Top FAQs for
Starting a Business
Starting a business can be confusing. Below are the most common questions we receive from new business owners.
What are the benefits of incorporation?
The main reason to incorporate or form an LLC is to minimize your personal liability. Once your business is incorporated (either by forming an LLC or Corporation), it exists as a separate business entity. Essentially, you put a wall separating your personal assets from anything in the business.
Of course, there are other benefits too. Here are the top reasons to incorporate:
- Minimize your personal liability and protect your personal assets.
- Get more flexibility when it comes to taxes (talk to your CPA or tax advisor for specific advice on your personal situation).
- Boost the credibility of your small business.
- Add a layer of privacy (don’t use your personal name and home address to represent your business).
- Start building your business credit.
- Protect your business name and brand at the state level.
Can I reserve a business name?
Yes and CorpNet can help reserve your business name if you’d like. A business name reservation consists of a filing with the Secretary of State’s office to reserve a business name until you are ready to incorporate your business or form a Limited Liability Company. Generally, a name reservation will be effective and the name that you place on reserve will be on hold for 30-90 days. Once the name reservation expires, that name becomes available for use to the general public for anyone who wants to use it.
What is a Sole Proprietorship?
A Sole Proprietorship is the simplest structure for operating a business owned by one person (or a married couple). By default, states will consider a single-owner business to be a Sole Proprietorship unless the owner (the sole proprietor) files business registration paperwork to form an LLC (Limited Liability Company) or a Corporation. Sole Proprietors are not considered employees of their companies. They get paid by withdrawing funds (taking “owner’s draws) out of their businesses for personal use.
Many freelancers, consultants, and other professional service providers work as Sole Proprietorships. The Sole Proprietorship structure is also attractive to entrepreneurs in other industries, too (retail, landscaping, cleaning, and more). It’s common for entrepreneurs to start as Sole Proprietorships and then register their companies as formal business entities when they begin to grow or expand their businesses.
What is a Partnership?
What is a Limited Liability Company (LLC)?
What is a C Corporation?
A corporation has a formal structure consisting of shareholders, directors, officers, and employees. Every corporation must select at least one person to serve on its board of directors and officers are required to manage the day-to-day activities of the company.
As a separate business entity, a corporation files its own tax returns. As a C corporation owner, you’ll need to file both a personal tax return and a business tax return. In some cases, this can result in a “double taxation” burden for small business owners (see the question on double taxation below for more details).
What is an S Corporation?
Next, the board of directors must meet and resolve to elect S Corporation status. This is achieved by preparing and filing IRS Form 2553 with the IRS. Some states also require a similar filing at the state office before a corporation will be recognized as an S Corporation for STATE tax purposes.
What is a DBA?
A DBA lets the public know the true owner of a business. DBA laws are consumer protection laws. They exist, so consumers have full transparency on which companies they are transacting business with. In other words, DBAs prevent dishonest business owners from running a company under a different name to avoid legal problems.
What is the difference between a C Corporation and S Corporation?
What Is the difference between how LLCs and S Corporations are taxed?
However, although LLCs and S Corporations are both pass-through entities, there are some differences in how taxes are handled.
- Self-employment tax – Income of an LLC flows to the members involved with the business and is subject to self-employment tax. With an S Corporation, only salaries are subject to self-employment tax. Therefore, any distributions that paid out to S Corporation owners are not subject to Social Security and Medicare taxes.
- Tax flexibility – The LLC offers a lot more flexibility in terms of how owners can be taxed. With an LLC, owners can determine their allocations for the year and be taxed accordingly. With an S Corporation, owners must be taxed based on their pro-rata ownership interests. For example, if one owner owns 50 percent of the business, then that person will be taxed on 50 percent of the company’s profits.
Where should I form my LLC or C Corporation?
However, as a general rule of thumb, if your business will have fewer than five members or shareholders, you should form your business in the state where you actually live or where your business has a physical presence (such as an office.) When you incorporate in a different state from your physical presence, you’ll need to deal with added fees and paperwork, since you’re considered “operating out of state.” And for most small businesses, the added hassle and fees just aren’t worth it.
