New Business Start-up and Incorporation
While starting a business can be risky, armed with the right information you can make it work for you. However, succeeding in business often requires making tough choices. One of the first decisions you will need to make after going into business is how to organize your company. There are many different ways to formalize your enterprise. For the purposes of minimizing risk, we will be discussing incorporation.
Entrepreneurship requires making many decisions that are critical to your operation. One such decision is whether or not to incorporation. Incorporation is a legal step to formally register your business with the relevant authorities in your state and at the federal level.
However, with a number of different types of business structures, entrepreneurs can get confused as to which will work best. In this blog, we discuss each type of business incorporation and the tax registration process required for your business.
Types of Incorporation
The type of incorporation structure you use will depend on a number of factors. Many small businesses are concerned about taxes and the associated filing obligations for each type of registration. The following types of incorporation are available to a start-up entrepreneur:
DBA is a form of business registration, which means, “doing business as.” Used by companies, partnerships, and even sole proprietors, a DBA registration is essentially filing a fictitious name by which you will offer goods or services to the public. This type of registration is used quite often by large companies, but is also very attractive to small businesses, as an entrepreneur is able to legally use a business name without forming an LLC or a corporation.
Additionally, registering a DBA is the most affordable option available for a start-up business.
LLC and Corporations
An LLC is registering your business as a limited liability company. This form of incorporation merges the pass-through taxation of a sole entrepreneur or partnership with the limited liability of a corporation. This business structure attracts greater credibility amongst customers, vendors, and financial institutions. Many entrepreneurial business owners find this business model to be more attractive because it prevents creditors from coming after their personal assets.
Unlike LLCs, corporations are separate entities from their owners. The structure includes shareholders, directors, and officers. There are two types of corporations: the standard C corporation (C Corp) and the S corporation (S Corp). Both enjoy the same structure, limited liability, and incorporation formalities, but differ in relation to taxation and ownership.
With C corporations, the business pays taxes separate from the owners and there are no restrictions on ownership. With S corporations, the pass-through taxation benefit is enjoyed by LLC and DBA, but there are a number of restrictions in relation to ownership.
Since in many instances, the decision of which business structure to adopt will depend on the taxation and filing requirements, it is prudent to speak to a CPA to get a better understanding of the accounting and taxation requirements for your business.
Registration Requirements for Start-Ups
Once you have decided on a particular business structure, the next step for a start-up business is to handle the required registration process. This will include:
- Applying for the Tax ID – If you are a sole proprietor with employees, you will be required to apply for a tax identification number that is unique to the business. This application affords you an EIN (employer identification number) needed for local and federal tax registration returns and business licenses.
- Registering with the State – Each state will have its own tax law and registration requirements. Your start-up process will include following through with the required registration at the state level.
- Registering with Unemployment – As an employer when you hire employees, your business will be required to register with the unemployment agency in your state.
- Register with the EFTPS – This is the electronic federal tax payment system and as a start-up business, it will be important when you hire employees to register for this IRS system. The EFTPS is a platform that allows individuals to make secure electronic federal payments.
Starting a business without the required legal registration can spell problems in the future. If you are not sure about what is required or just need some guidance, consider the services of a CPA firm to help you with your incorporation process.
At Ash CPA Firm, we work with our business clients to offer advice and assist with the preparation of the required state and federal registrations and annual filings.