Perhaps you’ve got a hot idea for a new business and decided it’s time to turn a dream into reality. Or you’ve given up on finding your dream job and decided to create your own startup. Maybe it’s time to turn your side hustle into a full-time business.
No matter what your motivation for launching your own business, the journey ahead is no doubt both exciting and scary for new business owners. Where do you start?
What does it mean to legitimize your business?
Legitimizing your business means creating a solid foundation that allows your business to operate properly, and to be perceived as reputable to potential customers, other businesses, and even to lenders. Here’s a step-by-step list to get you started.
1. Choose a business name.
Think this one through carefully. Not only do you want to make sure it will be unique and memorable, you’ll also want to make sure it is legally available. Just because there are other businesses with similar names doesn’t mean you can’t use it, but be careful. If your business name is similar to another business— particularly one in your geographic area— your business credit profiles could get mixed up with one another. While you are at it, check domain names, and social media accounts (Facebook, Twitter, Instagram etc). Do a Google search. Before you make your final decision, consider a trademark search to avoid any legal challenges down the line. If your business name is too similar to another you may not be able to register that name when you create a legal entity. (See step 4.)
2. Choose your business address.
It’s OK to register your business at your home address, though some owners choose to use a service such as a UPS store to give their business a location separate from their home address. Keep in mind there will be situations—such as filing a tax return—where you will have to provide a physical address for the business.
3. Get a business phone number.
You may not have to get an expensive business landline from your local telecom, but you do need a number to give out to clients and customers, and it should be answered in a professional manner. You may want to use a service like GoDaddy SmartLine to add a business phone number to your cell phone. You can also investigate using a virtual business telephone service or answering service.
4. Create your business entity.
While it may be tempting for many business owners to just give it a whirl as a sole proprietor, you may be taking unnecessary risk. If your business gets into any kind of legal hot water, your personal assets could be at risk.
A limited liability company (LLC), S Corporation, C Corporation can offer asset protection and tax advantages. It’s also much easier to create a business credit profile and eventually get small business financing if you create a separate legal entity.
Check with legal or tax advisors if you need help choosing the right business structure. Once you’ve decided on an entity type, you can outsource all the tedious legal work to a business formation service.
5. Register your business name.
This will likely be part of the process when you incorporate. If you operate as a sole proprietor, it’s a good idea to file a fictitious name registration (DBA) with your state. If you incorporate, you’ll need to identify a registered agent; this should be someone who is able to accept service of process if your business is involved in legal action. Mail may also come to the registered agent so choose an individual or service that will reliably forward it to you. You can usually hire one fairly inexpensively.
6. Get business licenses and permits.
You may need to get a sales tax license, health department inspection, or certain professional licenses, depending on your type of business. Not sure what you will need? Talk with your local Small Business Development Center (SBDC) or SCORE chapter, both of which offer free and low-cost resources for small businesses. Your attorney or accountant may also be able to help. In addition, the Secretary of State website in the state where you incorporate your business may help you understand the permits you need.
7. Get an employer identification number (EIN).
An EIN is also known as a Federal Tax Identification Number, and is used to identify a business entity. Generally, businesses need an EIN, according to the IRS. (Think of it as the equivalent of a social security number for your business.) You can request an EIN for free online from the Internal Revenue Service at IRS.gov. Note, it will be required if you form a legal entity.
8. Open a business bank account.
Co-mingling business and personal funds can create all kinds of tax headaches and can also open you up personally to liability if your business is incorporated. (This is known as “piercing the corporate veil.”) Open a separate business bank account and use it exclusively for business purposes. Many small business lenders will want to see business bank statements to verify revenues.
The easiest way to find the right business checking account for your small business is to use our easy-to-compare list. We did all the research for you so you can spend more time comparing the best options.
9. Get a business credit card.
Getting a business credit card will allow you to separate business and personal purchases. It will also help you easily identify business purchases to make tax time easier. In addition, most business credit card issuers do not report activity to the owner’s personal credit unless they default. (This chart describes the policies of the major issuers.) This can help protect your personal credit from the activities of your business.
10. Set up your books.
One of the most important steps you can take to set your business up for success is to make sure your bookkeeping is done in a timely manner and that your business taxes (business income tax, sales tax, payroll taxes etc) are paid on time. When you set up your bookkeeping system, you’ll need to set up your chart of accounts and begin keeping track of business expenses and business income.
If you don’t know how business accounting works, consider hiring a bookkeeper or accountant, or at least take a class on business bookkeeping from your local SBDC. Starting your business bookkeeping out on the right foot will save you an enormous amount of time in the long run.
11. Get a D-U-N-S number.
This number will be used to identify your business in the Dun & Bradstreet commercial credit database. You can request a D-U-N-S number for free.
12. Establish business credit.
Did you know your business can build its own credit history, separate from your personal credit? You accomplish that by getting credit in the name of the business. It can be a little trickier than establishing personal credit since not all companies report to business credit agencies. Consider opening accounts with companies that allow you to make purchases on a net-30 basis and report payments to credit bureaus such as Experian (which keeps credit reports on businesses as well as consumers) or Dun & Bradstreet. You’ll buy things you need for your business, pay them off within thirty days and begin to build a good business credit score.
The sooner you do this the better, as age of accounts is one factor that can often help your business credit scores. (Nav’s free BusinessLauncher tool will give you the names of companies that report.)
13. Create a website.
Depending on your type of business, you may be able to get away with a basic website where prospective clients or customers can learn a little bit about your business and how to contact you. But not having one at all will likely hurt your business.
14. Register your business with online services.
You can register your business on Google so it comes up in online searches. This is especially important if your business has a physical address and specific business hours. Also register social media accounts for your business— even if you don’t plan to use them yet— and consider registering with review sites relevant to your business, such as Yelp or TripAdvisor. Depending on your type of business, you may want to set up a page on Facebook and/or LinkedIn.
15. Get insurance.
Business insurance is designed to keep you in business when losses come along. Without the right coverage, the high costs of lawsuits, property damage or employee injuries could bankrupt a new or growing company. Every business has different needs, but some of the most popular coverages include general liability, property, workers’ comp and commercial auto – and some of these can be bundled together to save money. Visit our partner Mylo to learn more.
Frequently Ask Questions (FAQs)
How do I legitimize my business for tax purposes?
Setting up a solid bookkeeping system and working with a tax professional to make sure taxes are paid on time is essential to make sure you comply with both state and federal tax requirements. The sooner you start, the better as it’s much harder to catch up. The IRS has lots of helpful information for small businesses at IRS.gov in their Small Business and Self-Employed Tax Center.
How do you legitimize a sole proprietorship?
Most entrepreneurs in the US start their businesses as sole proprietorships, which means they do not create an LLC, corporation or other formal business type. If you choose to operate this way, make sure you complete as many other steps on this list as possible. Consider forming a business structure as soon as it is feasible.
Do I need a business plan to legitimize my business?
This article was originally written on May 11, 2017 and updated on August 8, 2023.