When you’re starting a new business venture, you have a lot of important decisions to make that affect the future of your company. The way you decide to structure your business, for example, affects the way you have to register with the IRS and how you’re taxed going forward. If you have any questions about how to register your business with the IRS, it’s best to consult a tax or legal expert so you can be sure you’re doing it correctly.
Why You Need to Register Your Business With the IRS
The IRS is a branch of the federal government that oversees tax collection. As a small-business owner, you’ll need to interact with the IRS when you pay your taxes. Depending on what your business structure is like, you may pay taxes on the profits of your business on your personal tax return or through your corporate entity.
Pick a Business Location
The first step to registering your business with the IRS is to establish where your business will be located. Depending on the state and city in which your business is located, you may have different rules for zoning, taxes, permits and licenses. In addition to considering where your target market is located and the real estate costs, it’s important to keep the restrictions of specific government agencies in mind when selecting your location.
Remember that not all businesses will have a brick-and-mortar location or a retail storefront. Depending on your type of business, a home office in your primary residence can also be your business location. Keep the following in mind when selecting your business’s official location:
- Local startup costs
- State and local income tax, sales tax, property tax and corporate tax
- State and local small-business tax credits
Deciding on Your Business Structure
The way your business is structured legally will also affect the way you register and interact with the IRS. Your business structure dictates the amount of taxes you pay as well as your legal liability in relation to the business. There are a number of different business structures from which you can choose, each with its own benefits and drawbacks:
- Sole proprietorship: By default, you are considered a sole proprietor if you engage in business activities but don’t register as a different kind of business. The assets and liabilities of the business are considered the same as the assets and liabilities of the business owner.
- Partnership: This is a structure for two or more people or businesses. The profits and liabilities of a partnership is passed through to the owners on their personal tax returns.
- Corporation: This is the most complex business structure, and there are several different subcategories, including S corporation, B corporation, closed corporation, open corporation and nonprofit. The corporation is considered a separate legal entity than the business owner. As a result, they offer the highest level of legal protection.
- Limited liability corporation: This is a hybrid business structure between a partnership and corporation. The owners have liability protection, but the profits are passed through to personal income.
- Cooperative: In this structure, the customers of the business are the same as the owners. The profits from a cooperative are distributed between the user-owners.
Selecting Your Business Name
Once you know your business structure, it’s time to register your business name. There are different ways to register your name, but the way you choose to register will depend on the structure and location of your business. If you choose to do business using just your legal name, you do not have to register it anywhere.
Ways to register your business name include:
- Entity name: This protects your business name at a state level.
- Trademark: This protects your business name at a national level.
- DBA: Standing for “doing business as,” a DBA, which is sometimes called a fictitious name or trade name, may need to be registered in the state, county or city in which you’re located. You will need a DBA if you plan to use a name other than your own legal name for a sole proprietorship or partnership or if you plan to open a business under an existing corporation or LLC.
Depending on the structure you choose for your business, all you need to do to register the company is register your business name with state and local governments. In other cases, you may need to file a separate registration federally and by state.
Getting Your Employer Identification Number
An employer identification number, or EIN, is like a Social Security number but for your business entity. It is required if you want to open a business bank account, apply for business licenses and permits, pay employees and pay federal taxes. There are some cases where you may not need an EIN, such as if you’re a sole proprietor who does not have employees or a pension plan. In this case, you can use your Social Security number instead of an EIN in order to pay your taxes.
Be sure to apply for your EIN as soon as you decide on your business structure and name. You can apply online on the IRS website using the EIN assistant tool. You will need to provide your name, Social Security number, address, DBA and other information.
Understanding Your Tax Structure
Your business structure affects your tax structure, and there are two key ways you can be taxed: pass-through taxation or double taxation.
As a sole proprietor or partnership, the business does not pay taxes on its income. The income is passed through to the owner and declared on a personal tax return. As a corporation, however, the income of the business is taxed on a corporate level, and then it is taxed again when the corporation pays employees and shareholders on their personal tax returns. An LLC can choose between a corporate tax structure or a partnership tax structure.
Registering With State and Local Agencies
In addition to registering federally in some cases and getting your EIN, you may need to register with your state or with your county or city agencies. This will depend on your business location. Check with your secretary of state’s office for details on the rules for your state. Generally, you’ll need to register with the state if you’re a partnership, corporation, LLC or nonprofit corporation.
In addition to filling out the registration paperwork with the state, you will need to provide additional legal documentation depending on your business structure. For example, an LLC needs to provide articles of organization and an LLC operating agreement, whereas a corporation needs to provide articles of incorporation and company bylaws.
Your local government agency typically oversees licenses and permits. While you may not need to register with a local agency to form your business, you may need to acquire specific requirements in order to legally operate your business in that location.
Changing Your Business Name With the IRS
As your business grows and evolves, you may end up needing to change the name to better fit your new direction. It’s important to inform the IRS of your name change as soon as possible. Your business structure will determine the way the name change is handled. In some cases, you may need to register for a new EIN.
- U.S. Small Business Administration: Register Your Business
- U.S. Small Business Administration: Get Federal and State Tax ID Numbers
- Square: Registering Your Business: A Step-by-Step Guide
- QuickBooks: How to Register as a Self-Employed Business Owner: : A Step-by-Step Guide to Conquer Complexity
- IRS: About IRS
- IRS: Form SS-4 & Employer Identification Number (EIN)
- IRS: Checklist for Starting a Business
- IRS: Employer ID Numbers
- IRS: Business Name Change
Anam Ahmed is a Toronto-based writer and editor with over a decade of experience helping small businesses and entrepreneurs reach new heights. She has experience ghostwriting and editing business books, especially those in the "For Dummies" series, in addition to writing and editing web content for the brand. Anam works as a marketing strategist and copywriter, collaborating with everyone from Fortune 500 companies to start-ups, lifestyle bloggers to professional athletes. As a small business owner herself, she is well-versed in what it takes to run and market a small business. Anam earned an M.A. from the University of Toronto and a B.A.H. from Queen's University. Learn more at www.anamahmed.ca.