Do you have a great business idea, but you’re not quite sure how to get from the idea phase into owning and operating your own business?
You’ve come to the right place! There are many important aspects to running a company, and each state has its own rules and regulations to consider.
In this guide to starting a business, we’ll discuss all the relevant details of business ownership in the United States. By the time you’re done reading, we think you’ll have a strong grasp of the necessary steps involved.
Select your state below to start a small business. We'll walk through the ten most important steps and share helpful resources along the way.
Create a Business Plan
The first step to creating any business entity is to formulate a business plan. You need to think about what products and services you’ll sell, determine your operational budget, figure out how to market your business, and much more.
Your business plan doesn’t need to be incredibly complicated or formal. However, it is vital that you take the time to think these things through enough to write them down with confidence. These are all important aspects of business formation that require careful consideration.
If you’d like some help, we like the U.S. Small Business Administration’s convenient how-to guide about writing business plans.
Name Your Business
The next step in any state is to come up with the perfect business name for your new business. Your business name is important because it’s your company’s best chance to make a first impression with potential customers, and you need to make an impact. Choose something memorable that also highlights the purpose of your business.
Another crucial aspect of naming your business is making sure the name you want is actually available and hasn’t already been claimed by another entrepreneur. Therefore, you should search your state’s business database to ensure that you can use your desired name. (It’s probably a good idea to come up with a few different options in case your first choice is taken!)
In Alabama, you will also need to reserve your business name before you form your entity. However, in all other states, this step is optional and largely unnecessary.
Designate a Registered Agent
A company’s registered agent is the individual or business that serves as the state’s contact point for the company. Whenever the state needs to send you important documents — such as service of process or an annual report reminder — they will deliver them to your company’s registered agent. Then, your agent informs you of the delivery, scans the documents, and forwards them to you.
This position is vital to any corporation or LLC because, without a registered agent, you could lose your good standing with the state, see your business dissolved by the state, or even remain unaware of a lawsuit progressing against your company.
The common choices for registered agents include having an owner of the business serve as its agent, designating a friend or family member, hiring an attorney or accountant to handle the role, and using a registered agent service (our favorite option).
Choose a Business Structure
At this point, it’s time to decide what type of business you want to start. The two most common options are the limited liability company (LLC) and the corporation. Each of these business structures has its advantages over the other, and which one you should form largely comes down to your unique needs and personal preferences.
We’ll dig a bit deeper into the differences between the LLC and corporation in a bit, but we’ll also touch on them here. The LLC is the more common option, partially because it’s much simpler. There’s not much paperwork involved, and the maintenance requirements basically amount to an annual report. Furthermore, LLC owners still receive the personal asset protection that makes a corporation so attractive as a business type in the first place. For more specific information about starting an LLC, check out our full article on the topic.
For some entrepreneurs, the corporation is the better choice. There’s far more effort involved both in forming one and in maintaining it, but for larger businesses they’re usually the better option, as they allow for more growth and investment than LLCs generally do.
Prepare and File Your Business Formation Documents
This step is a crucial one because it’s the step that actually forms your new business entity with the state. Some states have slightly different names for these documents, but in most states, an LLC will need to file the Articles of Organization and a corporation can incorporate using the Articles of Incorporation.
These documents are quite similar in many ways, but the Articles of Incorporation often require a bit more info than the Articles of Organization. Still, for the most part, the information required includes things like the name of your business, its principal office and mailing addresses, the name and address of your company’s registered agent, the names and addresses of the company’s owners, the purpose of your business, and more. Again, this info varies by state and entity type, so make sure to check with your state to find out what exactly you need to include.
When you’re finished preparing these documents, you can submit them to your state and pay the filing fee.
Draft an Operating Agreement or Corporate Bylaws
Whether you form an LLC or corporation, you will need to draft a document that outlines some key operational aspects of your business. For an LLC, this document is known as an operating agreement, while for a corporation, it’s called the corporate bylaws.
Typically, the type of information you’ll want to include in your operating agreement includes details about the business structure, the business purpose, management and voting rights, capital contributions and distributions, membership changes, the dissolution process, and more.
For corporate bylaws, the info varies somewhat. You should include information about the corporation’s officers, directors, shareholders, meeting schedules, stock type and amount, how to amend the company’s Articles of Incorporation, and more.
The other difference between these two documents is that the corporate bylaws are usually legally required, while the operating agreement is typically optional. Either way, this is not something you want to skip out on, as these documents can prevent ownership disputes down the line.
Set Up Taxes
The first step to setting up your company’s taxation structure is obtaining a federal tax ID number (also known as an employer identification number or EIN) from the Internal Revenue Service. This helps your business hire employees, pay taxes, and set up business bank accounts, among other important tasks.
