Recently an entrepreneur asked me how to start a business and I thought, wow where do I start? And right as I was about to start covering concept ideation he said, “Oh, I already have an idea, I mean the actual entity.” “Ahhh, yes that’s the easiest part,” I said.
Here are 3 easy steps you can use to create your legal entity.
1) Creating your entity: Go to your local state’s Secretary of State website and create an entity. (LLC, S-Corp, C-Corp, B-Corp)
2) Register your entity: You can get your EIN (your business’s SSN) from the IRS website.
3) Raise money: Use the documents you get from step one and step two to create a bank account.
Here’s a little more explanation on these steps.
1) Creating your entity: First you must determine where to base your entity. Some people will say that you need to have a Delaware C Corp, but that isn’t true. To domicile an entity in Delaware is a wasted expense. It is much better to just use your home address and register the entity in your home state. There are several types of entities you can select from, here are the options:
- LLC: Limited Liability Company (LLC) or a Limited Liability Partnership (LLP) are simple entities used to shield liabilities from the owners and pass through the profits to the owners. These entities are simple so you can only issue a percentage ownership rather than different classes of shares like you can with a corporation.
- S-Corp: It’s like a corporation “lite” where there is still the pass through benefits like an LLC but with the ability to have more complexities than a LLC. The limitation is that you must have no more than 100 shareholders, and all of those shareholders are U.S. citizens.
- C-Corp: A traditional corporation. No pass though meaning revenues of the company are taxed at the entity level and then taxed again when the profits are distributed to shareholders.
- B-Corp: Just like an S-Corp except that rather than just focusing on generating value for shareholders these entities have a social benefit that they can focus on. This is great because it allows a management team to have dual focuses, rather than only having to abide by their fiduciary responsibility. This responsibility requires executives of a company to make strategic decisions that will enrich shareholders.
2) Register your entity: You can get your EIN (your business’s SSN) from the IRS website. You can select the type of entity you want here. It’s pretty straightforward.
3) Raise money: Use the docs you get from step one and step two to create a bank account. Make sure you consider the benefits from different banks. Typically, national banks are great if you need access to a large network of branches or if you make frequent foreign transfers. The downside is they usually have monthly fees or account minimums which are annoying. Credit unions usually don’t have the fees and have more flexibility regarding lending, if you are considering raising debt capital.