Launching a new business means much more than just ownership. After a business idea is conceived and adequate funding is received, people jump into starting the business without further thought. But many miss out the fact the startup has to be registered. This sort of rush-to-start approach has become more common and attractive these days because of the simplicity in starting a business with many online services. Though registration may not seem to be very important initially, it can crop up later as trademark dispute, tax problems, bureaucratic snags and lot more. Registering a business could add legitimacy to a business and put in more trust and credibility to the brand marketing.
“If you treat this as paperwork and box checking, you are missing some of the issues that will be critical to your business, said Therese Flaherty, director of the Wharton Small Business Development Center at the University of Pennsylvania. She also added, “You ought to be inquisitive about that. If you are not, it will come back and bite you later.” Here below is the process and the issues involved in registering a new business in the USA.
1.Deciding the legal configuration of the business:
A business has to be considered as a separate person and as a legal entity. There are various factors that would affect the legal configuration of the business. The legal configuration depends on the level of control by the founder, business’ vulnerability and financing needs. The legal structure decided by the founder will decide the registration requirements. The company has to be registered under the state or the local government depending on the legal structure. For the companies that has the legal structure to be a corporation, non-profit corporation or a limited-liability company or partnership, has to be registered with the state government. For sole proprietorship concern, it is enough to register at the local level. But it has to registered under the state government if it to be operated in various places with the same name. However, it has to be noted that the legal status of the business could be changed on a longer run and additional changes has to be done then when needed.
2. Register the name of the business:
There are many instances when the company chose a name at the spur of the moment and were forced to change it later. This can be an expensive affair. The company’s previous branding and marketing efforts may go waste or may have to undergo costly litigation and bear the charges for the damages caused. Even small-scale business could be tripped if the name is not kept right. So it is very important to get the name right. Once the right name is picked, it has to be ensure no one has use the same name. It can be checked with United States Patent and Trademark Office database to check if someone has already registered and trademarked the company. Internet in the right place to research on the name for anyone. When the business is more riskier it would be better to hire an attorney or an expert to turn over the right rocks.
Along with the business name, the legal name of the business has to be registered. By legal name, it means the name of the person or organization that owns the business. If the business is a partnership concern, the legal name is the name of the partners mentioned in the partnership agreement. The legal name of the business is a name that would be mentioned in all the government official documents and forms. The forms include application form for employer tax identifications, licenses and permits. If one want s to sell items in a different name, ‘assumed name’ has to be filed with the registration form with the local and state government. The assumed name is not the same as personal name or the names of the partners or formally registered name of the business. However, it has to be noted that there are some states where the laws does not let one register fictitious business names.
3. Federal Tax ID:
It is vital for employers with employees, business partnerships and corporations and other classification of organizations to receive an Employer Identification Number (EIN) from the U.S Internal Revenue Service. It is also called as an Employer Tax ID and Form SS-4. This ID is a must for the organizations that function even without employees. Sole proprietors and other single-person limited liability company can use their Social Security numbers. This number is used for local tax registration forms, federal tax returns, local business licenses and also to distinguish the business entity. The process of obtaining the number is quite simple and free of cost too. There are number of ways to apply for the number and the easiest would be applying for it online. The service is offered by the Internal Revenue Service. Requirement for the state number/ charter has to be checked with the state government only.
4. Registration with state revenue agency:
Apart from the federal tax ID, the startup has to acquire Tax IDs and permit from the state’s revenue agency. If the business sells products, it is a must to compile sales tax and so it is mandatory to have a Sales Tax Permit or Vendor’s License to officially and legally deal with the products. This ID can be obtained from state or local government or sometimes may be needed to obtain from both.
Apart from the business taxes paid to the federal government, there are also state and local taxes which has to be paid. The most common types of tax obligations for small businesses or firms are listed below:
- Tax Permit – In the major states in USA, company owners need to register the business with a state tax agency and apply for the necessary tax permits. It is a must in most states for every business to apply for a state sales tax permit as a means to collect sales tax from customers for every product purchased.
- Income Taxes – Income tax is almost common in all the states. The income tax structure is depended on the legal entity of the business. The LLC gets taxed independently from the owners, if the business concern in a Limited Liability Company, while sole proprietor report their personal and business income taxes using the same form. For details on other businesses in the particular state, General Tax Information link has to be checked.
- Employment Taxes – The organization with employees are liable to pay the required taxes by the state and the federal government. Despite of changes in the law, every state is required to pay state workers’ compensation insurance and unemployment insurance taxes. Businesses in states like California, Hawaii, New Jersey, New York, Rhode Island and Puerto Rico are obliged to pay for temporary disability insurance.
5. Obtain licenses and permits:
This is the final and the most awaited step – registration. Most of the businesses in USA have to obtain business license or permit under some category to function formally. It is common to register with the city or county tax collector. The final step has several names like business-tax application, tax registrations or business-license application. Small startups are required to acquire general business license or specific to the industry operating permits from the agencies of the state or local government. These process enable the government to keep track of the business that are liable to pay tax to them. Some places it is in the form of fee whereas in other places it is paid in the form of taxes.
It is very important to know the licensing conditions in the place where the startup is going to be launched, as regulations and conditions change by industry, location and the government. No abiding the regulations, the government can impose huge fines that can pose company at serious risk. “Do not blow the sales permit off,” said Rich Stim, a lawyer and coauthor of ‘Wow, I’m in Business.’ He also added, “That would be a big mistake. You are dealing with tax people, so it will get ugly quickly.”
Federal license might be needed if the business is dealing with activities that are under the supervision and control of federal agency. Extra requirements like planning and zoning boards, regulatory agencies or professional licenses may be needed for some business. So it is better for the owner to completely understand the tax and licensing requirements for the business entity and ensure he abides by all to avoid mishaps or confusion later.