Business formation basics: structures, EINs, registered agents and licenses

The SBA’s guide to choosing a business structure (opens in a new tab) walks through each option. In broad terms:

• Sole proprietorship: one owner, no separate legal entity. It is the default if you start doing business on your own without forming anything. The business and the owner are legally the same, so the owner is personally liable for its debts and obligations.
• Partnership: two or more owners sharing a business. In a general partnership, the partners share management and liability. A limited partnership has at least one general partner and limited partners whose liability, and usually whose role in running the business, is limited.
• Limited liability company (LLC): an entity formed under state law that can protect the owners’ personal assets from many business debts. By default, a single-member LLC is taxed like a sole proprietorship and a multi-member LLC like a partnership, and an LLC can elect to be taxed as a corporation instead.
• Corporation: a separate legal entity owned by shareholders, with its own tax return and more formal rules about directors, meetings and records. A standard corporation is often called a C corp.

An S corp is not a structure you form with the state. It is a tax status that an eligible corporation or LLC asks the IRS for by filing Form 2553. With the election, business income generally passes through to the owners’ personal returns instead of being taxed at the corporate level.

The election comes with eligibility rules about the owners and the kinds of shares, and owners who work in the business are generally expected to be paid a reasonable salary through payroll. Whether, and when, an election makes sense depends on your income, your state and your plans, which is why owners usually work it out with a tax professional.

LLCs and corporations are created by filing with a state, usually the secretary of state. Sole proprietors and partnerships often register a business name (a DBA or assumed name) if they trade under a name other than the owner’s. The SBA’s register your business (opens in a new tab) page explains the options.

An employer identification number is the business’s federal tax ID. Many businesses need one, including those with employees and most partnerships, LLCs with more than one member and corporations, and banks often ask for one to open a business account. You can apply for an EIN online with the IRS (opens in a new tab) for free. The SBA’s page on federal and state tax ID numbers (opens in a new tab) covers state tax IDs as well.

1. Choose a structure and check that your name is available in your state.
2. File formation documents with the state if you are forming an LLC or corporation, or a name filing if you need one.
3. Get an EIN from the IRS, free, directly on irs.gov.
4. Register for any state taxes that apply, such as sales tax or state payroll taxes.
5. Apply for the licenses and permits your industry and location require.
6. Open a business bank account, using your formation documents and EIN.

LLCs and corporations generally must name a registered agent: a person or company with an address in the state of formation who accepts legal papers and official state mail for the business. Some owners act as their own agent; others pay a commercial registered agent service, especially if they form in a state where they do not live or want to keep their home address off public records. Your state’s business filing office lists its own rules.

Which licenses and permits you need depends on what you do and where. Some regulated activities need a federal license, many states license specific trades and professions, and cities and counties often require a general business license, zoning approval or health and building permits. The SBA’s licenses and permits guide (opens in a new tab) explains how to find the federal and state requirements, and your city or county clerk can tell you what applies locally.

• Anyone charging you for an EIN as if it were an official fee. The IRS issues EINs for free.
• Letters that look like they come from a state agency, offering “compliance” filings or certificates for a fee. Check with your state filing office before paying.
• Formation services that promise an LLC removes all personal liability.

• Given my liability risks and income, how do the structures compare for me?
• Would an S corp election make sense, and at what point?
• What state filings, annual reports and taxes apply after formation?
• Do I need any licenses before I start operating?

Free and low-cost counseling is available through SBA resource partners (opens in a new tab), including SCORE mentors, Small Business Development Centers, Women’s Business Centers and Veterans Business Outreach Centers. Next, see how to separate your business and personal finances.