321 - The Biz Blueprint
On today's episode of the podcast, I'm sharing my Small Business Blueprint.
I share this topic annually as a reminder for those of you who are new to the podcast or who need a reminder of the steps that still need to be completed. These are the steps you'll need to take if and when you plan to legally solidify your sole proprietorship, form an LLC and/or form an S corporation.
You can get help with all of this inside our program Legally Launched. The doors are officially open and if you join by end of day Friday, January 26th, then you can get access to a live cohort of the program where we'll be doing three group Q&As on Tuesdays at 9am PST/12pm EST. Each one will be structured with the course, which is only about 20 minutes of videos each week. The biggest benefit to Legally Launched is you're going to learn what actually needs to happen with your LLC and S corp and how to maintain them moving forward so they don't dissolve. Join at notavglaw.com/legallylaunched
While we use my home state of California as an example, these blueprint applies to all states.
1. Get registered agent
2. Choose biz name and check availability
3. Determine entity and file articles
4. Obtain employee identification number (EIN)
5. File for seller's permit
6. Get fictitious business name license
7. Obtain business license or business tax certificate
8. Draft operating agreement
9. Draft meeting minutes
10. File S corp election
11. File statement of information
12. Pay annual franchise tax
13. Open back accounts
14. Set up payroll
Steps 1 - 10 are what cover your entity, 11-14 are post-formation requirements.
Before we dive deeper into the steps, I need to remind you to stop paying for bull shit. Online filing systems are like car mechanics, if you don't know what you need, how do you know if you really need everything they say you do? The blueprint is going to tell you everything you need, and will vary based on your business entity choice. If you plan to stay a sole prop I recommend looking at steps 4 - 7 and 13. Do the same if you have a general partnership, but add a partnership agreement. LLC formation, go through the full blueprint but only include steps 10 and 14 if you plan to elect S corp status on your LLC. You can always form an LLC and elect S corp status on a future year. Even as a sole prop it's good to get your EIN and other business licenses now. If you do an LLC later you can update that then.
Let's review the steps in detail.
1. Get a registered agent - This is the person who will receive service of process if you are ever sued. Every LLC and Corporation must have one located in the state where the LLC is formed. You can be your own registered agent with your home or office address or you can hire a corporate registered agent which usually happens under two circumstances - they don't feel comfortable receiving service of process because your home address or office address is publicized or your office is outside the state where you formed.
2. Choose biz name and check availability - LLC filings are rarely denied but one common reason for denial is using an already taken name. Google "(your state) LLC search" to avoid this before filing. The rules that constitute a similar name vary by state. Almost every state allows online LLC filing through a .gov address. Don't fall for the trap of filing through a third party and paying additional fees.
3. Determine entity and file articles - Entity means the legal ways to form your business. The options are sole proprietorships, general partnerships, limited liability companies, S corporations, and C corporations. The default entities are a sole proprietorship and general partnership. The most common options for small businesses are LLCs and S corps. Remember that an S corp is not a type of entity, it's a tax status therefore for most soloprenuers an LLC would be the best starting point. If you plan to make more than $60k-ish a year, check out the S corp Savings Calculator to determine if you should file an S corp . If you want S corp status within the first year, you must file for S status within two months and 15 days from the date of forming your business. For existing entities, you can change your status by filing before March 15th of the year you want S status to become.
4. Obtain employee identification number (EIN) - Essentially this is a social security number for your business. You are required to have one if you have employees or if your business is a partnership or a corporation. Most banks require an EIN to open a business bank account. You want the EIN in the LLC's name so you want to file the LLC first. You can get your EIN totally free through the IRS website during IRS business hours, do not file through any third parties.
If you already have an EIN, it's okay to file for a new EIN when moving from a sole prop to an LLC but the IRS would prefer you to update your existing EIN instead which is cleaner and helps maintain your tax history under one account, it just takes longer. The most common mistake is things getting wonky if you have multiple EINs and mistakenly use the wrong one.
5. File for seller's permit - Sellers permits are required when you have sales subject to sales tax. Some states have different names for sellers permits. If you don't need this, don't get it because once you have one, the state will be looking for sales tax returns from you, therefore hold off on getting one until you start collecting sales tax.
6. Get fictitious business name license - After you get your EIN it's time to file your FBL. This is to establish your DBA (doing business as) and this is typically filed through your county. If you need multiple DBAs, many counties allow you to file several on one form and pay for each, add any and all you want and make sure to put them all on your business license. You only get one FBL per business. FBLs also have renewal requirements and may renew at a different timeline than your LLC.
7. Obtain business license or business tax certificate - Business licenses are sometimes called tax certificates. These are required by most cities, check your city requirement. These are typically required anytime you operate a business in that city and the definition of operate may vary city to city and is generally based on physical location which would be where your office or storefront is. Some cities have requirements for businesses that operate out of their home. Many business to business exceptions for hiring require businesses to have a business license, you should always ask for a copy when hiring someone using one of the exceptions (more on this in episode 278).
8. Draft operating agreement - If you have two or more individuals coming together to form a partnership you need a partnership agreement. A general partnership doesn't have a separate existence in the eyes of the law so the partners will be held jointly and severally liable for any debts or liabilities of the business. State default rules apply in absence of a partnership agreement. If you don't have an agreement a court can make and infer particular rules. The main reason to form an LLC is for liability protection. To maintain your liability protection, you must meet particular requirements that prove you’re keeping yourself separate from your business. One way to do that is through an operating agreement. You can get operating agreements in the Contract Club (notavglaw.com/club).
9. Draft meeting minutes - The operating agreement and meeting minutes are internal documents, meaning they don’t get filed with the city, county, state, or IRS.Recording meeting minutes is one of those formalities to maintain your magical liability bubble. They don’t have to be complicated; you don’t need to record minutes for every minor decision, like offering a promotion, for example. Instead, record major business changes in meeting minutes like salary raises, opening and closing bank accounts, buying physical property, etc.
10. File S corp election - If you’re filing your LLC later in the year, note that you’re only getting the tax benefits for those months. If your S election is not effective on the 1st of the year, you file what’s called a part-year tax return. For the one part of the year you don't have S corp status you file taxes as a pass-through. For the other part, you file as an S corp. Because this makes things more complicated, you may want to file for S Corp status at the beginning of the following year.
11. File statement of information
12. Pay annual franchise tax
13. Open back accounts
14. Set up payroll
