Information provided in the Learning Center deals with general issues and should aid in the process of forming and managing a business entity. However, forming and managing a business is complex. The way your business is set up can affect the tax you owe, your liability to others and the way you govern your business. We recommend that you consult an attorney, accountant or CPA for specific advice on legal and tax matters and to discuss the implications of both the initial and subsequent decisions. We do not offer tax or legal advice or business planning.
- Starting a Business
5 Steps to Registering Your Business
Whether you are starting a new business or expanding an existing business, you will need to follow some basic steps to ensure you have all the necessary licenses, permits and registrations needed to legally operate.
1. Determine the Legal Structure of Your Business
You must organize your business as a legal entity. There are several options to consider, and all have different legal, financial and tax considerations. The right legal structure for your business depends on a number of factors, including the level of control you want to have, your business' vulnerability to lawsuits, and financing needs.
The legal structure you choose will determine further registration requirements. Once you choose a legal structure, you may have to file registration forms with your state and/or local government. The requirements vary from state to state.
Some business types require registration with your state government:
- A corporation
- A nonprofit organization
- A limited-liability company or partnership
If you establish your business as a sole proprietorship, you won't need to register your business at the state level. However, many states require sole proprietors to use their own name for the business name unless they formally file another name. This is known as a "Doing Business As" (DBA) name, trade name or a fictitious name.
2. Register Your Business Name
"Doing Business As," "DBA," "Assumed Name," and "Fictitious Name" are terms that are used to describe the process of registering a legal name for your business.
By default, the legal name of a business is the name of the person or entity that owns the business. If you are the sole owner of your business, its legal name is your full name. If your business is a partnership, the legal name is the name given in your partnership agreement or the last names of the partners. For limited liability corporations (LLCs) and corporations, the business' legal name is the one that was registered with the state government.
Your business' legal name is required on all government forms and applications, including your application for employer tax identifications, licenses and permits. However, if you want to open a shop or sell your products under a different name, then you may have to file an "assumed name" registration form with your state and local government.
Contact your TRIAD representative to learn about the requirements in your state.
3. Obtain Your Federal Tax ID
Employers with employees, business partnerships and corporations, and other types of organizations must obtain an Employer Identification Number (EIN) from the U.S. Internal Revenue Service. The EIN is also known as an Employer Tax ID, Federal Employer Tax ID, FEIN and Form SS-4.
For a fee, TRIAD can prepare the application and obtain an EIN for you, however applying for an EIN is a free service offered by the Internal Revenue Service. You can apply with the IRS: Online, by Toll-Free Telephone Service, Fax or Mail.
4. Register with Your State Revenue Agency
Just as you must have a Federal Tax ID, you will also need to obtain Tax IDs and permits from your state's revenue agency.
If you plan to sell products and you are required to collect sales taxes, you will likely need to obtain a Sales Tax Permit or Vendor's License from your state or local government (or both).
5. Obtain Licenses and Permits
Most businesses are required to obtain some type of business license or permit to legally operate. The vast majority of small businesses will need to obtain a general business license or industry-specific operating permits from state and local government agencies.
Incorporating Your Business
When you're starting a business, one of the first decisions you have to make is the type of business you want to create. A sole proprietorship? A corporation? A limited liability company? This decision is important because the type of business you create determines the types of applications you'll need to submit. You should also research liability implications for personal investments you make into your business, as well as the taxes you will need to pay. It's important to understand each business type and select the one that is best suited for your situation and objectives. Keep in mind that you may need to contact several federal agencies, as well as your state business entity registration office.
Here is a list of the most common ways to structure a business.
- Limited Liability Company (LLC)
- S Corporation
A corporation is an independent legal entity owned by shareholders. This means that the corporation itself, not the shareholders that own it, is held legally liable for the actions and debts incurred by the business.
Corporations are more complex than other business structures. Corporations tend to have costly administrative fees and complex tax and legal requirements. Because of these issues, corporations are generally suggested for established, larger companies with multiple employees.
For businesses in that position, corporations offer the ability to sell ownership shares in the business through stock offerings. "Going public" through an initial public offering (IPO) is a major selling point in attracting investment capital and high quality employees.
Forming a Corporation
A corporation is formed under the laws of the state in which it is registered. To form a corporation you'll need to establish your business name. For corporations, your legal name is the one you register with your state government. If you choose to operate under a name different from the officially registered name, you'll most likely have to file a fictitious name (also known as an assumed name, trade name, or DBA name, short for "doing business as"). State laws vary, but generally corporations must include a corporate designation (Corporation, Incorporated, Limited) at the end of the business name.
To register your business as a corporation, you will need to file certain documents, typically articles of incorporation, with your state's Secretary of State office. Some states require corporations to establish directors and issue stock certificates to initial shareholders in the registration process. TRIAD can help you find out about specific filing requirements in the state where your business will be formed.
Once your business is registered, you must obtain business licenses and permits. Regulations vary by industry, state and locality.
If you are hiring employees, you will need to follow federal and state regulations for employers.
How Corporations are Taxed
Corporations are required to pay federal, state, and in some cases, local taxes. Most businesses must register with the IRS and state and local revenue agencies and receive a tax ID number or permit.
When you form a corporation, you create a separate tax-paying entity. Regular corporations are called "C corporations" because Subchapter C of Chapter 1 of the Internal Revenue Code is where you find general tax rules affecting corporations and their shareholders.
Unlike sole proprietors and partnerships, corporations pay income tax on their profits. In some cases, corporations are taxed twice - first, when the company makes a profit, and again when dividends are paid to shareholders. Corporations use IRS Form 1120 or 1120-A, U.S. Corporation Income Tax Return, to report revenue to the federal government.
Shareholders who are also employees pay income tax on their wages. The corporation and the employee each pay one half of the Social Security and Medicare taxes, but this is usually a deductible business expense.
Advantages of a Corporation
Limited Liability. When it comes to taking responsibility for business debts and actions of a corporation, shareholders' personal assets are protected. Shareholders can generally only be held accountable for their investment in stock of the company.
Ability to Generate Capital. Corporations have an advantage when it comes to raising capital for their business - the ability to raise funds through the sale of stock.
Corporate Tax Treatment. Corporations file taxes separately from their owners. Owners of a corporation only pay taxes on corporate profits paid to them in the form of salaries, bonuses, and dividends, while any additional profits are awarded a corporate tax rate, which is usually lower than a personal income tax rate.
Attractive to Potential Employees. Corporations are generally able to attract and hire motivated employees of high quality because coporations can offer competitive benefits and the potential for partial ownership through stock options.
Disadvantages of a Corporation
Time and Money. Corporations are costly and time-consuming ventures to start and operate. Incorporating requires start-up, operating, and tax costs that are not required of most other structures.
Double Taxing. In some cases, corporations are taxed twice - first, when the company makes a profit, and again when dividends are paid to shareholders.
Additional Paperwork. Because corporations are highly regulated by federal, state, and in some cases local agencies, increased paperwork and recordkeeping burdens are associated with this entity.
Limited Liability Company (LLC)
A limited liability company is a hybrid type of legal structure that provides the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership.
The "owners" of an LLC are referred to as "members." Depending on the state, the members can consist of a single individual (one owner), two or more individuals, corporations, other LLCs, and even other entities.
Unlike shareholders in a corporation, LLCs are not taxed as a separate business entity. Instead, all profits and losses are "passed through" the business to each member of the LLC. LLC members report profits and losses on their personal federal tax returns, just like the owners of a partnership would.
Forming an LLC
While each state has slight variations to forming an LLC, they all adhere to some general principles:
Choose a Business Name. There are 3 rules that your LLC name needs to follow: (1) it must be different from an existing LLC in your state, (2) it must indicate that it's an LLC (such as "LLC" or "Limited Company") and (3) it must not include words restricted by your state (such as "bank" and "insurance"). Your business name is automatically registered with your state when you register your business, so you do not have to go through a separate process. Read the "How to Name a Business" tab above to learn more about choosing a business name.
File the Articles of Organization. The Articles of Organization is a simple document that legitimizes your LLC and includes information like your business name, address, and the names of its members. The form is provided by and filed with your state's LLC office. For most states, you file with the Secretary of State. However, other states may require that you file with a different office such as the State Corporation Commission, Department of Commerce and Consumer Affairs, Department of Consumer and Regulatory Affairs, or the Division of Corporations & Commercial Code. Note: there may be an associated filing fee.
Create an Operating Agreement. Operating agreements are not required by most states and are not filed at your state office. However, an operating agreement is highly recommended for multi-member LLCs because it structures your LLC's finances and organization and provides rules and regulations for smooth operation. Percentage of interests, allocation of profits and losses, members' rights and responsibilities, and other provisions are usually included here.
