You’ve got a great business idea and you’re excited to start, but you don’t know the first thing about how to make this thing legal. Don’t worry because EVERYONE has been at this point in their business before. The good news is that it’s actually pretty easy to register a business.
Here’s a quick overview of everything you need to do in order to make your business legit:
Come up with a good business name
Write Your Articles of Incorporation
Write Your Operating Agreement
Register with the Secretary of State
Register with the IRS
Let’s get one thing straight before you start this process…
Do you even need to file?
A common mistake among first time entrepreneurs is that they file their business entity too early. If you can hold off on it until you actually start to see a sizable amount of revenue (+$10,000) then do it! By pulling in some dough first, you’re doing two things:
You’re validating that your business idea is actually going to work.
You’re making sure your name doesn’t suck.
Registering a business costs money and time and in the true spirit of a lean start-up, you shouldn’t even think about it until you have concept validation. If you register now and then realize your business idea isn’t gonna pan out, then you just wasted time and money and you’re going to have to spend more time and money unregistering it.
The second thing is that a lot of people get into business and then realize their name either sucks or that there is a better business name out there for them. It is possible to change your “Doing Business As” (DBA) name, but it will also cost you money every single year to renew your DBA filing. The reality is that you aren’t going to realize if you like your name or not until you’ve used it a bunch. You won’t realize how hard “Adventuropia” is to say until you are talking on the phone with a dozen people and they all think you’re saying “Adventure-Topia” or “Adventure-Uropia”. Once you start saying it, writing it, etc, you’re going to quickly realize if it sucks or not. Make sure you love it first, then file it with the government so you don’t waste time and money.
There are a few reasons that you might actually need to file right away though…
If you need to open a business bank account, take out a loan, or even open a business PayPal account, you will need an EIN (Employer Identification Number) aka a TIN (Tax ID Number). FYI: Your TIN & EIN are the same thing. Your EIN is the number that the IRS gives you to track your finances similar to your social security number. (Fun Fact: If you’re a sole proprietor, then your TIN is your Social Security number.)
The truth is, when you’re trying to make your first few bucks in your business, you could mix up all you business transactions with your personal transactions (ie. using your personal bank account and your personal PayPal account), you just have to be sure to track those incomes and expenses and separate them from personal income and expenses.
This isn’t illegal at all. You don’t have to create all these separate entities and accounts upfront, you just need to make sure that you do it before the end of the year so that you can file your taxes with the government correctly.
The one big reason that you may want to file your business right away is that you won’t be able to get a loan from a bank without being in business for two years. Once again, there are exceptions to this by working with the Small Business Assiciation (SBA), but that’s a lesson for another article.
Now let’s finally get into the logistics of what you need to register:
If you want to see how to do this click by click, then check out our module on how to register a business. The hard part here isn’t creating the entity (in our module we show you how to create the entity in under 20 mins). The hard part is writing the Articles of Incorporation and the Operating Agreement.
What are these two documents?
The Operating Agreement is an agreement between you and your business partners on how the business is going to be run. For example, this is where you should include a vesting equity schedule—an agreement on who is going to get what shares of equity for doing what.
The Articles of Incorporation are like the constitution of the business. What is it’s legal name, where is it located, how many shares are there going to be, and what are the shareholder rights going to be. Most states default to giving shareholders more rights than the board would like. Delaware isn’t one of those states, which is why so many public companies register there.
Not everybody needs these.
If you choose not to add amendments to your articles of incorporation, then it will just include your basic business information like the name, location, etc. This will work just fine if you’re starting a business and you don’t ever plan on having investors, business partners, or shareholders. If you plan on being a solo-preneur, don’t worry about going into depth in either of these documents.
The only reason you would need an operating agreement is if you plan on splitting equity with a business partner, investors, or shareholders. In fact, if you have a business partner and you want to take out a loan, most banks won’t even give you a loan unless they see that you have an operating agreement. They view any business that has multiple owners and no operating agreement such a great risk investment that they won’t give you money no matter what. Do you have a business partner? Then get an operating agreement.
These documents used to cost around $2,000 for Articles of Incorporation and $8,000 for an Operating Agreement. That’s $10,000 in legal paperwork just to file your business that may not have even made $10,000 in revenue yet!!! (Oh, but don’t worry, your lawyer will probably also include the five minutes it takes to register your business for you as well.) That’s why we created a fill in the blank template for you.
We sat down with a lawyer and cranked out a 24 page operating agreement that has every single clause you may possibly need for no matter what kind of business you’re in. It's total overkill. But the great thing is that you can now save $10,000 registering your business by using our template and it’ll take you a fraction of the time to complete.
With both these documents in hand and a name picked out, just Google your state’s Secretary of State website and follow the instructions there. Then click here to file your business with the IRS and follow the instructions listed.