Following the steps necessary to ensure that your business stays “legitimate” — both under the law and in the eyes of your customers — will allow you to avoid any legal disputes or fines in the future.
What’s more, making your business legitimate can go a long way in ensuring that the public always views you as a trustworthy, reliable, and credible business.
Steps to Making Your Business Legitimate
Making your business legitimate can be done with a few essential steps. These steps include:
- Choosing a marketing-friendly business name
- Choosing the right business structure
- Getting an official business address
- Getting a business phone service
- Applying for an Employer Identification Number (EIN)
- Applying for required licenses and permits
- Opening a business bank account
Not only will these guidelines help ensure your business will be compliant with all of its state and federal requirements, but they will also help present an image of dependability to your customers and potential partners.
Find a Marketing-Friendly Business Name
Choosing a business name is actually one of the most important decisions you will make when launching your business.
This is because your business name:
- Is your customers’ first point of reference
- Is a principal part of your brand image
- Can limit your growth if chosen incorrectly (e.g., if it doesn’t reflect the nature of the products or services that you will be selling in the future)
All in all, your business name should be short in length, memorable, and somehow be “indicative” of your brand’s professionalism and expertise.
Choose the Right Business Structure
Each business entity structure comes with its own pros and cons. A sole proprietorship entity will allow you to have a much higher degree of flexibility when it comes to how you can manage and run your company on a day-to-day basis.
It will also involve fewer startup costs and paperwork when being set up. On the other hand, the improved credibility and increased funding options of a corporation may be better suited to your specific business goals.
A limited liability company (LLC) is commonly used as a “best of both worlds” option as it provides the managerial flexibility and tax-through taxation of a sole proprietorship while still allowing its owners to benefit from limited personal liability under the law.
For more information on picking your ideal business structure, see our How to Choose a Business Structure guide.
Get an Official Business Address
Having a business address will increase your credibility with your consumers and make your business look more legitimate — especially if you are selling the majority of your products or services remotely.
An official business address can also provide practical benefits, as it will mean that you will have an address where you can receive official documents and all other correspondence.
Get a Business Phone Service
Hiring a third-party business phone service can allow you to tailor your time to making important managerial and growth-related decisions without having to worry about how to manage your inbound and outbound calls.
The top-tier business phone services can also provide businesses with:
- Video conferencing
- iOS and Android apps
- Team messaging and document sharing software
- Unlimited calls and SMS
If you are interested in purchasing a business phone service, check out our Best Small Business Phone Service review.
Apply for an EIN
According to the Internal Revenue Service (IRS), you need to apply for an EIN if your business:
- Is registered as a partnership or a corporation for tax purposes
- Employs staff
- Files tax returns that relate to excise and employment or alcohol, firearms, and tobacco
- Withholds taxes on wages that are paid to non-resident aliens
You may also need to apply for an EIN if your business is involved with:
- Certain types of trusts
- Nonprofit organizations
- Farmers’ cooperatives
- Real estate mortgage investment conduits (REMIC)
- Plan administrators
Even if you don’t technically need an EIN (e.g., if you’re a sole proprietorship or single-member LLC without employees), certain benefits of getting an EIN mean that you should likely apply for one even if you are not legally obligated to.
Apply for Required Business Licenses and Permits
Most businesses will be required to obtain some form of licensing in order to operate in their home state.
Determining the specific license that you will need to operate in your state is usually quite complicated — as it relates to your specific industry and specificities.
You may be required to apply for business licenses at a local, county, state, and/or federal level.
Ensuring you have all of the required licenses to operate legally as a business entity in your state is important in order to avoid potential fines or restrictive measures in the future.
Local Licenses and Permits
The most common local business licenses for small businesses are:
- Local business operating license: This is one of the most “basic” types of operating licenses that grant owners the right to operate in their home state. You will likely need to apply for this in your local or city governmental agency.
- Zoning and land use permit: Your state’s zoning department will usually have to check that your business’s address complies with the area’s relevant zoning codes. If you are starting a type of business that has already operated in your area in the past, you will likely be able to ignore this step.
- If your area is not zoned for your specific business type, you will need to apply for a conditional use permit — this can be quite a lengthy process.
