individual to form a new entity in their resident state. Therefore, a new entity can be formed in any state, but the business owner’s decision on location is typically based on the type of benefits provided and requirements of organizing and maintaining the entity in a particular state. The State of Delaware is a popular choice for business start-ups because its business law is one of the most flexible in the United States. Furthermore, Delaware does not require entities, other than corporations, to file an annual report, although most non-corporate entities are required to pay a flat annual tax of $300. The fees associated with forming a new entity vary by state and entity type. For specific information on setting up a business in a given state, we recommend visiting the Secretary of State website for that state.
Once you have formed your new entity, the next step is to register your business with the Internal Revenue Service. This is done by obtaining an Employer Identification Number (“EIN”), which is used by the IRS to identify your entity in its system. Some states use the same IRS-assigned EIN to identify your new entity in that particular state, while other states assign your entity a state-specific identification number. Texas is an example of such a state. When registering in the state of Texas, you would be provided with an ID number to be used specifically in the state of Texas, separate from your IRS-issued EIN. If you will be selling tangible personal property or providing taxable services in your state of organization, you will need to obtain a sales and use tax permit to collect sales tax and should file the appropriate application.
Once you have your entity’s EIN, state EIN (if needed), and any required sales tax permit, you are ready to do business in your chosen state. However, if you plan to conduct business outside of your home state (the state in which your entity was formed or incorporated), you will need to qualify your entity in any additional states. Your entity becomes qualified in an additional state when you obtain a Certificate of Authority from a state’s Secretary of State. This notifies another state that you plan on conducting business in their jurisdiction and that they can expect to receive any required filings from you.
After you have set up and registered in the various states in which you will be conducting business, it is important to ensure your new business is set up with proper bookkeeping services. A qualified bookkeeper or bookkeeping team is essential for properly recording daily transactions, and maintaining organization and compliance. In addition, having a solid bookkeeping team to rely on will help your accounting and tax team work more efficiently, which in turn saves you money and time, enabling you to run your business more effectively.
The steps required to set up a new business are not complicated in and of themselves, but should be taken seriously to avoid missing any necessary pieces. Our experienced staff of professionals at FF&F are familiar with the process of starting a business, and we are available to assist you through each step. In addition, we have an expert Accounting Services team that can provide you with a full range of bookkeeping services as needed for your business. For questions about setting up a business or information about our services, please contact us at email@example.com or 212-245-5900.
Jonathan Niyazov, CPA is a Tax Manager with FF&F. He has over 9 years of combined tax and accounting experience compromised in both, closely held private companies, and large international accounting firms. Jonathan has a strong background in individual, corporate, and partnership taxation. His experience in the private and public sectors grants him a unique understanding of taxation that provides our clients with tax savings strategies at every level.