The entity decision is the architecture. Standing up the business is the construction — a sequence of mechanical filings, account openings, and elections that together turn a Schedule C in your head into an operating company. Most of it is one-time work; doing it correctly in the first 60 days prevents a year of cleanup.
Decide the entity, then the state. section “Choosing a Business Entity” settles the entity — sole proprietor, single-member LLC, multi-member LLC, S-corporation, or C-corporation. The next question is where. For a small operating business with one or two founders working in a single state, form the entity in the state where you actually do business — not Delaware, not Wyoming, not Nevada. The promotional material about “Delaware advantages” applies to VC-backed companies that intend to raise institutional money; for a consulting LLC in California, forming in Delaware buys you registered-agent fees and a Delaware franchise tax on top of California’s, with no offsetting benefit. Form a Delaware corporation only if you plan to raise priced equity from institutional investors and your counsel tells you to.
File the formation document. For an LLC, file Articles of Organization with the secretary of state of your formation state; for a corporation, Articles of Incorporation. The filing fee is typically $50–$500 and the turnaround is days. Choose a name that is available in the state’s business-name database, and reserve the matching domain and run a basic trademark search before you commit. For a sole proprietorship operating under a name other than your legal name, file the state’s DBA (“doing business as”) registration with the county or state.
Get an EIN. Apply to the IRS for an Employer Identification Number using Form SS-4. The online application takes ten minutes and issues the number immediately. The EIN is required for an LLC, partnership, corporation, or any business that will hire employees, open a business bank account, or file employment-tax returns. A sole proprietor without employees can operate on their SSN, but get an EIN anyway — handing your SSN to every client’s accounts-payable system is not what you want.
Open a separate business bank account. The single most important post-formation move for an LLC or corporation is a dedicated bank account in the entity’s name. Funding the entity from personal funds, then running revenue and expenses through that account, is what supports the liability shield in court. Co-mingling personal and business funds is the most common reason courts pierce the corporate veil and hold the owner personally liable for company debts. Open the account the week you receive the EIN; deposit the founders’ capital contributions formally and document them in the books; pay all business expenses from the business account thereafter. Use a business credit card for the same reason — the trail of separation matters.
Register for state and local taxes. If you sell taxable goods or services, register for a sales-tax permit with the state revenue department before the first sale, and understand your nexus footprint — post-Wayfair, economic nexus thresholds (typically $100,000 of sales or 200 transactions per state) trigger sales-tax collection obligations even without physical presence. If you have a physical presence in a city or county with a business-license requirement (most do), file the local registration. California and a handful of other states impose a minimum franchise tax on LLCs and corporations regardless of profitability — $800 in California, due in the first quarter of operation and every year thereafter regardless of whether the business earned a dollar. Know the number before you form the entity.
Set up bookkeeping from day one. The cost of running QuickBooks Online, Xero, or a comparable cloud ledger from day one is a few hundred dollars a year; the cost of reconstructing a year’s transactions from bank statements at tax time is your weekend in March. Pick a method (cash basis is the default for most small businesses; switch to accrual once inventory or receivables matter), assign a chart of accounts that maps onto your tax-return categories, and reconcile monthly. If you do not have the discipline to keep books yourself, hire a bookkeeper at $200–$500 per month. The cost is trivial against the deductions you will otherwise miss and the time you will burn at year-end.
Quarterly estimated taxes from the first profitable quarter. An S-corporation pays its owner through payroll, which withholds federal and state tax automatically. Everyone else owes quarterly estimated payments under IRC §6654, “Failure by individual to pay estimated income tax”, due April 15, June 15, September 15, and January 15. The safe harbor is the smaller of 90% of the current year’s tax or 100% of last year’s (110% if your prior-year AGI exceeded $150,000) — section “Safe Harbor” has the mechanics. Skip the safe harbor and you owe interest at the short-term applicable federal rate plus 3%, computed quarterly. The penalty is small per quarter and large per year.
Buy insurance before you take a client. The LLC shields personal assets from business debts; it does not shield you from the consequences of your own professional negligence, which clients sue on personally. For any client-facing service business, buy professional liability (errors-and-omissions) insurance before the first engagement. For a business with physical premises, foot traffic, or employees, add general liability and a business owner’s policy (BOP). If you have employees, workers compensation is mandatory in nearly every state, and the penalty for going uninsured is far higher than the premium. Cyber liability is increasingly non-optional for any business that holds client data. The combined annual premium for a small-services LLC typically runs $1,500–$5,000 — a rounding error against a single covered claim.
Capitalize equipment deliberately. IRC §179 and bonus depreciation (section “Rent and depreciation on equipment and machinery (Section 179)”) let you expense most business equipment in the year of purchase rather than depreciating it over five to seven years. The temptation in year one is to buy everything “because it’s deductible” — resist it. A deduction is worth your marginal tax rate, not a hundred cents on the dollar; spending $10,000 to save $3,000 of tax is the textbook bad trade. Buy the equipment you actually need to operate, document the business purpose contemporaneously, and keep the receipts. For vehicles, the 6,000-pound gross-weight cliff that separates the Section 280F luxury-auto cap from the SUV exception is the single most consequential equipment decision a small-services business will make — see section “Sport Utility and Certain Other Vehicles”.
Build the contract stack. Three documents underwrite every client relationship: a master services agreement defining scope, payment terms, IP ownership, and limitation of liability; a statement of work for each engagement; and a mutual nondisclosure agreement if the relationship involves any confidential information. Use a lawyer for the first version of each; $2,000–$5,000 of legal fees up front avoids the much larger cost of litigating a poorly-worded scope clause later. For contractors you hire, the distinction between independent contractor and employee is governed by IRS Pub. 15-A, “Employer’s Supplemental Tax Guide” — misclassification triggers back payroll taxes and penalties, and the IRS has been aggressive about it for a decade.
Annual hygiene. Most states require an annual report or statement of information, typically due on the formation anniversary or a fixed date, with a filing fee in the $25–$300 range. Miss it twice and the state may administratively dissolve the entity — which terminates the liability shield. The federal Corporate Transparency Act’s Beneficial Ownership Information (BOI) filing requirement has been subject to repeated legal and administrative changes since enactment; check the current status with FinCEN before relying on any one rule. Schedule the recurring filings on a calendar with two weeks of buffer; a $50 fee filed on time is trivial, a reinstatement filing after administrative dissolution is not.
Layer the optional structure once cash flow permits. Three further moves — not required at launch, but high-value once the business is producing real profit — are worth queuing. First, formalize an accountable plan (section “Operational Deductions and Family Employment”) before reimbursing yourself for any business expenses, so the reimbursement is deductible to the business and tax-free to you. Second, open a Solo 401(k) and, once profit clears roughly $500,000, layer a cash balance plan on top (section “Retirement Plans for the Self-Employed”). Third, once profit clears the break-even, run the S-corporation arithmetic (section “Reasonable Compensation and the Break-Even Point”) and elect if it pencils.
None of this is exotic. It is the standard set of moves that distinguishes a business from a side-project-with-paperwork. Done in the first 60 days, it costs roughly $2,000–$5,000 in filing fees, professional services, and software subscriptions, and it eliminates the great majority of mistakes that pull otherwise-legitimate small businesses into IRS, state, or civil enforcement.