- Health licenses and permits: If your business relates to consumers’ health (e.g., a fitness gym or a restaurant), you may need to obtain certain health licenses or permits in order to be allowed to operate as a legit business.
- As the requirements for these can vary significantly depending on your location, you should check with your local government agency to identify the health permits that you will need ahead of time.
Less common local licenses and permits include environmental licenses, signage licenses, fire department permits, and building permits.
State Licenses and Permits
You may also require additional licensing permits at a state level:
- State business operating license: This is often used to track a business’s revenues so that they can be taxed accurately. State business licenses are usually issued by specific government bodies or the Secretary of State.
- Sellers’ licenses: These will depend on your industry but are usually reserved for businesses selling products such as firearms, gasoline, liquor, lottery tickets, or anything else that would likely require increased regulation
- Occupational licenses: In the vast majority of US states, businesses in certain professions will need to obtain an occupational license in order to be allowed to operate legally. These include but are not limited to:
- Insurance Agents
Federal Licenses and Permits
While most small businesses do not have to obtain federal licenses, they may need to if they operate in a federally regulated industry.
Such industries include:
It is worth noting that home-based businesses will require some sort of permit or license in order to operate legitimately within the US.
Usually, business owners operating from their home will only need to obtain a home occupation permit in order to show that their business isn’t producing any harmful externalities — but this will once again be dependent on your state of operation.
For more information on what licenses you will need in your state of operation, check out our How to Get a Business License guides.
Open a Business Bank Account
Having a separate bank account for your business is a legal requirement where your business is incorporated as it is considered to be a separate financial entity to yourself under the law.
Even where this is not a legal requirement, however, business owners are highly recommended to open a separate bank account as it can help them to:
- Keep accurate financial records
- Differentiate between their personal and business assets
- Obtain monetary benefits (e.g., annual interest)
- Have increased access to business credit and business
Frequently Asked Questions
How long does it take for a business to become profitable?
It is difficult to define an exact timeline in which businesses become profitable. This is because profitability generally depends on:
- The volume of capital needed to start a business
- The number of partners and/or shareholders involved within a business
- The percentage of revenue that is reinvested into the business
Having said that, it usually takes more than a year and rarely exceeds three.
Keep in mind that depending on your business structure, you may be able to generate a very sizable income from your company even if it is making a loss on paper. This is because your salary can be treated as a business expense.
Do I need a business plan?
Even though writing a business plan is not a legal or regulatory requirement, it can be an essential part of starting a business for several reasons.
For one, persons that invest time into planning and writing a business plan are statistically much more likely to actually go through with their idea.
Moreover, a business plan can help business owners by:
- Allowing them to discover critical problems that need to be fixed before launching their idea
- Making them more financially attractive to potential lenders
- Enabling them to adequately plan out the timeline and expansion of their company.
What is limited liability under the law?
Limited liability refers to the fact that business owners of incorporated business entities (i.e., corporations, LLCs, and nonprofits) are not personally liable for any debt accrued by their company if it happens to go insolvent.
This means that their personal assets (e.g., their vehicles, homes, and personal savings accounts) will not be claimable in a US court. Previous lenders will have to rely on the registered assets of the actual companies involved.
This is because incorporated structures are considered to be completely separate financial entities to their owners.
Are LLCs optimal for starting businesses?
LLCs are dynamic business structures that provide a “best of both worlds” option between sole proprietorships and corporations.
This can make them an ideal structure for starting business owners with relatively small budgets because they are:
- Easy to set up
- Safe (through limited personal liability)
- Tax-friendly (no double taxation)
For more information about LLCs, check out our state-specific How to Start an LLC guide.
What is ‘pass-through’ taxation?
Pass-through taxation is usually seen in unincorporated business structures (e.g., sole proprietorships and general partnerships), but it can also be seen in LLCs and S corps.
Unlike corporations — that have to pay taxes both at a corporate level (21%) and on a personal level (income tax) — businesses with pass-through taxation only pay tax once on the same stream of revenue.
This is because all of a company’s profits are “passed” down directly to its owners, who then pay tax for the first time on their individual tax returns.