Introduction
Mary just started her small cookies business and sales have been going better than expected. But here is the problem: she still needs to register her business as a legal entity. I am just a small business owner. Why should I legalize it? She said.
It is easy to be like Mary who believes that her business is not big enough to be legalized. But the truth is that you need to make your enterprise a legal entity. Doing this not only shows professionalism but also improves the chances of your business’ success.
Every country in the world has its requirements for small business registration. For instance, in the US, the small business administration has a helpful guide to assist business owners in making their enterprise a legal entity. You need to research the rules and regulations surrounding business registration before you get started.
This guide will help you with the steps to follow when registering your small business and the benefits of doing so.
Key Takeaways
- You need to choose an original business name that is not similar to others and register that name.
- Every state and country has its licensing laws, so make sure you research the rules and regulations in your country and state.
- There are several business structures you can register your business under, ensuring you understand what each involves.
- Depending on the industry of your business, you can get more than one business license.
Steps to Take When Registering Your Small Business
There are several rules and regulations you need to follow in registering your business. These laws can be easy unless you understand them. Here are some important steps you should know if you want to make your business a legal enterprise by the law:
- Organize Your Business Legally
- Choose a Business Name
- Carryout research on Federal and state licensing laws
- Purchase an Insurance policy
- Register with the State
- Register with the IRS
- Obtain Business Licenses
- Maintain Your Business License
Organize Your Business Legally
Before registering your small business, you need to know what structure your business falls under. You can decide to make your business a sole proprietorship, corporation, partnership, or limited liability company (LLC). The business structure you go for must be the same as the documentation you file when registering your business. If you don’t know what each of the business structures means, it is wise to learn what the structures involve when organizing your business legally.
Choosing the right business structure can affect how you file for your business taxes or protect your liability. There are several types of business structures you can choose from. They include
- Sole proprietorship
You can choose a sole proprietorship structure if you own your small business independently and handle all the expenses and obligations. The downside of this is that it can directly affect your personal finances.
- Corporation
If you would like to separate your liability from your business, then consider incorporating your business. There are several types of corporations; each type separates a business entity from its owners. Therefore, a corporation can pay taxes, assume liability, sue people, and own properties.
- Partnership
As its name implies, partnership means two or more people being the owners of a business. If you can’t run your business alone, finding a business partner is a good idea. This partner can complement your skills and make your business grow.
- Limited Liability Company
This is a hybrid structure that many small business owners go for. This business structure provides the legal protection of incorporation and the tax benefits of a partnership.
In the end, choosing a business structure is your decision to make. You know what is best for your business growth and needs. It is necessary to understand how each legal structure works. Speak to a legal or business advisor if possible to make a better decision.
Choose Your Business Name
The next thing to do after choosing your enterprise structure is to choose a business name. It is important to do this on time because no two businesses are allowed to have the same name in many places. So, when choosing your business name, ensure that you have an alternative if your first name has been used. Something to note when choosing a business name is, if your structure is a corporation, the name must include Corp., co. incorporated, or company, etc.
Carryout Research on Federal and State Licensing Laws
Every country and state has licensing laws. You must learn which law applies to your business structure. In most cases, you might only need to apply for a state business license. This license allows you to open business accounts or apply for insurance and bonds for your company.
You might also need to apply for a business license from your residential area in the state. If you do not understand how local licensing works, contact the local regulatory authorities in your area for help.
Some of the documents that you will be required to provide when registering your business include:
- Articles of Incorporation
- Doing business as (DBA)
- Income tax forms
- Articles of Incorporation
To become a legal business entity, the government will require you to submit a document called articles of incorporation. This is especially necessary for business owners that were to register as a corporation. Articles of incorporation include your business purpose, name, corporate structure, and other important information about your firm.
- Doing business as (or DBA)
Another important document is a DBA which shows your registered business name. You might decide to take extra steps to trademark the business name for legal protection. Most state laws require you to get a DBA before proceeding with your business registration. You can contact your state clerk’s office and ask what this involves. Usually, you will have to pay a fee to get your name registered.
- Income tax forms
You need to file some important forms that show you fulfill your federal and state tax obligations. The business structure you choose will determine the type of forms you need to file. You can check for more information on what this involves on your state’s tax website.
Purchase an Insurance Policy
You might not know this, but purchasing an insurance policy is important when registering your small business. If you deal constantly with incidents like property theft or damage, it is necessary to be well-protected. There are several types of business insurance you should consider for your small business. For instance, if your small enterprise has employees, you can purchase worker-compensation insurance. Or if you deal with heavy materials, you could get professional liability insurance that covers you when you do something risky when operating your business.
