Introduction
Starting a business is one of the most exciting and challenging ventures you’ll ever undertake. With over 5.5 million new businesses registered in the United States last year alone, entrepreneurship is thriving. However, the path from idea to incorporation involves critical decisions that will impact your taxes, liability, and growth potential for years to come.
At Norgaard Consulting, we’ve helped over 10,000 businesses navigate the formation process successfully. This comprehensive guide walks you through every step of business formation, from choosing the right structure to filing your final paperwork.
Understanding Business Structures
Sole Proprietorship
A sole proprietorship is the simplest business structure, perfect for individual entrepreneurs just starting out. You and your business are legally the same entity, which means simplified taxes but personal liability for business debts.
Pros:
- Easy and inexpensive to establish
- Complete control over decisions
- Simple tax filing (Schedule C)
- No separate business tax return required
Cons:
- Unlimited personal liability
- Difficulty raising capital
- Business ends with owner
- Limited tax deduction opportunities
Best for: Freelancers, consultants, and low-risk businesses with minimal startup capital needs.
Limited Liability Company (LLC)
The LLC has become America’s favorite business structure, combining liability protection with tax flexibility. In 2024, 70% of new businesses chose the LLC structure, and for good reason.
Pros:
- Personal asset protection
- Pass-through taxation option
- Flexible management structure
- Fewer formalities than corporations
- Can elect S-Corp taxation
Cons:
- Varies by state regulations
- Limited life in some states
- Self-employment taxes
- May be more expensive than sole proprietorship
Best for: Most small to medium businesses, real estate investments, and professional services.
Corporation (C-Corp)
Corporations offer the strongest protection and best structure for raising capital, but come with more complexity and regulations.
Pros:
- Strongest liability protection
- Unlimited growth potential
- Stock options for employees
- Easier to raise capital
- Business continuity
Cons:
- Double taxation
- Extensive recordkeeping
- Formal corporate structure required
- More expensive to maintain
Best for: Businesses planning to go public, seeking venture capital, or needing complex ownership structures.
S-Corporation
An S-Corporation is a special tax election that allows corporations (and LLCs) to avoid double taxation while maintaining corporate benefits.
Pros:
- Pass-through taxation
- Liability protection
- Save on self-employment taxes
- Professional credibility
Cons:
- Strict eligibility requirements
- Limited to 100 shareholders
- US citizens/residents only
- One class of stock only
Best for: Profitable businesses with steady income looking to minimize self-employment taxes.
Step-by-Step Formation Process
Step 1: Choose Your Business Name
Your business name is more than just a label—it’s your brand identity. Here’s how to choose wisely:
- Brainstorm names that reflect your business values and services
- Check availability through your state’s Secretary of State website
- Search trademarks via USPTO.gov to avoid infringement
- Secure the domain name for your website
- Check social media handle availability
Pro Tip: Even if you’re not ready to build a website, purchase your domain immediately to prevent others from taking it.
Step 2: Select Your State of Formation
While most businesses incorporate in their home state, some choose business-friendly states like Delaware or Wyoming. Consider:
- Home state advantages: Convenience, single state filing, lower costs
- Delaware advantages: Business-friendly courts, flexible laws, privacy
- Wyoming advantages: No state income tax, strong asset protection, privacy
- Nevada advantages: No state income tax, strong privacy laws
Important: If you form in another state but operate in your home state, you’ll need to register as a foreign entity, potentially doubling your fees and paperwork.
Step 3: Appoint a Registered Agent
Every business needs a registered agent—a person or company designated to receive legal documents on your behalf. Requirements include:
- Must have a physical address in the state of formation
- Available during business hours
- Cannot be a P.O. Box
- Can be yourself (if you meet requirements) or a service provider
Recommendation: Using a professional registered agent service ($99-$299/year) provides privacy and ensures you never miss important documents.