Obtain Licenses and Permits. Once your business is registered, you must obtain business licenses and permits. Regulations vary by industry, state and locality. Use the Licensing & Permits tool to find a listing of federal, state and local permits, licenses, and registrations you'll need to run a business.
Hiring Employees. If you are hiring employees, read more about federal and state regulations for employers.
Announce Your Business. Some states, including Arizona and New York, require the extra step of publishing a statement in your local newspaper regarding the formation of your LLC. Check with your state's business filing office for requirements in your area.
In the eyes of the federal government, an LLC is not a separate tax entity, and therefore the business itself is not taxed. Instead, all federal income taxes are passed on to the members of the LLC and are paid through their personal income tax. While the federal government does not tax income on an LLC, some states do, so check with your state's income tax agency.
Since the federal government does not recognize an LLC as a business entity for taxation purposes, all LLCs must file as a corporation, partnership, or sole proprietorship. Certain LLCs are automatically classified and taxed as a corporation by federal tax law. For guidelines about how to classify an LLC, please visit IRS.gov.
An LLC that is not automatically classified as a corporation can choose its business entity classification. To elect a classification, an LLC must file Form 8832. This form is also used if an LLC wishes to change its classification status. Read more about filing as a corporation or partnership and filing as a single member LLC at IRS.gov.
The following tax forms should be filed depending on your classification:
- Single Member LLC. A single-member LLC files Form 1040 Schedule C like a sole proprietor.
- Partners in an LLC. Partners in an LLC file a Form 1065 partnership tax return like owners in a traditional partnership.
- LLC filing as a Corporation. An LLC designated as a corporation files Form 1120, the corporation income tax return.
The IRS guide to Limited Liability Companies provides all relevant tax forms and additional information regarding their purpose and use.
Combining the Benefits of an LLC with an S-Corp
There is always the possibility of requesting S-Corp status for your LLC. A small business attorney can advise you on the pros and cons. You'll have to make a special election with the IRS to have the LLC taxed as an S-Corp using Form 2553. This must be filed prior to the first two months and fifteen days of the beginning of the tax year in which the election is to take effect. For more information about S-Corp status, visit IRS.gov or read Should My Company be an LLC, an S-Corp or Both?
The LLC remains a limited liability company from a legal standpoint but for tax purposes can be treated as an S-Corp. Be sure to contact the state's income tax agency where the election form will be filed. Ask them whether or not they recognize elections of other entities such as the S-Corp and what the tax requirements are.
Advantages of an LLC
Limited Liability. Members are protected from personally liability for business decisions or actions of the LLC. This means that if the LLC incurs debt or is sued, members are not required to satisfy the claims with their personal assets. This is similar to the liability protections afforded to shareholders of a corporation. Keep in mind that limited liability means "limited" liability - members are not necessarily shielded from their or their employees' tort actions, such as accidents.
Less Recordkeeping. An LLC's operational ease is one of its greatest advantages. Compared to an S-Corporation, there is less registration paperwork and there are smaller start-up costs.
Sharing of Profits. There are also fewer restrictions on profit-sharing within an LLC, as members distribute profits as they see fit. Members might contribute different proportions of capital and sweat-equity. Consequently, it's up to the members themselves to decide who has earned what percentage of the profits or losses.
Disadvantages of an LLC
Limited Life. In many states, when a member leaves an LLC, the business is dissolved and the members must fulfill all remaining legal and business obligations to close the business out. The remaining members can decide if they want to start a new LLC or part ways. However, you can include provisions in your operating agreement to prolong the life of the LLC, should a member decide to leave the business.
Self-Employment Taxes. Members of an LLC are considered self-employed and must pay the self-employment tax contributions towards Medicare and social security. The entire net income of the LLC is subject to this tax.
A partnership is a single business where two or more people share ownership.
When two or more people decide to join together to carry on a trade or business, their relationship is considered to be a partnership. In general, each partner contributes to all aspects of the business including money, property, and labor or skill. In return, each partner shares in the profits and losses of the business.
Because partnerships entail more than one person in the decision-making processes, it's important to discuss a wide variety of issues up front and develop a legal partnership agreement. This agreement should document how future business decisions will be made, including how the partners will divide profits, resolve disputes, change ownership (bring in new partners or buy out current partners), even how to dissolve the partnership. Although partnership agreements are not legally required, they are strongly recommended and it is considered extremely risky to operate without one.
Types of Partnerships
There are three general types of partnership arrangements:
- General Partnerships assume that profits, liability, and management duties are divided equally among partners. If you opt for an unequal distribution, the percentages assigned to each partner must be documented in the partnership agreement.
- Limited Partnerships (also known as a partnership with limited liability) are more complex than general partnerships. Limited partnerships allow partners to have limited liability as well as limited input with management decisions. These limits depend on the extent of each partner's investment percentage. Limited partnerships are seen as attractive to investors of short-term projects.
- Joint Ventures act as general partnership, but for only a limited period of time or for a single project. Partners in a joint venture can be recognized as an ongoing partnership if they continue the venture, but they must file as such.
Forming a Partnership
To form a partnership you must register your business with the state. This process is generally done through your Secretary of State's office. The Business Entity Registration page has information on specific filing requirements in the state where your business will be formed.
You'll also need to establish your business name. For partnerships, your legal name is the name given in your partnership agreement or the last names of the partners. If you choose to operate under a name different than the officially registered name, you will most likely have to file a fictitious name (also known as an assumed name, trade name, or DBA name, short for "doing business as").
Once your business is registered, you must obtain business licenses and permits. Regulations vary by industry, state and locality. Use our Licensing & Permits tool to find a listing of federal, state and local permits, licenses, and registrations you'll need to run a business.
If you are hiring employees, read more about federal and state regulations for employers.
Most businesses will need to register with the IRS, register with state and local revenue agencies, and obtain a tax ID number or permit.
A partnership must file an annual information return to report the income, deductions, gains, and losses from the business's operations, but the business itself does not pay income tax. Instead, the business "passes through" any profits or losses to its partners. Each partner's personal tax return includes his or her share of the partnership's income or loss.
The IRS guide to Partnerships provides all relevant tax forms and additional information regarding their use.
Partnership taxes generally include:
- Annual Return of Income
- Employment Taxes
- Excise Taxes
Partners in the partnership are responsible for several additional taxes, including:
- Income Tax
- Self-Employment Tax
- Estimated Tax
Filing information for partnerships:
- Partnerships must furnish copies of their Schedule K-1 (Form 1065) to all partners by the date Form 1065 is required to be filed, including extensions.
- Partners are not employees and should not be issued a Form W-2.
The IRS guide to Partnerships provides all relevant tax forms and additional information regarding their purpose and use.
Advantages of a Partnership
Easy and Inexpensive. Partnerships are generally an inexpensive and easily formed business structure. The majority of time spent starting a partnership is often spent developing the partnership agreement.
Shared Financial Commitment. In a partnership, each partner is equally invested in the success of the business. Partnerships have the advantage of pooling resources to obtain capital. This could be beneficial in terms of securing credit or by simply doubling your seed money.
Complementary Skills. A good partnership should reap the benefits of being able to utilize the strengths, resources, and expertise of each partner.
Partnership Incentives for Employees. Partnerships have an employment advantage over other entities if they offer employees the opportunity to become a partner. Partnership incentives often attract highly motivated and highly qualified employees.
Disadvantages of a Partnership
Joint and Individual Liability. Similar to sole proprietorships, partnerships retain full, shared liability among the owners. Partners are not only liable for their own actions, but they are also liable for the business debts and decisions made by other partners. In addition, the personal assets of all partners can be used to satisfy the partnership's debt.
Disagreements Among Partners. With too many cooks in the kitchen, there are bound to be disagreements among at one point or another. Partners should consult each other on all decisions, make compromises, and resolve disputes as amicably as possible.
Shared Profits. Because partnerships are jointly owned, each partner must share the successes and profits of their business with the other partners. If there isn't an equal contribution of time, effort, or resources, this can cause discord among partners.
An S Corporation or S Corp is a special type of corporation created through an IRS tax election. An eligible domestic corporation can avoid double taxation (once to the corporation and again to the shareholders) by electing to be treated as an S corporation.
An S Corp is a corporation that has received the Subchapter S designation from the IRS. A business must first be chartered as a corporation in the state where it's headquartered to be considered an S Corp. According to the IRS, S Corporations are "considered by law to be a unique entity, separate and apart from those who own it." This allows for a limit on the financial liability for which an owner (aka "shareholder") is responsible. Nevertheless, liability protection is limited - S Corps do not necessarily shield owners from all litigation such as an employee's tort actions as a result of a workplace incident.
