How to start a small business legally
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🎯 Quick Guide Summary & Core Answer
Here is the direct answer on how to start a small business legally in 5 sequential steps:
⚡ TL;DR / Key Takeaways
- Follow a structured, expert-verified sequence of 5 steps to successfully start a small business legally.
- Focus on the critical milestones: Pick the right entity for your actual situation and Handle state and local registrations.
- Read the fact-checked tips and warnings to avoid common pitfalls during execution.
Step-by-Step Instructions
Pick the right entity for your actual situation
Don't default to an LLC because a blog told you to. The right answer depends on three things: how many owners you have, how much profit you expect in year one, and how much liability risk your specific business carries. A single-owner freelancing LLC and a two-person coffee shop LLC are very different animals. For most solo service businesses (consultants, designers, writers, developers, coaches), a single-member LLC with the default tax treatment is fine and costs almost nothing to maintain. For businesses with multiple owners, an LLC with an operating agreement or an S-Corp election both work — but the S-Corp payroll requirement isn't worth it until you're netting $40k-$60k a year after paying yourself a reasonable salary. Two situations where the entity decision matters a lot: if you're in a high-liability industry (food service, construction, anything involving kids), an LLC alone may not be enough — look at umbrella insurance too. And if you're going to raise outside money or take on investors, talk to a lawyer before you file. The wrong entity now can cost you thousands to unwind later.
File the entity with your state
Every state has a Secretary of State office (sometimes called the Department of State or Corporations Division) where you file formation documents. For an LLC, that's the Articles of Organization. For a corporation, it's the Certificate of Incorporation. Filing fees range from $50 (most states) to over $500 (California charges $800 minimum, Massachusetts $500). You can do this yourself online in any state — the forms are not complicated, and you're not signing under oath in most cases. The state's filing website is usually the first result for '[your state] LLC filing.' Watch out for third-party services that look official but charge 3-5x the state fee. They sometimes bundle services you don't need, like a registered agent you didn't ask for. Processing times vary wildly. Some states approve LLCs in 24 hours (Delaware, Wyoming, Ohio). Others take 2-4 weeks (California, Florida, Texas). If you need the business bank account open quickly, pay the state's expedited fee — usually $50-$100 extra for 24-hour processing.
Get your EIN from the IRS
An Employer Identification Number is the IRS identifier for your business. You need it to open a business bank account, file taxes, hire employees, and apply for most licenses. The good news: it's free, takes about 10 minutes, and you can do it entirely online at irs.gov. The IRS website walks you through a short questionnaire about your entity type and activities. At the end you get your EIN immediately — no waiting, no mailing. Print the confirmation page and save the PDF; that document is your EIN letter, and most banks will want a copy. One common mistake: filling out the EIN application as the wrong entity type. If you formed a single-member LLC, the IRS default is to treat it as a disregarded entity (you report business income on your personal return via Schedule C). That's what most people want. If you elected S-Corp treatment, the answer changes. Have your formation documents open when you fill this out.
Open a dedicated business bank account
This step is non-negotiable and a lot of new owners skip it, then regret it at tax time. Mixing personal and business expenses is the #1 reason small-business bookkeeping becomes a nightmare. Open a business checking account the day after you get your EIN — most banks can do it in 30 minutes if you walk in with your formation documents, EIN letter, and a government ID. You don't need a fancy business account. A basic business checking from Chase, Bank of America, Mercury (if you're online-first), or your local credit union is fine. Avoid accounts with monthly fees if you're just starting — most banks waive them for the first year if you ask, or for balances above a low threshold. Set up a second account for taxes too. Every time a client pays you, transfer 25-30% of that payment into the tax account. You'll thank yourself in April. Doing this from day one is the single highest-leverage habit for new business owners.
Handle state and local registrations
This is where new owners get blindsided because the requirements vary enormously by location and industry. At minimum, most states and cities want some combination of: a business license (general operating license), a sales tax permit (if you sell taxable goods), a professional license (for regulated fields like real estate, law, therapy), and a zoning permit (if you're operating from home or a commercial location). The fastest way to figure out what you need: go to your state's Department of Revenue website and your city/county clerk's website. Both usually have a 'starting a business' wizard that lists every permit and license for your business type and zip code. SBA.gov also has a state-by-state lookup tool that's surprisingly useful. Don't ignore this step. Operating without a required license can mean fines, your business insurance being voided, and in some industries, personal liability piercing through your LLC. The fix is usually a $50 application and a short wait — far cheaper than the consequences.
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