Though there’s no formal guide book or instruction pamphlet, for most U.S. small business owners the initial registration and licensing requirements should be considered in a certain order. I like to think of it as a large funnel; at the mouth of the funnel is the creation of the entity and at the bottom are all the local and trade specific permits one may encounter. Hopefully, these tips will help you pave a smooth path on your way to starting your next business.
First and foremost, form a company! Whether it’s a corporation or an LLC, form an entity to help protect you and any partners from the debts and liabilities of the venture. Until the legal documents to create the entity are filed you’re leaving yourself personally liable for all things related to the business. In today’s society where lawsuits run rampant, why take the chance? Forming an entity in Delaware provides a solid foundation for protection by giving you the most favorable legal environment in the nation, since 2001.
Now that you’ve formed the entity and have separated yourself from liabilities of the business, it’s time to do the same thing from a financial standpoint. Imagine that the company is a living being that is going to generate its own revenue. That revenue will be taxed by the IRS. Just like individuals, businesses can get their own tax identification numbers for claiming income and paying taxes. The tax ID or EIN is much like a social security number and just one more step to help separate you from your business.
Next you’ll need to consider requirements where the company plans to physically operate or bank. This is where the funnel begins to taper. Each jurisdiction you encounter may have its own registration requirements. As a rule of thumb, always start at the top and work your way down when it comes to state and local licensing requirements. A great place to start is the Secretary of State’s office, as most states require the registration of out of state entities through a process known as foreign qualification. This is also a good place to inquire about trade specific permits and/or licenses that may be granted by state boards.
If the entity will generate revenue in a given state, the next stop should be the Division of Revenue where the entity will typically file for a business license. Be careful though, as some states handle business licensing at a county level.
Obtaining a business license will complete the registration “funnel” for most business owners. But for those operating within the incorporated limits of a city or a town, a visit to city hall may also be in order.
Properly registering a small business entity in the U.S. will not be the same process for everyone, as state and local compliance issues differ from state to state, county to county, and city to city. Following this “funnel” model is a good way to keep your entity legal and valid where operating by affording you very little opportunity to miss a critical license or registration along the way.