What differentiates the S Corp from a traditional corporation (C Corp) is the ability to have profits and losses pass through to the shareholder's personal tax return. Consequently, the business is not taxed itself, only the shareholders. There is an important caveat, however: any shareholder who works for the company must pay him or herself "reasonable compensation." Basically, the shareholder must be paid fair market value, or the IRS might reclassify any additional corporate earnings as "wages."
Forming an S Corporation
Before you form an S Corporation, determine if your business will qualify under the IRS stipulations.
To file as an S Corporation, you must first file as a corporation. After you are considered a corporation, all shareholders must sign and file Form 2553 to elect your corporation to become an S Corporation.
Like all businesses, S Corps must obtain all relevant business licenses and permits. Regulations vary by industry, state and locality. Use the Licensing & Permits tool to find a listing of federal, state and local permits, licenses, and registrations you'll need to run a business.
If you are hiring employees, read more about federal and state regulations for employers.
Combining the Benefits of an LLC with an S Corp
There is always the possibility of requesting S Corp status for your LLC. Your attorney can advise you on the pros and cons. You'll have to make a special election, using Form 2553, with the IRS to have the LLC taxed as an S Corp. And you must file it before the first two months and fifteen days of the beginning of the tax year in which the election is to take effect.
The LLC remains a limited liability company from a legal standpoint but for tax purposes it's treated as an S Corp. Be sure to contact your state's income tax agency where the election form will be filed. Ask them whether or not they recognize the S Corp election and what the tax requirements are.
Most businesses will need to register with the IRS, register with state and local revenue agencies, and obtain a tax ID number or permit.
All states do not tax S Corps equally. Most recognize them similarly to the federal government and tax the shareholders accordingly. However, some states, like Massachusetts, tax S Corps on profits that rise above a specified limit. Other states don't recognize the S Corp election and treat the business as a C-Corp with all of the tax ramifications. Some states, like New York and New Jersey, tax both the S Corp's profits and the shareholders' proportional shares of the profits.
Your corporation must file Form 2553 to elect "S" status within two months and 15 days after the beginning of the tax year or at any time during the tax year preceding the tax year the change in status is to take effect.
Advantages of an S Corporation
Tax Savings. One of the best features of the S Corp is the tax savings for you and your business. While members of an LLC are subject to employment tax on the entire net income of the business, only the wages of the S Corp shareholder who is an employee are subject to employment tax. The remaining income is paid to the owner as a "distribution" which is taxed at a lower rate, if at all.
Business Expense Tax Credits. Some expenses that shareholder/employees incur can be written off as business expenses. Nevertheless, if such an employee owns 2% or more shares, then benefits like health and life insurance are deemed taxable income.
Independent Life. An S Corp designation also allows a business to have an independent life, separate from its shareholders. If a shareholder leaves the company or sells his or her shares, the S Corp can continue doing business relatively undisturbed. By maintaining the business as a distinct corporate entity, clearer lines are defined between the shareholders and the business that improve the protection of the shareholders.
Disadvantages of an S Corporation
Stricter Operational Processes. As a separate structure, S Corps require scheduled director and shareholder meetings, minutes from those meetings, adoption and updates to by-laws, stock transfers and records maintenance.
Shareholder Compensation Requirements. A shareholder must receive reasonable compensation. The IRS takes notice of shareholder red flags like low salary/high distribution combinations, and may reclassify your distributions as wages. An audit could result in paying a higher employment tax.
Register Your Fictitious or "Doing Business As" (DBA) Name
The legal name of a business is the name of the person or entity that owns a business. For example:
- If you are the sole owner of your business, its legal name is your full name
- If your business is a partnership, the legal name is the name given in your partnership agreement or the last names of the partners
- For limited liability corporations (LLCs) and corporations, the business' legal name is the one that was registered with the state government
The legal name of your business is required on all government forms and applications, including your application for employer tax IDs, licenses and permits. However, if you want to open shop or sell your products under a different name, then you may have to file a "fictitious name" registration form with your government agency.
A fictitious name (or assumed name, trade name or DBA name, which is short for "doing business as") is a business name that is different from your personal name, the names of your partners or the officially registered name of your LLC or corporation.
For example, let's say Mary Smith is the sole proprietor of a catering company she runs out of her home. Mary wants to name her business Seaside Catering instead of using her business' legal name, which is Mary Smith. In order to use Seaside Catering, Mary will need to register that name as a fictitious business name with a government agency. The appropriate government agency depends on where she lives. In some states, you have to register fictitious names with the state government or with the county clerk's office, or both; however, there are a few states that do not require the registering of fictitious business names.
Forced DBA or Forced Assumed Name
If the legal business entity name registered with the state government is not available for use in another state because the name or similar name is being used by another entity, the business entity must register or qualify under an assumed name. This is often referred to as a Forced DBA or Forced Assumed Name.
How To Name a Business
Choosing a Name
Whether it's a clever moniker, a personal tribute, or simply picked out of a hat, your business' name will frame its identity. The significance of choosing a name can sometimes be a tricky undertaking. You may find it helpful to keep alternatives in mind during your selection process.
Once you've decided on the perfect business name, you'll want to ensure that it's secure and protected. Be aware laws may vary from state to state, so check with your state Secretary of State to comply with regional policies.
Availability of Proposed Names
Set aside some time to research your proposed names. Because a business can establish a trademark simply by operating under a given name, you must be diligent in checking both registered and unregistered trademarks. A quick scan on an Internet search engine can save you valuable time, energy, and money by ruling out existing businesses with similar names and/or services. The next step is to search various databases that pertain to your business structure.
Trademark law prevents businesses from operating under names that are likely to be mistaken for the name of an existing competitor. If you violate trademark law, you may be required to pay monetary reparations and change your business name. To avoid violating trademark law, do your research and select a name that is legally available.
To confirm name availability, check your county clerk's office for a list of fictitious/assumed names - often unregistered trademarks - operating in your region, or state, if applicable. In the event that your proposed name is already in use, you should discard it from your list.
Multiple databases should be consulted to provide the most thorough search effort. The Thomas Register (available online) provides entrepreneurs with a free, unregistered trademark database. Federally registered trademarks can be found on the U.S. Patent and Trademark Office's database.
Corporations, Limited Liability Companies (LLC), or Limited Partnerships
For businesses organized in the manner of a corporation, LLC, or limited partnership, contact your state filing office for an additional name database search.
Considering Your Results
If you find a business operating under your proposed name, you may still be able to use it, provided your business and the existing business offer different goods/services or are located in different regions.
However, avoid naming your business after a prominent existing trademark or any trademarks that are indistinguishable to your proposed name that provide the same goods/services, as it may violate trademark law. Keep in mind that federally registered trademarks are protected across the United States.
Once you've cleared your proposed business name, you must register it. There are also optional registrations available to business owners to ensure legal name protection.
If your business name is not your own personal name, it's referred to as an assumed, or fictitious, name. Registrations of this kind may also be known as a DBA, or "Doing, Business As." Depending on where you live, this registration can be obtained from a state agency or a city or county clerk's office. Visit the Business Name Registration (Your DBA Name tab above) for more information.
For corporations, LLCs, or limited partnerships, often business names are registered when the articles of incorporation/organization or statements of limited partnerships are returned to your state filing office. If operating under a fictitious/assumed/DBA name, fictitious name statements may be required by the state and county where the business is located.
Registering for a trademark is not required, but it often provides valuable protection of your business name. Just as you could not infringe on a trade name in your selection process, you would be offered the same protection against potential competitors.
If your business will operate in more than one state, you may want to apply for a federal trademark.
See your state Secretary of State office (for state) and the U.S. Patent and Trademark Office (for federal) trademark registration.
Insurance for your business will protect you from unforeseen dangers, and adequate insurance could make the difference between having to close your business after a disaster or continuing to operate. Don't short-change your business when it comes to insurance coverage.
Running a small business involves a significant investment. Business insurance protects your investment by minimizing financial risks associated with unexpected events such as the death of a partner, an injured employee, a lawsuit, or a natural disaster. Unless you are an employer, business insurance is generally not required by law, however, it is common practice to purchase enough insurance to cover your assets. If your business is an LLC or a corporation, your personal assets are protected from business liabilities; however, neither business structure is a substitute for liability insurance, which covers your business from losses.