Step 4: File Formation Documents
For LLCs:
File Articles of Organization with your state, including:
- Business name and address
- Registered agent information
- Member/manager information
- Business purpose
- Duration (usually perpetual)
Cost: $50-$500 depending on state
For Corporations:
File Articles of Incorporation, including:
- Corporate name
- Registered agent
- Stock structure
- Incorporator information
- Business purpose
Cost: $100-$800 depending on state
Step 5: Obtain Your EIN
An Employer Identification Number (EIN) is your business’s Social Security number. You need it to:
- Open business bank accounts
- Hire employees
- File taxes
- Apply for licenses
How to apply: Free directly through IRS.gov, or we can handle it for $79.
Step 6: Create Governing Documents
LLCs Need an Operating Agreement:
- Ownership percentages
- Profit distribution
- Management structure
- Voting rights
- Transfer restrictions
- Dissolution procedures
Corporations Need Bylaws:
- Shareholder meeting procedures
- Board of directors’ powers
- Officer roles and responsibilities
- Stock transfer procedures
- Corporate formalities
Critical: While not always legally required, these documents prevent future disputes and are required by banks and investors.
Step 7: Open a Business Bank Account
Separating personal and business finances is crucial for:
- Maintaining liability protection
- Simplifying taxes
- Building business credit
- Professional appearance
Required documents:
- EIN confirmation
- Formation documents
- Operating agreement or bylaws
- Registered agent confirmation
State-Specific Considerations
California
- $800 annual franchise tax minimum
- Statement of Information required within 90 days
- Publication requirement for LLCs in some counties
New York
- Publication requirement for LLCs (can cost $1,000+)
- Biennial statements required
- New York City has additional requirements
Texas
- No state income tax
- Franchise tax on gross receipts over $1.18 million
- Assumed name certificates for DBAs
Florida
- No state income tax
- Annual report required by May 1st
- Sunbiz.org for all filings
Common Formation Mistakes to Avoid
- Choosing the wrong structure: 60% of businesses change structures within 5 years—costing thousands in legal fees
- Not getting an Operating Agreement: Leading cause of partner disputes
- Mixing personal and business expenses: Pierces corporate veil
- Forgetting annual requirements: Can lead to dissolution
- DIY without understanding implications: Tax consequences can be severe
Ongoing Compliance Requirements
Annual Reports
Most states require annual or biennial reports including:
- Current address
- Registered agent confirmation
- Officer/member updates
- Franchise tax payment
Deadlines vary: Mark your calendar or use our compliance service.
Business Licenses
Depending on your business:
- General business license (city/county)
- Professional licenses (state)
- Industry-specific permits
- Sales tax permits
- Federal licenses (rare)
Tax Obligations
- Federal income tax
- State income tax
- Payroll taxes (if employees)
- Sales tax (if applicable)
- Quarterly estimated taxes
Cost Breakdown
DIY Formation:
- State filing fee: $50-$500
- EIN: Free
- Operating Agreement template: $50-$200
- Registered agent: $99-$299/year
- Total: $199-$1,199
Professional Formation (Norgaard Consulting):
- Complete formation package: $399
- Includes all documents
- Lifetime customer support
- Compliance calendar
- Better value with no mistakes
Next Steps After Formation
- Get business insurance: General liability at minimum
- Set up accounting: QuickBooks or hire a bookkeeper
- Build business credit: Open credit card, pay on time
- Create contracts: Client agreements, employment contracts
- Develop compliance calendar: Never miss a deadline
Conclusion
Business formation is the foundation of your entrepreneurial journey. While it’s possible to DIY, the complexity and long-term implications make professional guidance invaluable. A properly formed business protects your assets, minimizes taxes, and positions you for growth.
At Norgaard Consulting, we’ve streamlined the formation process to be fast, affordable, and worry-free. Our team ensures you start right, stay compliant, and focus on what you do best—running your business.
Ready to form your business the right way? Schedule a free consultation or start your formation today.