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How do I form a business?

You’ve come up with a brilliant business idea. You’ve researched the market, estimated your profits, made a website, and even secured your social media handles.

Now, you just need to figure out how to manage your business finances. So you run to the bank to open a small business account and the banker gives you a list of the documents you’ll need to open a business checking account. As you start researching these documents, the realization starts to set in: “Wow — this is a lot of documents. What am I missing? Are there other documents and legal requirements that I don’t know about? Why is there so much paperwork involved in forming a business?”

Don’t fret! This handy guide will walk you through the steps you’ll need to take when forming your business and list the documents you may need to obtain. Yes, there’s a lot, but when broken down step by step, it’s doable. And if anyone can do this, it’s you.

Choose a business structure

Before you start to form a business, the first decision to make is choosing a business structure. The process of forming a corporation, for example, is very different than starting business as a sole proprietor.

So, let’s dive into a quick overview of each of the different business structures. Each of the options offers different pros and cons. We’ll look at some of these pros and cons, but be sure to talk to a tax advisor or attorney if you’re not sure which option is best for you.

list of business entity types

Sole proprietorships

A sole proprietorship is an unincorporated business with just one owner. Since it’s unincorporated, you don’t have to form the business with the state. In some situations, starting a sole proprietorship is as simple as … starting to do business. However, there may be local licensing and filing requirements depending on where you’re doing business and whether or not you’re planning to use a DBA name (also known as a trade name or fictitious name).

Legal considerations: If you have a sole proprietorship, there’s no separation between you and the business. This means your personal assets and liabilities are not separated from the business assets and liabilities. A sole proprietor can only have one owner, and ownership cannot be transferred.

Tax structure: A sole proprietorship is the most basic tax structure. Essentially, profits or losses are reported on your personal tax return. You’ll still want to separate your personal and business finances, but when you do your taxes at the end of the year, the profits flow through to your personal tax filings. One thing to keep in mind is that any net income will be subject to self-employment tax in addition to your regular income tax.


A partnership is a business with multiple owners. There are several different possible types of partnerships: general, limited, and limited liability. Many of the laws that govern partnerships are state-specific, so if you’re considering a partnership you should check with your Secretary of State’s office to learn more.

In general, to form a partnership you’ll need to create a partnership agreement. You’ll also need to apply for an Employer ID Number [EIN] with the IRS and you may have to file documents with the state depending on the type of partnership you choose.

**Legal considerations: **As we mentioned, there are several different types of partnerships and the primary difference between them is how liability is handled. Here’s a helpful overview of the different types of partnerships (general, limited, and limited-liability) and how they work. If you have further questions about choosing the best partnership type, it’s a good idea to consult an attorney.

Tax structure: Partnerships are similar to sole proprietorships in that profits or losses pass through to the personal tax returns of the partners (although the specific tax forms used are slightly different). Any net income that flows through to the business owner’s personal tax return will be subject to an additional self-employment tax of around 15.3%.

Limited liability companies

Limited liability companies (LLCs) can have one or multiple owners. They are unique because LLC is a legal structure but not a tax structure. That means you can form an LLC and choose to be taxed in one of a few different ways.

Legal considerations: An LLC will protect you from personal liability in most cases — this means if your business faces a lawsuit or bankruptcy, your personal assets generally won’t be at risk.

Tax structure: LLCs can be taxed as a sole proprietorship, partnership, C corporation, or S corporation. This flexibility is an advantage because some of these tax structures offer potential tax advantages, and LLCs are generally easier to form and maintain than corporations.


A corporation can have a single owner or multiple owners (known as shareholders). This structure is generally preferred by business owners who are planning to get outside investors in the future. It also offers liability protections and potentially certain tax benefits. On the other hand, corporations are generally more challenging to form and maintain than other business entities.

**Legal implications: **From a legal perspective, there’s only one type of corporation. Corporations are considered to be separate legal entities from their owners (shareholders), with their own assets and liabilities.

Tax structure: There are two different possible tax structure for corporations.

  1. S-corporations are considered “pass-through” entities. This means that any profits or losses will be passed through to the personal returns of the business owners, just like with a sole proprietorship or partnership. The difference, however, between an S-corp and other pass-through entities is that an S-corp may allow you to reduce your Self Employment Tax liability; you can divide your income from an S-corp into two components: a reasonable salary (on which you pay the self-employment tax) and profit distributions (on which you pay only your applicable income tax rate). It’s a good idea to consult with a tax advisor if you’re considering this possibility.
  2. C-corporations are not pass-through entities, which means that the corporation pays tax on its profits, and then when the shareholders receive dividends, they will report this income on their personal tax returns. This double taxation can make C-corps less attractive for business with only a few owners, but this structure can be advantageous for businesses with many owners or businesses looking for outside investors.

Register your business with the state or local government

The next step is to register your business with the state. The requirements will depend on your state laws and the the legal business structure that you choose. For example, sole proprietorships and general partnerships don’t have to form their business with the state, but may need to get a business license or DBA filing.

Decide if you want to register a DBA

Many businesses use a DBA (“doing business as”) name, which allows them to conduct business in a name that’s different than their legal business name.

Why is this useful? If your business is a sole proprietorship, a DBA will allow you to use a business name and deposit checks made out to that name.

A DBA filing is also helpful if you want to use more than one different name for different aspects of your business. For example, maybe you have a business where you offer household repairs and commercial window washing. With some customers, you might use the name “Acme Residential Handy Jobs” and with others, “Acme Commercial Window Cleaners.” A DBA will allow you to operate with both names without creating an entirely separate business.

If you do choose to use a DBA, you may have to register it with the state or local government. This requirement does vary from one place to another, so be sure to check the requirements for your state.