Your state government determines insurance requirements for businesses. Most states require businesses with employees to pay for workers' compensation insurance, unemployment insurance, and state disability insurance. Your state may require insurance of specific business activities. For example, if you own a car or truck and use it for business purposes, you may be required to purchase commercial auto insurance. Finally, your financial lender or investors may require you to maintain life, business interruption, fire, flood or other types of insurance to protect their investments.
Types of Business Insurance
Insurance coverage is available for every conceivable risk your business might face. Cost and amount of coverage of policies vary among insurers. You should discuss your specific business risks and the types of insurance available with your insurance agent or broker. Your agency can advise you on the exact types of insurance you should consider purchasing.
General Liability Insurance
Business owners purchase general liability insurance to cover legal hassles due to accident, injuries and claims of negligence. These policies protect against payments as the result of bodily injury, property damage, medical expenses, libel, slander, the cost of defending lawsuits, and settlement bonds or judgments required during an appeal procedure.
Product Liability Insurance
Companies that manufacture, wholesale, distribute, and retail a product may be liable for its safety. Product liability insurance protects against financial loss as a result of a product defect that causes injury or bodily harm. The amount of insurance you should purchase depends on the products you sell or manufacture. A clothing store would have far less risk than a small appliance store, for example.
Professional Liability Insurance
Business owners providing services should consider having professional liability insurance (also known as errors and omissions insurance). This type of liability coverage protects your business against malpractice, errors, and negligence in provision of services to your customers. Depending on your profession, you may be required by your state government to carry such a policy. For example, physicians are required to purchase malpractice insurance as a condition of practicing in certain states.
Commercial Property Insurance
Property insurance covers everything related to the loss and damage of company property due to a wide variety of events such as fire, smoke, wind and hail storms, civil disobedience and vandalism. The definition of "property" is broad and includes lost income, business interruption, buildings, computers, company papers and money.
Property insurance policies come in two basic forms: (1) all-risk policies covering a wide range of incidents and perils except those noted in the policy; (2) peril-specific policies that cover losses from only those perils listed in the policy. Examples of peril-specific policies include fire, flood, crime and business interruption insurance. All-risk policies generally cover risks faced by the average small business, while peril-specific policies are usually purchased when there is high risk of peril in a certain area. Consult your insurance agent or broker about the type of business property insurance best suited for your small business.
Home-Based Business Insurance
Contrary to popular belief, homeowners' insurance policies do not generally cover home-based business losses. Depending on risks to your business, you may add riders to your homeowners' policy to cover normal business risks such as property damage. However, homeowners' policies only go so far in covering home-based businesses and you may need to purchase additional policies to cover other risks, such as general and professional liability.
Insurance Requirements for Employers
Businesses with employees are required by law to pay for certain types of insurance: workers' compensation insurance, unemployment insurance, and, depending on where the business is located, disability insurance.
Workers' Compensation Insurance
Businesses with employees are required to carry workers' compensation insurance coverage through a commercial carrier, on a self-insured basis, or through the state Workers' Compensation Insurance program. Visit your state's Workers' Compensation Office for more information on your state's program.
Unemployment Insurance Tax
Businesses with employees are required to pay unemployment insurance taxes under certain conditions. If your business is required to pay these taxes, you must register your business with your state's workforce agency.
Some states require employers to provide partial wage replacement insurance coverage to their eligible employees for non-work related sickness or injury. Currently, if your employees are located in any of the following states, you are required to purchase disability insurance:
- California: Employment Development Department
- Hawaii: Unemployment Insurance Division
- New Jersey: Department of Labor and Workforce Development
- New York: New York State Workers' Compensation Board
- Puerto Rico: Departamento del Trabajo y Recursos Humanos/Department of Labor and Human Resources
- Rhode Island: Rhode Island Department of Labor and Training
For many people, taxes are an unpleasant but necessary evil. This section helps you with certain aspects of the taxes you must collect from your customers, including strategies for tax record-keeping.
Getting a Tax Identification Number
You're familiar with paying personal taxes. As a small business owner, you'll need to pay business taxes as well. All businesses are required to pay federal, state, and in some cases, local taxes. Most businesses will need to register with the U.S. Internal Revenue Service (IRS) and state and local revenue agencies in order to receive a tax ID number or permit.
The following resources will help determine your tax registration requirements.
Employer Identification Number (EIN)
What is an EIN?
An EIN is also known as a federal tax identification number, and is used to identify a business entity. Employers with employees, business partnerships and corporations, and other types of organizations, must obtain an Employer Identification Number (EIN) from the U.S. Internal Revenue Service.
For a fee, TRIAD can prepare the application and obtain an EIN for you, however applying for an EIN is a free service offered by the Internal Revenue Service. You can apply with the IRS: Online, by Toll-Free Telephone Service, Fax or Mail.
Do you want to see another Business' EIN?
There are several ways to try to locate another business' EIN.
- If a company is public it may put its EIN on the first page of its 10-Ks, 20-Fs and other U.S. Securities and Exchange Commission (SEC) filings. You can locate these documents for free through the SEC's Electronic Data Gathering, Analysis, and Retrieval (EDGAR) database.
- Nonprofits often include the EIN on Form 990. GuideStar maintains a free, searchable database of these documents.
- Private companies sometimes list EINs on company websites. You can also search fee-based resources such as Westlaw (BUS-TRACK and/or FEIN-ALL) or Lexis (D&B/FEIN).
What if you misplace your EIN?
There are ways to retrieve your company's EIN if you lose the number.
- First, look for your confirmation notice issued by the IRS after you applied for your EIN.
- Ask the IRS to search for your EIN by contacting the Business & Specialty Tax Line. You will need to provide identifying information to verify that you are authorized to receive the EIN.
- Contact the IRS by phone at 1-800-829-4933.
State Tax Registration
Just as you must have a federal tax identification number, you will also need to obtain Tax IDs and permits from your state's revenue agency. Businesses that operate within the state are required to register for one or more tax-specific identification numbers, licenses or permits, including income tax withholding, sales and use tax (seller's permit), and unemployment insurance tax.
If you plan to sell products and you are required to collect sales taxes, you will likely need to obtain a Sales Tax Permit or Vendor's License from your state or local government (or both).
Business Structure and Tax Implications
When starting a business, you must decide what form of business entity to establish. Your form of business (for example, sole proprietorship, partnership, limited liability corporation) determines which income tax return form you have to file. The federal government levies four basic types of business taxes:
- Income tax
- Self-employment tax
- Taxes for employers
- Excise taxes
To learn more about these taxes, visit the U.S. Internal Revenue Service's (IRS) Guide to Business Taxes.
Federal Income Taxes
All businesses except partnerships must file an annual income tax return. Partnerships file an information return. Which form you use depends on how your business is organized.
The federal income tax is a pay-as-you-go tax. You must pay the tax as you earn or receive income during the year. An employee usually has income tax withheld from his or her pay. If you do not pay your tax through withholding, or do not pay enough tax that way, you might have to pay estimated tax. If you are not required to make estimated tax payments, you may pay any tax due when you file your return.
Self-employment tax (SE tax) is a social security and Medicare tax primarily for individuals who work for themselves. Your payments of SE tax contribute to your coverage under the social security system. Social security coverage provides you with retirement benefits, disability benefits, survivor benefits, and hospital insurance (Medicare) benefits.
You must pay SE tax and file Schedule SE (Form 1040) if either of the following applies.
- Your net earnings from self-employment were $400 or more.
- You had church employee income of $108.28 or more.
Employment taxes include the following.
- Social security and Medicare taxes
- Federal income tax withholding
- Federal unemployment (FUTA) tax
It is important to correctly classify an individual as an employee or an independent contractor. If you incorrectly classify an employee as an independent contractor, you can be held liable for employment taxes for that worker plus a penalty. An independent contractor is someone who is self-employed. Generally, you do not have to withhold or pay any taxes on payments to an independent contractor.
Federal Income, Social Security, and Medicare Taxes
You generally must withhold federal income tax from your employee's wages. Social security and Medicare taxes pay for benefits that workers and their families receive under the Federal Insurance Contributions Act (FICA). Social security tax pays for benefits under the old-age, survivors, and disability insurance part of FICA. Medicare tax pays for benefits under the hospital insurance part of FICA. You withhold part of these taxes from your employee's wages and you pay a matching amount yourself.
Federal Unemployment (FUTA) Tax
The federal unemployment tax is part of the federal and state program under the Federal Unemployment Tax Act (FUTA) that pays unemployment compensation to workers who lose their jobs. You report and pay FUTA tax separately from social security and Medicare taxes and withheld income tax. You pay FUTA tax only from your own funds. Employees do not pay this tax or have it withheld from their pay.
Have the employees you hire fill out Form I-9 and Form W-4. If your employees qualify for and want to receive advanced earned income credit payments, they must give you a completed Form W-5.
