Tax preparation is a crucial part of any new business. You’ll be working your way through a host of tasks, like completing your IRS registration, looking for clients, pricing your services, and most importantly, choosing the right tax software.

You might be tempted to stick to tried and tested methods to file your taxes, like a pre-installed application on your desktop. But with the sensitive data you’d be handling, a basic software program just won’t cut it. Fortunately, tax software providers have several cloud-based options that compensate for the shortcomings of traditional desktop tax filing.

Cloud-based tax software programs offer innovative solutions such as automating your tax filing, simplifying bookkeeping, keeping track of tax returns, and protecting your company from IRS audits. Businesses are also aware of these benefits — spending $29 billion on cloud services in the first quarter of 2020 alone.

We walk you through some other features and benefits of cloud-based tax filing software and explain why it outperforms traditional local applications.

1. No installation needed

Desktop-based tax filing software programs must be installed on every computer or device, which is a time-consuming and tedious process.

However, cloud-based software lets you access the software via the internet. As such, you don’t need to install it on the computer to access it. By removing the installation process, cloud-based tax software becomes available for use instantly.

2. Data security

In the age of cyber threats, data security is the foremost concern of every business, and rightfully so. Data security is even more important when it comes to the sensitive financial data of your business. Thus, you need a robust software program to shield you from cyber threats when filing taxes online.

Cloud-based software stores all your data remotely in a secure data center. Plus, your tax software provider ensures that the data is protected via firewalls, antivirus, antimalware, data encryption, and multi-factor authentication. This way, you know your business’ and clients’ sensitive information is as secure as it can be.

3. Improved accessibility for employees

Desktop-based tax filing tools can only be used on office desktops, which is a roadblock for small businesses that encourage work from home. Remote employees and tax accountants need to be able to function just as efficiently as on-site employees.

Cloud storage holds the data in remote servers that you can access via the internet. This means that your employees can access cloud-based tax software from any device. There is no compatibility issue since all they need is high-speed internet and a web browser.

And since cloud-based tax filing software can be accessed from anywhere without compromising on its features, CPAs working from home can help you with your tax and income reporting without a hitch. This improved accessibility also offers employees and collaborators a better work-life balance and reduces the hours spent in long commutes. 

4. Scalability

Your business will not remain the same forever. All your business plans aim to expand your reach and customer base. Given this, it only makes sense that your tax software also accommodates your business’s growing needs.

Most desktop-based software is designed for a specific size of the organization. A change in the size implies that you need to change the software, leading to an additional burden on your IT team.

Luckily, cloud-computing technology makes tax and accounting software flexible enough to scale with your business. You wouldn’t have to search for another cloud-based tax filing tool when the size of your business changes. You only need to upgrade or downgrade to a different plan.  

5. Round the clock customer support

Picture this: it’s tax season. You’ve had your CPA review the numbers and are ready to file your taxes online. Just as you’re about to press the ‘send’ button, your software freezes and stops working altogether. There’s no IT whiz kid around you to get the problem fixed, the deadline to submit your tax returns is fast approaching, and you’re in deep trouble.

With cloud-based tax software companies, you don’t have to live out this nightmarish scenario. Most software providers offer 24/7 customer support. Since the software is not limited to your office desktop, it is much easier for support teams to fix the issue remotely. These features enable small businesses to file their taxes on time. 

6. Automated backup

Losing hours of income tax filing work because you forgot to save your work is a disheartening and painful experience. Cloud-based tax software automatically backs up your data at regular intervals. As such, all your data and hard work will be perfectly secure.

7. Automatic updates

Software programs need regular updates to fix bugs or offer new and improved features. If you use desktop-based tax software, you need to manually download the new version each time it’s released, which translates to additional work for you and your employees.

You can’t afford to miss these updates, either — they’re required for the greater efficiency of your tax filing program.

In contrast, cloud-based software programs automatically undergo updates and fixes at the central server, thereby protecting your business from major IT-related complications. In some cases, you won’t even realize that the software has been updated. 

8. Cost-effective

Desktop tax software programs are often more expensive than their cloud-based counterparts. These applications often charge hefty installation and maintenance fees.

Moreover, you cannot download the software once and replicate it for your employees, which means you’ll be paying to get it installed on each computer in your office. These factors only add to the already sky-rocketing costs of a small business.

Cloud-based tax filing software, on the other hand, is almost always cheaper than desktop versions. Part of this is because the makers only create one version of it that works across all devices. And since software hosting providers allow you to customize your payment plans, you can control how much you want to invest in these tools.

9. Easy integrations

Every company needs multiple software programs to keep track of various aspects of the business. Many of these may work on the same data set. In this case, cloud-based tax filing software can easily integrate with your existing financial management, accounting, and ERP programs. This eases the process of gathering the data required for computing taxes.

In conclusion

Cloud-based tax software is the future-centric solution to many of the problems that plague traditional desktop applications. It is versatile, robust, scalable, cost-effective, and supports multiple devices. As a result, every organization — big or small — stands to benefit tremendously by shifting to the cloud for their tax filing needs.

Intuit’s TurboTax is a perfect example of a cloud-based tax software program for small business owners. Its user-friendly features and tailor-made packages make it extremely easy and convenient to run your business. The company’s excellent customer service is an added

Picking the right attorney in your startup is as important as picking the right business partner. You can’t underestimate the importance of selecting an attorney who “gets” your business model, your market opportunity, and most importantly, your fundraising and exit strategy.

My business partner and I made many mistakes in our first tech startup, and so many of them were the result of choosing a lawyer who was a terrible fit. 

Let me paint the picture for you: We were about two months into our startup idea. We had stars in our eyes and excitement in our bellies. Both my business partner and I were “green”—meaning, this was our first startup venture, and we had no idea what we were about to get ourselves into on that warm fall day when we walked into the office of our soon-to-be attorney…

The attorney was, in fact, a business attorney, but what we later discovered was she had never before worked with a tech startup with high growth ambitions, the need to raise multiple rounds of financing over the next two years, and the goal to exit/sell the company in a five- to seven-year timeframe.

We were targeting raising around $3 million from investors. We had personally invested $70,000 of our own money at this point, and we were hoping to raise at least another $250,000 to help us hire a team, launch our company, and begin to build our product.

We shared all of this with our attorney before she helped us write our Operating Agreement (OA), so we assumed we were in good hands. The agreement seemed to have all the things business partners would need in order to professionally launch and run a company together (i.e., team roles and responsibilities, ownership percentages, “what if” scenarios, etc.).

We set off to raise our money. We developed a kick-ass investor pitch and we started pitching it to family, friends, angel investors, and even venture capitalists for feedback. We knew we were too early for VC money, but it was nice to get the chance to pitch to VCs early in our startup and learn what milestones we needed to accomplish to become “venture-ready.”

We soon got interest from an angel investor, and he wanted to invest $300,000 in our startup. My business partner and I were elated. After a couple of due diligence meetings with the investor and our attorneys, he gave us the check.

