Before I give you the steps to setting up a business, I first assume that you already have an idea for a business.  This might sound dumb for me to even mention, but it blows my mind how many people have said to me, “I heard you can make money on the internet,” and I respond with, “some people do, but do you have an idea for a product or service that you want to sell?”  Then there’s dead silence!  How can you decide you’re going to start an online business and then not even have a clue as to what type of business.  Ha ha, LOL.  Second, I assume that this is a GOOD idea.  For example, you have done market research that has revealed that there actually is a demand for this product or service.

1. Write a Business Plan.

This is not required, but it’s a good idea just to get an upfront estimate of all your costs.

2. Secure a(n) DBA, LLC, S-Corp, C-Corp, etc.

There are different ways to set up your business and declare that you are ready to do business. Which method you chose depends on you and your business goals. When deciding which business entity to go with you will consider potential business risks and liabilities, formalities and expenses involved, income tax situation, and your need to raise capital.   The costs for each article of incorporation will vary for each person depending on the state and county where you are forming the articles of incorporation.  No matter where you live, however, the most expensive option is hiring a lawyer to incorporate your business.

C-Corporation

Limited personal liability, owners can split corporate profit among owners and corporation, paying lower overall tax rate.  Separate taxable entity.  May have an unlimited number of shareholders, good if you plan to have an IPO to raise capital.  C-Corps are more expensive to create than partnership or sole proprietorship, but have certain tax benefits and allows the owner to sell shares of stock to raise capital faster.  There are certain formality requirements (i.e. annual reports, minutes, meetings, etc.) that are required to maintain corporate status.

S-Corporation

Owners have limited personal liability for business debts.  Owners report their share of corporate profit or loss on their personal tax returns.  Income must be allocated to owners according to their ownership interests.  Owners can use corporate loss to offset income from other sources.   Fringe benefits limited for owners who own more than 2% of shares.  An S-Corporation is more expensive to form than a partnership or sole proprietorship, but enjoys certain tax benefits.  However, it requires more formality than a limited liability company, which offers similar tax benefits.

Non-Profit Corporation

Tax benefits available only to groups organized for charitable, scientific, educational, literary or religious purposes.  Contributions to non-profit corporations are tax-deductible.  Fringe benefits can be deducted as business expenses.  Same formalities as other corporations, but if the non-profit corporation ends, then all it’s profits must go to another nonprofit corporation.

Limited Liability Company

Combines the best of both worlds (the corporation’s liability protection and the pass-through tax structures of a partnership).  IRS rules now allow LLCs to choose between being taxed as a partnership or a corporation.  More expensive to form than a partnership or sole proprietorship, but depending on where the formation occurs the tax benefits the first year may be more than enough to pay for the expense.  The sale of member interests may take place per company policy.  LLC’s are significantly easier to maintain than a corporation.

Sole Proprietorship

The owner is personally liable for business debts and he or she reports profit or loss on his or her personal tax return.  This is a simple and inexpensive option.  There is no filing required.

General Partnership

Owners (partners) are personally liable for business debts and they report profit or loss on his or her personal tax return.  Simple and inexpensive to create and operate.  No filing necessary.

Doing Business As – DBA

This is not a type of incorporation, but I thought it was still important enough to mention.  Let’s say your name is Jane Smith and you’re going to start Jane’s Lawn Care.  If you are planning on receiving payments in the name of “Jane’s Lawn Care,” then you will need a DBA.  This tells the bank that you are “doing business as” Jane’s Lawn Care.  If you are only going to receive checks made out to Jane Smith, then you don’t need a DBA.  If you get an LLC or another type of incorporation, then you don’t need a DBA.

3.  Apply for your EIN (tax id)

You don’t really need to do this right away.  Technically, you don’t need your EIN until you do your taxes for the year.  Therefore, this could be the last thing you attain, but I decided to put it right next to getting your letters of incorporation because it just makes logical sense to do it now.  Besides, it only takes 15 minutes to apply online for your EIN.

4. Open a business checking account.

There are a lot of banks offering free business checking accounts. This will help you to keep your money for the business separate from your personal funds. Remember, keep the revenue from the business going back into this account and don’t withdrawl for any personal expenses. This is how you will grow your business. Buying Quickbooks is a good investment to help keep business expenses separate from personal ones, and it makes it easy to see where you are making your money on your business. You can also use Excel to track debits and credits to your business if you don’t have the money to buy Quickbooks.

5. Open a website