|How Do I Start My Own Small Business?||
Last updated: July 2009
This guide will help you start your own business by:Answering questions about what is needed in starting a small business in the "Common Questions" sectionExplaining your options in structuring a company in the "Common Questions" sectionFor more information about starting a small business see the "Related Articles" sectionClick on words that appear like 'this' to learn what these words mean.Northwestern University School of Law's Entrepreneurship Law Center was instrumental in the creation of this guide. To learn more about the Entrepreneurship Law Center and its services, visit the Center's homepage. What Type of Business Should I Start? If you are the only owner of the business, you are a "sole proprietor". There is no government filing or approval required to operate your business in this way, and millions of Americans have done so. Just report the profits and losses from the business in your tax return on IRS Form 1040 on a separate sheet called Schedule C. And pay your federal and state income taxes if the business earns a profit.If you have a business partner, the business is a "partnership". That means that you and your partner share responsibility for running the business and share the profits and losses. Exactly how you want to do this should be spelled out in a partnership agreement. See "Do I Need a Written Contract with my Business Partner"?Many business owners decide to incorporate their businesses. This is not a legal requirement. But it may be a good idea to form a corporation because it helps protect you personally from debts and liabilities connected with the business. It is perfectly acceptable to incorporate even if there is only one owner (shareholder).How Do I Incorporate My Business? To incorporate you must fill out and file Articles of Incorporation with the Illinois Secretary of State. The form and easy to follow instructions can be downloaded from http://www.ilsos.gov/corparticles/. The filing fee is $181.25. Each year after the first, the corporation will have to file an Annual Report and pay a filing fee of $25 or more, depending on how much money it is making.Subchapter S of the Internal Revenue Code allows corporations to receive favorable tax treatment. The requirements of Subchapter S are complicated, and there are disadvantages. Therefore, it is best to ask a professional if it is a good idea for the company to become an "S" corporation.A limited liability company (LLC) is another possibility. It is more expensive to set up and maintain than a corporation, but it has many advantages and could result in lower federal and state income taxes. To form an LLC, you must fill out and file Articles of Organization with the Secretary of State. The first year filing fee is $500 and the Annual Report fee is $250. See http://ilsos.gov for forms and instructions. These are not easy to understand, but there are lawyers, CPA's, commercial filing services and small business centers that can help you.How Do I Choose A Good Company Name? Regardless of what kind of business is involved you will need a company name. Many small business owners use their own names like "John Doe Messenger Service". That is perfectly alright but what if you want to use a name with more marketing appeal like "Flash Messenger Service"?First check to be sure that no one else in your area of operations and industry is already using a similar name. On the example given, there would be a problem if some one was already operating "Flash Bicycle Delivery" because customers could be confused. You can do your research by checking telephone directories in your area, and by searching the on-line data base maintained by the Illinois Secretary of State. Or you can contact the Secretary of State by phone at (800)-252-8980. The Secretary of State will not allow you to form a corporation or LLC if the name you wish to use is the same as the name of an existing corporation or LLC.If you plan to do business on a nationwide basis, you should also check the trademark data base maintained by the U.S. Patent and Trademark Office for any trademark that is confusingly similar.What Should I Do If Another Business Has the Same Name? When you find that someone else is using a confusingly similar name, you should select another to avoid being sued. If you are looking for a very simple name that describes the business (like "Flash Messenger Service"), you may have to try several times to find a name that no one else is using. If the business is being operated as a sole proprietorship, with only one owner, or as a partnership, the company name must be recorded with the Recorder of Deeds in the county where the business is located. This will cost about $100. If the business is a corporation or LLC, the papers on file with the Secretary of State take the place of recording the name.Do I Need A License for My Business? Almost every business is required to obtain some kind of license or permit. Occasionally, the license is obtained from the State of Illinois or the county. More often it is required by the municipality in which the business is located. Probably the best way to research this is to check with your city or village clerk.If the business is a retail store, a web-based service, a consulting firm or other low risk operation, it is relatively easy to obtain the required license. However, if it is a restaurant and lounge, day care center, transportation for senior citizens, or manufacturing operation, the premises or equipment may have to be inspected before the license is issued. Many new business owners are frustrated because they are already paying rent on the space but cannot open because they do not have their licenses. Keep this in mind in planning.Also keep in mind that most communities require that home-based businesses be licensed. Regulations regarding hours of operation and visitors to the home may present problems for the business owner. Do I Need an ID Number for My Business? Both the federal government and the State of Illinois issue ID numbers.If the business is a partnership, corporation or LLC, or if it is a sole proprietorship with employees from whom taxes are withheld, it must obtain an Employers Identification Number (EIN). This is done by filing IRS Form SS-4 or by calling the IRS at (800)-829-4933. If you call, it is best to have a blank copy of Form SS-4 on the table in front of you. The form can be down-loaded from http://www.irs.gov/ .Likewise the company must obtain an Illinois Business Tax number from the Illinois Department of Revenue. See http://tax.illinois.gov/Businesses/index.htm for instructions and registration form. When you register the business, inquire whether the company is eligible for a resale number that allows it to purchase goods and services for resale without paying sales and use taxes.Should I Open a Bank Account for My Business? It is important that a business have a separate bank account even if the company is a small operation with a single owner. The account keeps business revenues separate from the owner's money. The monthly statements and cancelled checks are like a free accounting service, at least during the first year when there are only a limited amount of financial transactions.The new business owner should deposit enough money in the account to cover anticipated early expenses like business cards, stationary, web site design, product prototypes and rent. This can be in the form of a "capital contribution" which cannot be paid back to the owner without paying income taxes on the payment or a "loan" which the owner can recover without paying taxes on it. The Internal Revenue Service has rules about what constitutes a capital investment and what constitutes a loan. The owner should seek professional advice on this question.Many businesses fail because the owner is unwilling or unable to invest enough money in the company.Banks are happy to have small business customers. Check to see if the bank you prefer has a minimum balance requirement or a charge for each check written.What Do I Need in Order to Open a Bank Account? Since 9/11 banks have been requiring considerable paperwork before opening an account. This includes personal ID for the owner and copies of all organizational documents if the customer is a corporation, LLC or partnership. The bank will also ask for the company's Employer Identification Number.The account is opened by making a deposit and signing a "bank resolution". This is the official document in which the company agrees to comply with banking requirements and which identifies the individual officers or employees who are authorized to sign checks.Do I Need to Tell My Previous Employer about My New Business? If you are currently employed or have just left a job, take a few minutes to think about how your employer will react when it learns of your new venture. If you are in an entirely different industry, there should be no serious problem. On the other hand, if you intend to do business in the same industry, or to call upon the same customers as you did before, the employer may have the right to stop you from doing so.The key questions you should ask yourself are these:1. Did I sign something that prohibited me from moonlighting or working for a competitor?2. Am I using any confidential information that I learned at my old job?3. Have I taken with me any drawings, customer lists, price sheets or other materials?4. Did I use my employer's laboratory equipment or facilities to establish my company?5. Is a fellow employee joining me in the new venture?If the answer to any of these questions is "yes", you better talk to a lawyer. It is difficult enough to start a new business without having to worry about a legal claim from a prior employer.
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