Entrepreneurs interested in starting a small business should know the basic requirements to create new companies. Outside of creating a business plan and analyzing your target market, there are other steps you’ll need to take to establish your new venture.
Below are five requirements you should know about to ensure you start your company off on the right foot and be prepared for whatever challenge comes your way:
1. Choose the Best Entity Structure for Your Business Goals
Deciding the structure type for your company has long-term consequences in matters of finances and taxation. The most common categories of business entities are:
- Sole proprietorship
- Limited Liability Corporation (LLC)
Each has unique benefits and disadvantages depending on your business goals, the products and/or services you offer if you have partners who plan to go it alone, and how you plan to distribute revenue.
Having these details will ensure you make an informed decision about what entity you should form and the liabilities of your choice. For example, sole proprietorships require no formal registration with the state it operates, but the owner assumes total personal and commercial liability.
2. Ensuring Your Chosen Business Name is Available
Choosing a name is one of the most challenging aspects of creating a new business. Most states require new companies to verify their name isn’t already in use by another organization before they can register it. If you plan to go the sole proprietor route, your company will have your name by default unless you opt to use a “doing business as“.
3. Request an EIN from the IRS
Typically, businesses that form partnerships or corporations will need an Employer Identification Number (EIN). This requirement also applies to companies that have employees. This number is helpful in a variety of ways, including:
- Tax purposes (filing your return)
- Obtaining a line of credit or loan
- Opening a business bank account
- Obtaining business licensing
While sole proprietorships and single-owner LLCs don’t have this requirement, getting an EIN for this business structure further separates your personal and commercial liabilities. Plus, you can use it instead of your social security number on various business-related documentation.
4. Get Your Company’s Licensing and Permits
Whether you’re a partnership or a sole proprietor, you’ll need different governmental licenses and permits to operate. Figuring out what you need often requires research on your Secretary of State’s website and a few phone calls to the appropriate agencies. You might discover you also need federal-level permits depending on your business.
5. Purchase Required Business Insurance
Owning a company comes with many risks and, depending on your industry, may require business insurance. However, the decision to carry liability to coverage shouldn’t hinge on whether it’s mandated by the government or industrial oversight agencies.
When you understand your insurance costs compared to the potential financial harm you face if sued by a disgruntled employee, an angry customer, or other situation, your company holds liability. It makes sense to purchase a policy, especially since you may be unable to conduct business or participate in collaborative projects unless you’re protected.
To choose the best business insurance coverage, it’s essential to consider your company’s size, the type of clients you have, the industry you are in, and other relevant factors. Below are three policy options businesses rely on for comprehensive protection against perils:
This form of commercial insurance protects your company against a range of liabilities, including:
- Accidental property damage
- Personal injury claims
- Slander and/or libel suits
- Legal defense costs
Remember, these protections only apply in claims brought by third parties, like a client or vendor, but not those employed by your company.
Workers’ compensation provides immediate coverage for when an employee gets hurt. This policy is legally required in nearly every state, though the threshold for carrying this policy can vary depending on the number of staff you have employed.
Professional Liability Insurance
To err is human, but without professional liability coverage, a single mistake can spell the end of your company. Also called E & O insurance, these policies are essential for companies that provide professional services, such as accountants, hairdressers, or lawyers.
General liability doesn’t cover the financial harm your customer suffered because of a failure on your part to fulfill your obligations. This also applies to your employees, so if your tax service makes a mistake on a client’s return that costs them thousands in fees to the IRS, you’ll be glad these damages are covered.
Commercial Property and Auto Coverage
Whether you have to carry insurance coverage on your commercial property or fleet is dependent on your industry, but it’s still a wise investment. For example, even if you don’t own the building your company operates, should a fire destroy your equipment and inventory, you’ll have the policy to help you rebuild.
If your organization relies on a fleet to ship products, provide transportation for employees to sales meetings, or take customers from point A to B, commercial-grade auto insurance is a must. Unfortunately, personal car insurance doesn’t offer the higher limits needed to adequately cover the damages in an accident one of your team members could cause.