If you have decided to join the great American tradition of becoming an entrepreneur, congratulations on your choice. Owning a business is one of the most fulfilling and challenging aspects of entrepreneurship. The most difficult part of starting a business is deciding to go ahead and begin the business.
After you determine your business’s name, goals, location, and financial strategy, it is important to take the time to consider business formation from a legal perspective. The way you set up your business legally will have a huge impact on your business going forward. We have included a few business formation tips that will help you as you set up your business.
1) Choose an Operating Entity Rather than Operating as a Sole Proprietor
We always recommend that business owners consult with an experienced business formation lawyer as soon as possible. Your business formation lawyer will help you choose and establish an operating entity, such as an LLC or a corporation, through which to conduct your business.
The default business entity is called a sole proprietorship. All you need to do to establish a sole proprietorship in Illinois is to choose your business name, obtain an Employer Identification Number, and obtain the permits, licenses, and zoning clearances that you need. You can use your own name or file an assumed business name certificate with the Illinois county clerk.
Sole proprietorships are often easier to establish than a limited liability corporation (LLC) or corporation. Nonetheless, there are serious benefits that come with taking the time to establish another type of legal entity for your business.
For example, if you establish a limited liability company, you will gain the flexibility and lack of formality provided by a sole proprietorship. At the same time, you will benefit from limited personal liability for the debts of your business and any lawsuits against your company. The lawyers at AU Law have advised many clients on proper business formation.
After reviewing your business plan as well as your goals, we will advise you as to which business formation works best for you. Most often, we help clients form corporations or LLCs. We will also help you create the business so you can rest easy knowing that you are protected from personal liability.
2) Apply for an EIN
Starting a business can be extremely challenging, especially in these unprecedented and uncertain economic times. It can be easy to use your personal checking account to pay bills for your company until your business starts bringing in a profit. First, you will need to apply for an Employer Identification Number (EIN). An EIN is a nine-digit number that the IRS will assign to you. You can use it to file for income tax purposes on behalf of your business.
You will also need an EIN to establish your business’ legal entity in Illinois and to open a business bank account. Opening a business bank account will help you and your accountant separate your personal expenses from your business expenses.
When it comes to filing for income tax, you will need to ensure that you can prove that your business expenses were business-related, not personal, so that you can take advantage of all available tax deductions. You can also get a credit card for your business or a small business loan. By doing so, you will be able to keep your business debt separate from your personal debt.
Once you have your EIN and separate business account, it will become easier to keep your personal finances and business finances separate. We also recommend keeping your business expense receipts in a separate location. If the IRS audits your business, you will need to prove that your expenses were business-related by showing the auditor your receipt.
3) Consider Creating a “Trust” to Hold Your Business
Establishing a trust for your operating entity can be incredibly helpful, depending on your unique circumstances. Establishing a trust creates a buffer between you, personally, and your business. An experienced trust attorney can create a well-structured trust for your business. You will be able to control the assets in the trust, including your business. At the same time, creating a well-written trust can reduce your personal liability and exposure to risk.
4) Establish a 401(k) for Your New Business
New business owners often feel too overwhelmed to begin setting up retirement accounts, especially if they have extended themselves financially to start the business. However, it can be beneficial to create a solo 401(k), also called a self-directed 401(k). These accounts are special types of retirement savings accounts that are only available to qualifying small businesses.
You will be able to save as much as $50,000 per year while getting a large tax deduction. Tax savings are only one of the reasons to take the time to establish a 401(k), however. If you set up the 401(k) well, the money in your account will be protected from lawsuits, bankruptcy proceedings, and possibly, even the IRS.
5) Take Time When Filing Your Articles of Organization
If you decide to create an LLC in Illinois, your lawyer will draft articles of organization for you. Once signed, these articles will create your business in Illinois. Be sure to pay attention to all of the details in your articles. If you need to change anything, you can, but it can be a hassle. Articles of organization must include the following:
- Name Your LLC
- Name the principal place of business of your LLC
- Name the effective date of your LLC, or when your LLC will legally begin
- Provide the name and address of your registered agent
- Name the purpose of your LLC
- Include the names and addresses of the managers of your LLC if applicable
- Include the dissolution date, when applicable
Contact Our Chicago Business Formation Lawyers
Forming a business can be challenging. That is why you need an experienced business formation lawyer on your side while you are forming your business. Contact AU LLC as soon as possible to schedule your initial consultation.