Other than that, taxation varies quite a bit for LLCs and corporations. Corporations typically need to pay corporate income tax on both the federal and state level, while LLCs are usually “pass-through” entities, which means they do not owe corporate income tax. Instead, LLC owners pay taxes on the company’s income on their personal tax returns.
Either way, you should also check with your county and municipal governments to see if they have any additional taxes for you to pay. Whether intentionally or not, the last thing you want to do with your business is skirt taxes, as this will likely lead to extensive financial and legal complications.
Obtain Licenses and Permits
Next, you’ll need to acquire all relevant licenses and permits for your business. Some states require all businesses operating within their borders to obtain a general business license. In addition, there are many industry-specific licenses on the federal, state, and local levels.
Many states make the licensing procedure easier by providing an online portal where you can search for the relevant licenses and permits for your business type. However, not all states do this, and in some states, you’ll be left on your own to track down the licenses you need.
Get a Business Bank Account
Next, you’ll need to set up a business bank account and an accounting system. The business bank account is simple enough — all you need to do is bring your EIN to the bank of your choice and tell them you’d like to set up a business account. Once the account is set up, make sure to use it exclusively for your business expenses and income. Commingling your business and personal assets is a highly dangerous practice that makes your business susceptible to lawsuits, administrative dissolution, and more.
As for your accounting system, the easiest solution is to get accounting software like QuickBooks for your business. This allows you to keep track of all your business income and expenses in one convenient place, making tax time (and legal compliance) a breeze.
Obtain Business Insurance
If your business has employees, you will be legally required to acquire workers’ compensation insurance in most states. And, even if your business is located in Texas (the one state that doesn’t require workers’ comp), you should still absolutely obtain this coverage. Beyond workers’ comp, there are many industry-specific insurance policies that might be advisable depending on the nature of your business, and a general liability policy is almost always a good idea, especially for businesses with retail locations that customers visit in person.
Maintain Your Business
When you’ve completed all of the preceding steps, your remaining responsibility is to properly maintain your new business. LLCs and corporations are both required to file annual reports in most states, which is a simple filing that keeps the state’s records up-to-date. There are also states that require businesses to pay annual franchise taxes.
While that’s usually the end of the story when it comes to the LLC’s maintenance requirements, corporations also have to hold regular meetings with their directors and shareholders. Furthermore, corporations must keep detailed minutes at each of these meetings.
Some licenses also need renewals at regular intervals, so you’ll need to keep your eye out for this as well.
Should You Form an LLC or a Corporation?
Throughout this article, we’ve touched on some of the differences between LLCs and corporations. If you want to know more about how the LLC compares to a corporation, check out our full-length article on the topic.
That said, we’ll also briefly compare them here to give you an idea of which one you might prefer. The LLC has some concrete advantages over the corporation, including flexible taxation, flexible business structure, a simpler formation process, fewer formalities, and (usually) lower maintenance costs.
That said, the corporation has some of its own advantages, like the ability to issue stock and attract venture capitalists, as well as the well-established legal precedent of the corporation. For most small businesses, the LLC is the preferable entity type, although there are plenty of exceptions.
When Is the Best Time to Form a Business?
It can be difficult to tell when you should form your corporation or LLC. Every business has different priorities, and what makes sense for one entrepreneur might not make sense for you. However, in general, we think it’s always best to form your business entity before you execute your first business transaction.
If you do business before forming your LLC or corporation, those transactions will be performed by default as a sole proprietorship or general partnership. This means these transactions are not protected by the corporate veil, which is the layer of separation your entity provides between your business and personal assets. Even if you form an LLC or corporation later, you as a business owner will have full liability for the transactions you executed before that business formation.
Especially considering the fact that you don’t have anything to gain from delaying your incorporation, we think it’s always a good idea to form your corporation or LLC as soon as you nail down your business concept and name.
Hiring a Business Formation Service
Does this process sound like a hassle? Would you rather pay someone else to form your business entity while you focus on actually growing your company? Fortunately, there are plenty of reputable incorporation services out there that can provide professional assistance for a mere fraction of a lawyer’s fees.
There are dozens of different companies that offer business formation services these days, and it can be difficult to discern which of them is your best option. That’s why we put together our comprehensive guide to the top-rated business formation services available online. We encourage all of our readers to check out that guide and choose the right company for your specific situation. In addition, we’ll briefly run down a couple of our favorite options here.
ZenBusiness: $39 + State Fee
We always appreciate what ZenBusiness has to offer, and they’re our top pick for business formation services for a reason. First off, ZenBusiness has some of the lowest price points in the industry. In addition, this company includes some valuable features like a full year of registered agent service at no additional cost.