The deal we made with him was he’d get 30% of our company in exchange for the $300K, and my business partner and I each diluted from 50% ownership down to 35% each. So far it sounded like a fair deal, considering we didn’t yet have a product developed—only a pitch deck, a business plan, a fleshed-out idea, and some user interface (UI) designs of what we thought our online product would look like.

However, the deal we made with this investor was not in the best favor of the company’s growth—we just didn’t know it at the time.

The non-dilution clause that killed my startup.

What we’d signed was an agreement that the investor could keep his 30% ownership and never dilute.

Now, if you’re a savvy investor or entrepreneur, I’m sure your jaw just dropped as you read that. Maybe you even shouted some profanities out loud. For those of you who don’t understand the implications of an investor this early in a deal never diluting his shares: That kind of a deal is unheard of and extremely detrimental to any future fundraising.

When fundraising for a startup, all investors dilute as additional investors join in on the deal. This should be clearly spelled out in your Capitalization Table, or “Cap Table” as it’s commonly called. A Cap Table shows who owns the company, what the ownership shares are, and what the owners have invested in exchange for that share.

Our attorney updated our operating agreement to include a “non-dilution clause” for this investor, and my business partner and I later found out how much this would cost our company—both financially and otherwise.

Now, let’s fast-forward about nine or ten months into the growth of the company. We had a beta product launched, 20 beta testers, and lots of interest from different investor groups. One group of angels was interested in investing up to $500,000 in our company, and another was willing to match those funds if the first group invested. We even won $65,000 from an angel investor pitch competition in the form of a convertible note.

We were on a roll.

That is until one very savvy investor from the interested angel group asked for a copy of our operating agreement. We gladly handed it over to him as part of the due diligence process. A few days later, he asked to schedule a call with us. This is when we found out just how devastating it was to have that “non-dilution clause” as part of our OA.

The investor said, “We can’t invest in you unless this clause is removed from your operating agreement.”

It didn’t seem like too big of a deal to ask our first angel investor to agree to us removing the clause. But when we asked him he was livid that we had “gone back on our deal.” We explained to him and his attorney that this clause was harmful to our growth, and that interested investors were stipulating that we remove it. We even explained that it’s not common to have this clause in an OA for startup companies—especially tech startups.

Neither he nor his attorney grasped this concept. His attorney was convinced he was protecting his client’s investment, when in fact he was harming his investment because the non-dilution clause was not allowing other investors to fund our growth.

That $300,000 investment, which had initially made us so happy, was what we later learned is endearingly called “dumb money.”

Our attorney should have known.

At this point in our startup’s saga, a mentor suggested we hire another attorney—someone with experience in technology startups that raise multiple rounds of financing and desire founder exits within five to seven years. It felt awkward going to another attorney without telling our first attorney (we were advised not to do so), but we decided it was important for the health of the company. So we hired another firm to help us facilitate the removal of this clause.

We eventually got the clause removed, but it took several months and tens of thousands of dollars. It also cost me, as the CEO of the company, time away from additional fundraising and selling, since both my business partner and I spent too much time on expensive legal meetings trying to convince our only investor that he was harming the future of our company, and ruining his own investment by blocking others from coming in.

By the time the clause was removed from our OA, the Great Recession was in full swing. The housing debacle was ramping up, and the angel investor group that had been interested in investing in us had moved on, and invested their funds in another startup. We lost the opportunity and had to raise funds from our friends and family to help sustain us for a few more months. Ultimately, we ran out of money and had to dissolve the company.

Success is a terrible teacher

This was a terrible—but also great—lesson to learn at that stage in my startup career. Mind you, my business partner and I didn’t blame the failure of our company on that one investor because we did make a series of other mistakes, but I can tell you that the experience hurt us at a critical time during our company’s launch.

I now say that “success is a terrible teacher,” and I strongly believe in that statement. Life’s best lessons come from failure. What’s important, though, is to learn from those failures and share those experiences with others, in the hopes of helping them avoid making the same mistakes.

I hope I can help you avoid making the same mistakes we made.

It’s important to conduct due diligence on anyone that comes into contact with your company—especially your attorney.

Below is a quick checklist of ten questions that will help you select the right attorney for your startup. Please add to it in the comments if you have other tips for entrepreneurs!

10 questions to consider when interviewing an attorney for your startup:

1. Has the attorney ever worked in your industry before? Do they understand the startup lingo in your industry, and do they understand your business model?
2. How much time do they have for you?
3. Who else in their firm can help you if they are unavailable for some reason?
4. Have they worked with companies who have raised multiple rounds of financing to start or grow?
5. Can they create and advise on a Capitalization Table?
6. Do they (or does the firm they work for) have experience creating compensation packages for key employees, including stock options for all employees?
7. Do they (or does their firm) have experience with intellectual property and patents?
8. Have they worked with companies that have a global footprint?
9. Do they have experience with mergers and acquisitions, including how to set up the company for successful exit scenarios?
10. Are they willing to share a few references from other startup companies they’ve helped?

After our company failed, I took several weeks and interviewed angel investors, venture capitalists, and other founders who had experienced failed startup ventures and investments. As a result of my research, I compiled a presentation titled “The Top 10 Reasons Startups Fail.”

I’d love to hear your startup failure stories. Tweet me @iamcarolina.

Best of luck to you in your startup venture!

Editor’s note: This article originally published in 2014. It was updated in 2019.

If you’ve decided to incorporate as a C corporation, S corporation, or B corporation entity, this article will outline all the steps you’ll need to take.

It’s common to feel a bit lost or overwhelmed at this stage, but with this guide, you’ll gain confidence in your ability to create your new business entity and get back to the work you love. We’ll review some new language and concepts in this process, but once you’re done, you may never need to think about this stuff again. 

A corporate business entity is like a whole and unique person that you get to create and control. 

It has its own tax life, laws, lifecycle, and care instructions. It absolutely is a responsibility, but the ability to incorporate is also the right of any U.S. citizen, so be sure to take advantage of it when it’s best for you. 

Think of the entity formation process like doing your personal taxes—you must submit everything correctly, but you don’t need to understand every detail of the laws and codes surrounding the process. Plus, there are tools that can help you get it right.

Here’s a checklist of the steps we’ll cover:

1. Pick your home state (probably the state you’re in now) 
2. Give your company a name
3. Name your trusted inner circle of company leaders (or just yourself)
4. Tell your state whom they can contact about legal matters
5. Fill out some forms—your “articles of incorporation”—and pay between $100 and $800 to submit them
6. Decide what the company should do and what it shouldn’t do
7. Write that stuff down in a special book
8. Hold your first board meeting
9. Agree upon how much of this business each of your leaders owns, and write that down on slips of paper called “stock certificates”
10. Follow the rules that your state lays out for you

Once that’s done, you’re free to get to work running and growing your new business!