Small businesses are advised to get a business owner policy or general liability insurance. The general liability insurance covers personal injury to you, a third party, and property damage.
Register with the State
You can apply for a license that pertains to the business structure you choose from the state’s regulatory bodies. Depending on the structure you go for, you may need to provide further documentation during the application. For instance, a partnership structure will require you to provide a partnership agreement, while a corporation will require you to provide articles of incorporation.
Register with the Internal Revenue Service (IRS)
The IRS will ask you to provide an employer identification number. This is especially important if your enterprise structure is a partnership or corporation. Depending on your country, it is important for you to apply for the employer identification number. It is free and easy to get. Once you get this number, you can open an account with the Internal Revenue Service (IRS) into which you will pay your income tax that is deducted from your employees’ salaries.
Obtain Multiple Business Licenses
Apart from registering with the state, you might need to apply for other licenses. This depends on the type of business you are operating and the country or state you live in. Some countries require you to have only one license, others might want a couple.
For instance, if your business operates in two cities, you will need to apply for business licenses in both cities based on their regulations. Also, professionals like accountants, electricians, cosmetologists, and mechanics need to have both a general business license and an occupational/professional license. For businesses that require safety precautions, the local laws of the area will need a safety license from the businesses. You need to understand how the niche of your enterprise affects the registration of your business.
Maintain Your Business License
After taking steps to legalize your business, you need to ensure that you stay compliant with the licensure requirements. Even when you decide to close the business, there are some important documents you must file to avoid being penalized. As your enterprise keeps growing, you might need to get more licenses or renew old ones. It is vital that you understand how to ensure that your license is in good standing at all times.
Benefits of Registering Your Small Business
So, why should you go through the stress of registering your business? The following are some benefits of making this choice:
- You can open business accounts
- You can get business loans
- You enjoy tax benefits
- It improves reputation among customers
- You get supplier discounts
- You can hire good talents
- It offers business continuity
You can Open Business Accounts
Before you open a business account, you will need to provide proof of registering your business with the appropriate authorities. A business account is a very important asset for your small business. It allows you to separate your personal financial transactions from your business ones. It also improves your professionalism as you give your customer a business name for financial transactions instead of yours.
You can Get Business Loans
It is easier to apply for small business loans when you legally register as one. Investment companies and lenders will surely ask for your business license as well as other important documents and information, before granting a loan to you.
You Get Tax Benefits
A tax benefit is any tax law that assists in reducing your tax liability. The benefits range from deductions and tax credits to exclusions and exemptions. Getting a business license offers tax benefits like deferred tax payments, insurance premium deductions, and income splitting.
It Improves Your Reputation Among Customers
Your customers want to know if you are a legitimate business. Customers often check if a business has a license before buying a product or hiring a service. You need to prove your legal legitimacy to new customers. A potential prospect may think you are a scam if your enterprise is not registered. They wouldn’t want to ‘waste money’ on your product as they are not sure if you are a fake company or not.
You Get Supplier Discounts
As a registered enterprise, you are more likely to get discounts from your suppliers. This is because suppliers reserve wholesale rates for small business owners that have a license. Also, if you want to get government contracts for your business, a license is one of the important documents you must have.
You can Hire Good Talents
No one will want to work for a company not recognized by the law. Everyone deserves job security and assurance that they will be paid according to the law. Having a business license offers you an opportunity to hire the best talents in your niche industry. So, if you plan on hiring workers for your small business, it’s wise to register your enterprise now so you have a better chance of getting the best and most skillful workers in the field.
It Offers Business Continuity
One of the best things about registering your business is that it offers continuity for your company even if you fall sick or die. Your registered business is a legal entity on its own, so your children or trusted companion can take over the business or sell it. None of this will be possible if you do not register your small business.
Conclusion
There are so many benefits you will get from registering your small business. Do not be like Mary who does not see the need to incorporate her business. Although the process for registration can be a lot of work, following the steps above will help you make a better decision. The benefits you will receive from registering your business are worth all the work. You will not only enjoy a good reputation among customers, but your business legacy will continue even if you die.
Frequently Asked Questions
Is there a duration I should wait before I register my small business?
No, registration is one of the first things you should do after having a business idea. Registering your business on time helps you to protect intellectual property and copyrights. You also choose your preferred business name on time.
Is a business license expensive?
The fees for a business license vary by state, country, and industry. It depends on the location of your small business, the niche industry and the type of licensing you want.
Is an EIN a requirement?
It is not a must that you get an employer identification number. However, if you want to open a business account or hire staff, you must have one.