ZenBusiness receives spectacular feedback from its clients, with 6,200+ reviews available online and nearly all of them being positive. Finally, the company also displays tremendous corporate responsibility, as it loans money to women- and minority-owned businesses and partners with Kiva.org to help lift people out of poverty.
Incfile: $0 + State Fee
Another of our favorite options is Incfile. It’s impossible to top what Incfile has to offer for pricing, as they will form your business free of charge, as long as you pay your own state fee. Like ZenBusiness, Incfile also includes a year of registered agent service with your business formation service for no extra charge.
Additionally, Incfile has nearly 27,000 reviews online, with positive feedback far outweighing negative feedback. We don’t think they’re quite as well-rounded as ZenBusiness, but it sure is hard to argue with Incfile’s pricing model!
Frequently Asked Questions About Starting a Small Business
How long does it take to incorporate a business entity?
The answer to this question varies considerably based on your state of formation. There are some states that have online business formation portals where you can form an LLC or corporation immediately. Meanwhile, some states require you to mail in paper forms that can take a matter of weeks. Additionally, many states offer some sort of expedited service that can dramatically speed up your formation process. For more details, ask your business formation service or your state’s Secretary of State office.
Should I use an online incorporation service, hire an attorney, or form my own business entity?
All three of these options have their own advantages and disadvantages, depending on your priorities. Forming your own entity will always be the cheapest option, although it doesn’t involve any professional assistance.
On the other end of the spectrum, hiring an attorney can be prohibitively expensive for many startups, although the expert advice you’ll get can make it worthwhile. Finally, an online business formation service splits the difference, providing professional help while charging a fraction of an attorney’s fees.
Should I form an LLC or a corporation?
It’s hard to answer this question without knowing the specifics of your business. That’s because each of these entity types has its own pros and cons, and each is the better choice for certain types of companies. For the most part, the LLC is the preferred option for most small businesses, while the corporation is the better fit for bigger businesses with ambitious expansion plans. However, even these generalities have plenty of exceptions, so make sure you weigh all of the advantages and disadvantages of each before choosing your entity type.
What types of bonus features can I expect if I use an incorporation service?
This all depends on which company you choose to form your corporation, and which of its formation packages you opt for. In general, it’s common to see these companies include perks and features like registered agent service, bylaws templates, annual report service, binders embossed with your company’s name, and more.
Can I form a corporation or LLC with a limited lifespan?
Yes, when you incorporate your LLC or corporation, you will have the option to designate a perpetual lifespan or a specified dissolution date.
Can I form an LLC or corporation by myself? Or do I need co-owners?
Although the vast majority of corporations have multiple owners or shareholders, you are welcome to form a one-person corporation in many states if you’d like to. As for the LLC, single-member LLCs are quite common.
Do I need to hold regular meetings for my LLC or corporation?
Corporations have strict requirements to hold shareholder and board of directors’ meetings on a regular basis, and also to take detailed minutes from those meetings. However, LLCs have no such requirements. They are not required to hold meetings or take minutes if they do.
What state should I form my business in?
This is a bit of a tough question, as different states have different pros and cons for incorporations. For the most part, entrepreneurs tend to form corporations and LLCs in their home states, and this is typically our recommendation as well. However, there are a few states with distinct advantages that we should briefly discuss.
Delaware is a popular option for incorporations because it doesn’t assess taxes for business transactions performed outside the state. In addition, it has low fees and taxes, as well as an exclusive court system for business matters called the Chancery Court, a feature you won’t find in any other state.
Nevada is another common choice because of its extremely low business taxes. There is no corporate income tax here, making it arguably the cheapest state to run a business in. Also, you don’t need to live in Nevada to own and operate a corporation or LLC here.
How does limited liability protection work?
The limited liability protections afforded by a corporation or LLC are often referred to as the “corporate veil.” This veil provides a layer of separation between your business and personal assets, preventing creditors from pursuing your house, car, personal bank accounts, and more while suing your business. Thanks to the corporate veil, only your business assets are at risk in a lawsuit.
However, if you fail to form or maintain your business in compliance with state laws, your corporate veil could be “pierced” and you will lose your limited liability protection.
While there are several vital steps in the process of starting a business, taken individually, these steps aren’t terribly complex.
It can seem overwhelming if you consider the entire process all at once, but if you break down these steps and take care of them one at a time, they’re all quite manageable. Keep in mind that you don’t need to go it alone with the DIY option ― if this process becomes overwhelming, or if you simply don’t have the time and energy to devote to these steps ― assistance is available.