Starting a business comes down to a series of practical steps: choosing a legal structure, registering with your state, getting a federal tax ID, securing any required licenses, and setting up your finances. Most people can complete the basics within a few weeks, though timelines vary depending on your state and industry. Here’s what each step involves and what it will cost you.
Choose a Legal Structure
Your business structure determines how you pay taxes, how much personal liability you carry, and how much paperwork you deal with. The three most common options for new businesses are sole proprietorships, LLCs, and S corporations.
A sole proprietorship is the simplest path. If you start doing business without registering any formal entity, you’re automatically a sole proprietor. There’s no formation paperwork and you have complete control. The downside is significant: your personal assets (house, car, savings) are on the line if the business takes on debt or gets sued. You report business income on your personal tax return and pay self-employment tax on your profits.
A limited liability company (LLC) separates your personal assets from the business. If the LLC faces bankruptcy or a lawsuit, your personal savings and property are generally protected. Profits and losses pass through to your personal income tax return, so you avoid corporate-level taxes. You still pay self-employment tax on those profits. Formation requires filing paperwork with your state and paying a fee, typically ranging from $35 to $500 depending on where you live.
An S corporation also provides liability protection and pass-through taxation. The key difference is that S corp owners who work in the business pay themselves a reasonable salary, and only that salary is subject to payroll taxes. Profits above the salary pass through without self-employment tax, which can save money as your income grows. The tradeoff is more complexity: you must file separately with the IRS for S corp status, run payroll, and follow stricter operational and filing requirements. Most brand-new businesses don’t need this structure right away, but it becomes worth considering as profits increase.
Register Your Business
If you’re forming an LLC or corporation, you’ll file formation documents (usually called articles of organization or articles of incorporation) with your state’s secretary of state office. Many states let you file online, and processing can take anywhere from a few days to several weeks. Expedited processing is available in most states for an additional fee.
Even sole proprietors need to register if they operate under a name other than their own legal name. This is called a “doing business as” (DBA) filing, sometimes called a fictitious name or trade name registration. You typically file a DBA with your county clerk or state office, and fees are usually modest.
Many states also require a periodic information filing within the first few months after formation, and then annually or biennially after that. Missing these deadlines can trigger late fees, and some states will administratively dissolve your LLC or revoke your corporation’s standing if you fall behind.
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, open a business bank account, or operate as anything other than a single-member sole proprietorship. Even if it’s not strictly required, getting an EIN is free and keeps you from handing out your personal Social Security number to clients and vendors.
You can apply for an EIN directly on the IRS website. The online application is available during business hours, and you’ll receive your number immediately upon completion. There is no fee.
Secure Licenses and Permits
The licenses you need depend on your industry, your location, and what you’re selling. Common requirements include a general business license from your city or county, a sales tax permit if you sell taxable goods, zoning clearance if you’re operating from a specific location, and professional licenses for regulated fields like healthcare, real estate, accounting, construction, and food service.
Start by checking with your city or county clerk’s office and your state’s business licensing portal. Many states offer online tools where you enter your business type and get a checklist of required permits. Don’t skip this step. Operating without proper licenses can result in fines or forced closure, and some permits take weeks to process.
Estimate Your Startup Costs
What you’ll spend upfront depends heavily on the type of business. The SBA breaks businesses into three categories for cost planning: brick-and-mortar businesses, online businesses, and service providers. A freelance consultant working from home has very different needs than someone opening a retail store.
Common expense categories to budget for include:
- Office or retail space: Rent, deposits, and any buildout costs
- Equipment and supplies: Computers, tools, furniture, or specialized machinery
- Inventory: Initial stock if you’re selling physical products
- Website and marketing: Domain registration, hosting, design, and initial advertising
- Insurance: General liability, professional liability, or product liability depending on your industry
- Licenses and permits: Filing fees, professional license costs
- Legal and accounting fees: Entity formation help, bookkeeping setup
- Communications and utilities: Phone, internet, electricity
A service-based business run from home can often launch for under $1,000 if you already have the necessary equipment. A product-based business with inventory and a physical location might require $10,000 to $50,000 or more. Talk to other business owners in your industry, get quotes from vendors, and build a spreadsheet before you commit money. Underestimating startup costs is one of the fastest ways to run into trouble in your first year.
Open a Business Bank Account
Separating your personal and business finances is critical, especially if you formed an LLC or corporation. Mixing personal and business funds (called commingling) can undermine the liability protection your business structure provides. If a court finds that you treated your LLC’s money as your own, it can “pierce the corporate veil” and hold you personally liable for business debts.
To open a business bank account, you’ll generally need your EIN, your formation documents, and a government-issued ID. Shop around for accounts with low or no monthly fees, especially while your revenue is still building. Many banks and credit unions offer free business checking for accounts with modest balances.
Set Up Your Tax Obligations
As a business owner, you’re responsible for paying income tax on your profits throughout the year, not just at tax time. The IRS requires estimated quarterly tax payments if you expect to owe $1,000 or more when you file. For individuals, payments are due on the 15th day of the 4th, 6th, and 9th months of your tax year, and the 15th day of the 1st month after your tax year ends. For a calendar-year filer, that means April 15, June 15, September 15, and January 15.
You can make payments through the Electronic Federal Tax Payment System (EFTPS), IRS Direct Pay, or your IRS online account. Missing these deadlines results in underpayment penalties, so mark them on your calendar from day one.
Beyond federal taxes, most states impose their own income tax on business profits, and many cities or counties add local taxes as well. If you sell taxable goods or services, you’ll need to collect and remit sales tax on a schedule set by your state, often monthly or quarterly.
Keep thorough records from the start. Save every receipt, invoice, and bank statement. Good bookkeeping makes tax filing simpler, supports your deductions if you’re audited, and gives you a clear picture of whether your business is actually making money. Accounting software designed for small businesses can automate much of this for $10 to $50 per month.
Get Insurance Before You Launch
Even with an LLC’s liability protection, insurance fills gaps that your legal structure doesn’t cover. General liability insurance protects against claims from customers who are injured on your premises or harmed by your product. Professional liability insurance (sometimes called errors and omissions) covers service-based businesses if a client claims your work caused them financial harm. If you hire employees, most states require workers’ compensation insurance.
Costs vary widely by industry and coverage level. A home-based consultant might pay a few hundred dollars a year for a basic policy, while a contractor or retailer could pay several thousand. Get quotes from multiple insurers before you open your doors.