Getting started with business formation

Pick a name for your small business

Before choosing a business name, you can conduct several searches to make sure the name is available. Consider checking with the U.S. Patent and Trademark Office to make sure the name isn't already trademarked. Search to see which state government website you should use (often it is the Secretary of State's office) to find out if the business name you want is available and allowed in your state. See if website domain names and social media names are available. When you create your business, you'll have to register your business name with the state, which prevents other businesses from using the same name in the same state. If you want to protect your name across the country, you could trademark the business name.

Draft governing documents

Consider working with a business attorney to create governing documents that are tailored to your specific needs–you might also be able to find free templates online. Governing documents are internal documents that say how the business will be run. They could be important if you're starting a business with someone else. If you have a disagreement over how much each partner earns, or who gets to make different decisions, the governing documents could help you avoid an argument.

Register your business entity with a state

Each state has its own rules for how to create a business. Generally, the Secretary of State's office is the part of the state government that registers new businesses.

Get tax identification numbers

Your business will likely need an Employer Identification Number (EIN). The EIN is like your business's Social Security number, and it's used to open business bank accounts, pay employees and file taxes. You can apply for an EIN from the IRS for free online. The Small Business Administration's (SBA) website has links to each state's department, where you can find out if you need a state tax ID and learn how to apply for one.

Obtain the required licenses and permits

A Small Business Development Center may be able to help you determine which licenses or permits you'll need to open and run your business. These centers are created through partnerships between universities, states and the SBA to offer free and low-cost training and consulting to small businesses. Your business may need a variety of local, state, and federal licenses or permits, so consulting with experts is a great way to be sure you’re meeting the requirements for your business.

See practical business skills for more information.

Taxes are a big topic for small businesses. Here are a few things to keep in mind so you've got a better idea of what's involved, and how to pay, business taxes.¹

Federal tax structures

Sole proprietorships

If you haven't created a separate business entity and are running your company as a sole proprietorship, you don't have to file a separate business income tax return — all business revenue and expenses get reported on your individual tax return. You'll still want to keep precise business records, as you'll record your business income and expenses on Schedule C, which is part of your individual tax return.

Partnerships

Partnerships are similar to sole proprietorships in that the tax responsibility “passes through” to the business's owners. Unlike a sole proprietorship, the business needs to file an information return with the IRS, Form 1065 U.S. Return of Partnership Income, also known as a partnership tax return.

S corporations

Corporations that elect for S corporation taxation are pass-through entities. Similar to partnership returns, they don't pay corporate income taxes. Instead, the income from the S corporation passes through to the individual shareholders and gets reported on the owners' individual tax returns. The owners have to pay taxes on their share of the income. However, S corps still have to file an 1120S information return to report the business's activity to the IRS.

Limited liability companies

With an LLC, how you report and pay federal income taxes will depend on how you elected to have your LLC taxed and the number of members (i.e., owners). 

You could elect to have the LLC taxed as either a C corp or an S corp and follow the rules for those types of entities. This requires a special election by sending in a Form 2553 to the IRS requesting this treatment. 

Or, if you're the sole owner and don't elect for corporation taxation, your LLC will be taxed as a sole proprietorship. The LLC's income or losses will flow through to your individual tax return and be reported on a Schedule C.

State and local taxes can include:

Income tax: You may need to pay state income taxes on the money you earn or your business earns. As with federal income taxes, you may have to make estimated state income tax payments throughout the year.

Unemployment taxes: This money funds the state programs that help temporarily unemployed workers. 

Sales tax: Local and state governments might impose a sales tax on the products you sell. You'll need to record what you sell, collect the tax from customers and pay the money to your local and state governments.

Real estate tax: A local tax that you might have to pay if your business owns any land or buildings. 

Business personal property tax: A local tax you have to pay on business assets, such as equipment and furniture.

Franchise tax: The annual or biannual tax that some states charge business entities that do business in their state. This may apply even if you don't have a store in the state, but still ship products to the state.

¹ Consult an accountant or business tax attorney who is familiar with your industry and area. They can help you understand your tax obligations on the local and state levels and can recommend ways to minimize your taxes.