Before we get started, you’ll want to prepare just a few things:

Let’s avoid getting caught off-guard during this process. Even if you’re chomping at the bit to get started, read through these initial ideas before diving in. 

Consider finding and working with a CPA and a lawyer. Having both will add cost, but they should also add significant peace of mind to your work throughout this process. Ideally, you will interview a few candidates and pick the partners you feel comfortable working with for a long time.

Also, creating a quick lean financial forecast will help ensure your business idea is viable and financially sound. An accountant with a mind for Strategic Advisory services can help with that, too. 

In addition to those two types of hired help, you can get free guidance and support from a local SBDC consultant. Having these experienced brains reviewing your business plan can help ensure you don’t waste time and money on what is really a cool hobby or rewarding social venture masquerading as a great business idea.

1. Decide on your business location

This fact may surprise you: Different states have very different rules for their corporations. As long as you follow their unique rules, it’s your right to create your new business in any U.S. state that you want. 

To keep it simple, I’ll recommend that you incorporate in the state that you are physically located in, and that you’ll do most of your business in. 

This option takes greatest advantage of your knowledge of your state and its laws, the helpful local people you know, and the ability to physically visit government offices if needed. Whatever you decide, take a moment to review the reasons the following states are popular choices for incorporation: 

Delaware is a very popular state to incorporate in, and boasts the highest number of incorporated entities in America. It appears extremely friendly to businesses, it has easily-understood legal processes, has well-developed corporate statuses, and some call it a “tax haven” because it doesn’t collect taxes from out-of-state businesses. 

Because of its popularity, Delaware is also statistically a popular state for investors to finance businesses. This sounds great, but doing business in another state means additional paperwork. You’ll need to pay “foreign qualification” fees when you register, name a “registered agent,” pay “franchise taxes,” and make required annual reports to Delaware. 

Nevada is also very popular because it boasts zero state corporate income tax, franchise tax, and personal income tax. While those sound like strict benefits, the reality is that many businesses still pay their local taxes and thus save nothing, and might even pay more, in total. Increased privacy is often promoted as a benefit, but you may be disappointed—feel free to test that idea by searching for corporate directors on Nevada’s website.

After those two, out-of-state popularity declines, though some other states are worth noting. Utah is often cited as having excellent online applications and forms. Wyoming offers no state income taxes and good asset protection. California can be appealing to California-based investors (particularly fast-growth tech companies) despite high income and corporate taxes, and franchise fees for all businesses regardless of size.

If those last three paragraphs muddied the waters, I’ll reassure you that most businesses that exist and do business in their own state should also incorporate there. You’ll avoid the potential extra headaches, paperwork, registration, fees, and legal compliance. Historically, the advantages that Delaware and Nevada offer tend to only benefit the very largest companies, or those with investors or buyers who specifically prefer those states for legal reasons. 

2. Give your business a name

When you’re naming your business, your goal is to pick one that:

•  Describes your business
• Will be remembered by your customers
• Will not be rejected by your state
• Will not cause legal issues later on

For some, the dream of starting a business starts with the name they’ll hang on their shingle. Others might care less whether their bar is “Joe’s Pub” or “Joe’s Tavern,” as long as they’re doing what they love.

While you invent your business name, consider the following quick tips:

• Be descriptive: Yes, some popular companies have names like Google, Yahoo, and Bing, but most companies should indicate what the customers can expect from you. 
• Be flexible: Think about your future. Don’t let an overly-specific name restrict your product offerings later. 
• Be online: Consider your online domain name, especially if being found online is a key part of your business model.
• Be yourself: Even if you are legally allowed to use a name, be sure you can’t be confused with others. Also avoid misleading terms like “bank” or “insurance,” which some states outright prohibit if not applicable to your type of business. 

Your business name must not be currently used by another corporation, particularly in your industry. An easy first step is to find the online search tool that your state provides online, sometimes called “Business Name Availability Check” or “Business Registry Database.” Search for it on your state’s Corporate Filing Office or Secretary of State webpage.

If you are working with a lawyer, you should get their feedback on the name you choose. If not, you can send a name availability inquiry letter to your state’s Secretary of State office yourself. Once you are confident that your name is unique and acceptable, you’re ready to file it as part of the incorporation papers.  

3. Appoint your board of directors

It sure sounds official, but your board of directors is just a group of people who are legally required to act in your company’s best interest. Oh, and one of those people can be you! Check with your state on the minimum number of board members, but assume you might want three people serving in this capacity. 

Most states also require individual board members to hold positions of president, secretary, and treasurer. It is certainly typical to include initial investors and mentors on the board of a new company, so pick your friends wisely, and consider their long-term commitment to your company’s success. 

The owner of the business is usually also a member of the board. For board members who don’t serve in other roles, the only requirement is attending board meetings in their assigned capacity. 

Note that if you are working with a lawyer or online incorporation service, you might name an “incorporator,” who is responsible for managing the articles of incorporation. This is typically a temporary role and ends once the incorporation process is complete. 

4. Name your registered agent

Your choice here is to either hire an agent or be your own. A registered agent is a person who is assigned to accept official mail and service of process in case of a lawsuit. This role must have a physical address in the state of incorporation, and also be available during business hours. In short, if someone is suing your business, this role ensures you can be found and contacted properly. 

If you’re working with a lawyer, they should have firm advice. If your business has a storefront that is open during normal hours, it is totally fine for you or your business itself to be your own registered agent. Anyone serving you can simply walk in your front door. 

Some businesses might prefer to outsource this role. If that seems appealing, the good news is that a registered agent can be hired inexpensively ($300 or less) and cover all your needs. This is particularly appealing for businesses with no physical address or irregular hours. 

5. Complete and file your articles of incorporation

Finally, you can actually create your corporation! Your decision here is whether to file yourself or hire a service. Either choice is good, and the online services are reliable and inexpensive. If you’re working with a lawyer, they might offer to file for you. 

With everything you’ve prepared so far, you shouldn’t worry much about this step—the documents are easy to complete and usually only a couple pages. 

The articles of incorporation are the official documents that you will file to legally establish your new corporation, including the name you’ve chosen, your registered agent, and your board of directors. If you’d like to file yourself, you’ll find the documents you need on your state’s Secretary of State website, and possibly at the physical location of the filing agency office. The cost of filing ranges between $100 up to $800 or so, depending on your state and type of entity. 

So, why use a service? 

Simply put, some people prefer the peace of mind, and others might find their state-issued forms a bit daunting. You’ll still need to gather all the same information either way, but if you prefer the extra guidance, you’re not alone. 

Extremely popular services like LegalZoom and Incorporate provide a step-by-step process and guarantee your forms are filed quickly, correctly, and completely. The cost of their services range from $80 to $400 (in addition to your state’s filing fees), which many find affordable. LegalZoom also provides many related services and products that might help guide your new business in the right direction. 

