How to create a business entity

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Additionally, you may want to develop a line of businesses that are closely related in terms of the products and services offered, the industry, or even its customers. In such a case, it may make good sense to create a single brand that will unify the various business operations. Marketing can be simplified under this type of multiple business structure and the businesses could flourish under a unified brand.

If you find your future plans include the addition of similar lines of business to your existing business (or the business entity you are about to form), there may be a simple way to structure multiple business entities which could reduce tax filing costs and administrative time in the future.

How to Structure Multiple Businesses Under a Single Business Entity

  • First determine which type of business entity you’d like to form:
    a. Limited Liability Company; or
    b. Corporation (an S or C Corporation); or
    c. Partnership.
  • Determine if the business trade name you’d like to use is available in the state in which you choose to form a business entity.
  • If it is available, determine if the trade name has been federally trademarked by another party. If so, go back to the drawing board!
  • If it is available for your federal trademark registration, consider filing for it after you launch your business.
  • Form the business entity you’ve chosen in the state in which you choose. If you choose an LLC, you will need to draft an Operating Agreement. If you choose a Corporation, you will need to file Incorporation documents.
  • File all of the necessary start-up documents and public notices with your state and local government (if applicable).
  • File for a Federal Employer Identification Number (EIN) for the business entity.
  • Make any federal tax elections necessary.
  • Under the business entity, apply for a fictitious name for any other lines of business you’d like to operate under the umbrella of the business entity you’ve formed.

Example of Multiple Business Structure Under a Single Business Entity

If you have a business that manufactures shoes in New York called ‘Soho Shoes, Inc.’ and you’d like to offer speaking engagements to shoe designers under the trade name Soho Shoes Speaks and start a blog about the life of a shoe designer at SohoShoesMusings.com, you could hold all these lines of business under one company.

To do so, the incorporated business known as Soho Shoes, Inc. would apply for two fictitious names (or DBAs) — one for Soho Shoes Speaks (for speaking engagements) and another for Soho Shoes Musings (for the blog).

It’s important to note that before your business files for a DBA or Fictitious Name, you should verify that your use of the name does not violate another party’s intellectual property rights. You don’t want to get into trouble and have to start over again after your start marketing your products and services to potential customers.

This multi-business structure example is really one business entity with three different marketing or trade names. So, it’s relatively easy to co-market the related lines of business while minimizing the tax reporting requirements. In my book, this structure saves time and money and that is always good!

What Does Filing a Fictitious Name Mean?

When your LLC, Corporation or Partnership has filed for a fictitious name, the state has given permission to the business to use a trade name for marketing purposes which differs from the business entity’s legal, or official name. It’s really that simple.

The fictitious name certificate does not create a separate business entity so the line of business operating under a DBA is part of the business entity which filed for the DBA.

You will not be able to sell member shares in the LLC, stock in the Corporation, or partnership rights in the Partnership for one of the lines of business which operates under the fictitious name.

And if you choose to sell one of the lines of business operating under the fictitious name, you will have to sell under an asset sale agreement as only part of the business entity will be transferred to the buyer. This can be tricky to do if the accounting books and records for the multiple lines of business have not been kept separately. So, seriously consider keeping separate banking and accounting records for each line of business under this multiple business structure if you think you may sell your business in the future.

In part three in this series, you may explore alternatives to using a single business entity with multiple fictitious names (or DBAs).

How to create a business entity

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What Are the Different Types of Partnerships?

Entrepreneurs starting a new venture should always run their business as its own legal entity. There are two main types of legal entities: LLCs and corporations. Any business not organized as its own legal entity and owned by one individual is a sole proprietorship. In a sole proprietorship the owner is responsible for all of the actions and liabilities of the business. Business entities such as LLCs and Corporations protect business owners by creating a corporate veil between the business and the owner. LLCs and Corporations may have one owner or many owners. Partnerships are also a form of legal entity but their use has gone by the wayside in favor of LLCs which are taxed similarly but provide better limited liability protection.

Choose what form of business entity you’d like to use. Most businesses today are organized as LLCs or Corporations. The choice between the two is largely a matter for discussion with your CPA and attorney as the technical differences typically impact your tax strategies. In general, corporations are a more formal form of legal entity compared with LLCs, a simpler, more flexible form of entity.

Pick a name for your business entity. Head to the website for the secretary of state where you live. Find the section that allows you to check if someone else is already using the name you would like to use. You need to choose a name that is not already taken and that follows the naming regulations your state has established.

File the appropriate paperwork. Corporations are created by filing articles of incorporation while LLCs are formed by filing articles of organization. Expect to pay a filing fee to the secretary of state of $75-$200, epending on which state you’re filing in. The articles used to form your business entity will contain the name of the entity, the names of the primary owners, and the individual who will receive legal notices on behalf of the company.