Form I-9. You must verify that each new employee is legally eligible to work in the United States. Both you and the employee must complete the U.S. Citizenship and Immigration Services (USCIS) Form I-9, Employment Eligibility Verification.
Form W-4. Each employee must fill out Form W-4, Employee's Withholding Allowance Certificate. You will use the filing status and withholding allowances shown on this form to figure the amount of income tax to withhold from your employee's wages.
Form W-5. An eligible employee who has a qualifying child is entitled to receive advance earned income credit (EIC) payments with his or her pay during the year. To get these payments, the employee must give you a properly completed Form W-5, Earned Income Credit Advance Payment Certificate. You are required to make advance EIC payments to employees who give you a completed and signed Form W-5.
Form W-2 Wage Reporting
After the calendar year is over, you must furnish copies of Form W-2, Wage and Tax Statement, to each employee to whom you paid wages during the year. You must also send copies to the Social Security Administration.
You may be required to pay excise taxes if you do any of the following.
- Manufacture or sell certain products.
- Operate certain kinds of businesses.
- Use various kinds of equipment, facilities, or products.
- Receive payment for certain services.
Learn About Your State and Local Tax Obligations
In addition to business taxes required by the federal government, you will have to pay some state and local taxes. Each state and locality has its own tax laws. The sections below provide access to key resources that will help you learn about your state tax obligations. Having knowledge of your state tax requirement can help you avoid problems and your business save money. The most common types of tax requirements for small business include:
In most states, business owners are required to register their business with a state tax agency and apply for certain tax permits. For example, in order to collect sales tax from customers, many states require businesses to apply for a state sales tax permit.
Nearly every state levies a business or corporate income tax. Your tax requirement depends on the legal structure of your business. For example, if your business is a Limited Liability Company (LLC), the LLC gets taxed separately from the owners, while sole proprietors report their personal and business income taxes using the same form. Consult the General Tax Information link under your state for specific requirements.
In addition to federal employment taxes, business owners with employees are also responsible for paying certain taxes required by the state. All states require payment of state workers' compensation insurance and unemployment insurance taxes. The following states/territories also require a business to pay for temporary disability insurance:
- New Jersey
- New York
- Rhode Island
- Puerto Rico
Tax Information for Specific Business Types
Have you considered that your business might have specific taxes for its industry? Some industries, in fact, do. The U.S. Internal Revenue Service (IRS) has published guides for the following businesses that have special tax considerations:
- Automotive Sales and Service Industries
- Construction Businesses
- Entertainment Industry
- Farmers and Agricultural Business Owners
- Farmers and Fishermen Estimated Tax - FAQs
- Gas Retailers
- Non-Profits and Charities
- Real Estate Businesses
- Retirement Plan Practitioners
- Tax Professionals
Setting Up a Payroll System
Whether you have one employee or 50, setting up a payroll system not only streamlines your ability to stay on top of your legal and regulatory responsibilities as an employer, but it can also save you time and help protect you from incurring costly Internal Revenue Service (IRS) penalties.
Here are 10 steps to help you set up a payroll system for your small business:
- Obtain an Employer Identification Number (EIN). Before hiring employees, you need to get an employment identification number (EIN) from the IRS. The EIN is often referred to as an Employer Tax ID or as Form SS-4. The EIN is necessary for reporting taxes and other documents to the IRS. In addition, the EIN is necessary when reporting information about your employees to state agencies. You can apply for an EIN online or contact the IRS directly.
- Check Whether You Need State/Local IDs. Some state/local governments require businesses to obtain ID numbers in order to process taxes.
- Independent Contractor or Employee - Know the Difference. Be clear on the distinction between an independent contractor and an employee. In legal terms, the line between the two is not always clear and it affects how you withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment taxes.
- Take Care of Employee Paperwork. New employees must fill out Federal Income Tax Withholding Form W-4. Your employee must complete the form and return it to you so that you can withhold the correct federal income tax from their pay.
- Decide on a Pay Period. You may already have a manual process for this, but setting up a pay period (whether monthly or bi-monthly) is sometimes determined by state law with most favoring bi-monthly payments. The IRS also requires that you withhold income tax for that time period even if your employee does not work the full period.
- Carefully Document Your Employee Compensation Terms. As you set up payroll, you'll also want to consider how you handle paid time off (not a legal requirement, but offered by most businesses), how you track employee hours, if and how you pay overtime, and other business variables. Don't forget that other employee compensation and business deductibles such as health plan premiums and retirement contributions will also need to be deducted from employee paychecks and paid to the appropriate organizations.
- Choosing a Payroll System. Payroll administration requires an acute attention to detail and accuracy, so it's worth doing some research to understand your options. Start by asking fellow business owners which method they use and if they have any tips for setting up and administering payroll. Typically, your options for managing payroll include in-house or outsourced options. However, regardless of the option you choose, you -- as the employer -- are responsible for reporting and paying of all payroll taxes.
- Running Payroll. Once you have all your forms and information collated, you can start running payroll. Depending on which payroll system you choose, you'll either enter it yourself or give the information to your accountant.
- Get Record Keeping Savvy. Federal and some state laws require that employers keep certain records for specified periods of time. For example, W-4 forms (on which employees indicate their tax withholding status) must be kept on file for all active employees and for three years after an employee is terminated. You also need to keep W-2s, copies of filed tax forms, and dates and amounts of all tax deposits.
- Report Payroll Taxes. There are several payroll tax reports that you are required to submit to the appropriate authorities on either a quarterly or annual basis. If you are in any way confused about your obligations, take a look at the IRS's Employer's Tax Guide, which provides some very clear guidance on all federal tax filing requirements. Visit your state tax agency for specific tax filing requirements for employers.
- Managing a Business
After you have successfully launched your business, you have the ongoing challenge of managing it, while at the same time adhering to laws and regulations that govern your industry.
Doing Business in Another State? It Might Be Time to Register
When a business entity wants to operate in another state, it generally must obtain a certificate of authority to do business from that state's Secretary of State. A certificate of authority usually costs about $150. It's important to determine if registering to do business within a jurisdiction is necessary. It's not a decision to make lightly because it will likely trigger inquiries by the state's tax agency as to whether the corporation should be subject to tax there. On the other hand, doing business in a state without registering can result in penalties or corrective action by the jurisdiction. Many states bar unregistered business entities from maintaining a lawsuit in their courts until the business entity registers to do business and pays all outstanding taxes. In New York, for example, the attorney general has the authority to restrain an unregistered business entity from transacting business within its borders. What constitutes doing business in a state? Unfortunately, the answer varies from state to state and is sometimes unclear. Most states maintain a list of safe harbor activities that do NOT constitute doing business. A type of activity that is often included on these lists is maintaining a bank account within a state's borders. Many state statutes don't specifically define what they consider to be doing business in their jurisdiction. It usually depends on the facts of each case and is best answered by reviewing the jurisdiction's case law. Opening a store in a state would constitute doing business in any jurisdiction. But it's harder to find definitive answers to questions such as whether hiring an employee who telecommutes from a state would be considered to be transacting business there. Because of the unclear nature of these determinations, it's usually a good idea to consult a lawyer who is familiar with this area.
Certificate of Good Standing
A certificate of good standing is a state government-issued document that declares a business is in existence or authorized to transact business in that state. This certificate acts as official evidence that the company is in compliance with all state-required laws and regulations.
A certificate of good standing generally establishes that a business has met specific criteria including:
- The business is registered, incorporated, or otherwise authorized to conduct business in that state.
- The business has paid all costs and fees owed to the state.
- The business has correctly filed and paid all applicable taxes.
- The business has filed all applicable documents with the state.
Businesses obtain certificates of good standing for many reasons - as a requirement to complete certain business operations, as a way of proving to customers and other businesses that all regulations have been met, and as evidence that a previously delinquent company has become compliant again.
How to Change Your Business Name
Changing a business name is a costly and disruptive process, especially for established businesses. You can't just start calling it something different. Print and online marketing materials and bank accounts will have to change, websites adjusted, domain names registered, email addresses updated, and so on.
This is all assuming your chosen new name is even available.
So before you take the leap, familiarize yourself with these steps. Most of them are required by law, but others are simply good business practice.
Trademark infringement can carry a high cost for your business. Before you pick a name, use the U.S. Patent and Trademark Office's trademark search tool to see if a similar name, or variations of it, is trademarked.
Check Available Domain Names
Before you do anything to change your business name, be sure you can claim it online. You can do this with a simple web search, but you should also check whether a complementary domain name (or web address) is available. You can use the WHOIS database of domain names. If the name you want is available, claim it right away. This guide explains how to register a domain name.
