Starting a small business comes down to a series of concrete steps: picking a legal structure, registering with your state and the IRS, setting up your finances, and making sure you have the right licenses. Each step builds on the one before it, and skipping any of them can create expensive problems later. Here’s how to move from idea to operating business.
Choose a Legal Structure
Your business structure determines how much personal risk you carry, how you pay taxes, and how much paperwork you deal with each year. The three most common options for new small businesses are sole proprietorships, LLCs, and S corporations.
A sole proprietorship is the simplest. There’s no separate legal entity, which means you and the business are the same thing in the eyes of the law. You report business income on your personal tax return and pay self-employment tax on your profits. The downside is significant: your personal assets (house, car, savings) are on the hook if the business gets sued or can’t pay its debts.
A limited liability company (LLC) creates a legal wall between your personal assets and the business. If the LLC faces a lawsuit or goes bankrupt, your personal property is generally protected. Profits and losses pass through to your personal tax return, so you avoid corporate-level taxes. You still pay self-employment tax on those profits, covering your Medicare and Social Security contributions. LLCs require a state filing and a small annual fee, but the liability protection makes them the most popular choice for new small business owners.
An S corporation also shields owners from personal liability and passes income through to personal tax returns. The key advantage over an LLC is that only the salary you pay yourself is subject to payroll taxes, not the full profit. The trade-off is more administrative work: you need to run payroll, file additional tax forms, and follow corporate formalities like keeping meeting minutes. S corp status is an IRS tax election, so you’d typically form an LLC or corporation with your state first, then file Form 2553 to elect S corp treatment. This structure tends to make more sense once your business is consistently profitable enough that the payroll tax savings outweigh the added costs.
Register Your Business
If you’re forming an LLC or corporation, file your formation documents with your state first. This is typically done through your Secretary of State’s office, either online or by mail. Filing fees vary by state, generally ranging from $35 to $500. You’ll need to choose a business name that isn’t already taken in your state, and many states require you to designate a registered agent (a person or service authorized to receive legal documents on your behalf).
Once your state entity is established, apply for an Employer Identification Number (EIN) from the IRS. An EIN is essentially a Social Security number for your business. You need one to open a business bank account, hire employees, and file business taxes. The IRS online application is free and takes just a few minutes. You’ll need to complete it in one sitting since it expires after 15 minutes of inactivity. Have your Social Security number and your business entity type ready before you start. If approved, you’ll receive your EIN immediately on screen. Print or save the confirmation letter right away.
One important note from the IRS: form your entity with your state before applying for an EIN. If you don’t, your application may be delayed. You’re also limited to one EIN application per responsible party per day.
Set Up Business Finances
Open a dedicated business bank account as soon as you have your EIN. Mixing personal and business transactions makes bookkeeping a nightmare and can weaken the liability protection your LLC or corporation provides. If a court finds that you treated business funds as your own personal money, it can “pierce the corporate veil” and hold you personally responsible for business debts.
Choose an accounting method early. Most small businesses use cash-basis accounting, which records income when you receive it and expenses when you pay them. It’s simpler and matches how most people already think about money. Accrual accounting, which records transactions when they’re earned or incurred regardless of when cash changes hands, is required for certain larger businesses but optional for most startups.
Set aside money for taxes from the start. When you’re self-employed, no employer is withholding taxes from your paycheck. Instead, you’re responsible for making quarterly estimated tax payments to the IRS. These payments are due four times a year, typically in April, June, September, and January. Missing them triggers penalties. A common rule of thumb is to set aside 25% to 30% of your profit for federal and state income taxes plus self-employment tax. If you use the IRS Electronic Federal Tax Payment System (EFTPS), schedule payments by 8 p.m. ET at least one calendar day before the due date.
Get Licenses and Permits
The licenses you need depend on what your business does and where it operates. Some businesses need only a general business license from their city or county. Others, particularly restaurants, construction firms, retail stores, and businesses involving plumbing, dry cleaning, farming, or vending machines, face industry-specific licensing and permit requirements at the local level.
Start by checking three places: your city or county clerk’s office, your state’s Secretary of State website, and any industry-specific regulatory board (like a state health department for food businesses or a contractor licensing board for construction). Some states also require a separate sales tax permit if you’re selling physical goods. Fees and renewal schedules vary widely, so budget for both the initial cost and the ongoing obligation to renew.
Funding Your Business
Most small businesses start with some combination of personal savings, credit cards, and loans. If you need outside capital, the SBA 7(a) loan program is the federal government’s primary lending program for small businesses. These loans go up to $5 million, though most small business owners borrow far less. You don’t borrow directly from the SBA. Instead, the SBA guarantees a portion of the loan, which makes banks and credit unions more willing to lend to you.
The SBA doesn’t publish a hard minimum credit score, but eligibility depends on your credit history, your ability to demonstrate that you can repay the loan, and what the business does and where it operates. In practice, most SBA lenders look for a personal credit score of at least 680, though some will work with lower scores if other parts of your application are strong. You’ll typically need a business plan, financial projections, and personal financial statements.
Beyond SBA loans, consider business lines of credit for managing cash flow, equipment financing if you need specific machinery or technology, and microloans (often under $50,000) offered by nonprofit lenders and community development organizations. For very early-stage businesses without revenue, personal savings or contributions from friends and family are often the most realistic options until you have enough track record to qualify for traditional lending.
Handle Ongoing Tax Obligations
Your tax forms depend on your business structure. Sole proprietors report business income and expenses on Schedule C, filed with their personal Form 1040. LLCs with a single member do the same unless they’ve elected corporate tax treatment. Multi-member LLCs file Form 1065, a partnership return that distributes income to each member’s personal return.
If you have employees, you’ll file Form 941 (Employer’s Quarterly Federal Tax Return) to report wages, tips, and withheld income and payroll taxes. You’ll also issue W-2 forms to employees and file them with the Social Security Administration each January. If you pay independent contractors more than $600 in a year, you’ll issue them a 1099-NEC.
Keep clean records from day one. Track every business expense, save receipts, and categorize transactions consistently. Accounting software designed for small businesses can automate most of this. Good records don’t just make tax filing easier; they help you understand whether your business is actually making money and where your costs are going.
Build Before You Launch
Before you start spending money on marketing or inventory, nail down a few basics. Write a simple business plan, even if no one else will read it. A one-page document covering what you sell, who your customers are, how you’ll reach them, and what it costs to operate will force you to confront the math of your idea. If the numbers don’t work on paper, they won’t work in practice.
Secure a domain name and set up a basic web presence. Register your business name on the platforms where your customers spend time. Set up a dedicated business email address rather than using a personal one. These small steps cost very little but signal to customers, vendors, and lenders that you’re running a real operation. From there, the work shifts from setup to execution: finding customers, delivering your product or service, and managing your cash flow week by week.