This article is the second in a monthly column from the SBA Utah District Office on how to start a small business. The material in this article is provided for informational purposes only and as a starting reference. Readers are encouraged to consult with an attorney and accountant regarding the formation and use of an entity for their particular business.
In last month’s column, we explored ideation, validating your business idea with market research and gathering feedback from experts. Once you’ve confirmed your idea has real potential, it’s time to take the next step: officially setting up your business.
Choosing the right business entity
No single business entity is perfect for everyone. One of the biggest early decisions you’ll face is choosing the right business structure. Your choice of business entity can impact everything from daily operations to taxes and personal liability. Choosing the right one depends on your vision, how you plan to operate, and your financial goals. Below are the primary entities to consider, each with unique benefits and trade-offs.
- Sole proprietorship: A sole proprietorship is the simplest business entity to set up. As the sole owner, you’re in complete control of the business, making this structure easy to manage and inexpensive to start. However, it does come with significant personal risk since your business liabilities are your personal liabilities. If the business faces legal issues, your assets are at stake.
If you are running a sole proprietorship under a name other than your personal name, you’ll probably want to register an assumed name or “Doing Business As” (DBA) with the Utah Department of Commerce.
While a sole proprietorship might be ideal for freelancers or single-owner businesses in low-risk industries, keep in mind it may not offer the legal protections that other entities do. As your business grows or takes on more risk, you may want to consider moving to a more structured entity.
- Limited Liability Company (LLC): The LLC, or Limited Liability Company, is one of the most popular business entity choices for startups. If set up and operated correctly, an LLC offers personal asset protection while keeping a lot of flexibility in management and tax treatment. In most cases, it can shield personal assets from business liabilities — meaning if the company faces legal or financial trouble, personal property like your home or savings are typically safe.
Another unique advantage is that LLCs, if set up and operated correctly, are tax-friendly and can be adapted to suit different financial strategies. By default, an LLC operates as a “pass-through” entity, meaning that any income or loss flows through to your personal taxes, avoiding the double taxation corporations face. Additionally, LLCs can elect to be taxed as an S Corporation (S Corp) if the business reaches a point where this strategy makes sense, potentially offering more tax advantages.
Employing family members in an LLC
One lesser-known benefit of an LLC is the opportunity to employ your children under 18 and pay them up to $14,600 a year (as of 2024) without paying payroll taxes or having them incur income taxes on that amount. For the business, this expense is fully deductible. This strategy can work well for certain business models, but make sure the work is legitimate, with tasks appropriate for the child’s age, and that you maintain a record of hours, tasks and pay rates. Because there are many requirements regarding this benefit, it is important to seek out professional tax advice to ensure you are doing things correctly. Also, remember that if you choose to have your LLC taxed as an S Corp, this benefit goes away since the default LLC tax structure allows for it, but the S Corp structure does not.
Electing S Corporation status for an LLC
Once your business grows, electing S Corp status can help reduce self-employment taxes by dividing your earnings into a reasonable salary and dividends. While the salary portion is subject to employment taxes, dividends are not, which could save you money. Setting the right salary is important to satisfy IRS guidelines, and tools like Robert Half or Glassdoor can help you find comparable salaries for similar positions. Keep in mind that while this strategy can be helpful for tax savings, each LLC and its members will have different needs, so it’s worth discussing these options with a tax professional.
While LLCs are a common choice, they’re not “one-size-fits-all.” The flexibility they provide makes them ideal for many small business owners, but your decision should be based on factors like liability, management needs and tax strategies, ideally with guidance from a trusted accountant.
Corporations: S Corp vs. C Corp
Corporations offer the most formal structure and often appeal to businesses seeking investment or planning for significant growth. There are two primary types of corporations to consider: S Corporations and C Corporations.
An S Corporation, or S Corp, is a popular choice for smaller businesses due to its pass-through tax structure, meaning business income flows directly to the owners’ personal tax returns, avoiding double taxation. However, S Corps come with restrictions, such as limits on the number of shareholders and their residency.