Notify Your Secretary of State
All business types, except sole proprietors, should first notify their Secretary of State to change names in their articles of incorporation and applications for authority to transact business. States will have online forms for this, and they usually charge a small fee. During this process, you'll find out whether your new name is already in use in your state by another entity. You can do this via online state databases of registered business names and fictitious names.
File a New 'Doing Business As' Name
If you previously filed a 'Doing Business As' Name, or DBA, with your local government, you'll need to repeat this process with your new name.
Revise Business Licenses and Permits
Check with your state, county or city to determine the process involved in updating or obtaining new business licenses and permits. There is typically a fee for this process.
Let the Tax Authorities Know
The IRS and your state and local revenue agencies will need to be notified of any change of business name.
You May Need a New EIN
Generally, sole proprietors, corporations, and partnerships don't need a new Employer Identification Number (EIN) if they change their business name. However, there are certain situations where these entities may need to obtain a new EIN, like if a partnership incorporates or one partner takes over as a sole proprietor. Likewise, if a sole proprietor incorporates or takes on a partnership, a new EIN is needed. The IRS provides an easy-to-read guide - Do You Need a New EIN - that explains under what circumstances a business needs to obtain a new EIN.
Update Business Documents, Contracts and Agreements
In addition to updating your marketing material, developing a plan to notify customers and building your new brand, you should also revisit and update business loan paperwork, lease documents, bank accounts, etc., that will all need to reflect your name change.
Changing a Business Structure
Thinking of changing your business structure?
There are many reasons why businesses change the way their business is legally structured - gaining protection against personal liability, seeking a break from excessive bookkeeping, dissolving a partnership, and more. Before making any changes to your corporate structure, talk to a lawyer or tax expert about the tax implications of any changes.
Regardless of your current or future structure, these steps should be followed as you change your structure:
- Notify State and Local Agencies - Changes in business structure are governed by state law, so check your state's website for information the forms you need to complete.
- Register with the IRS - You may need to apply for a new Employer Identification Number (EIN).
- Reapply for Business Licenses - They may be required by some states if your structure changes.
- Closing a Business
File Dissolution Documents
When a business entity is closing its operation, it is essential that the business entity take the necessary steps to remove the entity from the tax and public records to avoid future business taxes, penalties, and interest.
As a general rule, domestic corporations will dissolve, limited liability companies and limited partnerships will cancel, and foreign business entities will withdraw. If your business is operating as a general partnership or sole proprietorship, depending on the jurisdiction, you may or may not be required to formally dissolve your business or cancel your assumed name.
In many cases, in order to file a dissolution, cancelation or withdrawal, the entity must be in good standing. In addition, a Tax Clearance Certificate may be required for both domestic and foreign entities.
You should follow the guidelines and procedures set forth in your operating or partnership agreement, bylaws or other governing document and applicable State laws. The procedure and vote should be documented in writing.
Cancel registrations, permits, licenses, and business names.
To protect your finances and reputation, ensure that you cancel all licenses and permits that you will no longer need. If you have registered under an assumed or trade name other than your own name, then you can cancel that business name registration with your local government.
Comply with employment and labor laws
Ensure that final paychecks are paid to employees by their last day of work, or soon after, according to your state laws. Your state may also require you to pay employees for their unused leave.
The Worker Adjustment and Retraining Notification Act (WARN) protects workers, their families, and communities by requiring employers with 100 or more employees to provide at least 60 calendar days advance written notice of the closing. Depending on location, small businesses may need to comply with worker protection rules as well. Many states have enacted legislation similar to WARN requiring businesses with less than 100 employees to comply.
Resolve financial obligations
- Taxes - When you file income tax returns for the year in which your business closes, check the box that indicates the document is a FINAL return. Many state revenue agencies require additional filings for sales tax. If the business has employees, final employment tax returns must be filed, in addition to making final federal tax deposits of these taxes.
- Employees - If you have employees, you must obligate your payroll tax responsibilities or you may risk personal liability. Inform your federal and state tax agencies that your business is closing and that you will cease to file unemployment returns and an employer's quarterly tax form.
- Business debts - Notify all lenders and creditors of your plans to dissolve the business and settle remaining debt. If you are unable to pay your debts, you may want to consider filing for bankruptcy. Contact the business associates to whom you owe payment, or who owe payment to you. It's a good idea to discuss with your accountant, attorney, and insurers to ensure that you have everything accounted for.
- Close Accounts - Finally, don't forget to close out your business bank account and cancel your business credit cards.
You may be legally required to maintain records, particularly tax and employment records, even after your business has closed. A prudent guideline for keeping records ranges anywhere from 3 to 7 years.
Canceling an EIN
Once an EIN has been assigned to a business entity, it becomes the permanent Federal taxpayer identification number for that entity. Regardless of whether the EIN is ever used to file Federal tax returns, the EIN is never reused or reassigned to another business entity.
The IRS cannot cancel your EIN. However, if you receive an EIN but later determine you do not need the number (the new business never started up, for example), the IRS can close your business account. The EIN will still belong to the business entity and can be used at a later date, should the need arise.
To close your business account, write to the IRS at: Internal Revenue Service, Cincinnati, Ohio 45999 and state the reason you wish to close your account. If you have a copy of the EIN Assignment Notice that was issued when your EIN was assigned, include that when you write. Otherwise, be sure to include the complete legal name of the entity, the EIN, and the business address.
- Business License & Permits
Most city, county and state governments, and in some instances, the federal government, require business owners to obtain business licenses. A local business license is a county or city license that grants you, as the business owner, the privilege of legally operating a business within a certain city and/or county jurisdiction.
State business licenses are issued to businesses that provide products or services regulated by state law. For example, doctors, lawyers, hairdressers, realtors, auto mechanics, private investigators, building contractors and others who must meet state licensing requirements. State licenses are also required of businesses that must meet certain state standards or codes, such as restaurants and other establishments that serve alcohol. Each state has different agencies regulating these types of businesses.
Federal licensing is required if your business is involved in activities supervised and regulated by a federal agency. Here is a brief list of the licenses and permits that you may need for your business:
- Alcohol Beverages
- Firearms, Ammunition and Explosives
- Fish and Wildlife
- Commercial Fisheries
- Maritime Transportation
- Nuclear Energy
- Radio and Television Broadcasting
- Transportation and Logistics
Many businesses are also required to obtain permits. Generally, permits regulate the safety, structure, and appearance of the community as defined by local and/or state laws, typically referred to as "ordinances." Once your jurisdiction determines that your business is in compliance with such ordinances, you will be issued the relevant permit(s) enabling you to legally operate your business. Local permit requirements vary by jurisdiction. Failure to have the proper permits may prevent your business from opening and could result in fines or even in being shut down. Usually it is best to first research the kinds of permits your business will need and find out what the regulating agency requires. This helps ensure that you are in compliance with regulations and could help you avoid costly delays and expenses related to retooling your business after the fact.
State Tax Number, Sales Tax (Seller's Permit)
If you have employees in addition to an EIN, you will need a State Tax Identification Number. If you are a retail business or wholesaler of tangible, taxable items, you will need a sales tax license or seller's permit. This allows you to charge sales tax to customers on items purchased.
- Uniform Commercial Code
LEARN MORE ABOUT UCC
The Uniform Commercial Code (UCC) is a comprehensive set of laws governing commercial transactions between U.S. states and territories. These transactions include borrowing money, leases, contracts, and the sale of goods.
Disclaimer: This discussion does not constitute legal advice. It is strongly recommended that you review all applicable state statutes and, in addition, retain legal counsel to assist you.
UCC Filings and Small Businesses
The most important UCC regulation affecting small businesses is the UCC-1 form, also known as a Financial Statement. When a lender secures interest in a borrower's personal property used as collateral, the lender files form UCC-1 with the state's Secretary of State Office (or equivalent state records office). Lenders can also file UCC-1 forms in multiple states if a borrower has business locations in multiple states, or moves from one state to another. "Personal property" means non-real property used in operating a business, such as equipment, furniture and inventory.
The UCC-1 form serves as a public notice of a lender's interest in the assets for a business. All information on a UCC-1 form is public information. Before a lender makes a secured loan, it does a lien search in the state's UCC filings database to make sure no other UCC-1 form has been filed against the borrower's collateral. If more than one lender files a UCC-1 against the same collateral, the one filed first has a priority claim should the borrower default or go bankrupt.
