Setting up a new business is an exciting venture, but if you plan to operate in the United States, it’s important to look beyond the creative elements that come with launching your new company. If you want to succeed and remain lawful, you’ll need to take some time to think about how you plan to navigate the complexities associated with American business laws.
To ensure you tick off all the proverbial boxes you’ll need to legitimize your company, make certain you understand the different laws and steps you need to take to adhere to them. Once established, you’ll also need to make sure you’re thoroughly familiar with how to remain consistently compliant with federal and state laws, along with any industry regulations that apply to your company.
Getting ready to nurture your new idea and launch it into a full-fledged business? To get going on your journey to entrepreneurship, start by meeting all legal requirements to operate your company in the U.S. Here’s a broad overview of what you need to do.
One of the primary decisions you’ll need to make during the formation of your new company is to decide on what type of business structure you want to choose. The formation type you select will have a direct impact on your taxes, ability to raise money, personal liability, and the type of paperwork you’ll need to file. In the U.S., the main options most companies choose will be from the list of the following.
Often referred to as a “mom and pop” operation, a sole proprietorship is the simplest type of business formation and the most affordable, which is a great benefit. Another advantage is that entrepreneurs can usually set up a sole proprietorship very quickly.
However, a sole proprietorship is owned by one person, and there is no legal distinction between the company and the owner, which can be a big drawback since it means the owner is liable for all business obligations, both financially and legally. In the event the sole proprietorship becomes entangled in a lawsuit, bankruptcy, or other issue, the owner’s personal assets are subject to risk.
Partnerships are structured much like sole proprietorships with one primary difference – ownership of the business is assumed by more than one person. Like a sole proprietorship, there is no distinction between a business and its owners, which means all financial and legal obligations ultimately fall on the owners.
Limited Liability Company (LLC)
An LLC is a very popular business formation structure in the U.S. since it protects owners from personal liabilities (in most situations) if the business runs into any legal or financial problems. Additionally, the company can pay self-employment tax as opposed to corporate tax. Due to this separation and other advantages of an LLC, many entrepreneurs choose this route.
If you’re selecting an LLC, you want to keep in mind each state has its own LLC laws. This means you will not be able to rely on a uniform law. Additionally, if you plan to operate in more than one state, you’ll have to check into the laws of each one, what you’ll need to do, and how laws or procedures affect you.
Owners of C corporations enjoy legal protection from the business’s liabilities. Unlike other business structures, when it comes to taxes, owners are taxed separately from the business and file separately with the IRS.
While there are benefits to this type of structure, forming a C corp can be expensive and complicated – especially during its early stages. These companies are recognized at the federal level but also may be subjected to different fees and regulatory requirements. C corps can also have many shareholders, unlike other types of businesses.
An S corporation operates much like a C corporation, except the owners don’t enjoy separate taxation from the business. Additionally, this business formation type is limited to 100 shareholders with one class of stock.
Not all businesses are created with the intention of making a profit. Nonprofits do not distribute income to members or other stakeholders in the company. These companies are organized under state law, so owners must make certain they take the time to understand what’s required of them and adhere to those criteria.
Choosing a structure is one of the primary first steps you’ll need to take when forming your new company – it must be done before registering your startup with federal agencies, along with the state it’ll be operating in. But even before registration, be sure to choose a memorable business name that is not currently being used. This way, you can put on the application and begin to legally use your new business name.
Understanding Federal and State Taxes
Taxes are another set of laws you’ll need to navigate as you get established and ready to launch. Some taxes will be federal and are easier to understand since these are uniform across the U.S. However, other taxes are on a state-by-state basis, which means you’ll need to dig deeper to understand the tax laws in each specific state you are setting your business up in.
Obtaining an Employer Identification Number (EIN)
Any business that plans to operate in the U.S. or one of its territories and plans to hire employees will need to obtain a federal Employer Identification Number (EIN) from the Internal Revenue Service (IRS). This is a fairly easy step when forming a business.
The IRS regulates this process, and all you’ll need to do is simply file and submit your application online. This number will allow you to legally hire employees, pay federal taxes, apply for your business licenses, and open any business bank accounts you’ll need.
You’ll also need to educate yourself on state laws to determine whether your company needs a state tax ID number as well. Your state’s website should offer a wealth of information about this step and whether you have any legal obligations to meet before launching your business.
Ideally, every business owner should separate their personal and company bank accounts – for LLCs and corporations; this is a must. For U.S. residents, this is usually a pretty straightforward process, not too unlike opening a personal bank account. You show your ID and other relevant documents to the bank requests.
For non-U.S. citizen owners, there are some additional challenges faced when establishing banking, especially if they are unable to travel to the U.S. Non-residents will need to verify their identity. Some banks will allow owners to do this online, while others require them to physically come to the bank. There are ways that empower non-U.S. resident owners to be able to open bank accounts without visiting the U.S., where they can use online forms and show passport identification, photos, and videos of themselves to prove who they are.
To open a bank account, you’ll need to prove your identity, show business formation documents, Federal Tax ID number, bylaws and operating agreement, passport, U.S. business location address, and list of owners who hold more than 25% ownership.
Licenses & Permits
All businesses are required to apply for business licenses and permits at both the federal and state levels of government. However, licenses and permits are not the same for each company. The ones you need will depend upon the industry you operate in and where your business is physically located.
To get an idea of the types of licenses and permits that are generally required at the federal level, visit the U.S. Small Business Administration website to start your research. At the state level, you’ll need to check with your state’s government website to see if any other types of licenses and permits are required. In some instances, you may need to obtain licenses and permits at the local government level as well.
As you work through each step to ensure compliance with U.S. business laws, be sure to keep detailed records. This way, when it comes time for renewals, paying taxes, and performing other tasks, you’ll have everything you need right at your fingertips.
Starting a business in the U.S. may seem complicated and stressful, but once you understand the essential steps, it becomes far less intimidating. Making a list and meticulously going through all the steps one by one reduces the cumbersome elements associated with launching a new company.