How to start a small business

A sole proprietorship is what you have by default if you start trading without registering anything. It is genuinely the simplest option, requires no formation paperwork, and reports on your personal tax return. The cost is that there is no legal separation between you and the business: if the business is sued or cannot pay a debt, your personal assets are exposed.

A partnership is the same arrangement with more than one owner, and carries the same exposure. It is worth having a written partnership agreement even between people who trust each other completely, because the situations that destroy partnerships are the ones nobody anticipated — illness, a change of direction, or one partner wanting out.

A limited liability company sits between the two extremes and is why it has become the default choice for small operations. It is registered with a state, creates a legal separation between business and personal assets, and by default is taxed like a sole proprietorship or partnership rather than as a separate entity. That combination — liability protection without a second layer of tax — is what makes it attractive.

A corporation is a genuinely separate legal entity. It offers the strongest liability separation and is what investors expect if you ever intend to raise outside money, but it carries real administrative weight: formal records, meetings, and in the standard form, tax paid at company level and again on distributions to owners.

The honest test is what would happen if the business were sued or failed owing money. If a bad outcome could reach your home or savings, the cost of forming an LLC is small insurance. If you are testing an idea with no employees, no premises and no meaningful liability, a sole proprietorship is a reasonable place to start.

Structure is not permanent, but changing it later is more work than choosing correctly now — and some changes have tax consequences at the point of conversion.

Registration happens at state level. An LLC or corporation is formed by filing with the state — usually the Secretary of State — paying a fee and naming a registered agent who can receive legal documents at a physical address during business hours.

Sole proprietors generally do not register the entity itself, but if you trade under a name other than your own legal name, most states or counties require a fictitious business name filing, often called a DBA — 'doing business as'.

An EIN, the Employer Identification Number, is your federal tax identifier. You need one if you have employees, operate as a corporation or partnership, or in many cases to open a business bank account. Applying takes minutes on the IRS website and it is free. Sites charging a fee to obtain one for you are reselling a free government service — a pattern worth recognising, because it recurs across almost every government process.

Licences are the layer people miss. There is no single business licence in the United States. Depending on what you do and where, you may need a general operating licence from your city, a county permit, a state professional licence, a sales tax permit if you sell taxable goods, and a health, building or zoning approval for physical premises.

Check the zoning rules before signing a lease, and check them before running a business from home too. Home-based businesses are usually fine, but restrictions on signage, customer visits, deliveries and equipment do exist and are enforced when neighbours complain.

Open a separate business bank account on day one, even as a sole proprietor. Mixing personal and business money makes tax preparation painful, makes deductions difficult to substantiate, and for an LLC can undermine the liability protection you formed the company to get.

Employment conditions people to a system where tax is withheld before the money reaches them. Self-employment removes that entirely, and the obligation does not wait for the annual return.

Estimated tax is generally paid quarterly by people who expect to owe tax and have no withholding covering it. Missing those payments can result in a penalty even if you eventually pay in full at year end — the penalty is for paying late, not for paying short.

Self-employment tax is separate from income tax and is the part that surprises people most. As an employee, Social Security and Medicare contributions are split between you and your employer. Self-employed, you pay both halves. A portion is deductible in calculating income tax, which softens it, but the headline rate is higher than most people budget for.

How the business itself is taxed depends on the structure. Sole proprietorships and single-member LLCs generally report on the owner's personal return. Partnerships and multi-member LLCs file an information return and pass income through to the owners. Corporations file separately.

State taxes are a separate system with separate rules. Some states have no personal income tax, some levy franchise or gross receipts taxes on businesses regardless of profit, and sales tax obligations depend on what you sell and where your customers are.

Record-keeping is not optional. Keep receipts, invoices, bank statements and mileage records. The deduction you cannot substantiate is the deduction you lose in an audit, and reconstructing a year of records after the fact is far harder than keeping them as you go.

If you take on employees, an entirely new set of obligations begins — payroll tax withholding, unemployment insurance, workers' compensation in most states, and eligibility verification. Classifying someone as a contractor when they function as an employee is a well-policed error with expensive consequences, and the test is about the working relationship rather than what the contract calls it.

Most small businesses in the United States start with the owner's own money, help from family, or a small amount of credit. Outside investment is the exception rather than the norm, and it is worth calibrating expectations before building plans around it.

The Small Business Administration does not generally lend directly. It guarantees a portion of loans made by banks and other lenders, which reduces the lender's risk and makes approval more likely for borrowers who would otherwise struggle. You still apply through a lender, and you still need to be creditworthy.

Expect a lender to want a business plan, financial projections, and personal financial information. For a new business with no trading history, the decision often rests substantially on your personal credit — which is a reason to check and repair your credit before applying rather than after being declined.

A personal guarantee is common on small business lending and means exactly what it says: if the business cannot repay, you are personally liable, regardless of whether you formed an LLC. This is the most frequent way that liability protection turns out not to apply in practice.

Grants exist but are narrower than the internet suggests. Genuine federal small business grants are typically tied to research, specific industries or particular circumstances rather than general start-up costs. Anyone charging you a fee to access a list of free government grants is selling something you can find yourself.

SBA resource partners provide free or low-cost mentoring and counselling, including help preparing a business plan and understanding local requirements. For a first-time owner this is among the highest-value free resources available, and it is chronically underused.

Insurance is where thin margins tempt people to gamble. General liability, professional liability where relevant, and property cover for premises or equipment are the usual starting points, and some are legally required — workers' compensation in most states once you have employees, and commercial auto cover if vehicles are used for business.

Do not assume a homeowner's or personal auto policy covers business use. It typically does not, and discovering that at claim time is a common and expensive lesson.

Your business name being registered with a state does not give you nationwide rights to it. Trademark protection is a separate federal system administered by the US Patent and Trademark Office, and searching existing trademarks before committing to a name and branding is far cheaper than rebranding after a dispute.

Advertising and marketing are regulated. The Federal Trade Commission requires that claims be truthful and substantiated, and rules covering endorsements, testimonials, pricing claims and email marketing apply to small businesses exactly as they apply to large ones. Ignorance of them is not a defence.

If you handle customer data or take card payments, security obligations follow — from card industry standards to state data breach notification laws, which exist in every state and differ in their detail.

Written contracts matter more as the business grows. A clear scope of work, payment terms, and what happens if either side wants out prevents the disputes that consume a small business owner's time. Even a short written agreement is dramatically better than none.

Finally, keep the entity in good standing. States require periodic reports and fees to maintain an LLC or corporation, and letting that lapse can administratively dissolve the company — quietly removing the liability protection you have been relying on, usually without you noticing until it matters.