I’d recommend you find the correct forms yourself, and take a look at the process. If it seems simple enough, go ahead and file. If you feel there are a couple hundred dollars of value to getting help, go for it, and know that thousands of people make the same choice every month. 

6. Create your corporation’s bylaws

This is an easier step than it might seem. In fact, I recommend you keep your new corporation’s bylaws as simple as legally possible. It takes more effort to edit bylaws than day-to-day company policy or employment contracts, so this is a great time to write the minimum amount to comply with your state’s requirements. This is so common that many states (or your incorporation service) will even provide you a “fill in the blank” style template. In that case, use it!

The purpose of the bylaws is to outline the basic procedures and operations of your business. This will include many data points we’ve already covered, including the company’s name and location, the responsibilities and members of the board of directors. The bylaws will outline the rules to edit bylaws in the future. Finally, they will outline the next two steps we’ll discuss below: board meetings and distribution of shares. 

Again, resist any temptation to over-complicate or embellish your bylaws. Stick to the basic requirements and save your unique flourishes for your mission statement and marketing materials.

7. Create a corporate record book

If you used an incorporation service, they might have sent you a nice binder with your bylaws template, stock certificates, and maybe even a nifty corporate seal embosser (neat!). If so, this step is complete. 

If you’ve done these steps on your own, you’re going to need to find a retail location that will sell you a binder. I recommend the three-ring style with pockets. This binder is a legally required step and is the home for all your board meeting minutes, so make sure you actually do it.  Oh, and keep this binder in a nice safe place! To be safe, it’s optimal to keep seven years’ worth of these paper records on file, because, in a worst-case scenario, they can be requested in a legal proceeding.  

8. Hold your first board meeting

Your first board meeting is a critical step, but I recommend that you focus on the minimum required steps to fully comply, and save deeper discussions for other venues.

Here’s a reasonable step-by-step guide:

• Set a meeting time and location that 100 percent ensures all board members will attend
• Complete the bylaws and send them in advance to all board members
• Call the meeting to order and your board secretary records the minutes of the meeting
• The minutes name all the board members and their roles
• Present documents including the articles of incorporation, bylaws, stock shares, and anything else required by your state 
• You move and vote to accept the bylaws which everyone has read in advance
• You put all that stuff into that nifty binder from the previous step
• The current board (known as the initial board) appoints the board of directors, their roles, and their salaries (which can be zero dollars)—in most cases, these are the same people and roles as they were initially 
• If you’d like, you can name corporate officers like your CEO, CFO, etc.

Again, the most critical step is to record the minutes of this meeting and put them in that record book (binder) from step six. There are templates online for this meeting, and I’ll just reiterate that most companies are best off following those templates, keeping this meeting simple and streamlined, and discussing all other business matters in separate meetings.   

9. Issue stock

Put simply, you’ll issue stock to formalize which people have what amount of ownership stake in your new company. 

The cash from each share issued can help the company start, run, and grow operations. For example, if your company begins with four stakeholders who own equal amounts of the venture, you might issue 1,000 shares of stock to each person, resulting in a 25 percent ownership for each of the four people. In fact, nobody technically owns the company itself, but rather people own shares of the company’s stock. 

The other aspect of the stocks you issue is the dollar value of each share you issue, known as par value. In the above example, if 4,000 shares are issued at $2 par value, each stakeholder pays the company $2,000 for a total of $8,000 starting cash in the company’s account. The company can then use these funds to operate the business.  

A fun (and useful) fact is that the lowest value a new share can have is zero dollars. It may seem odd, but this can be the simplest option for a company that doesn’t need cash to start. Using this approach, you could issue 1,000 shares each to four stakeholders at a value of zero dollars (or “no par”), and no money will need to be exchanged. Whatever the initial value of the stock, it is always possible to sell it for more—whatever an investor is willing to pay—at a later date, so don’t feel locked-in to this early decision.  

This process may seem daunting. There are conceptions of ownership, money moving into new accounts, sometimes even fancy paper. Indeed if you are working with a lawyer, they should make this process feel comfortable for your company’s needs.  

This article will not delve into the more complex options and requirements for a corporation’s stock. You can read further about the details of preferred stock versus common stock Classes A and B. 

Most small businesses will be fine sticking to small numbers of common stock only. Some corporations also need to register with the SEC, so be sure to research whether that is required for your company. Most small businesses are exempt from the SEC requirement, particularly if you are issuing small numbers of shares (5,000 is typical) to only a few people. 

10. Go run your new business and keep following the rules!

At this point, you’re probably relieved that you can get back to the work you love! Some important items to keep on your radar include:

• Do your taxes! If corporate taxes are totally new to you, it’s probably best to work with a CPA who also does Strategic Advising for small business owners.

• Comply with the state requirements and regulations. For example, companies selling alcohol, firearms, or fish all must maintain licenses to conduct business. Each state will have its own business licenses and requirements, so this is another great area to rely on your lawyer to help ensure you are complying with all regulatory requirements. 
• If you want to become an S corporation instead of a C corp, you have 75 days to file a simple form with the IRS. Form 8825 is not complicated, so if you want to go this route, get this form filled quickly and mail or fax it to the IRS. 
• Alternatively, if you’d like your business to be a benefit corporation or B corp, you’ll have a few more steps you’ll need to complete. An excellent guide to the remaining considerations and steps you’ll need to take is here.
• Get back to work, and good luck!

Primary sources

U.S. Small Business Administration: 

https://www.sba.gov/business-guide/launch-your-business/choose-your-business-name

https://www.sba.gov/business-guide/launch-your-business/apply-licenses-permits

IRS:

https://www.irs.gov/businesses/small-businesses-self-employed/operating-a-business

https://www.irs.gov/businesses/small-businesses-self-employed/state-government-websites

This article is part of our Business Startup Guide, a curated list of our articles that will get you up and running in no time!

A federal tax ID number is also known as a federal employer identification number, also called an EIN or FEIN. It’s a 9 digit number assigned to a business by the IRS.

The U.S. Internal Revenue Service uses these numbers to:

1. Identify businesses located in the United States and its territories
2. Recognize a business for purposes of tax documentation
3. Identify what business employees filing taxes work for

Essentially, any business that has employees needs to obtain one, but depending on such things as the type of tax return you file, you may need one even if you have no employees. You can find out whether or not you need to obtain an EIN on the IRS website, or use the checklist here (last updated May 2019).

If you can answer “yes” to any of the IRS’s questions below, you need to apply for an employer identification number:

• Do you have employees?
• Do you operate a business as a corporation or a partnership?
• Do you file an employment, excise, alcohol, tobacco, or firearms tax return?
• Do you withhold taxes on income paid to a non-resident alien, other than wages?
• Do you have a Keogh plan?
• Are you involved with trusts, except certain grantor-owned revocable trusts, IRAs, or exempt organization business income tax returns?
• Are you involved with estates?
• Are you involved with real estate or mortgage investment conduits?
• Are you involved with nonprofit organizations?
• Are you involved with farmers’ cooperatives?
• Are you involved with plan administrators?