A C Corporation, or C Corp, is often best for larger companies or those seeking venture capital. C Corps allow for unlimited shareholders and are attractive to investors. However, they face double taxation — both at the corporate level and again on dividends paid to shareholders. C Corps also have stricter regulatory requirements, making them more complex and costly to operate.
Other entity types: Partnerships and nonprofits
Beyond the main structures, there are other common entities tailored for specific strategies and business needs:
- Limited Partnerships (LPs) and Limited Liability Partnerships (LLPs): LPs and LLPs are common for businesses where multiple owners want defined roles, liability protection and pass-through taxation.
- Nonprofits: Nonprofits serve public or charitable purposes and can receive tax-exempt status, but they come with strict guidelines and limitations. Also, profits for the nonprofit cannot be distributed.
With all these options, remember that no single entity is “best.” Your ideal structure depends on factors like your industry, risk level and growth plans. Consulting a trusted attorney, accountant and/or business advisor can help you make an informed decision based on your unique situation.
Naming your business
Once you’ve chosen an entity, it’s time to register your business. Registration may seem like just another item on the checklist, but it’s a crucial step toward legitimizing and protecting your business.
Selecting a name for your business is more than a creative exercise; it’s about building your brand and protecting it from legal issues. To start, check the Utah business name search tool to confirm that your chosen name isn’t already taken in the state. Additionally, conduct a U.S. trademark search. A name that’s trademarked elsewhere could lead to legal complications, even if the trademark holder is in a different state. A cease-and-desist order could force you to rebrand, which is costly and time-consuming.
After clearing your name in state and trademark databases, check social media platforms and domain availability. Aim for a name that’s easy to spell, is memorable, and ideally is available as a .com domain. While other domain extensions like .net or .biz can work, a .com often has the most credibility. And remember, your domain doesn’t have to match your business name exactly — it could be a tagline or relevant phrase, as long as it’s short and simple.
Registering your business in Utah
With your business name and entity selected, you’re ready to register. In Utah, visit the Utah Department of Commerce website to create a Utah ID and begin the registration process. You’ll need a few essential documents, including:
- Employer Identification Number (EIN): This is your business’s federal tax ID, obtained through the IRS. Think of it as a Social Security number for your business. It is important to memorize or keep this number easily accessible as it will be used for taxes, banking and various legal documents.
- Articles of organization (for LLCs) or articles of incorporation (for corporations): These documents outline the foundational structure and purpose of your business. While registering your business, the state website can help provide you with a template, but you may want to seek assistance from a business advisor to create custom articles that fit your business.
This part of the process may feel overwhelming, but it doesn’t have to be. The SBA’s resource partners — such as the Small Business Development Center (SBDC), Women’s Business Center (WBC) and SCORE — offer free guidance on registering your business as well as long-term support for operating your business. Not only will they explain the steps needed to register and start your company, but they’ll also sit with you as you complete the forms online.
Beware of companies charging hundreds or even thousands of dollars to help with registration — most of what they offer can be done with support from SBDC, WBC and SCORE for free.
State registration complete. Now what?
After state registration, the next step is to check with your city for local business licenses. Requirements vary, and most cities do require some form of licensing. It’s usually easiest to go directly to your city’s business office to ensure you meet all local regulations.
Opening a business bank account is another essential step. Mixing personal and business finances can lead to complications, especially if you want your entity to provide liability protection. Keeping separate accounts helps maintain a clear record of business expenses, which is crucial for tax purposes and for protecting personal assets.
Setting yourself up for success
Choosing a business entity and registering your business are foundational steps, but remember, they’re just the beginning. Careful planning here lays the groundwork for everything that follows. By thoughtfully selecting your structure, protecting your brand and meeting legal requirements, you’re setting yourself up for smoother operations and greater growth potential.
And don’t forget, support is available! Lean on the SBA’s resource partners for expertise at every stage. Setting up a business in Utah is affordable and straightforward with the right guidance — so use those trusted resources to build a solid foundation for your business journey.