How to Set Up a Business Entity

Chartering a successful business is a long and complex process. It takes careful consideration, consistency, and effort to strike a balance between your business and its implications. Moreover, you need clarity on the type of business entity you want to establish and, consequently, its legalities, tax implications, and ownership. 

This article will familiarize you with the detailed process of establishing a business entity, whether it is the right solution for your business, and how else you can expand globally. 

What is a Business Entity?

A business entity is an organization you form to conduct business. Here, one or more people can form a legal entity to facilitate business activities or engage in trade. The financial transactions for a business entity are accounted for separately.

Business entities run at a state level. Hence, they must comply with state laws. As a business owner, you must file documents with a specific state agency, such as the office of the Secretary of the State, to legally set up the business.

Types of Business Entities

Business owners often identify their company as a legal entity before executing operations. There are several business entities, each with its legal framework, taxation, and liability structure. 

Therefore, you must familiarize yourself with its types before setting up a business entity. Here are the primary and popular business entities with their advantages and limitations.

1. Sole Proprietorship

A  sole proprietorship is the easiest way to set up a business entity. It requires a single person as the sole owner to open and operate a sole proprietorship business. You need not register your business with the state.

The benefits and downsides of running a business as the only owner include:

So how to set up a sole proprietorship? Create a business plan and choose a location. Obtain local business licenses and permits, if required. You must be willing to make sacrifices and stay self-motivated to last while your business matures.

2. Limited Liability Corporation (LLC)

An LLC or a limited liability company is a business set up by one or more people. It provides liability protection to its members and follows regulations based on the specific jurisdiction of the country. Further, it offers more flexibility and scalability options than a sole proprietorship.

Here are the notable advantages and disadvantages of opening a limited liability company: 

A limited liability company requires a unique name and documents. The documents that you may require vary depending on the region. Moreover, you can take the help of a registered agent and frame an operating agreement with other members. While framing the documents, ensure that you adhere to the local laws and legal regulations. 

3. Corporation

A corporation is a legal business entity that has many rights and responsibilities under the law. Corporations are separate from their owners and can enter contracts, own assets, hire employees, pay taxes, and loan or borrow money.

Some upsides and pitfalls of establishing a corporation are:

Establishing a corporation is relatively more complex. You must file articles for incorporation, define share structure for shareholders, appoint directors and issue shares to raise capital. Local requirements may vary; hence, consulting your particular regulations is critical.

7 Steps in Establishing a Business Entity

Thousands of new businesses see the light of day every year. Approximately 4.4 million new businesses commence annually. In fact, the first quarter of 2023 saw a mind-boggling rate of 1.31 million applications! That is a huge number, of course! Unfortunately, only a tiny percentage of them hold the potential to survive.

While many factors contribute to the failure rate, inadequate market research, not following a plan, and insufficient money to run the business are among the top reasons.

Starting a new business is challenging. However, a good idea and an effective strategy can make it possible. Here is a step-by-step process for building a successful business entity.

1. Create a Business Plan

The first step to establishing a legal entity is framing a foolproof plan. A well-crafted business plan is a foundation for your venture. It highlights your short-term and long-term objectives, strategies, and financial projections. 

But what makes a good business plan? Well, it depends on your specific definition of good. A general way to create a plan for an entity involves

- Defining your business's mission, core values, and vision.

- Conducting in-depth market research to identify your target audience.

- Selecting the products and service offerings, setting a pricing strategy, and analyzing competitors.

- Developing a marketing plan, penning operational details, and estimating financial projections.

A business plan provides a clear direction and serves as a reference point to track progress. It helps you set realistic goals and prepare for the curve falls in the future in advance. The more concise and attractive your plan is, the more investors will be interested in investing.

2. Select the Business Structure

Now comes the complex part. Choosing a business type means selecting the proper legal structure. Your business type determines the ownership of the business, taxation processes, and liability. It impacts how you run and expand your business in the long run.

Some steps to help you decide on the business structure:

- Research different business structures, for instance, LLC, sole proprietorship, and corporation.

- Consider multiple factors, including ownership flexibility, taxation, and liability protection.

- Select the structure that aligns with long-term objectives.