Check licensing and permit requirements

Depending on your business type and location, you may need to get a business license or certain permits in order to conduct business. Since these requirements vary widely from state to state, it’s a good idea to check with your state and local government to understand what’s necessary for your situation.

Form a LLC or corporation by filing with the state

If you decide to form an LLC or corporation, you’ll do this by filing documents with the state. Typically you will want to form your business in the state in which you live, but in rare cases it may make sense to register your business in a different state due to tax or practical considerations.

In general, you’ll file Articles of Organization to form an LLC and Articles of Incorporation to form a corporation. Your state may use a slightly different name for these documents. These are public document confirming that the state has recognized your business as a legal entity. One thing to keep in mind: because these are public documents, the information you provide may be visible to anyone who searches for it.

illustration of tax forms

Register with the IRS

Obtain an EIN

Now that you’ve got your business filed with the state, you’re ready to obtain a tax identification number, commonly known as an EIN (Employer ID Number), from the IRS for your business. An EIN is required for most business types, but it’s optional for sole proprietorships and single-owner LLCs with no employees.

Applying for an EIN is a simple process that you can do online in less than 15 minutes (or over the phone with an IRS agent).

Elect a tax status

As we mentioned earlier, LLCs and corporations can be taxed in one of a couple of different ways. If you form one of these businesses, you’ll have the option to elect a tax status.

That means that once your business is formed and you’ve received an EIN, you’ll need to let the IRS know if you’d like a tax structure that’s different than the default for your entity type. This is done by filing Form 2553 with the IRS. If you have questions about this process, you’ll want to get a tax advisor involved.

Create written agreements and internal documents

Depending on your business type, you may need (or simply want) to create internal documents that outline how you’ll run the business. These documents cover things like how profits will be divided, how ownership is calculated If your business has more than one owner, these documents can save you a lot of headaches in the future.

  • If your business is an LLC, you’ll need to create an Operating Agreement.Your state won’t require you to file an operating agreement, but some states require you to create one for your records. Check with your state to confirm the exact requirements for your business.
  • If your business is a corporation, the written rules for your business are called Corporate Bylaws. Many states require you to create Corporate Bylaws, though most don’t require that you file them.
  • If your business is a partnership, your written agreement is a Partnership Agreement; it should include the rights and responsibilities of each owner as well details on how you’ll make decisions and divide profits. You don’t have to file this document with the state and there aren’t any specific requirements around what it must include, but you might need to provide a copy of the agreement when opening a business bank account.

In general, it’s a good idea to consult a small business attorney if you have any questions about how to create your Operating Agreement, Bylaws, or Partnership Agreement. These are important — and sometimes complex — legal documents so it’s worth bringing in an expert if you need one.

Research state and local requirements

Your state or country may have additional requirement, so it’s a good idea to check in with both your Secretary of State and your county’s business department to find out if you need to take any final steps to get ready for business.

Figure out sales tax

This is the tax that’s is tacked on to your final bill for certain goods and services. Sales tax regulations differ by state and by industry, so make sure to look up the sales tax requirements in your state and ensure you’re charging the right amount of sales tax to your customers.

Learn about licenses

States often require licenses to practice, depending on your business type. Your local government may also require some sort of license, and local licenses are different from state licensure requirements. That means you should check with both your city and state to figure out what you’ll need to operate.

Get a sign permit

Every wonder why there aren’t more flashing neon signs around town? That’s because most municipalities regulate signage. If you’d like a sign, you’ll likely need a sign permit even if the sign is connected to your business.

Prep for property tax

Property tax isn’t part of setting up your business, but you will have to pay for it eventually and it’s good to keep in mind from the start. Property tax is usually levied at the county level and can include real property, company vehicles and any assets that the company has for operation: furniture, computers, cameras and the like. It’s calculated by taking a percentage of the value of the asset.

Additional requirements before hiring employees

Congratulations. You’re ready to hire employees, meaning your business has grown to the point where you can’t handle everything on your own. It also means you’ll have to be aware of a couple additional requirements. The requirements for workers’ compensation and payroll taxes are different depending on whether you’ll be using independent contractors or hiring employees, and the IRS has guidelines to help you determine the difference.

Workers’ Compensation

Workers’ compensation requirements vary from state to state, but almost every state requires workers’ comp in some way or another. Workers’ compensation is a form of insurance that provides benefits for employees who get hurt or sick while on the job. Even though this is a requirement imposed by the state, in many states, you’ll need to work with a private insurance broker to get this coverage. There are plenty of brokers in every state who offer workers’ compensation brokerage services.

Payroll taxes

Ever receive a paycheck and notice it’s for less than expected, considering the hours you worked and your pay rate? That’s because employers are required to withhold a portion of your income for taxes.

Simply put, payroll tax is made up of these taxes: income tax, Social Security, Medicare, state unemployment, and federal unemployment.

Both the employee and the employer are required to pay taxes on each employee’s salary. The employer is responsible for withholding both shares of these taxes and paying them to the federal government.

Requirements for obtaining a shop, office, or workspace

Certificate of occupancy

Certificates of occupancy are granted at the municipal level. This is the city’s way of saying that the physical property the business is operating out of is up to code and safe for customers. The requirements can vary based on the type of space your business occupies: for example, if you’re a restaurant, the requirements may be more stringent than for a non-retail office like an accounting firm.

Business insurance

Most lenders require business insurance for commercial loans for real property. It’s similar to how lenders require home insurance if you owe money on the home; it’s their way of protecting their investment (the loan) in case the building burns down. This insurance can be obtained locally or out of state through a business insurance broker.


Hi there! This post exists to offer you (hopefully) useful information but it cannot take the place of personalized professional advice. Please consult a qualified expert if you have questions about your business. Also, Azlo doesn’t endorse any third-party sites that are linked here.

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