It's a new year and a lot of you might be thinking about starting your own new business. There is so much more to creating a business than picking out a logo and printing up business cards. You must take a few steps to ensure your business is created correctly and legally. Below is a list of recommendations to follow, but we always advise that you speak to an expert for more information.
Apply for an EIN or an electronic identification number from the IRS
An EIN is a unique identifier applied to your business for all future communications with the IRS. It helps differentiate between you personally (SSN) and your business (EIN). Applying can be done electronically or by paper. We recommend applying electronically because it is completed immediately and you’ll be able to print out a .pdf letter from the IRS with your EIN number. Use this link to apply for your EIN electronically. Mailing can take up to 6 weeks to get a letter from the IRS. Once you have that letter, keep the electronic format because it will be requested from any number of sources for example, your bank, your state government, suppliers and lending institutions. And, please note, that you can’t look up the letter online at a later date. You have to call IRS and that can be a challenging and time involved process.
Register your business with the state, which includes registering your trade name
First, you need to see if the business name you want is available, meaning that no other business in your state is using that name. In Maryland you would go to this site and search. If your name is available, go to this site to register your trade name. Using this site, you will provide the trade name, along with all personal information and define how your business is going to be structured (LLC, Sole Prop, etc). You submit it for approval and depending on the state, it can be instant or take up to 2 weeks to approve your business. In Maryland, the average response is 3 to 5 business days. You will typically get an email with your approved articles of organization, which is a .pdf document that provides all the information you gave the state. It’s simply proof you are a legitimate business in the state you applied. Within a week after that, you will show up in your state’s database as an active, in good standing business. Creditors, lenders and banking institutions will look here to determine if you are a legitimate business.
Set up your appropriate tax accounts with the state, which can include sales tax, withholding taxes and personal property taxes.
Now that you have a legitimate business you have to determine which taxes you are responsible for paying. Each state has different requirements for sales tax. If you are going to be selling any type of product or a taxable service, you will need to set up a sales tax account with your state. For Maryland, go here to set up your sales tax account.
If your business will have employees (not including yourself), then you need to set up your withholding tax account. This account is used to pay the payroll taxes that are withheld from the employees pay checks. If you don’t plan to have employees immediately, you can always set this account up later, when you hire your first employee. For Maryland, you use the same website as above to set up this tax account.
Every business has to have a personal property account. In some states, it is automatically set up and it is simply a way for the state to keep track of what assets the business has on a year to year basis. Many businesses don’t have tangible assets, like land, buildings or equipment, but you still have to file annually to indicate that you don’t have any property (in most states). In the state of Maryland, whether you have assets or not, you have to file a personal property tax return, along with a $300 filing fee. Failing to do so, can result in the revocation of your business license, even if you have no assets.
Once these accounts are set up it is your responsibility to file appropriate reports even if the amounts are zero. For example, if you set up a sales tax account in June and don’t sell any product until December, you will still need to submit sales tax filings to the State stating that you had $0 sales during that time period. If not, you will be subject to penalties and interest for failure to file.
Create an operating agreement
An operating agreement is a set of rules and guidelines that structure your business and how it functions. It is extremely important to have this document in cases where a business has multiple owners. The types of items that are included in an operating agreement include the roles and responsibilities of each owner, the process of ending a partnership, voting rights, allocations of profits, losses and dissolution process.
Open your business bank account
Now that you have the above items in place, you can go to the bank of your choice and open a business checking account in the name of your business. This step comes later in the overall process of setting up a business because most banks require you to have a legitimate business in place in order to open a business checking account. You need a business banking account to create a separation from you personally and your business entity.
Choosing a bank comes down to a few key factors. It is up to you to determine how important each of those factors are. Our advice would be to choose a bank that you can establish a relationship with the branch manager. It gives you a point of contact if you ever have any problems or questions and they will understand your needs better over time. For example, having a relationship with a branch can come in handy if you need to get a deposit in on that day and you are close to the 2pm deadline. You can call ahead and let them know you are on the way and they can hold the deposits for you. A great branch manager will notify you when there is an issue with your account and can sometimes help defer any bank fees. Another item to consider when choosing your bank is the online capabilities, like mobile deposit, cell phone apps and the ability to download monthly statements online easily. If you have access to a credit union, like Navy Federal Credit Union, they typically offer the most complete package for a small business owner and would be recommended.
We know this is a lot of information to digest in one sitting, so please let us know if you have any questions about setting up your new business. We're happy to help walk you through the process and make it as easy and pain free as possible.
Written by Tom Barnhill, Owner of Business by Barnhill