You’ve done the hardest part: honed in on your Big Idea and found a way to make it profitable and viable (…hypothetically). So the next thing you must do is all of the dirty work (read: paperwork) involved in officially forming your business.
But before you scream WHERE DO I BEGIN AND WHAT IF I BLOW IT, check out some of these common incorporation questions that we can help you answer—and tackle.
Where should I form my business?
Due to the varied state corporate laws, there is no one-size-fits-all answer to this question. Instead, determining the right state to register in and the right structure for your business requires a fact-specific analysis based on your unique circumstances. However, when it comes to which state your business should be registered in, the relevant issue is often where the income was earned. For most service providers, the income is earned where the person providing the services is located. For businesses that sell products, the income is likely earned where the product is shipped from or possibly where the businesses headquarters are located.
I’ve heard Delaware is the best place to form a business, is that true?
You’ve probably heard at some point from somewhere that every business should incorporate in Delaware. However, Delaware is not a magical, universal solution. Sure, there are some advantages to forming your business in Delaware, including favorable corporate laws for publicly traded companies, speed and efficiency with filings and governmental requirements, and anonymity. But, there are also some substantial disadvantages like needing to register as a foreign entity in your home state and double tax liability in Delaware and your home state. This creates both a monetary and administrative burden on your business just as it’s starting out. There are certainly reasons why Delaware makes sense, but there are also reasons it doesn’t make sense for startups. (Don’t worry, we can help you decide what to do.)
What about Nevada, isn’t that a good state too?
Often called the “Delaware of the West” (by nerds like us), Nevada is a tempting state in which to incorporate for reasons of taxation, low fees, liability protection, and minimal disclosure and reporting requirements. Here’s a secret though: unless your corporation is planning to physically operate from Nevada, you likely won’t experience any of these benefits. As a Nevada corporation, you’ll still pay “foreign entity” taxes in all other states in which you operate. Moreover, you’ll likely only be able to take advantage of Nevada’s other favorable corporate laws if a majority of your shareholders actually live in Nevada and the bulk of your business is done inside Nevada.
I live part-time in two states, where do I form?
Since the determining factor of where to incorporate is commonly where the income is earned, this is the first thing to consider.
Additionally, here are a few frameworks to guide you as you consider what state to register in:
- If you’re a service provider incorporated in State A, do most your work from that State A, but provide some services outside of State A, then you should probably only worry about registering and paying taxes in State A. This is the situation most businesses are in.
- If you’re a service provider who is constantly on the move (such as military spouses or location-independent business owners), than you should consider establishing a tax home in a particular state and incorporating and filing taxes in that single state.
- If you’re a service provider who moves every few years, then you should consider incorporating in a particular state and registering as a foreign entity in the new state each time you move. It’s totally inconvenient to do this but far better than trying to re-incorporate every time you move.
Remember that these are just frameworks to start thinking about which state makes sense for you. Don’t go registering an LLC in Delaware or Nevada just because that’s what everyone else is doing. Instead, consider the unique factors in your business and take the time to meet with a lawyer and/or accountant (ideally, both!) to figure out which state makes sense for you. This is a very important business decision and should not be taken lightly or made quickly. It’s also important enough that it should not be avoided.
I’m a U.S. citizen but I live abroad, can I form a U.S. business?
If you are a U.S. citizen living abroad and would like to form a U.S. corporation, you basically have your pick of any state in which to incorporate. If you have any plans to return to a specific state, or if any of the business activity of your business will occur in a particular state, it might make sense to incorporate in that state. Otherwise, you should choose a state whose residency requirements, level of taxation, and other corporate laws are most beneficial to someone in your position. Luxury!
I am not a U.S. citizen, can I form a U.S. business?
U.S. citizenship is a prerequisite for some corporation types (S-Corps), so you’ll encounter some restrictions at the formation level. Otherwise, forming a U.S. corporation as a foreigner isn’t too much different than forming as a U.S. citizen. Many foreign nationals choose to incorporate in Delaware, but if you aren’t a resident of the U.S., you’ll certainly benefit from advice regarding the best state in which to incorporate, banking assistance and choosing a registered agent. So, it’s probably worth your while to consult an attorney and an accountant when forming your U.S. corporation.
I want to form a business with someone else, can I do that?
Totally! Partnerships (both general and limited), corporations (C-Corps and S-Corps), and limited liability companies are all appropriate for two people or more. (Sole proprietorships are founded and operated by a single individual.)
I don’t want to use my home address when I form my business, what are my options?
Whether you’re just firing up that business or recently transitioning to running your business from home, you’ll find there’s a whole slew of reasons you’ll be required to provide a physical mailing address (think state and federal requirements for your biz). If you’re not comfortable using your home address, there are options available like UPS mailbox services, virtual offices, and coworking spaces that may allow you to have a physical address without too much inconvenience.
What business entity should I use—an LLC or an S-Corp?
