A checklist for making your small business legit

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Perhaps you’ve got an awesome business idea and you’ve decided it’s time to turn a dream into reality. Or you’re done with your day job and decided to create your go out on your own. Maybe it’s time to turn your side hustle into a full-time business.

No matter what your motivation for launching your own business, the journey ahead is no doubt both exciting and scary for new business owners.

Where do you start?

What does it mean to have a legit business?

Making your business legit means creating a solid foundation that allows your business to operate properly, and to be perceived as reputable to potential customers, other businesses, and even to lenders. Here’s a step-by-step list to get you started.

1. Choose a business name

Think this one through carefully. Not only do you want to make sure it will be unique and memorable, you’ll also want to make the name you want is legally available. Just because there are other businesses with similar names doesn’t mean you can’t use it, but be careful. If your business name is similar to another business— particularly one in your geographic area— your business credit profiles could get mixed up with one another.

While you are at it, check domain names, and social media accounts (Facebook, Twitter, Instagram etc). Do a thorough Google search. Before you make your final decision on what to call your startup, consider a trademark search to avoid any legal challenges down the line. If your business name is too similar to another you may not be able to register that name when you create a legal entity. (See step 4.)

2. Choose your business address

Before you file any paperwork, you need to research the best place to locate your business. This is essential because you will need to register your business, pay taxes and apply for licenses and permits based on the regulations of that location. You should take a look at the cost, benefits and restrictions of different government agencies on the city as well as state level. For example, Texas is known for its low business tax rate and lack of an individual income tax which makes it an attractive low-cost place to do business.

For practical reasons, many small business owners start out with a home-based business, and locate it where they currently live. It’s often OK to register your business at your home address, as long as there are no zoning restrictions or HOA rules that prohibit it.

Some business owners choose to use a service such as a UPS store to give their business an address separate from their home address. Keep in mind there will be situations—such as filing a tax return—where you will have to provide a physical address for the business.

3. Get a business phone number

You may not have to get an expensive business landline from your local telecom, but you do need a number to give out to clients and customers, and it should be answered in a professional manner. You may want to use a service like GoDaddy SmartLine or Google Voice to add a business phone number to your cell phone. if you expect a lot of calls from prospective customers, consider using a virtual business telephone service or answering service.

4. Create your business entity

While it may be tempting for many business owners to just give it a whirl as a sole proprietor, you may be taking unnecessary risk. If your business gets into any kind of legal hot water, your personal assets could be at risk.

A limited liability company (LLC), S Corporation, C Corporation can offer asset protection and tax advantages. It’s also much easier to create a business credit profile and eventually get small business financing if you create a separate legal entity. (Here’s the difference between an S corp and C corp.)

Check with legal or tax advisors if you need help choosing the right business structure. Once you’ve decided on an entity type, you can outsource all the tedious legal work to a business formation service.

5. Register your business name

This will likely be part of the process when you incorporate. If you operate as a sole proprietor, it’s a good idea to file a fictitious name registration (DBA) with your state. If you incorporate, you’ll need to identify a registered agent; this should be someone who is able to accept service of process if your business is involved in legal action. Mail may also come to the registered agent so choose an individual or service that will reliably forward it to you. You can usually hire one fairly inexpensively.

6. Get business licenses and permits

You may need to get a sales tax license, health department inspection, or certain professional licenses, depending on your type of business. Here’s a state-by-state guide to business licenses.

Not sure what you will need? Talk with your local Small Business Development Center (SBDC) or SCORE chapter, both of which offer free and low-cost resources for small businesses. Your attorney or accountant may also be able to help. In addition, the Secretary of State website in the state where you incorporate your business may help you understand the permits you need.

7. Get an employer identification number (EIN)

An EIN is also known as a Federal Tax Identification Number, and is used to identify a business entity. Generally, businesses need an EIN, according to the IRS. (Think of it as the equivalent of a social security number for your business.) You can request an EIN for free online from the Internal Revenue Service at IRS.gov. Note, it will be required if you form a legal entity.

8. Open a business bank account

Co-mingling business and personal funds can create all kinds of tax headaches and can also open you up personally to liability if your business is incorporated. (This is known as “piercing the corporate veil.”) Open a separate business bank account and use it exclusively for business purposes.

Many small business lenders will require business bank statements to verify revenues.

The easiest way to find the right business checking account for your small business is to use Nav’s list of best business checking accounts. We’ve done the research for you so you can spend more time comparing the best options.

9. Get a business credit card

Getting a business credit card will allow you to separate business and personal purchases. It will also help you easily identify business purchases to make tax time easier. In addition, most business credit card issuers do not report activity to the owner’s personal credit unless they default. (This chart describes the policies of the major issuers.) This can help protect your personal credit from the activities of your business.

10. Set up your bookkeeping

One of the most important steps you can take to set your business up for success is to make sure your bookkeeping is done in a timely manner and that your business taxes (business income tax, sales tax, payroll taxes etc) are paid on time. When you set up your bookkeeping system, you’ll need to set up your chart of accounts and begin keeping track of business expenses and business income.