Execute an operating agreement. Corporations typically refer to operating agreements as shareholder agreements. An operating agreement defines the roles and responsibilities of each owner of the company and provides for valuation of the company and procedures for selling interest in the company.

Consider having your attorney file all of the paperwork when creating your business entity. In addition to saving you time, they will likely provide valuable advice and prevent mistakes.

Definition & Examples of a Business Entity

How to create a business entity

A business entity is an organization that’s formed to conduct business. The type of business entity formed determines how a business is taxed and its exposure to liability.

Learn more about how business entities work.

What Is a Business Entity?

Business entities refer to the type or structure of a business, not what it does. How it’s structured affects how taxes are paid and liabilities are determined. Business entities are usually created at the state level, often by filing documents with a state agency such as the Secretary of State.

  • Alternate name: Business structure

How Business Entities Work

Choosing a business entity is one of the first steps new businesses should take. It determines what tax form you file and what happens if your business is sued. Many business structures offer protection for your personal assets. If you’re sued, your business assets could be at risk, but your personal assets won’t be.

New business entities are formed by filing paperwork with your state, if required, and paying any required fees. The best type of business entity depends on the type of business and the number of owners. It’s one of the most important decisions business owners make, so it’s best to consult tax and legal professionals for advice specific to your business.

The Small Business Administration has local offices that can advise on setting up your business. It also partners with vetted organizations that provide free or low-cost business advice, like the Women’s Business Center, and can direct you to appropriate resources.

Types of Business Entities

States recognize several business entities, but most business owners will choose one of five: corporations, general partnerships, limited liability companies, limited liability partnerships, and sole proprietorships.

Sole Proprietorships

A sole proprietorship is an unincorporated business with one owner or two owners who are married. This is the default entity if you start a business and you’re the only owner, and you typically don’t need to register with your state. You may have to obtain a business license or permits depending on the type of business you’re conducting.

Freelancers and consultants are often sole proprietors. With this business entity, you file one tax return rather than separate business and personal tax returns.   With this type of structure, your personal assets could be at risk if your business is sued.

General Partnerships

A general partnership is an unincorporated business with two or more owners, and all partners manage the business and share the profits. It’s the default form of ownership for businesses with multiple owners. As with a sole proprietorship, your personal assets could be at risk if your business is sued, but all the partners share that risk.

Limited Partnership

A limited partnership is a registered business entity. You have two types of partners in this entity: general partners, who actively manage and assume liability for the business, and limited partners, who act only as investors without managing the business, limiting their liability and tax burden.

Partnerships must file returns to report income, deductions, gains, and losses, but they do not pay income tax. The profits and losses are passed through to the partners.  

Corporations

A corporation is an independent, legal entity that separates your personal and business assets. Also called a C corporation, a corporation has shareholders, a board of directors, and officers. Setting up a corporation is more complicated than setting up a sole proprietorship or partnership; there’s more paperwork and fees are higher. One drawback to a C corporation is that profits can be taxed twice—once when the profits are made and a second time when dividends are paid.

S corporations are a special type of corporation that offers pass-through taxation. Profits are passed through to the owners’ personal income without being subject to corporate tax. It avoids the double taxation that can occur with C corporations. S corporations can’t have more than 100 shareholders and all must be U.S. citizens.  

Limited Liability Companies

Limited liability companies (LLCs) offer liability protection. They’re simpler to set up than corporations and you can choose whether it’s treated as a corporation or as a pass-through entity for tax purposes. LLCs can have one owner (referred to as a member) or many, so it’s a useful alternative to sole proprietorship for freelancers and other individual business owners.  

Definition and explanation

The business entity concept (also known as separate entity and economic entity concept) states that the transactions related to a business must be recorded separately from those of its owners and any other business. In other words, while recording transactions in a business, we take into account only those events that affect that particular business; the events that affect anyone else other than the business entity are not relevant and are therefore not included in the accounting records of the business.

This concept is very important because if transactions of a business are mixed up with that of its owners or other businesses, the accounting information would lose its usability.

The business entity concept of accounting is applicable to all types of business organizations (i.e., sole proprietorship, partnership and corporation) even if a law does not recognize a business and its owner as the separate entities.

Importance/need of business entity concept

The business entity concept of accounting is of great importance because of the following reasons:

  1. The business entity concept is essential to separately measure the performance of a particular business in terms of profitability and cash flows etc.
  2. It helps in assessing the financial position of each and every business separately on a particular date.
  3. It becomes difficult and impossible to audit the records of a business if they are intermingled with those of different entities/individuals.
  4. The concept ensures that each and every business entity is taxed separately.
  5. The employment of business entity concept is very general among business organizations. If a company ignores this concept, it would not be able to compare its financial performance with that of others in the industry.