An appropriate structure is essential for many reasons. It will define the legal framework, influence profit distribution, and how you file taxes. 

3. Choose a Location

Almost everyone doing business knows that location is one of the factors in a profitable business. It has a significant and direct impact on its success. You must find an area with an unmet need for your services in the market and then fill it.

Here is what you can do to pick a promising business location:

- Consider your target consumer base and analyze potential regions composing the specific demographic.

- Check the proximity to suppliers, competitors, and transportation hubs for easy movement of goods and services.

- Evaluate the associated costs, like utilities, taxes, and rent or lease expenses.

The right location can help you increase your visibility and exposure. The accessibility and cost efficiency will allow you to expand into new markets and maximize customer satisfaction.

4. Register Your Business

It is time to take your business to the next level once you pick a location. You must establish legitimacy to protect your business from potential liabilities. Further, registration is essential to seek permission to operate legally in a specific area.

It may seem daunting considering the legal standpoint, but gradually following the specific steps can simplify the process:

- Select a business name and verify its availability.

- Register your entity with the requisite government agencies.

- Obtain business licenses, approvals, and permits.

- Acquire an Employer Identification Number (EIN) for the purpose of tax.

Customers and partners will find your business more trustworthy and credible once you register with the appropriate government agency. It will ensure legal and regulatory compliance and provide access to government benefits, protections, and grants for your business.

5. Financial Setup

Now you have a registered entity in a location that attracts customers. But how are you going to manage funds and track expenses? Financial management is crucial to meet tax obligations and comply with financial regulations.

Organizing your finances ensures your business can handle expenses and generate revenue. Some tips for building a financial setup are:

- Open a business bank account to separate your finances.

- Secure your initial funding through investors, loans, and personal savings.

- Leverage accounting software or hire a professional accountant to handle balance and accounts.

- Create an organized invoicing and payment system for customers and clients.

A financial setup will assist you to maintain precise financial records and disclose accurate income and expenses. It will ultimately strengthen your credibility and provide a sustainable economic infrastructure.

Also Read: Hidden Challenges and Costs Associated with Global Entity Establishment

6. Build a Brand

You want your customers to recognize your brand and continue using your products. Branding gives your business a personality, resonates with your audience, and draws in new customers. 

The given pointers can help you go the extra mile and make you stand out in a crowd:

- Design an appealing and distinct brand logo and slogan.

- Create a professional and user-friendly website to expand your reach.

- Foster consistent branding across marketing platforms and materials.

- Establish active social media profiles to increase customer engagement.

Creating a good brand will distinguish your business in the competitive market. It enhances brand recognition and customer loyalty and helps you engage with the target audience.

7. Launch and Monitor

With everything done, a grand entry is the final step to establishing your entity. A strategic and coordinated launch accompanied by effective marketing strategies can set the stage for your brand.

To market your business, you can consider the following points:

- Plan and execute an exciting launch strategy to create anticipation.

- Employ multiple marketing channels, like social media, advertising, and email marketing.

- Create fresh and compelling content to engage and interact with customers.

Continuously monitoring your performance after launch is necessary. The metrics give valuable data insights and allow you to adjust and optimize your strategies to meet set objectives.

Build Your Global Team With Skuad

Establishing an entity involves substantial upfront costs, legal compliances and fees, and administrative management. But what if you build a global team without opening a subsidiary in another country? It will eliminate significant challenges, including infrastructure costs, minimize legalities and compliance headaches, and facilitate faster market entry. 

This is where Skuad, a reputed EOR platform, can help you. With Skuad, you can easily expand your business across borders while staying 100% compliant. 

Book a demo today and start your hassle-free global employment journey.

FAQs

Q1. Why form a business entity?

A lack of legal entity exposes your personal assets to risk every day you are in business. A legally formed business entity allows you to mitigate the risk and increase the growth potential.

Q2. How much does it cost to set up a business entity?

Expanding and setting up a foreign entity involves considerable money and time. Although the cost significantly depends on the industry you operate and location, it can cost between $15,000 and $20,000 on average.

Q3. How is sole proprietorship business taxed?

Sole proprietors are personally liable for income tax and National Insurance contributions due on the profits each tax year. In addition, the income tax rate is the same as the individual business rate.