How to apply for a federal tax ID (FEIN) number:

Applying is a simple process, usually done online. If you prefer to apply via fax, mail, or telephone, you can do this too.

It’s also worth remembering that applying for a tax ID number is free. If you’ve been asked to pay to apply, you’re on the wrong site!

You can apply for your federal tax ID number here.

During the application process, you will be asked to provide basic information including details regarding your business structure or the type of organization you operate, personal information, addresses, and other details relating to your business.

If you are not applying yourself, you will need to select a person designated as the “responsible party” for this application. If you are the small business owner, it will most likely be yourself, but it could also be a business partner if you have one. Whoever the responsible party is, they will need to have a valid taxpayer identification number (such as a social security number) to apply.

When can I start using my EIN?

Once you have completed the online EIN application, you can begin using the number immediately.

This will come in handy if you are:

• Opening a business bank account
• Filing a tax return
• Applying for business licenses

That said, it will take a couple of weeks for your EIN to become a part of the IRS’s permanent records. So, if you are looking to make an electronic payment, file an electronic return or pass an IRS taxpayer identification number (TIN) matching program, you will need to wait until you are a part of the permanent record.

I already operate a business, do I need a new tax ID number?

In certain circumstances, you may need to replace your tax ID number. These are situations which affect the structure of your business, such as taking on a partnership or filing for bankruptcy. If your business is going through a structural or organizational shift, look into whether applying for a new EIN is right for your circumstances.

What happens if I lose my federal tax ID number?

Once you receive your number, take a moment to write it down. You will need easy access to this number throughout your business’s life so it’s important you don’t actually lose it!

If you do lose it or forget it, however, you can call (800) 829-4933 and choose EIN from the list of options. Find out more about recovering a federal tax ID number here (last updated May 2019).

Key tax resources

If you are applying for a federal tax ID number with taxes in mind, it may be worth taking a look through some of the following resources:

• The IRS offers a great video on what business owners need to know about federal taxes
• 5 Tax Preparation Tips Every Entrepreneur Should Know
• How the Tax Cuts and Jobs Act Will Affect Small Businesses
• Must-Know Tax Tips for Freelancers
• Last Minute (and Year Round) Tax Tips
• What You Need to Know About Online Sales Tax and Nexus

It’s no secret that operating a small business is hard work. You devote tons of time and energy to making smart decisions, driving profits, and doing your best to keep your taxes low.

Now that tax season is just around the corner you’re probably wondering (or outright worrying!) about how the recent Tax Cuts and Jobs Act, which took effect in 2018, will affect your tax picture this year and beyond.

If you’ve been dreading tax time because of this uncertainty, it’s time to breathe a sigh of relief: most of the changes associated with the recent tax reform will actually benefit you this tax season—and it’s good to be informed of the not-so-great changes as well so you can plan wisely for the future.

Corporate tax reform in the United States was long overdue. For too many years, corporations in the United States faced a much higher corporate income tax rate than did companies based in most overseas economies. As a result, increasing numbers of U.S. companies chose to expand more overseas rather than in the United States and to be headquartered outside the United States, which wasn’t good for the long-term health of the U.S. economy and labor market. When Congress passed the Tax Cuts and Jobs Act in late 2017, it was the most significant tax reform passage since the Tax Reform Act of 1986.

Keep reading to learn the facts about how the 2017 tax reform bill will affect you and your small business this year.

Expect a reduction in your individual income tax rates

Following the 2017 tax reform bill, the corporate income tax rate was lowered from 35 to 21 percent, a 40 percent reduction. The Tax Cuts and Jobs Act also reduced individual income tax rates by several percentage points inside most tax brackets. This comes as great news for most small business owners in the U.S who operate their businesses as pass-through entities (including sole proprietorships, LLCs, partnerships, and S-corps).

If you’re a pass-through entity, you can take a 20 percent reduction

When Congress was reworking the tax code, it recognized that many small businesses operating as pass-through entities would be subjected to higher federal income tax rates compared with the new 21 percent corporate income tax rate.

To account for this, Congress provided a 20 percent deduction for pass-through entities. Here’s an example: assume that your sole proprietorship netted you $60,000 in 2018 as a single taxpayer. That would push you into the 22 percent federal income tax bracket. But, because the pass-through deduction allows you to deduct 20 percent of that $60,000 of income (or $12,000), you would only owe federal income tax on the remaining $48,000. This major change has encouraged small business owners to feel optimistic about being able to grow their businesses.

But keep in mind that this deduction gets phased out for service business owners (such as lawyers, doctors, real estate agents, consultants, etc.) at single taxpayer incomes above $157,500 (up to $207,500) and for married couples filing jointly with incomes more than $315,000 (up to $415,000). This deduction may be limited for other types of businesses above these income thresholds, so be sure to consult with your tax advisor if you have questions.

Now you can enjoy better equipment expensing rules

The so-called Section 179 rules have historically permitted small businesses to be able to immediately deduct the cost of equipment, subject to annual limits, they purchase for use and place into service in their business. But the 2017 tax bill expanded these rules. Now, more businesses can immediately deduct up to $1 million in such equipment expense annually (up to the limit of their annual business income).

Further, this deduction can also now be used for purchases on used equipment. These provisions, which don’t apply to real estate businesses, remain in effect through 2022 and then gradually phase out until 2027 when the prior depreciation schedules are supposed to kick back in.

The maximum depreciation deduction for automobiles has been increased

The 2017 tax bill included a major increase in the maximum amount of auto depreciation that can be claimed. Under this reform, the annual amounts of auto depreciation have more than tripled.

Effective with the tax year 2018, here are the maximum amounts that can be claimed:

Year 1: $10,000 up from the prior limit of $3,160

Year 2: $16,000 up from the prior limit of $5,100

Year 3: $9,600 up from the prior limit of $3,050

Year 4 and beyond: $5,760 up from the prior limit of $1,875, until costs are fully recovered.

After 2018, these annual limits will increase with inflation for cars placed into service.

Your interest deductions have been capped

Starting in 2018, companies with annual gross receipts of at least $25 million on average over the prior three years are limited in their deduction of interest from business debt.

Net interest costs are capped at 30 percent of the business’s earnings before interest, taxes, depreciation, and amortization (EBITDA). Farmers and most real estate companies are exempt from this. Then, effective in 2022, this provision becomes more restrictive and would thus affect even more businesses. At that point, the 30 percent limit will apply to earnings before interest and taxes.

You will lose some of your meal and entertainment reductions

The tax reform bill of 2017 eliminated the entertainment expense deduction for businesses. Under previous tax law, you were allowed to deduct 50 percent of those expenses (for example, when a business entertained customers and even employees at restaurants, sporting events, and fitness clubs).

