As of mid-May, there has been a reported nationwide uptick in filing tax ID applications. According to Grow from Acorns + CNBC, the number of employer identification number (EIN) application filings rose 1% by May 16, 2020. This increase followed eight straight weeks of year-over-year declines during the COVID-19 lockdowns. Information in the same article suggests that an increase in EIN filings means more individuals are viewing this unprecedented time as the perfect time to start a small business.
Across the United States, entrepreneurs are beginning to understand their “why” for wanting to start a business. They are choosing business models and drafting business plans to set goals. However, it’s equally as important not to forget what is necessary to keep startups in compliance. Here are a few items to cross off your startup’s to-do list in order to properly start a small business.
1. Incorporate or form an LLC
What does it mean to incorporate a business? Incorporation is defined as the process of creating a corporate business structure. An incorporated business is now a separate, legal entity from its owner. The separation also provides the owner with liability protection for their personal assets. Should an unforeseen circumstance occur, such as a lawsuit or business debts, liability protection ensures that this does not impact personal belongings, like cars and houses.
Once you decide to incorporate your business, you may quickly discover that there are several types of business entities. Some include limited liability companies (LLCs), corporations, nonprofits, benefit corporations, S Corporations, C Corporations, and B Corporations. Determining which entity to incorporate as will depend on your small business and its offerings. If you are genuinely unsure which entity formation is best for you, consult a legal professional for additional guidance and to answer any questions. Once you know which entity you’d like to form, you may start filing to incorporate as a legal entity.
2. Register for trademarks
If you’re starting a new business, it’s highly likely that you have a unique name, logo, design, slogan, or tagline associated with the startup. This is your trademark. It must be registered on a federal level in order for you, the owner, to maintain exclusive rights to the mark. Otherwise, the mark may be copied or plagiarized by competing businesses.
Prior to registering a trademark, however, it’s important that you conduct a name search. You may utilize the trademark database tool provided by the United States Patent and Trademark Office (USPTO). This allows you to see which trademarks have already been registered or are currently pending registration. If you find that a similar mark has been registered or is pending registration, you will need to come up with a new, different mark. However, if you find your mark is unique and not already registered or pending registration, you may begin to file a trademark application. This will ensure your piece of intellectual property is registered at the federal level and belongs exclusively to you.
3. Obtain an employer identification number (EIN)
As I mentioned at the beginning of this post, there has been a significant rise in tax ID application filings this year. Tax IDs are also known as employer identification numbers (EINs).
Why do small businesses need EINs? This nine-digit number issued by the IRS does more than identify employer tax accounts. Here are a few additional functions EINs provide small businesses.
- Hiring employees.
- Opening a business bank account.
- Building corporate business credit.
- Establishing a pension, profit sharing, or retirement plan.
- Changing your organization type. If you do decide to change business entities later on, an EIN needs to be obtained to reflect the organization’s changes.
Additionally, EINs are also necessary to obtain if you incorporate or form an LLC. Why? An incorporated business is considered to be its own legal entity—and you are officially an employee. As an employee, you must have an EIN so the IRS is able to keep track of your business and make sure the company collects payroll taxes.
4. Designate a registered agent
Who will act as the official point of contact between your business and the state? These duties are typically designated to registered agents. A registered agent, or RA, receives paperwork on behalf of the business from county and state agencies. This paperwork may include anything from renewal reminders to franchise tax forms. The RA then organizes the documents and passes the materials to the business owner in a timely manner to ensure nothing is accidentally lost or forgotten.
Who can be a registered agent? It is possible for an entrepreneur to designate themselves as an RA. However, if an entrepreneur decides to become a registered agent, they will need to follow a few ground rules. They must be available to accept service of process during general business hours, have a physical street address, and be a resident of the state in which they do business. If a small business owner cannot fulfill one—or all—of the above, they will need to work alongside a third party organization that may assign a registered agent.
5. File for business licenses
Business licenses, and permits, will vary for every business. You may file for the appropriate business licenses based on your industry, the city and state in which you have incorporated the business, and even your entity formation. If you are unsure of the licenses you need, check in with your local Secretary of State to ensure you have the proper licenses for your business.
6. Keep up with annual maintenance documents
Depending on the type of entity you incorporated as, you may need to file and renew certain documents with the Secretary of State on a regular basis. Keep a running list of the deadlines for annual maintenance documents, like annual report filings, that need to be filed with the state to ensure your small business remains in good standing and does not fall out of compliance.