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Becoming a Business Owner – Step by Step
Choosing a Legal Structure
When you have begun to outline your business plan, it’s time to decide on a legal structure. The legal structure of your company decides, among other things, upon:
- the number of people involved
- their personal financial risk
- making decisions in management
- allocating profits and losses
- filing taxes
The most common legal business structures in the US are:
- sole proprietorship, which is often used for small businesses with a single owner
- partnership, with applies to many businesses owned by two or more people
- limited liability company (LLC), which is ideal for keeping financial responsibilities low.
A corporation is rather recommended for larger, more established businesses, while cooperatives are particularly common in certain industries, such as agriculture.
If you have little to no experience with business administration, you might seek professional help from your mentor or a lawyer to advise you on legal structures. Generally speaking, you should never underestimate the importance of sound legal advice.
A good lawyer does not only help you to find the best legal structure for your new enterprise. He or she also ensures that you are compliant with all relevant laws, for example, regarding online business for e-commerce, environmental regulations for manufacturing, or local labor laws with regard to your employees.
Registering Your Company
After choosing a business structure, you must think about the name of your new company. Make sure to choose a name that doesn’t infringe on current US trademarks. Furthermore, it should be available as a URL or social media handle to advertise your new business online. Now you can find out more about local filing requirements and register your company!
Obtaining Licenses, Permits, and Certifications
Some businesses require special licenses and permits. For instance, if you want to open a shop for outdoor equipment, including hunting rifles, you have to obtain a federal license for selling firearms. Licenses and permits are issued by the federal government, as well as various state governments. To find out what kinds of permits you need, please use this handy online tool.
If you work as an independent contractor in a sole proprietorship, you may sometimes need an official license to carry out your chosen profession in the US (e.g. as a dentist or an architect). If you don’t have that license yet, get one as soon as possible, or you will get in trouble with the law.
Even if you don’t need a license job, check which professional certifications are common in the US. While your current qualifications are easily recognized in your home country, this may not always be the case in the US. Having the established US qualification enhances your credibility.
Acquiring Financial Skills
When it comes to financing your business, you should have some basic knowledge of finance-related topics. Again, professional advice or further training could be required. At the very beginning, do make sure that your personal budget can accommodate the strain of becoming self-employed.
Independent contracts often need to build up a client base first; newly established enterprises need funding, and the risk of failure is unfortunately a given. Plenty of businesses have to file for bankruptcy within the first three to five years. Such a failure can be a valuable learning experience, but you need some sort of safety net or support network to fall back on.
Furthermore, you may have to acquire new skills for various tasks, for instance:
- to estimate your start-up costs (both one-time and ongoing expenses)
- to prepare financial statements for accounting and taxation
- to develop an accurate cash flow analysis
- to raise investment capital
Equity funding means getting money in exchange for a share of the company. For this purpose, you must be prepared to market your business among your personal network. Some businesses, especially in IT, high tech, or e-commerce, also get access to venture capital to raise more equity funding.
If you cannot finance your entire venture from your own pocket or from investment capital, you obviously need to borrow some money that you will pay back later. If you have never filled out a loan application before, now’s the time to learn it!
Your chances of getting a loan are higher the lower the equity to debt ratio in your funding structure is. As little capital as possible should come from loans, while most of it is raised via investors. Furthermore, it is easier to apply for a loan if you can offer the lender (e.g. your bank) some collateral as security in case you won’t be able to repay the money.
In addition to traditional loans from banks and other financial service providers, some new businesses may also be eligible for government grants. This applies particularly to non-profit organizations and minority-owned companies. Have a look at this loan and grant database to find out more about funding for your fledgling company.
Last but not least, you must know your new tax responsibilities. You need a federal tax ID, as well as an Employer Identification Number if you want to hire another person. Your way of filing your taxes with the Internal Revenue Service is largely determined by your legal structure.
In general, you need to pay the following kinds of federal taxes:
- US income tax
- self-employment tax (i.e. contributions to US social security)
- taxes for your employees (withholding tax on their income, social security contributions)
- excise taxes (on the manufacture or sale of selected goods)
Read up on paying income tax as a self-employed person or small business owner on the IRS website. If you aren’t sure how to do proper record-keeping and file your business-related income tax return, don’t hesitate to find a tax consultant to help you get started.
And don’t forget that you might have to pay income on the state level, too. The Small Business Administration has more information on how to get a state tax ID, as well as a list of state authorities responsible for this topic.
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