There are exceptions under the new rules: For example, on-site cafeterias at a company’s offices and meals provided to employees as well as business meals associated with travel are 50 percent deductible. Meals provided to prospective customers as part of a seminar presentation are still fully deductible. And as long as they are inclusive of everyone, holiday parties and company picnics are also fully deductible.

The health insurance mandate has been eliminated

After the Affordable Care Act (a.k.a. Obamacare) was passed by Congress in 2010, some Republicans in Congress vowed to repeal it. Following Republican Donald Trump’s election in 2016, it seemed that the pieces were in place for Obamacare’s successful repeal. But, when the late Arizona Senator John McCain gave the repeal measure his infamous thumbs-down vote, Republicans fell one vote short in the Senate.

So, the 2017 tax bill included a little-known or -discussed measure that eliminated Obamacare’s mandate effective in 2019. This mandate required people to have or buy health insurance coverage, and if they didn’t, they’d face a tax penalty. So, the penalty tax also disappears in 2019.

Under the new tax reform, net operating losses (NOLs) can no longer be carried back for two years. However, NOLs may now be carried forward indefinitely until they are used up. The carry-forward limit was previously 20 years. NOLs are limited each year to 80 percent of taxable income.

Now that you know about the most significant provisions that will affect your small business this year, you can approach tax season with confidence. And best of all, you can make informed decisions as you continue to grow and shape your small business into the vibrant enterprise you have always envisioned.

If you haven’t already filed your taxes, now is the time to get your information together to ensure that they’re filed on time and avoid costly penalties and unnecessary stress. It’s also the perfect opportunity to start organizing your taxes for the next filing season.

There are a few steps you can take now to develop healthy financial habits that will make filing much easier now and in the future. Here are just a few to get started.

1. Know the important dates for your business’s tax filings

While exact due dates may vary year-to-year because of holidays or weekends, it’s essential to be aware of the general annual due dates:

• Partnerships, S corporations, and multiple-member LLCs are generally due by March 15 each year
• Sole proprietorships and single-member LLCs, which are filed on the schedule C of the personal tax returns, are due by April 15 each year
• Corporations that use the calendar year as a fiscal year are also generally due by April 15 each year

Set an alert in your calendar for at least two weeks before each of the IRS’s quarterly filing dates; otherwise, you could end up with late-payment penalties for missed filings. Check your state’s deadlines, too—they’re typically aligned with the IRS’s, but not always.

2. File your year-end taxes on time

If you haven’t already filed your taxes, you should at least have your financial information ready for your accountant. Take these steps ahead of time:

Ensure that your business financials are complete and schedule a meeting with your accountant. If you are a sole proprietor or single-owner LLC and file your personal and business taxes together, make sure you come prepared with your personal financials as well. Gather all pertinent income and expense information, as well as receipts. Bookkeeping software programs like QuickBooks and Xero make it easier to track income and expenses. These programs are affordable (or even free), so we encourage all small business owners to use them to manage financials online.

Follow up with your accountant at least a week before your company’s filing deadline to ensure that your taxes are submitted on time and make sure to request a filing receipt. If your accountant doesn’t have all the information they need to file it can cause delays, so be sure to respond quickly to your accountant’s calls or emails.

3. Prepare now for next season’s taxes

Make sure you’ve got the right accountant for your business.

A great accountant is an essential part of your team—someone who ensures that your books are set up properly, and also helps you make strategic decisions about business investments, expenses, loans, and other financial matters.

Early in this new tax year, assess whether you’ve got the right accountant for your business:

• Meet with your accountant quarterly (starting just after tax season) to learn strategies for tax savings and long-term growth. This can reveal whether your accountant is on board as a part of your business’s success team or is simply acting as a tax preparer.
• Ask about how their experience and clients align with your business or industry. Having knowledge related to your business shows that your accountant has nuanced insight that can benefit your company.
• If you know of their other clients (or can get references), ask if they’re satisfied with the relationship. It’s also advisable to check accreditations and licensing.

4. Update and maintain your financial records throughout the year

It takes about a month to form good habits (or to break not-so-productive ones), and the benefits of maintaining business financials on a daily basis are well worth the time investment. You’ll make smart, on-point and timely strategy changes and if you apply for a loan, potential lenders can easily assess your company’s financial position and will appreciate your great management skills.

Use this next month to get your business’s financials in order:

• Update your online financials daily. Some businesses, like restaurants and retail, will have many transactions throughout the day, and others may only have a few all month long. Regardless of which bucket your business falls into, get in the habit of checking your financials at the end of each day. Over time, you’ll find that you’re far more in-tune with how money is earned and spent and where there’s potential for growth or savings.
• Inform your accountant of all fixed-asset purchases that you’re planning (or have made) and about your company’s debt. The interest you pay on loans made to the business will be added to your company’s profit-and-loss statement as an expense, decreasing your taxable income. You can also use this information to leverage the tax code, as many large business expenses may qualify as business write-offs.

5. Stay on top of tax payments throughout the year

Far too many small businesses are derailed by unpaid taxes that accumulate throughout the year and, sometimes, over several years.

To avoid this:

• Keep track of due dates for quarterly and year-end filings for your estimated income taxes, as well as others like sales tax, and set reminders on your calendar of tax-payment due dates.
• Set aside estimated tax payments from your monthly revenues and deposit them in a separate bank account. This way, you’ll always have the money on hand to pay your taxes. If you haven’t already set up a separate business bank account, do it right away and don’t mix your personal and business expenses.

Small business taxes: You’ve got to pay them, so be smart about them

There can be tremendous business benefits when you approach tax seasons strategically—as well as painful financial consequences when you don’t.

Use these simple tips, as well as others that your accountant can share that are specific to your business or industry, to help you make the most of this inevitable business expense.

For years, “tax-free” online shopping brought customers to the web in droves. States lacked the authority to impose a sales tax collection obligation on out-of-state businesses with no physical presence in the state.

But that changed on June 21, 2018, when the Supreme Court of the United States overruled the physical presence rule in its ruling on South Dakota v. Wayfair, Inc. States can now impose sales tax on remote sellers based on economic nexus (the volume or dollar value of sales into a state) as well as physical presence.

In this new sales tax reality, there are three things every small business or startup should do:

1. Reassess nexus: Where are you and your current (and future) customers?

Why it’s time: Now that the Supreme Court has paved the way for South Dakota to impose a sales tax collection obligation on remote sellers with more than $100,000 in sales or at least 200 transactions in the state, other states are following suit. If you plan to start an online business or already sell across state lines, you should watch for new laws.

Already, more than 30 states have economic nexus laws in place or pending. If you sell in volume (as little as $100,000 or 100 transactions) into one or more of those states, you’ll likely need to register, collect, and remit sales tax to the proper taxing authorities even if you lack a physical presence.

