How to Avoid Spending Too Much Money on Legally Establishing your Business

Registering your business with its own checking account is a must - and it's something you can do yourself.

Let me tell you something. I paid $450 to Legal Zoom to sort out what I’m going to tell you in about 850 words.

And let me tell you something else: if you get anxiety-induced brain fog the moment you hear “LLC” or “EIN,” you are not alone. I often think of the Ron Swanson quote where he says, “Hey, I have some apples, would you like to buy them? Yes, thank you. That’s how hard it should be to start a business in this country!”

The fact is, you have to navigate these structures and processes to establish your business and get paid. There is no way around it. And there are plenty of predatory businesses hoping to squeeze a few hundred dollars out of you during this process, betting on the fact that you’ll be too overwhelmed to attempt it yourself.

I personally panicked when I saw the state registration form for my business, couldn’t make heads or tails of what an LLC vs. sole proprietorship was, and then paid LegalZoom to not explain it to me all that well.

They then filed paperwork that I could have done myself in 2 minutes. If you take nothing else from this article, let it be that you are smart enough to do this without LegalZoom, amen.

This overview assumes you want to start a business based on your skillset that won’t raise venture capital or incorporate other partners/investors. If you’re starting a business that’s looking to get investment and/or go public, this is not the article for you!

Whether you’re starting a consulting business, an interior design business, or a telephone psychic business, you have to create the business legally. It has to exist outside of your brain and your Gmail account.

The first thing you’ll have to decide:

1. What structure is your business?

What we’re assuming here is that you’re a solopreneur hanging a shingle around a skill you do well: finance, bookkeeping, home organizing, whatever. Maybe you’ve got some contractors, maybe 1-2 employees. For this scenario, the most common options are: LLC or Sole Proprietorship.

DO NOT GLAZE OVER. WE ARE GOING TO GET THROUGH THIS TOGETHER!

Sole Proprietorship:

This is the one I thought I was, because I was the only person in my business at the time. In fact, because I didn’t know what it meant, I think I may have checked this on some tax forms early on, even though I was never registered as a Sole Proprietorship. (Don’t at me IRS)

What you need to know about a Sole Proprietorship: it’s the easiest and cheapest to set up. It doesn’t require that you file separate business taxes and personal taxes. However, you open yourself up to the most risk with this structure. That means people can come after your house, your car, and your personal assets if they have a problem with your business.

To me, the ease is not worth the risk. But if you don’t want to deal with separate business taxes and you just want to get going for cheap, this is the option for you.

LLC

An LLC stands for Limited Liability Corporation. That is important because remember when I said people can come after your house and car with a Sole Proprietorship? They can’t do that with an LLC.

An LLC makes all of your business liabilities separate from your personal ones. There is immense benefit to keeping that separate: namely that people can’t go after your house over a business dispute.

The downsides to LLCs are:

1. You have to keep your LLC registered with the state

2. You have to file separate business taxes

This makes them slightly more expensive. A state filing fee (~$20 annually) and you have to pay separately to file your business taxes (Likely $600-1500 annually).

But, they have a lot of flexibility. You can change them into an S-Corp to save on taxes (more on that later.)

Are you with me? Good. Here’s what’s next.

2. If you picked an LLC, register with the state

Forget about your friend who registered their company with Delaware. (Unless you live in Delaware, in which case, register your business in Delaware!) Delaware registration as a non-Delaware resident makes sense if you are a corporation raising venture capital and/or planning to go public, but it doesn’t make sense otherwise.

LLC paperwork is super simple to complete and makes your business official in your state. Remember, if you went with a sole proprietorship, you don’t need to register your business.

3. Get an EIN number

Employer Identification Numbers (EINs) are like social security numbers for your business. You do not have to be an employer of full-time employees to have one - the name is a bit of a misnomer.

If anyone hires you as a contractor, they are going to ask for a W9 form, which asks for either your EIN or your social security number.

Would you rather an EIN number or a social security number be passed around all over the internet? I’m betting EIN number. Which is why even if you are a sole proprietorship, I recommend getting an EIN number, too.

To get an EIN, you go to this page on the IRS website. This is free. You do not need to pay anyone else to do it.

4. Open a business bank account and deposit all of the money you make there.

Once you have an EIN, you can use it to open a business bank account. This is important because your personal bank account and your business bank account should always be separate.

You should never be depositing money you make from the business directly into the personal bank account. Nor should you be paying expenses for the business from your personal bank account. Doing so will cost you thousands of dollars in book cleanup and tax issues.

TRUST ME.

It should be noted that you can often get a business bank account with your social security number, but if you ever expand to employees or become a multi-member LLC, EINs are required. Also a lot of banks still like you to have an EIN to keep your busines and personal accounts truly, cleanly separated.

And there you have it.

You have now elected a business structure, registered for an EIN, and established a business checking account to put all of the money you make in.

And, hopefully, you have paid exactly $0.00 to LegalZoom.

Business [Comma] Woman is for anyone building (or thinking about building) a business around her skills. Whatever you’re good at: accounting, tarot card reading, window washing, marketing, therapy - if it’s legal, we want you to make money at it. We focus on the stuff that gives entrepreneurs hives: getting clients, marketing services, selling services, pricing, etc. If this article resonated or was helpful, please share it!