The Single Most Effective First Step in Launching Your Small Business

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What’s the most important first step to launch a small business? Form an LLC or other legal business entity. Read on to find out why. [[{“value”:”

Want to start a business? Along with choosing a business name, getting a small business website, and making a small business marketing plan, perhaps the most important first step is something that sounds boring and legalistic. But it could be the most important move you ever make for your business and personal finances.

When you are officially ready to launch your small business, it’s important to make it “official” by forming a legal entity for your business. This can include forming a limited liability company (LLC) or incorporating your business as an S Corporation or C Corporation.

No matter what structure you choose, here are a few reasons why forming a legal business entity is crucial to your small business success.

1. A legal business entity makes your business “real”

When you form an LLC or incorporate your business, you are making your business “official” in the eyes of the law. You did it! Your business is no longer just a dream or a vision of something you might do “someday”; it’s a real thing that exists in the world, in the government records, with a business name and an Employer ID Number (EIN) all its own.

Registering your business with your state’s Secretary of State office or other business formation authority can feel empowering and inspiring. It gives your business a name that you can put on a website and print on business cards. It helps clarify your sense of purpose and supercharges your motivation — your business is real now, and you can shout it from the rooftops!

2. Separate your business from your personal finances

Forming an LLC or other entity can create a unique legal identity for your business that is separate from your personal finances. This can help protect your personal assets in case of a lawsuit against your business, and limit your personal exposure to business losses or debts (hence the “limited liability” part of the “company”).

Setting up an LLC is not a “get out of debt free” card, of course — some small business debts and small business credit cards require a personal guarantee from the business owner. And an LLC also doesn’t give you an invincible force field of protection against lawsuits. Creditors or plaintiffs’ lawyers could still try to go after your personal assets if a judge agrees.

But having a legal entity for your business can still provide peace of mind. And it’s the right thing to do if you want to operate your business in the most professional, tax-compliant way, while keeping your business separate from your personal life (and bank account).

3. Open a business bank account

Forming an LLC or other legal business entity can help you open a business bank account. This is an important step in your small business journey, because it gives you a home base for your business income. Getting a business checking account is a powerful feeling, because now you have a place to receive payments from your clients!

Opening your first business bank account can also be an occasion to apply for your first business credit card, and start to build credit under your business name. You might want to open a business savings account, too — the best ones are offering 4.00% APY (or higher) now.

4. Get potential tax advantages

Setting up a legal business entity makes it easier for you to get the tax benefits of being a small business owner. Having a separate business bank account and keeping business finances separate from your personal life can make it smoother to track tax-deductible business expenses.

Some business entities, like LLCs and S Corps, also get tax advantages like the 20% qualified business income deduction, and offer flexibility for how to manage your payroll tax liabilities. Talk to an accountant or tax attorney to see how your choice of business entity can affect your personal tax return.

Bottom line

Forming a legal business entity is important not just for the excitement and passion of committing to being an entrepreneur — it can also help protect you from some of the worst-case scenarios of being in business.

Don’t miss out on the financial advantages and possible tax benefits of forming an LLC or other legal business entity. Check with your state’s Secretary of State office to see your options for registering a legal entity for your small business.

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