Remember that, depending on the state, a sales tax collection obligation can be triggered in many ways. These include but aren’t limited to physical presence in a state, affiliate ties to in-state businesses, and sending employees into a state.

The bottom line: If you’re just starting your business or expanding into new states, it’s a good idea to do some research. Sales tax obligations for businesses aren’t as simple as they used to be. If you’re not sure what exactly nexus means for your specific business, it might be time to consult with a tax advisor.

2. Revisit registration: Do you need to collect and remit sales tax in more states?

Why it’s time: You probably know you need to register for sales tax collection in your home state if you make retail sales. If you make interstate sales, you may also have to register in one or more other states.  The first step is to determine where you have sales tax responsibilities. The next is to get a handle on how and when you need to file returns and remit sales tax. These requirements generally differ from state to state.

The bottom line: Having a third party handle registration and returns for you can be more cost-efficient and accurate than handling it in-house. Without a full suite of technology solutions that addresses every stage of sales tax compliance—from real-time rate calculation to on-time returns filing to business license and tax registration services—you may expose your business to risk.

3. Rethink compliance: Is there a better way?

Why it’s time: Managing sales and use tax manually is always challenging, especially for new and growing businesses. And with more than 30 states imposing sales tax collection obligations on remote sellers in the wake of the Wayfair ruling, it can be downright overwhelming.

If your new company is growing or planning to grow, your sales tax obligations will likely grow too. Just like your other business functions, sales tax compliance needs a strategy.

The bottom line: Having a reliable sales tax solution in place today better prepares you to deal with future sales tax obligations. You need a solution that can grow with your business, starting with affordable pricing for low volume companies and ending with a robust enterprise-level platform as you grow into more states.

Sales tax compliance is complicated, and it’s not likely to get easier anytime soon. But that doesn’t mean it has to eat up resources and be a burden on your business. Do your research, and don’t be afraid to reach out to seek expert help for sales tax calculations, state registrations, and returns filing.

Some businesses need an automated sales tax solution to stay above water, while some can be managed in-house; however, all businesses can benefit from consulting with an expert to determine a strategy that works for them.

If you’re looking for more resources to keep your small business legal and running smoothly, check out the latest on law and taxes on Bplans.

Your U.S. patent is granted and you are all set to implement your great idea. It might be releasing a new chain of products, enhancing the ongoing service, or maybe developing a new strategy to promote the brand or business.

But, did you know that if you have a patent granted in the U.S., you can’t stop someone from using your patented invention in China or anywhere outside the U.S.?

Do you know why? Patent laws are country specific, which means a U.S. patent won’t protect your invention outside the purview of the U.S. patent laws.

This is a big problem, isn’t it? So, what’s the solution? One solution would be filing the patent in all the different countries wherever you want to protect your invention—a tedious job.

There’s a better approach. You can file a single international application and mention all the countries where you want to get a patent protection. How to go about it? Well, that’s what I’ll be discussing in this article.

The holy grail of priority date

Before we move on, let me just explain the concept of priority date. For example, you have a rough draft of your invention in your head. You are not clear about the full detailed description, but you want to secure it anyway before coming up with the actual document.  

What should you do?

File a provisional application which will only include a brief summary of your invention. You get 12 months to file a full-blown patent application after filing a provisional patent application. Keep in mind that a provisional application in the U.S. doesn’t offer any protection outside of the US.

How does it help?

The day you file this application, you get a magic date called the priority date. If someone files a similar patent or published some kind of journal disclosing the invention, before you file a full-blown patent application, their disclosure won’t act as a prior art.

A prior art is any document that discloses your invention before the filing date of your patent application. If there exists a prior art for your patent application, your patent stands rejected.

Thus, it is advised that you file a provisional patent application as it gives your patent an edge over other similar patents before you file a full-blown patent application.

So as we are done with the concept of priority date, let’s discuss how you can file a patent application in multiple countries by following the Patent Cooperation Treaty (PCT) route.

Who makes filing a patent application in multiple countries possible?

The PCT allows you to patent your invention simultaneously in different countries with a single international patent application.

There are around 150 countries under the PCT umbrella; by filing one international patent application, an inventor can seek protection in 150 countries simultaneously.

What’s an international patent application?

An international patent application saves you from the pain of filing a patent application over and over again in multiple countries. All the patent offices of countries that are members of PCT consider an international patent application to be the initial patent application that they have to examine.

An international application is a single patent application that can help you get patent protection in multiple countries (without visiting the patent offices) and replaces all the individual regional or national applications.

How to file a patent application under the PCT

An inventor that wants to file a patent application in multiple countries using the PCT route should first file a patent application with their own national patent office. Within 12 months of the filing date, they will need to file an international patent application under the PCT.

You can also file your international patent application directly with the World Intellectual Property Organization (WIPO), without filing with the U.S. patent office. In fact, no matter which way you choose, your international patent application gets published at the WIPO. The condition for filing is that you have to comply with the national security provisions. You can explore more about directly filing with the WIPO here.

We can roughly divide the entire process of filing patents in multiple countries under the PCT into two phases: international and national. In this instance, the national phase refers to the individual nations (other than the U.S. or your own country) where you’d like patent protection.

International phase

1. Filing

As I’ve mentioned earlier, you can file your international patent application directly with the WIPO or you can follow the other route where you first file a patent application with the U.S. patent office and then file an international patent application.

2. International Search Authority

International Search Authority (ISA) then takes the charge to conduct a patent search to find any relevant patent document and research papers that can challenge the novelty of your patent application.

The ISA provides you an international search report (ISR). The international search report helps you evaluate your chances of securing patents in various countries. The ISA is bound to publish an ISR within 18 months of the earliest filing date.

That is to say, if you file a patent application with your national office on 1/1/2018 and with WIPO on 4/1/2018, then ISA is bound to publish ISR by 6/1/2019.

3. Supplementary international search

In case you have doubts regarding the comprehensiveness of search results in the ISR of your international patent application, and you think there may exist a prior art that can jeopardize your invention, you can request that ISA conduct another search.

This time, a different ISA will conduct a patent search for you. Supplementary international search reduces the possibility of finding a prior art at a later stage. You have to pay additional fees to get a supplementary international search conducted which differs as per the ISA. You can check the fee from Table I(c) here.

After completion of the supplementary search, ISA publishes a supplementary search report which is nothing but another ISR.

4. International Preliminary Analysis

Based on ISR’s search results for your international patent application, you may find some document challenging novelty of your patent application. If you wish, you can use that information to make amendments in your international patent application, which can increase its chance of getting granted.

After amending the claims of a patent application, you can request an International Preliminary Analysis for assessing the patentability of your amended patent application. An international preliminary report on patentability (IPRP), like ISR, helps you assess the chances of your patent application to get granted during the national phase.

After publication of ISR, you have to get a Supplementary International Search or International Preliminary Analysis conducted within 12 months. During these same 12 months, you can decide the countries where you would like to get a patent protection for your invention.