Examples

Some examples of the application of business entity concept are given below:

Example 1:

Mr. John has acquired a floor of a building having 3 halls for $1,500 per month. He uses two halls for his business and one for personal purpose. According to business entity concept, only $1,000 (the rent of two halls) is a valid expense of the business.

Example 2:

The owner of a company lends loan to his company. It would be strictly recorded as company’s liability and that has to be paid back to the owner.

Example 3:

Mr. Sam owns a company. He uses two different credit cards – one for the payment of business expenses and one for the payment of personal expenses. He pays $200 as the electricity bill of his company using his personal credit card. According to business entity concept of accounting, the electricity bill of the business should have been paid using company’s credit card. The payment of $200 using personal credit card would therefore be considered as the contribution of additional capital by Sam.

Summary of the process to establish a business in PA

Assuming you have the necessary information at the ready, you can create a subsidiary in as little time as a day. “Necessary information” includes information such as the company name, address, contact persons, intended capitalization, and similar items. Once the company is formed, you will likely be required to draft organizational resolutions and other “housekeeping” items may be required — such as establishing a bank account, adopting bylaws, and arranging financing.

Legal fees associated with incorporating or otherwise establishing a subsidiary typically range from $1,000-$2,000 (U.S.), depending on the nature and complexity of the subsidiary relationship. The Commonwealth of Pennsylvania charges a fee of $125 to file the documents needed to register your company.

The decision to organize an enterprise as either a corporation or as an LLC (“limited liability company”) is made on a case-by-case basis according to each enterprise’s unique requirements. While both structures provide a degree of “limited liability” (which generally prevents creditors from targeting the personal assets of the business owners to satisfy the liabilities owed by the company) we recommend that firms seek appropriate legal and accounting advice before determining whether to conduct business as a corporation or an LLC. Often, international companies forming U.S.-based subsidiaries will opt for the corporate entity structure.

Until recently, Delaware was known for having certain unique laws that protect corporate directors from liability for decisions that they make on behalf of their corporation, as well as for having a number of legal decisions that provide helpful guidance as to how corporate matters will be decided in the future — thus promoting legal certainty and planning. In 1988, however, Pennsylvania revised its Business Corporation Law so that it now provides substantially the same protection to directors as Delaware does, thus closing the gap between the two legal systems. Again, it is best to discuss these matters with legal counsel.

While there is no way to completely shield an enterprise from litigation or liability, firms can significantly reduce these risks by following certain well-established business practices, such as ensuring that the terms of contracts are clear, and by anticipating problems before they emerge. Maintaining accurate books and records (with the Subsidiary’s transactions and funds being completely segregated from those of the Parent) also helps to limit liability. Of course forming good working relationships with suppliers and customers, and retaining counsel to review contracts and other legal documents are also effective ways to reduce the likelihood of such problems.

As a general rule, firms are not required to pay income taxes (and are not assessed any by the state) in years in which they do not generate any profits.

Pennsylvania does, however, have a Capital Stock and Franchise Tax (CSFT) that is assessed against the ownership interests of both Corporations and LLCs. The amount of CSFT that is charged is determined by examining value of the enterprise based on a fixed formula, which primarily examines an enterprise’s net income and net worth. As a result, the amount of the CSFT that is ultimately assessed against your firm could be very low, if there is no profit. In recent years, Pennsylvania has been steadily lowering the rate of the CSFT, which will be entirely phased out by the year 2016.

Also, tax losses incurred in the early years of operations may be available to offset profits in later years.

The corporate net income tax (CNI) is only assessed against corporations — not most LLCs. Secondly, and perhaps more importantly, the income tax is only one consideration in determining where to do business. Other factors include the availability of suitable facilities, qualified workers, efficient logistics and transportation services, and location relative to major markets. Pennsylvania leads in all of these categories. Other considerations include the level of support that the government and other entities will provide for new businesses, and the desirable living opportunities that Pennsylvania offers.

It is important to remember that firms are generally required to pay CNI tax in each state in which they conduct business, according to the proportion of the business activities that they perform in each state. In addition, firms located in Pennsylvania can often reduce (or offset) the amount of CNI tax that they would otherwise be required to pay in Pennsylvania based on the amount of taxes they pay to other states. This means that if a corporation from another state does business in Pennsylvania, it will be required to pay Pennsylvania corporate net income tax based on the amount of business it does in Pennsylvania. Conversely, Pennsylvania corporations that also conduct operations in other states often are able to reduce Pennsylvania income tax liabilities through the appointment of taxable income to other jurisdictions.

Additionally, Pennsylvania recently moved to a 100 percent single sales factor to apportion income to the commonwealth for corporate net income tax purposes.