When starting a business (or growing a business from a sole proprietorship), the LLC and the S-Corp are the go-to entities for small business owners. Both entities provide liability protection (which prevents business creditors and those with a judgment against you from accessing your personal assets) and act as a pass-through which means that all income from LLCs and S-Corps are treated as income of the individual owners. However, there are various differences between the LLC and S-Corp that make this an issue to consider fully before deciding. A few items to ponder are things like corporate formalities, income allocation and tax requirements. This is also a decision that has lasting consequences for your business so consider getting assistance from an attorney and an accountant. It may be that an LLC and an S-corp aren’t the best fit and you should consider another option altogether. Rest easy, you do have more options than just these two.
Or maybe I should be a non-profit?
Well, maybe. If your business meets the requirements of non-profit status—for example, a 501(c)(3) charitable organization—forming as a non-profit is a wise idea. As a non-profit, you can take advantage of tax exemptions and government grants and funding. Qualifying legally as a non-profit is probably the most difficult part of forming a non-profit and you should consult a business attorney for advice and assistance with the process.
Do I need a DBA?
DBA—“doing business as”—is essentially a fictitious name (sometimes called a “trade name”) that a business may register in order to do business as that name. (See what we did there? Pretty logical stuff, right?). DBAs aren’t mandatory. Their necessity depends on the name under which your business was originally registered and the name under which you would like to actually do business as.
Not all states require DBAs, btw. But for those that do, here’s the deal. You need to register a DBA if:
- You are a sole proprietor and you want to do business as anything other than your real name.
- The same pretty much goes for existing Corporations or LLCs. If your articles of incorporation were filed under Crazy Mango Pants, LLC, but you came to your senses and decided it was better to do business as Crazy Banana Pants, LLC, you would need to register a DBA for Crazy Banana Pants, LLC.
I’m launching a new product/service. Do I need a new business entity? Or what about a DBA for that?
This really depends on how your entity was set up in the first place and the requirements your state lays out. Ideally, you want to use as general a description as possible for your entity when you get started. That way, you won’t have to be updating it every time you add a new product or service. And, as we mentioned above, a DBA is only if you are “doing business as” so simply adding a new product or service to the mix won’t require you to file a DBA unless you’re actually changing your practices to do business solely under the new name.
Do I have to name my business after me or can I pick any name I want?
When you’re deciding the name for your business, the sky really is the limit. Unless you want to do business under your own personal name, there is no requirement or specific reason you’d be stuck with that as your only option. The main legal items to consider when selecting a name are your state’s requirements and existing names that could cause trademark issues for you down the road. Deciding on a name is a huge endeavor and one that can require extensive research. Understanding all the steps to take when choosing a name will help you come up with a fantastic name for your business and keep you out of trouble later.
How do I know if the name I want is available?
Ah, the plight of anyone trying to name their business. Each state’s Secretary of State will prevent duplication of business names (including exact names and similar names) of corporations being formed in that state. So, if you seek to form a corporation in a particular state by a name that has already been registered, you’ll be prevented from doing so. In most states, you can easily perform a name search to determine if the business name you want to use is available. However, ensuring that the name you want to use is available in your state of formation is only part of the process in choosing a name. You should also consider whether your chosen name could infringe an existing trademark. A thorough trademark search is the best way to make this determination.
How can I stop other people from using my business name?
As we mentioned above, most states have restrictions on registering business with exactly the same or very similar to existing names. This prevents others from legally registering their business with your same name, but it doesn’t prevent the business from using your same name in their operations. The best way to protect your business name, and to prevent others from using it, is by registering a trademark with the U.S. Patent and Trademark Office to ensure that you own the exclusive rights to your business name. For more on the benefits and steps to registering, check out our free trademark guide.
How do I get started forming my business?
The first step is registering your business at the state level. Many states handle this through the Secretary of State but the best place to start is your state government’s website. Look for the office or branch that handles business registrations and you will be able to determine exactly what the requirements are for your state. Be sure to understand how the entire process works for your state since many states have unique requirements that add to the process. For instance, NY has a publication requirement for LLCs that increases the cost and administrative burden that many entrepreneurs are not aware of. If your state has specific requirements and deadlines, you’ll want to be sure you understand them and comply with them to ensure your business is properly formed and in good standing.
Once I file with the state, what else do I need?
Once you’ve formed your business, you’ll generally want to get an EIN, register for state and Federal taxes, and makes sure you’ve filed all initial IRS documents required by your entity. You’ll also want to make sure you’ve filed all required formation documents with your particular Secretary of State. It’s also probably a good idea to draft operating documents or other necessary agreements if you’ve formed your corporation with other people. These documents are vital to the smooth and successful operation or your business and for maintaining liability protection.
How do I get an EIN?
Once you’ve filed your initial documents with the state, you’ll also want to get an Employer Identification Number from the IRS. This is a fairly straightforward process and you can fill out the IRS online form to request one. You will then get your EIN and a letter from the IRS to serve as proof of your EIN at the end of the form.
Do I have to file anything else with the IRS?
This all depends on what business formation you have chosen. For example, if your business qualifies, you’ll probably want to consider filing the sub-chapter S election. This can drastically reduce your tax burden so it’s worth taking a look at, or consulting with an accountant or business attorney to see if it’s something you can and should take advantage of.
Do I need a business license?
Depending on the state and city you live in, you may need a business license even if you work from home. You can generally determine any licensing requirements on the same state website you got the formation information from. Licenses are an important requirement and ones that are often overlooked so be sure to determine if your industry requires a license in your locale.