Standing Up the Business
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 — and section “Choosing the State of Formation” settles where. For a small operating business with one or two founders working in a single state, form in the home state: for a California consultancy, incorporating in Delaware simply adds registered-agent fees and Delaware franchise taxes on top of California obligations with zero legal advantage. 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 trigger sales-tax collection obligations even without physical presence. The common threshold is $100,000 of sales into the state; the 200-transaction prong that appeared in the original Wayfair statute has since been repealed in a majority of states, so check each state’s current test instead of assuming the pair. 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.
Sales tax: the rate is local, and both errors are punished. Registration is the easy half. Two operational facts catch people afterwards. First, the rate is not a state rate. Most states source the tax to the destination and stack state, county, city, and special-district levies on top of one another, which is why two addresses a few blocks apart can carry different rates and why manual rate tables stop being maintainable somewhere around the second state you sell into. This is what the automated rate services exist for, and at any real volume they are cheaper than the first assessment.
Second, and less obvious: you can be punished in both directions. Under-collect and the state assesses the tax against you — not your customer — plus penalties and interest, on every sale in the lookback period. Over-collect and you have taken money from customers that was never owed, which in several states is a consumer-protection claim and has repeatedly produced class actions against national retailers over pennies per transaction across millions of receipts. There is no safe direction to round.
Resale and exemption certificates are your audit defense. If you buy goods to resell, you do not pay sales tax on the purchase — but only if you give your supplier a valid resale certificate, and only if the supplier accepts it. Running it the other way, when you sell to a customer who claims an exemption — a reseller, a nonprofit, an exempt agricultural or manufacturing use — you are the one who must collect and retain their certificate. On audit, an exempt sale with no certificate on file is treated as a taxable sale, and the assessment lands on you years after the customer has gone. Collect certificates before shipping instead of scrambling during an audit, track their expiration dates, and re-verify them on a schedule; several states require periodic renewal and none of them accept “the customer told me they were exempt.”
Sales for export are generally exempt as well, but the exemption is documentary: it turns on proof that the goods actually left the country — bills of lading, freight-forwarder receipts, export declarations — and not on the seller’s belief about where they were headed. A business built on exporting domestic goods should treat that documentation file as part of the product, because it is the only thing standing between it and a retroactive assessment on every shipment.
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 — trivial next to the cost of 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 instead of 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 IRC §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 no longer reaches a domestic entity: after four years of litigation and successive rewrites, a FinCEN final rule effective August 14, 2026 permanently exempts entities formed under U.S. state law and all U.S.-person beneficial owners from reporting, and FinCEN is deleting the U.S.-person data already filed. What survives federally is the obligation on foreign entities registered to do business here, for their foreign beneficial owners. State transparency statutes are a separate question and several states have enacted their own, so confirm both FinCEN’s current guidance and your formation state’s rules instead of assuming the federal rollback covers you. 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.