Starting a small company comes down to a handful of concrete steps: choosing a legal structure, registering with your state, getting a tax ID number, securing any required licenses, and setting up the financial foundation to actually operate. The process can take anywhere from a single afternoon for the simplest setup to several weeks if your industry requires special permits. Here’s how to work through each stage.
Pick a Legal Structure
Your legal structure determines how much personal risk you carry, how you pay taxes, and how much paperwork you deal with each year. Three structures cover the vast majority of small companies.
A sole proprietorship is the simplest option. There’s no separate legal entity, which means you and your 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 profits. The downside is real: if the business gets sued or can’t pay its debts, your personal assets (home, car, savings) are on the line.
A limited liability company (LLC) creates a legal wall between your personal finances and the business. If the LLC faces a lawsuit or goes bankrupt, your personal assets are generally protected. Profits and losses still pass through to your personal tax return, so you avoid corporate-level taxes, but you’ll owe self-employment tax on those profits. Most states charge a filing fee to form an LLC, typically ranging from $35 to $500 depending on where you live.
An S corporation also shields owners from personal liability and passes income through to personal returns without a corporate tax layer. The key difference is that S corp owners who work in the business pay themselves a salary, and only that salary is subject to payroll taxes. Profits above the salary pass through as distributions, which can lower your overall self-employment tax bill. S corps have restrictions, though: you’re limited to 100 shareholders, all of whom must be U.S. residents, and you must file a separate election with the IRS after forming a corporation or LLC with your state. For a brand-new one-person company, an LLC is usually the simplest starting point, and you can elect S corp tax treatment later if it makes financial sense.
Register With Your State
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 business filing office, typically the Secretary of State. The filing includes your company name, registered agent (a person or service authorized to receive legal documents on your behalf), and basic information about the owners or managers.
Before you file, check that your desired business name is available. Most states offer a free name search tool on their filing office’s website. Many states also require a periodic information filing within the first few months of formation, with fees that vary by state. Missing that initial filing or forgetting to renew it annually can result in late fees or even administrative dissolution of your company.
Sole proprietors don’t need to file formation paperwork, but if you want to operate under a name other than your own legal name, you’ll typically need to register a “doing business as” (DBA) name with your county or state.
Get an Employer Identification Number
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 (most banks require it). Even sole proprietors often get one to avoid putting their personal Social Security number on invoices and tax forms.
The IRS lets you apply online for free, and if your application is approved, you’ll receive your EIN immediately. The whole process takes about 10 minutes. You’ll need to complete it in one session since the application can’t be saved and expires after 15 minutes of inactivity. Have your business entity type and the responsible party’s Social Security number or taxpayer ID ready before you start. One important detail: if you’re forming an LLC or corporation, register your entity with your state first. Applying for an EIN before your state filing is complete can delay the process.
The online tool is available Monday through Friday from 6:00 a.m. to 1:00 a.m. Eastern, with reduced hours on weekends. You’re limited to one EIN application per responsible party per day.
Check for Required Licenses and Permits
The licenses you need depend on what your business does and where it operates. There’s no single national business license. Instead, requirements come from up to three levels of government.
At the federal level, you only need a license if your business activity falls under a regulated category. Examples include selling alcohol (regulated by the Alcohol and Tobacco Tax and Trade Bureau), broadcasting over radio or television (Federal Communications Commission), transporting goods or people by air (Federal Aviation Administration), and commercial fishing (NOAA Fisheries). Most small companies in service or retail industries won’t need a federal license.
State and local permits are more common. Construction, restaurants, retail stores, plumbing, dry cleaning, and farming are among the business activities frequently regulated at the city or county level. Your city or county clerk’s office can tell you what’s required for your location and industry. Many municipalities also require a general business license or business tax certificate just to operate within their jurisdiction, regardless of your industry.
Keep track of expiration dates. Most licenses and permits need periodic renewal, and renewing on time is significantly easier than reapplying after a lapse.
Open a Business Bank Account
A dedicated business bank account isn’t just good bookkeeping. It’s essential for maintaining the liability protection that comes with an LLC or corporation. If you mix personal and business funds in the same account, a court could decide your business entity is just a shell and hold you personally responsible for business debts.
To open the account, you’ll typically need your EIN, your formation documents (articles of organization or incorporation), and a government-issued ID. Some banks also ask for an operating agreement if you have an LLC. Shop around, because fee structures vary widely. Some banks offer free business checking with a low transaction volume, while others charge monthly maintenance fees of $10 to $30 or more.
Get Business Insurance
General liability insurance protects your company against claims that you harmed someone or damaged their property. It’s usually not legally required, but it’s worth carrying even if your business seems low-risk. Beyond protecting you from lawsuits, landlords, clients, and contractors often require proof of coverage before they’ll sign a lease or a contract with you. Without it, if you cause an accident, their insurance may have to cover the costs, which gives them a strong incentive to require you to carry your own policy.
If you hire employees, most states require workers’ compensation insurance, which covers medical costs and lost wages if an employee is injured on the job. Professional service providers (consultants, accountants, designers) should also look into professional liability insurance, sometimes called errors and omissions coverage, which protects against claims of negligence or mistakes in your work.
Set Up Your Accounting System
From day one, track every dollar coming in and going out. Cloud-based accounting software designed for small businesses typically costs $15 to $75 per month and handles invoicing, expense tracking, and basic tax reporting. Even a well-organized spreadsheet works in the earliest stages, but most people outgrow that quickly.
Decide whether you’ll use cash-basis or accrual-basis accounting. Cash basis records income when you receive it and expenses when you pay them. Accrual basis records income when you earn it and expenses when you incur them, regardless of when money changes hands. Cash basis is simpler and works fine for most small companies. If your annual revenue grows beyond a certain threshold or you carry significant inventory, the IRS may require accrual accounting.
Set aside money for taxes from the start. As a business owner, nobody withholds taxes from your income automatically. The IRS expects you to make quarterly estimated tax payments (due in April, June, September, and January) if you expect to owe $1,000 or more in taxes for the year. A common rule of thumb is to set aside 25% to 30% of your net profit for federal and state income taxes plus self-employment tax.
Explore Funding Options
Many small companies launch with personal savings, but if you need outside capital, several paths exist. The SBA 7(a) loan program is one of the most accessible government-backed options. To qualify, your business must operate for profit, be located in the U.S., meet SBA size requirements for a small business, and demonstrate a reasonable ability to repay. You also need to show that you can’t get comparable financing from conventional lenders on reasonable terms.
Interest rates on 7(a) loans are capped based on loan size. For loans of $350,001 or more, the rate can’t exceed the base rate plus 3%. For loans of $50,000 or less, the cap is the base rate plus 6.5%. You apply through a participating lender, not through the SBA directly. The SBA’s Lender Match tool connects you with lenders in your area.
Other funding sources include business credit cards (useful for short-term cash flow but expensive if you carry a balance), microloans from nonprofit lenders (often available to newer businesses that don’t yet qualify for traditional loans), and lines of credit from banks or online lenders. If your company is pre-revenue and can’t yet show the ability to repay a loan, you may be limited to personal savings, contributions from friends and family, or credit cards until you build a track record.