Courtesy of the New York Times
How to Register a Start-Up
By KERMIT PATTISON
Published: March 31, 2010
Think registering your business sounds like a perfunctory and insignificant task? Think again.
The registration process forces you to confront a battery of questions that should be part of the bedrock of your business plan. Too often, new business owners regard registration as just another bureaucratic ticket to punch, and they fail to focus on important related steps like claiming a business name, choosing a structure and securing all of the requisite permits. This sort of rush-to-the-wedding approach has become more tempting now that online services allow businesses to do these tasks with little thought.
Unfortunately, these matters can rear up later as trademark disputes, tax problems, bureaucratic snags or costly name changes. “If you treat this as paperwork and box checking, you’re missing some of the issues that will be critical to your business,” said Therese Flaherty, director of the Wharton Small Business Development Center at the University of Pennsylvania. “You ought to be inquisitive about that. If you’re not, it will come back and bite you later.”
Here are some issues you should think through before you register.
THE NAME GAME There are many examples of companies that picked a name without doing the proper due diligence and then were forced to change. This can be costly: You may have to throw out product, packaging, signs, stationery, business cards and all of your branding and marketing efforts. Or you may become embroiled in costly litigation and have to pay damages.
“The first thing you should think about is the name,” said Esther Barron, clinical assistant professor at the Northwestern University School of Law and director of its Small Business Opportunities Center. “Are there going to be trademark issues? Is somebody going to sue you for using that name? Can you stop other people from using it?”
Even small local businesses can be tripped up if they do not get the name right at the outset. Debbi Ramsey, the owner of a spa in Philadelphia, has gone through six names in two years. One choice had been taken. She switched to Bodyworks but customers said it reminded them of an auto body shop. Next she tried One Touch Body and Spa, but she got dirty looks when she went to the city for a permit. “They’re looking at me over their glasses with this ‘touching body’ in there,” she said. “I tried to explain that I do therapeutic massage and guys were coming up to the counter and saying, ‘Yeah, right, where’s your place?’ ”
Eventually, Ms. Ramsey settled on a more wholesome name: Natural Wellness & Spa. But getting the name right cost her more than $1,000 in expenses plus innumerable annoyances. “I had no idea,” she said of the ordeal. “It just added to the drama of starting a business.”
Do an Internet search. Check the United States Patent and Trademark Office database to see if your name is already trademarked. Scan trade association directories in your industry. Check with your county clerk’s office, state department of revenue and secretary of state to see whether your name is similar to that of an existing business. Search your state’s database of corporations and limited liability companies.
If you plan to do business interstate or on the Internet, consult registries in other states. If you plan to have a Web site — and you do plan to have a Web site, don’t you? — check to see if the domain name or something close is available.
In simpler cases, a layman can do the tasks associated with researching a name. good business or university librarian can help immensely. When more is at risk, you may want to hire a business or intellectual property lawyer to assure that an expert has turned over all the right rocks.
Peri Pakroo, a small-business consultant in Albuquerque and author of “The Small Business Start-Up Kit” (Nolo, 2010), suggests that businesses ask themselves a simple question: How disastrous would a name change be? If a change would be catastrophic, you should err on the side of more thorough search and consider hiring a lawyer and trademark protection.
PICK YOUR STRUCTURE Another central question to confront is your type of business entity. The choice should be a fundamental part of any business plan, something you think through before you register.
You must declare your form of entity (sole proprietorship, partnership, corporation or limited liability company) when getting a federal tax identification number and some business licenses. Different types of entities have different regulatory and tax requirements. In general, corporations, limited liability companies and limited partnerships must file with their state. Businesses that do not form corporations may be deemed sole proprietorships or general partnerships by default and have unlimited liability.
OBTAIN A FEDERAL TAX ID Most businesses will need a federal employer identification number — even if they do not have employees. Sole proprietors and some single-person limited liability companies can use their Social Security numbers.
You will typically need an employer identification number for local tax registration forms, federal tax returns and local business licenses. Happily, obtaining an E.I.N. is fairly easy and can be done online or over the phone.
REGISTER A FICTITIOUS NAME Any company with a trade name that does not include the legal names of owners (for sole proprietorships and general partnerships) or the registered name of a corporation, limited liability company or limited partnership name must file for what is known as a fictitious business name (sometimes known as a trade name or DBA). Depending on the jurisdiction, this may be done at the state or county level.
Do not neglect this step. “That’s an important thing, because a lot of times you won’t be able to open a bank account without it,” Ms. Pakroo said.
Again, do your due diligence to avoid name disputes.
FILE REGISTRATION AND PERMITS Now comes the part you have been waiting for — registration. In most areas, businesses must register with the city or county tax collector. This step goes by several names including business-tax application, tax registration or business-license application. This basically allows local governments to keep track of businesses they intend to tax. You will have to pay a fee and, in some jurisdictions, you may have to pay estimated taxes.
In many states, businesses that sell tangible goods must also obtain a seller’s permit that allows them to collect sales tax from customers (service businesses may be exempt). “Do not blow the sales permit off,” said Rich Stim, a lawyer and co-author of “Wow, I’m in Business” (Nolo, 2008). “That would be a big mistake. You’re dealing with tax people, so it will get ugly quickly.”
Some businesses may face additional requirements like planning and zoning boards, regulatory agencies or professional licenses.
ASK QUESTIONS AND LEARN Unfortunately, these processes can be confusing. Ms. Flaherty of Wharton suggests that entrepreneurs view registration and all the related questions as part of the learning and networking of building a business. With that mind-set, a founder will add value to the venture.
“It’s tempting to just think this is a bunch of meaningless paperwork and bureaucracy,” she said. “But it’s a mistake to treat it like that. A little bit of inquisitiveness is important.”
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