Steps to Establishing Your Image and Putting It Into the World

How to create a business entity

Before you can open your doors for business, you need not only to put your legal house in order but also, make decisions about the words and visuals that will represent your business and mold its identity. As you get ready to create your business image, there are few tasks you need to have already taken care of such as:

  • Determine how your business will be positioned in the market and your business’ place in the field.
  • Know your target market; who they are, where they can be found, and the best way to entice them to your business.
  • Decide how you want your business to be perceived and experienced in the marketplace. It is your brand. While you decide what you’re brand will be, how successful you are at creating the brand depends on your client and customers experience of your business.
  • Complete a business plan.
  • Consider the benefits and disadvantages of the available legal structure of your business entity could operate under and select the form of business that is best for you. Your options include sole proprietorship; partnership; limited liability corporation (LLC); C Corporation; or S Corporation. Most home business entrepreneurs start out as a sole proprietorship, but you need to know what the risks are before you do so.
  • Obtain licenses, permits and zoning waivers as required by your city or county.

Establishing Your Business Identity

Once you’ve put in the foundation of your business, here are eight tasks to put your business into the world:

  1. Create a tagline or slogan for your business. You should have already created a business name. Now you want to come up with something catchy that tells of your brand promise or identify. For example, “Just Do It,” is a slogan for Nike.
  2. Obtain address and phone numbers for your home business. If you don’t want to use your home address; you can get a P.O. Box at the U.S. Post Office or a mailbox at a mailing store. You can get tax deductions on a second business phone line in your home or purchase a distinctive ring to separate business from personal calls. Having a business address and phone number gives a professional appearance.
  3. Apply for an Employer ID Number with the IRS. If you started your business under something other than a sole proprietor; you’ll need to obtain an EIN. But even if you are operating as a sole proprietor, and EIN can be helpful. First, it’s free, and it gives you a Federal number, so you don’t have to use your social security. Second, you’ll need it to open a business bank account.
  4. Open a business bank account. The IRS prefers that you keep your business expenses separate from your personal account.
  5. Create your business logo. A good logo goes a long way in establishing your brand and business identity. Your logo should reflect what your business does. It should be unique, eye-catching and easy to identify. You can use a free or low-cost logo maker, or hire a professional graphic designer.
  6. Order business cards. Many entrepreneurs are stingy with their business cards, but they’re so affordable and easy to share. You should have a large stash and hand them out to anyone and everyone who is or knows a potential client. While you can print them at home, you don’t want to use DIY if it can jeopardize your professional image.
  7. Create and order your business stationery. Depending on your business; you may not need stationery. Still, it doesn’t hurt to have some for faxing or other correspondence. Your business card resource probably has an option for stationary, envelopes and return mail stickers or stamps.
  8. Establish an online presence for your business. It doesn’t matter what business you’re in, you should have an online presence. Today, most people go online and not the Yellow Pages to find businesses. Further, they use the Internet to learn about you and your products or services. Websites serve as a useful form of inexpensive advertising for most businesses. Even the most basic of websites can work well as your online brochure. You may also decide to set up a blog for your home business, either in conjunction with or instead of, a home business website. Also, consider a brand ambassador program.

You Have Your Business Identity, Now What?

Once you’ve taken care of the above tasks, you have tools and materials to share your business with the world. At this point, it’s time to put them to use. Be sure to monitor how well they work because they’re part of building your reputation and brand. Like you, your business is a living, breathing thing, and requires care and nurturing to ensure its success.

Step 1: Research Starting a Business

Step 2: Identify Your Type of Business

Step 3: Form Your Business

  1. Form a Profit or Non-Profit Corporation
    • Online Filing:Profit Articles of Incorporation, Non-Profit Articles of Incorporation
    • Print & Mail Form:Profit Articles of Incorporation (PDF), Non-Profit Articles of Incorporation (PDF)
  2. Form a Limited Liability Company
    • Online Filing:Articles of Organization
    • Print & Mail Form:Articles of Organization (PDF)
  3. Form a Partnership

Step 4: Register Your Business Name (Optional)

  • What is a Fictitious Name and When Should It Be Registered?
  • Register a Fictitious Name

Start a Business

  • General Information & Available Resources
  • Types of Business Entities/Structures
  • Start E-Filing

How to create a business entity

Ron DeSantis, Governor
Laurel M. Lee, Secretary of State

Under Florida law, e-mail addresses are public records. If you do not want your e-mail address released in response to a public records request, do not send electronic mail to this entity. Instead, contact this office by phone or in writing.

Florida Department of State

The Centre of Tallahassee
2415 N. Monroe Street, Suite 810
Tallahassee, FL 32303

Starting a Business?

Thinking of starting a business but don’t know how? Use the links below to get your business up and running. Learn how to assess your business idea, prepare a written business plan, and develop a structure for your business. The following links also include information on government business requirements, counseling, training, and other entrepreneurial resources.

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How to create a business entity

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