Business Basics Tip # 2 - Form Your Entity & Get a Business License
The main reason my first tip is to get a CPA is because that person can advise you about this second part. What type of business structure is best for you? You can do a ton of research online to get a good idea about the different options, but it’s better to talk to someone who understands your exact situation and can help you make the right choice. After you’ve talked to your CPA about your business plans, it’s time to form your entity and get your business license. You should do this before you work with your first paying client.
Starting a business is relatively simple, but it requires a lot of paperwork. You can do it yourself, but it can be a bit overwhelming. I recommend hiring a professional* (a CPA or lawyer) to help with this part to make sure the details are handled properly. When I started my first LLC, I let my attorney set it up for me. I recently started a second LLC with a business partner, and we had a CPA take care of the paperwork for us. The cost was well worth the time and energy it saved. Someone who specializes in business setup will guide you through the process so you know you’re taking the right steps in the right order and aren’t missing anything that could cause issues later.
*Professional fees, such as legal and accounting, are deductible as business expenses.
How do I get started?
Requirements vary from state to state, which is another reason to hire a professional who is familiar with the regulations in your area. In general, you’ll need to:
Decide on the structure (sole proprietor, LLC, S Corp, etc.)
Choose a business name that isn’t currently registered to another business
Register with federal, state, and local agencies
Apply for a Federal Tax ID number (and if your business is based in a location that requires state taxes, you’ll need a State Tax ID number as well)
Apply for federal, state, and local licenses*
* License fees are deductible as business expenses.
For more details on these steps, the U.S. Small Business Association is a great resource. Check out their online Business Guide here.
I’m going to work as a sole proprietor. Why should I get a license?
Some states require business licenses, and you can get fined for offering products or services without one.
Many banks require business formation documents and proof of license to open a business account (I’ll talk about the importance of this tomorrow).
If your potential clients are researching you (which they often do), It shows them that you are a professional.
It helps prove to the IRS that your work isn’t just a hobby and you are legitimately entitled to all of the business tax deductions.
Remember, you’re a business owner and not “just a freelancer.”
TIP: Check to see if your state offers a business license exemption for sole proprietors. In Nevada, for example, you can apply for an exemption if you have a home-based business that makes less than ~$30k/year. This can be useful if you are just starting out.
I don’t even have a paying client yet. How can I spend the money for all of this?
The exact licenses and permits you need will depend on the state and industry, and each comes with associated costs. But, it’s a necessary part of running your own business. And you can wait until you get your first client… but what if they want you to get started right away? You don’t want to get stuck scrambling to get your ducks in a row because you put it off too long.
You believe in yourself, right? You know your business is going to succeed and you’re going to recoup these startup costs. Make the investment in yourself and take the steps to get into the business mindset by officially starting your business!
I’ll be back tomorrow with Tip #3. Thanks for reading!