How can I create my new business?
- Do-it-yourself: DIY is the lowest cost method, but you’ll need to do everything yourself. This is the best option if you’re more interested in saving money than time. With this route, you need to be able to deal with lots of details and arbitrary rules.
- Online legal filing service: This option is slightly more expensive than DIY. An online legal filing service will complete and file the documentation for you. Like any legal document, the articles of incorporation and application are full of tedious details. A professional service can make sure that your application is done right and processed smoothly.
- Lawyer: This is the most expensive option, but may be necessary in certain situations. For example, if you have complex requirements for how your stock should be allocated or you are working with millions of dollars, then you should turn to expert advice.
Whichever method you choose, you may want to speak with a tax professional to determine what business structure will be the best for your particular circumstances.
How much will it cost to start my new business?
When is the best time to incorporate or form an LLC?
What is a Registered Agent?
Please note that a post office box or other mail service (e.g., UPS) is usually not sufficient to qualify as a registered agent. The agent is responsible for accepting official notices from the Secretary of State and service of process in the event the corporation is sued.
An LLC’s registered agent must be available Monday through Friday from 8 am to 5 pm at the location specified on the LLC’s Articles of Organization. The registered agent’s name and address are public information, therefore giving some privacy protection to an LLC’s owners.
Why do I have to have a Registered Agent?
What are Articles of Organization?
Filing articles of organization officially registers the company as an LLC with the state and establishes it as a separate legal entity from its owners (which are called members). That legal separation between owners personally and their business is one of the main drivers for entrepreneurs to form an LLC. In most instances, members are not held liable personally for the company’s legal and financial problems. That gives business owners some peace of mind that their personal assets (e.g., home, vehicles, retirement funds, etc.) will not be at risk if the LLC is sued or cannot pay its debts.
After receiving state approval of its articles of organization, an LLC is considered “domiciled” in that state (i.e., the state becomes the company’s “home” state). The business goes on record as a domestic LLC in the state, obligated to operate according to that state’s laws and codes.
What are Articles of Incorporation?
Filing Articles of incorporation registers the company as a corporation (C Corporation) with the state. It makes the business a separate legal and tax-paying entity from its owners, giving its incorporators and shareholders personal liability protection from the company’s legal and financial problems.
After receiving state approval of its articles of incorporation, a business is considered “domiciled” in that state (in other words, the state is the corporation’s “home” state). The company goes on record as a domestic corporation in the state, and the corporation must conduct business according to the laws and codes of that state.
Do I need an EIN?
Getting a Federal Tax ID number is optional if you’re a sole proprietorship, but if your business acts as a Corporation, Limited Liability Company, or a partnership, you are required by law to have one.
What is a beneficial ownership information report?
A beneficial ownership information report provides the Financial Crimes Enforcement Network (FinCEN) with information about registered business entities, their beneficial owners (individuals with substantial control over or 25% or more ownership interest), and their company applicants.
Most registered business entities meet FinCEN’s definition of a “reporting company.” Reporting companies can be either domestic or foreign. Domestic reporting companies are corporations, limited liability companies, and any other entities created by the filing of a document with a secretary of state or with any similar office under the law of a state or Indian tribe. Foreign reporting companies are entities (including corporations and limited liability companies) formed under the law of a foreign country that have registered to do business in the United States by the filing of a document with a secretary of state or any similar office under the law of a state or Indian tribe.
So, LLCs, C Corporations, S Corporations, and other types of corporations fit the definition. FinCEN doesn’t specifically mention them, but different entity types — such as Limited Partnerships, Limited Liability Partnerships, Limited Liability Limited Partnerships, and Business Trusts — might also be reporting companies. Businesses, like Sole Proprietorships and General Partnerships, which do not register formation documents, do not have to file a beneficial ownership report.
How do I keep my new business compliant?
Fortunately, CorpNet is here to help entrepreneurs meet the compliance requirements for business.
With our free online business compliance and monitoring tool*, the CorpNet’s Compliance Portal, you can stay on top of the many compliance requirements that apply to your company and their deadlines.
