Opening a business involves choosing a legal structure, registering with your state, getting a federal tax ID, and setting up a bank account. The process can take anywhere from a single afternoon for a simple sole proprietorship to several weeks for a more complex entity like a corporation. Here’s how to work through each step.
Choose a Business Structure
Your business structure determines how you pay taxes, how much personal liability you carry, and how much paperwork you’ll deal with each year. The most common options for new business owners are sole proprietorships, LLCs, and corporations.
A sole proprietorship is the simplest route. There’s no legal separation between you and the business, which means you’re personally responsible for all business debts. If someone sues the business or it can’t pay a supplier, your personal assets (savings, car, home equity) are on the line. On the plus side, there’s almost no setup cost, and taxes are straightforward: you report business income on a Schedule C filed with your personal tax return.
A limited liability company (LLC) creates a legal wall between your personal finances and the business. If the business takes on debt or faces a lawsuit, your personal assets are generally protected. A single-member LLC is taxed the same way as a sole proprietorship by default, with income passing through to your personal return. But LLCs can also elect to be taxed as a corporation, which sometimes lowers the overall tax bill once profits reach a certain level. Formation requires filing paperwork with your state and paying a filing fee, which ranges from about $35 to $500 depending on where you live.
A corporation (C corp or S corp) offers liability protection and a more formal ownership structure, which matters if you plan to bring on investors or eventually go public. Corporations come with more recordkeeping requirements, including holding annual meetings and maintaining corporate minutes. Most very small businesses don’t need this level of structure, but it’s worth considering if you expect rapid growth or outside investment.
Register With Your State
If you’re forming an LLC, corporation, or partnership, you’ll file formation documents with your state’s secretary of state office (or equivalent agency). For an LLC, this document is typically called articles of organization. For a corporation, it’s articles of incorporation. The filing includes basic information: your business name, registered agent (the person or service authorized to receive legal documents on behalf of your business), and the names of owners or organizers.
Most states let you file online, and processing times vary from same-day approval to a few weeks. Many offer expedited processing for an additional fee. Before filing, search your state’s business name database to make sure the name you want isn’t already taken.
Sole proprietors don’t need to file formation documents. If you want to operate under a name other than your own legal name, you’ll file a “doing business as” (DBA) registration, sometimes called a fictitious name or trade name filing. This is usually done at the county or state level and costs relatively little.
Get a Federal Tax ID
An Employer Identification Number (EIN) is essentially a Social Security number for your business. You need one if you plan to hire employees, operate as a partnership or corporation, or open a business bank account under your business name. Even sole proprietors often get one to avoid putting their Social Security number on invoices and tax forms.
Applying is free and takes just a few minutes through the IRS online application. You’ll need to know your business entity type and have the Social Security number (or individual taxpayer ID number) of the person who controls the business. The online tool walks you through a short series of questions, and if approved, your EIN is issued immediately on screen. Print the confirmation letter right away, because you can’t save the session or go back to it later. The application times out after 15 minutes of inactivity.
The online system is available Monday through Friday from 6:00 a.m. to 1:00 a.m. Eastern, Saturdays until 9:00 p.m., and Sundays from 6:00 p.m. to midnight. You’re limited to one EIN application per responsible party per day. One important detail: if you’re forming an LLC or corporation, complete your state registration first. The IRS recommends forming your entity with the state before applying for an EIN, because applying in the wrong order can delay your application.
Get Business Licenses and Permits
Most businesses need at least one license or permit to operate legally. The requirements depend on your industry, your location, and sometimes both. A general business license (sometimes called a privilege license) is required in many jurisdictions and is typically issued at the county or city level. You may need a separate license for each city or county where you conduct business.
Beyond the general license, certain industries require specialized permits. Food service businesses need health permits. Construction contractors typically need trade-specific licenses. Home-based businesses may need a home occupation permit from their local zoning office. Retailers usually need a sales tax permit from the state revenue department.
Start by checking with your state’s business licensing portal and your city or county clerk’s office. Many states have online tools that generate a checklist of required licenses based on your business type and location. Don’t skip this step. Operating without the right permits can result in fines or forced closure.
Open a Business Bank Account
Keeping business and personal finances in separate accounts is critical, especially for LLCs and corporations. Mixing funds can undermine the liability protection your business structure provides, because a court could decide the business isn’t truly separate from you personally.
To open a business bank account, you’ll typically need to bring your EIN (or Social Security number if you’re a sole proprietor), your business formation documents (articles of organization or incorporation), any ownership agreements if you have partners or co-owners, and your business license. Some banks ask for additional documentation, so call ahead or check the bank’s website before your visit.
Shop around before choosing a bank. Compare monthly maintenance fees, minimum balance requirements, transaction limits, and whether the bank offers integrated invoicing or payment processing. Many online banks offer free business checking with no minimum balance, while traditional banks may charge monthly fees but provide in-person support and cash deposit services.
Set Up Your Tax Obligations
Beyond your federal EIN, you’ll likely need to register with your state’s tax authority. If you’re selling physical products, most states require you to collect sales tax and remit it on a regular schedule. You’ll register for a sales tax permit through your state’s department of revenue.
If you’re hiring employees, you need to register for state unemployment insurance and set up payroll tax withholding. You’ll also need to report new hires to your state’s new hire reporting program, which is a federal requirement administered at the state level.
As a business owner, you’re generally responsible for paying estimated taxes quarterly rather than waiting until April. This applies to both income tax and self-employment tax (which covers Social Security and Medicare). Self-employment tax applies to sole proprietors and LLC members and is calculated on your net business income. Missing quarterly payments can trigger penalties, so mark the due dates on your calendar as soon as you start earning revenue.
Protect Your Business
Business insurance isn’t legally required in every situation, but going without it is a significant risk. General liability insurance covers claims if a customer is injured on your premises or by your product. If you have employees, workers’ compensation insurance is required in nearly every state. Professional service providers (consultants, accountants, designers) often carry professional liability insurance, sometimes called errors and omissions coverage.
Costs vary widely based on your industry, revenue, and number of employees. Many small service businesses can get basic general liability coverage for a few hundred dollars a year. Get quotes from multiple insurers and consider working with a broker who specializes in small business coverage to find the right mix of policies for your situation.