Lenders typically require a first lien security interest on all business assets. This is known as a blanket lien. The lender files a UCC-1 on any equipment or machinery. For example, if you lease some equipment, the leasing company may do one of two things: (1) file its own UCC-1 form with the understanding that it is already a blanket lien or (2) establish a subordination agreement with the lender that essentially allows the leasing company to recover its assets. If a subordination agreement is not made between the lender and the leasing company, the lender has a right to cover the leased assets until the blanket lien is satisfied.
Once a loan is paid off, the borrower should ask the lender to terminate the UCC-1 filing. Many lenders will not proactively terminate these filings.
Remember that laws vary from state to state, so you should consult an attorney on matters concerning UCC filings, liens and security agreements.
All 50 U.S. states have enacted some version of the UCC. Article 9 of the UCC covers the creation of security interests in goods. The security interest created is something like the old chattel mortgage or conditional sales contract.
To create a valid security interest under Article 9, the creditor or supplier of the goods (usually inventory, equipment or accounts receivable) must:
- Extend credit
- Receive a security agreement signed by the debtor or buyer of the goods
- Perfect the security agreement by filing a Financing Statement, wherever specified by the UCC, usually with a state agency in the state where the debtor is located, such as the Department of Licensing in that state. The Financing Statement must be signed by both debtor and creditor, and filed, in order to obtain a priority over other creditors. This is important, particularly in cases of bankruptcy, and where there are other secured parties.
Although there is no objection to taking a security interest after the credit has been extended, it is easier for a creditor to obtain priority by taking and filing the interest before the credit is granted. Often the debtor will decline to sign the necessary documents after the credit is fully extended, and bankruptcy preference issues could arise that would nullify the security.
Priority is important when it comes to foreclosure or realization on the security because, in the case of multiple filings, the courts usually follow the "first in time, first in right" rule. Priority is unimportant if another supplier of goods has received a purchase money security interest (PMSI) in the specific goods sold, given appropriate notices, and filed within a specified time of the debtor's actual receipt of the goods. The holder of a validly perfected PMSI has priority, no matter when he files.
Since creditors can search the records in the office of the agency designated to receive and file the Financing Statement in order to see who else may have perfected their security interests, it is important to file under the proper legal name of the debtor, and in the proper jurisdiction where the debtor maintains his principal place of business. Failure to file or filing in the wrong jurisdiction under the correct name of the debtor can result in the loss of the security.
As to be expected, there are always exceptions to what kind of property can be the subject of an Article 9 filing. The best example is where the property is titled motor vehicles. These can be perfected only by means of the title certificate, which probably involves filing with a different state agency than the one for filing Financing Statements.
Foreclosure or realization upon the security taken is another subject, not covered here. A Financing Statement expires five (5) years after filing unless renewed. Consulting with your lawyer is certainly advisable and probably necessary in the use of Article 9.
If you are in a business that provides goods or services on credit, laws protect you if you have difficulty securing payment.
- Article 9 of the Uniform Commercial Code (UCC) provides a means for a supplier of goods on credit to secure payment.
- Materialmen's liens provide a means for a contractor, sub-contractor, supplier, laborer, or professional such as an architect or engineer on a construction project to secure payment of an unpaid account.
Each law has different means of foreclosure and each one is independent of the other, although a supplier of material on a construction project could use Article 9 of the UCC in addition to a materialmen's lien. A problem could arise, however, in the use of Article 9 when the materials are incorporated into the construction project and cannot be readily identified or removed without damage to the project.
Materialmen's and Professionals' Liens
If you are a supplier of goods that will be attached to or incorporated in real estate or a professional whose design and consultation have been used in the site preparation or construction of the project, you can perfect a security interest therein by filing a Financing Statement in the jurisdiction where the real property is located. The difficulty is in the foreclosure process and how to reclaim the goods that have been incorporated into the project. For this reason, most suppliers of goods that are to become attached to the real estate and professionals have better collection results through the use of the materialmen's or professionals' lien.
These procedures are also governed by the laws of the state in which the private work is to be done. Such laws vary throughout the United States but almost all the states have the same generic approach. Public state and federal projects require different procedures.
Prior to filing a lien there may be a requirement for some parties to give a preliminary notice to the owner in order to obtain a priority, and failure to do so may affect the quality of the lien.
The lien itself must be filed within 90 days of when the lien claimant's last work was performed or materials supplied. It must be filed with the officer of the jurisdiction where the work has been done and with the individuals who record liens, like mortgages against real estate. Some states require a notice that the lien has been filed to be given to the owner within a certain time after filing. An action to foreclose must be instituted, by service and filing with the Clerk of the Court, within a specified time after the filing of the lien.
Priority of liens is important because there is often not enough property to pay all claims. Frequently, there is a mortgage or deed of trust that has priority and its foreclosure may eliminate your interest. There is hardly any way you can avoid recourse to your attorney if foreclosure is required. Failure of a contractor or sub-contractor to register with the appropriate agency where contractor registration, bonding and insurance are required can also result in the loss of a lien.
Public state projects require a preliminary notice to the general contractor. The potential claim would be made against the bond of the general contractor, not a lien on the property of the owner. Federal projects are protected by the Miller Act as amended by Congress in 1999. The procedures to follow are similar to those of public state projects.
- Apostille / Legalization
Public documents, such as birth certificates, judgments, patents or notarial attestations of signatures, frequently need to be used abroad. However, before a public document can be used in a country other than the one that issued it, its origin must often be authenticated. The traditional method for authenticating public documents to be used abroad is called legalization and consists of a chain of individual authentications of the document. This process involves officials of the country where the document was issued as well as the foreign Embassy or Consulate of the country where the document is to be used.
Because of the number of authorities involved, the legalization process is frequently slow, cumbersome and costly. A large number of countries all over the world have joined a treaty that greatly simplifies the authentication of public documents to be used abroad. This treaty is called the Hague Convention of 5 October 1961 Abolishing the Requirements of Legalization for Foreign Public Documents. Where it applies, the treaty reduces the authentication process to a single formality: the issuance of an authentication certificate by an authority designated by the country where the public document was issued. This certificate is called an Apostille.
An "apostille" is a certificate issued by a designated authority in a country that is party to the Hague Convention treaty. An Apostille certificate authenticates the origin of a public document. Apostilles can only be issued for documents issued in one country party to the Hague Convention treaty and that are to be used in another country which is also party to the Hague Convention treaty.
- Antigua and Barbuda
- Bosnia and Herzegovina
- Brunei Darussalam
- Cape Verde
- China, People's Republic of (Hong Kong & Macao Only)
- Cook Islands
- Costa Rica
- Czech Republic
- Dominican Republic
- El Salvador
- Korea, Republic of
- Marshall Islands
- Moldova, Republic of
- New Zealand
- Russian Federation
- Saint Kitts and Nevis
- Saint Lucia
- Saint Vincent and the Grenadines
- San Marino
- Sao Tome and Principe
- South Africa
- The former Yugoslav Republic of Macedonia
- Trinidad and Tobago
- United Kingdom of Great Britain and Northern Ireland
* Last Revised December 14, 2011
For documents that are to be used in a country that is not party to the Hague Convention treaty, the documents must be legalized or Certified via their embassy or consular office. See LEGALIZATION below for more information.
For the purposes of the Hague Convention the following are public documents:
- documents issued by a court or tribunal;
- administrative documents such as civil registry records or office of vital records regarding birth, death, marriage, etc.;
- notarial acts (notarized documents); and
- official certificates which are placed on documents signed by persons in their private capacity, such as official certificates recording the registration of a document or the fact that it was in existence on a certain date, and official and notarial authentications of signatures.
Apostilles certify only the authenticity of the signature of the official who signed the document, the capacity in which that official acts, and where appropriate, the identity of the seal or stamp which the document bears. An apostille does not imply that the contents of the document are correct.
You will need an Apostille if all of the following apply:
- the country where the document was issued is party to the Hague Convention treaty; and
- the country where the document is to be used is party to the Hague Convention treaty; and
- the law of the country where the document was issued considers it to be a public document; and
- the country in which the document is to be used requires an Apostille in order to recognize it as a foreign public document
An Apostille must be placed directly on the public document itself or on a separate attached page (called an allonge). All apostilles and allonges should be permanently affixed to the public document by the state issuing authority and not by the customer. Under no circumstances should customers detach the apostille to photocopy the documents.
If the country where the document will be used is not a party to the Hague Convention treaty, you will need Embassy (Consular) Legalization. Embassy (Consular) Legalization of official documents is a procedure of confirmation of the validity of originals of official documents or certification of authenticity of signatures of the officials, authorized to certify the signatures on documents, and also the validity of prints of stamps, seals by which the document is fastened. The documents for non Hague Convention Countries are subjected to State, Federal and Embassy levels. The Department of State, Authentications Office is responsible for signing and issuing certificates under the Seal of the U.S. Department of State providing authentication services on documents that will be used overseas. Then they are certified in the Embassy or Consulate of that country for which they will be legalized.