Accounting software not only makes it easy to keep track of income and expenses for tax purposes; it can also offer other features such as inventory management or sales tracking. It can also help you maintain accurate and up-to-date records so you may better assess the business.

If you don’t know how business accounting works, consider hiring a bookkeeper or accountant, or at least take a class on business bookkeeping from your local SBDC. Starting your business bookkeeping out on the right foot will save you an enormous amount of time in the long run.

11. Get a D-U-N-S® Number

This number will be used to identify your business in the Dun & Bradstreet commercial credit database. You can get a D-U-N-S® Number for free.

12. Establish business credit

Did you know your business can build its own credit history, separate from your personal credit? You accomplish that by getting credit in the name of the business.

Get started is tradelines: accounts that report to business credit bureaus such as Experian or Equifax (which create credit reports on businesses as well as consumers) or Dun & Bradstreet. With net-30 accounts you’ll buy things you need for your business, pay them off within thirty days and begin to build a good business credit score.

The sooner you do this the better, as age of accounts is one factor that can often help your business credit scores.

Read: How to Build Business Credit Fast

13. Create a website

A website is a “home” for your business on the internet. Unlike social media platforms that can restrict how your business shows up online, you remain in control of your website. 

You may be able to start with  a basic website where prospective clients or customers can learn a little bit about your business and how to contact you. But not having one at all will likely hurt your business.

Consider starting an email list as well so you can communicate directly with your customers or prospective customers.

14. Register your business with online services

Register your local business on Google so it comes up in online searches. This is especially important if your business has a physical address and specific business hours. Also register social media accounts for your business— even if you don’t plan to use them yet— and consider registering with review sites relevant to your business, such as Yelp or TripAdvisor.

Depending on your type of business, you may want to set up a page or profile on Facebook and/or LinkedIn, or other social media sites.

15. Obtain business insurance

Business insurance is designed to keep you in business when losses come along. Without the right coverage, the high costs of lawsuits, property damage or employee injuries could bankrupt a new or growing company. Every business has different needs, but some of the most popular coverages include general liability, property, workers’ comp and commercial auto – and some of these can be bundled together to save money.

How Nav can help

Nav can help your business with resources for every stage of growth: insurance, business credit cards, small business loans loans, payroll solutions, and more.

Nav also helps you manage your cash flow and credit together, all in one place.

And with Nav Prime, you’ll get detailed credit reports and business credit scores, along with tradeline reporting to help your business establish a business credit history.

Get started now.

Frequently ask questions

What’s the best business to start?

There are so many examples of successful businesses that it can be easy to get stuck in “analysis paralysis,” unable to decide which one you should start. Ideally, you want a business that combines your interests and/or skills to offer something people want to buy. 

 Whatever business you decide to start, do your market research. The biggest reason why new businesses fail is because there is a lack of market demand. Past research from startup failure post-mortems have shown this to be the case. Businesses that are tackling problems that are interesting to solve rather than serve a market need are often bound for failure. It is no wonder that one month after Paul Graham, Jessica Livingston, Trevor Blackwel, and Robert Morris started the Y Combinator seed accelerator in 2015, they picked “make something people want” as their motto.

To side-step this common pitfall, you need to conduct market research and understand your consumer base from the outset. By conducting research from the get-go, you are reducing your risk as you are able to run your business idea through a validation process without you having to sink significant investments. To get a good sense of your market, you may want to seek answers to the following questions:

• What pain point does your product/service solve?
• How many people would be interested in your product/service?
• What are the demographics of your target audience?
• Is the industry saturated with alternatives to your product/service?
• What is the competition like? What are their competitive advantages?

You may choose to conduct your own market research by organizing your own focus group or conducting surveys, questionnaires or in-depth interviews with your target market. Research can be very time-consuming so we encourage you to take advantage of public information. For instance, the Small Business Administration has compiled a list of reliable sources that provide market and customer information at no cost.

Read: 12 High Cash Flow Businesses to Start in 2024

How do I create a legitimate business for tax purposes?

Set up a solid bookkeeping system, and work with a tax professional to make sure you meet your tax state and federal tax obligations. The sooner you start, the better. It’s much harder to play catch up.

The sooner you start, the better. It’s much hard to play catch up. The IRS has lots of helpful information for small businesses at IRS.gov in their Small Business and Self-Employed Tax Center.

Find the best small business accounting software here.

How do you legitimize a sole proprietorship?

Most entrepreneurs in the US start their businesses as sole proprietorships, which means they do not create an LLC, corporation or other formal business type. If you choose to operate this way, make sure you complete as many other steps on this list as possible. Consider forming a business structure as soon as it is feasible. 

Do I need a business plan to legitimize my business?

A business plan is always a good idea. If you aren’t sure where to start, you’ll find free resources at SBA.gov. You can also get free help from your local SBA Resource Partners.

Is LLC a legitimate company?

A limited liability company (LLC) is a legitimate type of business entity. It offers a variety of benefits, including potential tax benefits and reducing personal liability. Most business lenders will also consider an LLC to be an acceptable form of business for business lending purposes. 

Are LLCs trustworthy?

Yes, forming an LLC or another type of business entity, such as a corporation, can be one way to convey trust in your business.