When your client incorporates or forms an LLC for their small business, it’s a huge milestone. But, running a corporation or LLC is different than running a sole proprietorship — and your client’s legal obligations don’t end after filing the formation paperwork.
You can help your small business clients navigate the world of corporate compliance by making sure their new business is set up on a solid legal foundation. Here are six important steps for any new corporation or LLC:
1. Get an EIN
Any business that’s set up as a formal legal entity (i.e., corporation, LLC, etc.) will need to register with the IRS and get an Employer Identification Number. If your client was already running the business as a sole proprietorship and had an EIN for the business, they most likely will need to apply for a new EIN for the new business structure. But, as you know, applying for an EIN is one of the easiest tasks to do (and it’s free). Review the criteria and apply for an EIN on the IRS website.
2. Open a business bank account
Once your client has an EIN, the next step is applying for a business bank account. If they already had a bank account for their sole proprietorship, they probably will need to close that account and open a new one for the new EIN number and official LLC/corporation name. In most, if not all, cases, you’ll need an EIN before opening a business bank account.
Make sure your client understands the rules against commingling finances for corporations and LLCs. While the owner of a sole proprietorship can mix his or her personal and business finances, a corporation or LLC is legally required to keep its own books. Your client should keep a sharp line between their personal finances and the finances of their business.
3. File for any DBAs
It’s quite common for businesses to use variations of their official name (note that the “official name” is the name filed in the LLC/incorporation formation paperwork). If your client is planning on using a variation, they will need to file a Doing Business As (DBA), also called Fictitious Business Name, with the state or county. This lets the general public know who is behind any business. They should file a DBA no matter how minor the variation is. You can help your client file the DBA with the state or county clerk, or partner with an online legal filing service to handle it.
4. Get any needed local permits and business licenses
Most likely, your client’s business will need some kind of permit or license. I like to think of it this way: when you incorporate or form an LLC, it provides a solid legal foundation. But the local licenses and permits are like a driver’s license. They give a business permission to operate. Examples are professional licenses, reseller’s license, health department permit, and more. Contact your local government office, or visit BusinessLicenses.com, to figure out exactly what types of permits are needed for your client’s business and location.
5. Apply for a trademark to protect the brand
Your client may think that officially incorporating or forming an LLC with the state will prevent anyone else from using their business name. That’s partly true. When you form a corporation or LLC, this means that no other company can form a corporation or LLC with that name in that state. But another company could still operate as a sole proprietorship with your client’s name in your client’s state, as well as form a corporation or LLC with that name in any of the other 49 states.
If your client is really serious about protecting their brand on a national level, they should file for trademark protection. You can do this directly with the U.S. Patent and Trademark Office or have an online legal filing service take care of it. Be sure you to check the availability of the name beforehand to avoid being rejected.
6. Get a jump start on corporate compliance requirements
Corporations and LLCs need to create and file some basic recordkeeping to remain in good standing. For the most part, this paperwork is simple, but important. If your client fails to keep up with their compliance requirements, they can lose their good standing with the state, and even lose their personal liability protection.
The initial report and annual reports are the most common compliance requirements. Other examples include operating agreement/bylaws, annual meeting, and meeting minutes.
Finally, make sure your client understands that when they form a corporation or LLC, this marks the beginning of a brand new company. These six steps will help give their new business the right legal foundation for many successful years ahead!