- Registered Agent Services
Registered Agent Services / Statutory Representation
A registered agent accepts "service of process" and important legal and tax documents on behalf of a business and promptly forwards all legal documents and official state correspondence. In most states, appointing a registered agent is required by law.
There are certain requirements a company's registered agent must meet including maintaining a business office in the State which is generally open, or if an individual, being generally present at sufficiently frequent times to accept service of process and otherwise perform the functions of a registered agent.
TRIAD provides registered agent and/or registered office services in the state where your entity is incorporated or formed as well as the states in which it is qualified or registered to conduct business.
As your registered agent, TRIAD will:
- Remind you of upcoming deadlines, such as the due date for the annual report required in the state where your entity is incorporated or formed as well as the states in which it is qualified or registered to conduct business.
- Provide software to manage important corporate records and documents.
- Provide secure, online access to important documents.
- Monitor your company's status in the state(s) where it is registered.
Representation by Private Agreement
When your transaction calls for special representation to ensure proper notice of legal process, TRIAD can provide the service for you. Whether named in a loan agreement, shareholder agreement, lease or other legal contract, TRIAD can represent your interests and ensure all proper legal notification is received and forwarded according to authorized instructions.
Specialty representation applies to registered agent services required by specific federal or state statute or by private agreement. TRIAD can handle any specialty representation needs you may have.
Representation by Statute
Certain federal and state statutes require the designation of a registered agent. TRIAD can provide registered agent services under the following selected statutes as well as others.
- Air Pollution Control
- Broker-Dealer Registration
- Civil Aeronautics
- Employee Identification
- Engineering Registration
- Florida-Alien Corporation
- Franchise Uniform Offering
- Freight Forwarders
- Georgia Treated Lumber
- Hazardous Waste
- Sales Tax License Registration
- Securities Act Registration
- Water Carriers
- Worker's Compensation
- Liquor Control
- Maine Special Representation
- Maryland Interstate Registration
- Massachusetts Business Trust
- Motor Carriers
- Pesticide, Fungicide and Rodenticide
- Poison Control
- Public Service Commission
- Public Utilities Commission
- Independent Director Services
An Independent Director/Manager is an appointed member of the Board of Directors who is to protect against a voluntary bankruptcy petition being filed by the shareholders, members, partners, directors or managers (as applicable) of an otherwise solvent Special Purpose Entity.
Other names for Independent Director include Independent Manager, Independent Member, Springing Member/Manager, and Special Member.
The following is a generally accepted definition of "independent director":
A duly appointed member of the board of directors of the relevant entity who shall not have been, at the time of such appointment or at any time while serving as a director or manager of the relevant entity and may not have been at any time in the preceding five years, any of the following:
- A direct or indirect legal or beneficial owner in such entity or any of its affiliates;
- A creditor, supplier, employee, officer, director, family member, manager, or contractor of such entity or any of its affiliates; or
- A person who controls (whether directly, indirectly, or otherwise) such entity or any of its affiliates, or any creditor, supplier, employee, officer, director, manager, or contractor of such entity or its affiliates.
The independent director will need to execute certain organizational documents of the relevant entity and enter into a contract with any third party provider engaged to provide the services of an independent director.
- International Services
Through our international affiliate, TRIAD is able to provide company profile reports, good standing certificates, certified copies, tax certificates and status searches for international jurisdictions where such documents are available.
Company Profile Reports
A Company Profile Report provides a wide perspective and expert analysis of a company's financial condition, payment reliability, and commercial reputation, concluding with an unbiased opinion of the associated business risks. The Company Profile Reports include information of public record concerning registered office, date of formation, and directors (if available). All information is contained within the following standard sections:
- Identification of Legal Structure & History of Operations
- Summary (including credit opinion)
- Bankers Facilities
- Management of Finances
- Payment History
Good Standing Certificates
A Certificate of Good Standing is a certificate issued by a Company's Registry official as evidence that a corporation is in existence, is active and has complied with all tax requirements, or that it has filed annual reports or has not yet filed articles of dissolution. The certificate may indicate one or all of these items. A good standing is generally required by all jurisdictions when qualifying or forming a foreign entity.
In many countries, particularly in Europe, certificates of good standing are not available. A Certified Extract of the Trade Register is the best substitute for the good standing certificate. The Trade Register, located generally at the city level and not at the national level, will issue an excerpt that gives the particulars on a given company (e.g. name, formation date, name changes, directors and information concerning filing of annual reports, etc). In these countries, you will need to provide the local street address of the company in order for TRIAD to obtain this information.
Most international jurisdictions have Companies Registries that hold corporate documents. The corporate statute in the jurisdiction determines the public availability of the documents on file. Corporate documents that can be retrieved can also be certified by the jurisdiction.
Jurisdictions outside the United States rarely issue tax certificates. Contact us to find out if you can obtain a Tax Certificate indicating whether or not taxes have been paid for a particular jurisdiction.
A Status search is a search on a company that, depending on the jurisdiction, sets forth the address of the company, registered agent name and address, directors and incorporation/qualification date.
Formation of an entity in a jurisdiction with which you are unfamiliar is always a time-consuming and onerous task. Our international affiliate has worked with local Counsel in many jurisdictions for years and has the experience needed to assist you in forming a company in any country in the world. From English Common Law Countries and Offshore Tax Havens to Civil Code Countries, our international affiliate specializes in getting your company formed as quickly as possible.
The concept of a statutory registered agent/registered office is usually limited to countries which share the English language and the English Common Law traditions. In such jurisdictions, we can provide registered agent/registered office services. In countries that do not require a registered agent, you may have need for an agent in cases of Special Agreements, such as Loan Agreements. In most circumstances we have an "in-country" agent that fits the bill.
A Company Secretary must be appointed in certain jurisdictions. This office may be held by an individual or corporation. Through our International Affiliate, we can provide Corporate Secretary services.
- Launching Your Website
A critical component of starting any business is developing an online presence. It may sound like a simple concept, but it can be an overwhelming task that frustrates many business owners. Below is a brief overview of the steps necessary to establish a website for your company.
1. Register Your Domain Name
Registering your business through the Secretary of State's office does not ensure that your business name is available as a domain name. To check availability, you can do a quick search online initially. Note, that though a dot com name is a highly recognizable TLD (top level domain), there are other alternatives such as .org, .net, .co, .co.uk, .us, giving you more options, in case another company has a domain name you may be interested in. See our discussion on Trademarks to ensure you don't infringe on another company's name.
When you're ready to register your domain name, you'll find many companies provide this service online and they typically charge a yearly or multi-year fee to secure the name. Costs may vary, so we recommend shopping around before entering into an agreement.
2. Secure a Web Host
Once you have your domain name, you'll need to secure a web host - this enables you to store all website files and data tied to your website on a server. An effective host also provides bandwidth for the transfer of information to and from your site, e-mail addresses tied to your site and technical support 24/7 - hugely important to ensure a seamless experience for visitors to your site.
3. Develop the Architecture and Site Design
Once the "back-end" of your website is secure, you're ready to design the site. Consider the amount of information you need to highlight. This will dictate the organization or architecture of the site - how many pages will be needed and what type of supporting visuals and content will be included. You may also want to enable transactions on your site, so users can make purchases, post comments or contact you directly. You can work with any number of design agencies to collaborate on the development of your site, but this can be costly. An affordable way to streamline the process is to select a pre-made website template. There is a multitude of template options available to allow you to select a good fit for your company's site. Companies offering templates typically provide design customization to ensure your company's brand identity is captured appropriately.4. Create Content
Once the site architecture has been established, you'll need to develop content for the site. It's critical to develop copy that communicates clear but brief information appropriate for the intended audience. Additionally, you'll need to include supporting visuals, such as photos, video and/or graphics, to ensure each web page is visually interesting and engaging.
There are a multitude of companies and agencies that provide back-end and front-end web support, so it's up to you to research the right match for your needs. For your convenience, we recommend the following options to consider, based on our experience:
- For domain names, secure web hosting and over 30,000 pre-made templates, Ozzu, launched in 2003, is an all-in-one web resource. With over 46,000 members served nation-wide, they offer exceptional customer support, fast inquiry times and reasonable pricing.
- For copywriting services, Mary Anne Melear provides compelling content to effectively communicate the key benefits of businesses in a range of industries. A strategic writer since 2004, Mary Anne understands the importance of understanding your audience to effectively connect with your website visitors.