National phase: Starting the patent process in other countries

This is the phase of your patent application where you decide on which countries (outside of your home country) where you want to get a patent protection. If you think that your invention may have chances to perform better in German, Canadian, South Korean, Australian and Chinese markets, you would be choosing patent offices of these countries to begin the national phase of your patent application.

After selecting your desired countries, you pay their fees, submit your translated patent application, appoint a local patent agent, and the like. Their patent office then begins conducting a separate patent search on their end to check the novelty of your patent application to decide whether your application is eligible to receive a patent protection or not.

Conclusion

PCT is a cheaper way to protect your patent application in multiple countries. Aside from that, it also gives you a timeline of 30 months from your earliest filing date to decide countries where you think your invention may have a chance to make money.

You or your team had a eureka moment and you invented something unique. You have a hunch that this could be the next big thing. You don’t want to let the opportunity slip into someone else’s hand.

Should you protect your idea by filing a patent?

What is a patent?

A patent is a legal right granted by a particular government. If you hold a patent, no one can use your invention to make, sell, or market a product without your consent.

Patents are country specific. For example, if you have a patent in the U.S. and not in India, you can’t stop someone from using (and profiting from) your patented invention in India. So you’ll have to file for a patent in each country where you want to protect your invention.

Is it cost-prohibitive?

Filing a patent is costly—it can put additional stress on your budget. A patent may cost anywhere between $10k and $25k depending on the level of complexity of your invention. To top it off, only 0.2 to 5 percent patents become commercially viable—meaning even if you make the investment in protecting your idea, chances are actually pretty low that your product will ever launch.

So it’s a big decision. If you have a novel invention that you think has great potential to make money and you decide that you want to file, when should you do it? In this article I’ll offer some tips for figuring out:

1. When is the right time to file a patent application?
2. Is your idea patentable?
3. Is your idea actually unique?

When is the right time to file?

Don’t wait too long

After your eureka moment, you should file a provisional patent application as soon as you can. Why? Because filing one is cheap. For startups in the U.S., it will only cost between $65 and $130.

You’ll have a year to work out the details

After you have filed a provisional patent application, you get a period of one year to decide whether to go ahead with filing a properly drafted patent application. During this year, you should be able to figure out whether your idea is unique enough to qualify for a patent according to the law.

But how is a provisional patent application different from a regular patent application, Kanika? Great question! A provisional patent application doesn’t require claims, objective and advantages of an invention, disclosure of prior art, and the like.

For a provisional patent application, you will just need to provide a written description disclosing your invention. Even a description in layman terms would do the job.  

Doing this provides you an early priority date, which gives you an edge over others that file for patents with similar ideas though later. The U.S. follows the First to File system, which means that the one who files for a patent protection first has the upper hand.

If you are in a country that follows First to Invent system, you can have a chance to get a patent application granted if you prove that you were the one who came with the invention first. In the U.S., however, you won’t stand a chance. It’s better to be safe than sorry.

How can you find out whether your idea is patentable?

You had your eureka moment, and you have filed a provisional patent application. Now the next task is to hire a patent attorney to file a full-blown patent application. It is technically possible to file without legal representation, but I don’t advise it because, in a court of law, patent proceedings are focused on the specific language used in the application. It pays to have a professional to help draft your application.

However, before you even call an attorney and discuss your idea, I suggest you verify the novelty or uniqueness of your idea. It can save you $2,500 to $3,000 in attorney fees.

In the next section, I’ll explain how you can conduct this search on your own. Before that, let’s first discuss the conditions that your invention must satisfy to receive the seal of grant from a patent office:

1. Patentable subject matter

Every country has a defined list of certain properties or things that are not patentable—they fall under the category of non-patentable subject matter. For example, laws of nature – Newton’s law of motion, or any phenomenon which opposes it, is considered to be a non-patentable subject matter. Make sure your invention doesn’t fall into the non-patentable category.

2. Novelty

Your invention should be new. There shouldn’t be any already existing public document disclosing your invention before the date you submitted your patent application (or provisional patent application) to a patent office.

If the idea that you’re hoping to patent has already been publicly shared through an article, research paper, video, podcast, interview, or at a conference, for example, your chances of being granted a patent on it are slim.

3. Nonobviousness

This condition means that your invention shouldn’t be obvious to someone in your industry or someone who is a non-expert.

4. Usefulness or industrial application

Your invention should follow this criterion to get a patent protection. It must be useful.

If your idea discloses something that has no practical applications—for example, you file a patent application for a ghost catcher or a time machine—it is not going to receive a patent protection.

5. Mathematical formulae

There are a lot of patent applications for mathematical algorithms that get rejected during the patent examining phase or maybe later in court proceedings.

How to verify that your idea is unique

If your idea meets the five basic conditions, the next step is to verify that your idea is unique—and that no one else has already filed a patent for it. There are multiple free patent databases like Google Patents Search, Espacenet, and WIPO that can help you in the pursuit. Below is a list of patent search databases along with some other free resources:

Google Patents Search

Google patents search is a free patent database. You will find Google Patents easy to use—the process is a lot like any other search on Google. This free guide will help you learn how to how to conduct a patent search on Google Patents.

Espacenet

Espacenet is free patent database maintained by the European Patent Office. It has over 100 million worldwide patents. This guide will help you get accustomed to using Espacenet.

Patentscope

Patentscope by the World Intellectual Property Organization (WIPO) gives anyone access to 65+ millions of patent documents. 

USPTO

If you want to restrict your search to the U.S. only, heading over to the USPTO’s free patent database makes sense. Here is a guide that can help you learn how to use the database.

Conclusion

Simply put, if you or team comes up with an inventive idea, you should consider filing a provisional patent application right away. And before seeking help from an attorney, consider running a patent search on your own. It will save you some money for sure.

• You get the benefit of personal liability protection, as you would with a corporation.
• You keep things simple with a business that’s easier to run, similar to a partnership or sole proprietorship (for example, you aren’t required to file corporate taxes).

Who can form an LLC?

The good news is that just about anyone can start an LLC. You don’t need a huge company, lots of employees, or anyone but yourself (except in Massachusetts, where you need to have two owners).

The owners of an LLC are called “members” and there are no special qualifications required, but in most states, you can’t form one if you are in certain licensed professions, such as an attorney or a medical doctor. In that case, you can form a professional corporation, or PC.

You can have as many members (owners) as you want in your LLC, but most LLCs keep the ownership small (no more than five members), since you do need to work closely with each other and have a shared vision. Be sure the members are people you trust and can work with. A good LLC is like a marriage in that way.

How to form an LLC

• Create a business plan. Once you’ve decided that an LLC is a good fit for your business, you should start by creating a business plan (although it is not required), so that you have a roadmap for what you’re going to do and how you’re going to do it.
• Name your business. Next, you need to do a search within your state to make sure no one else is using the same business name you have chosen (it’s confusing for everyone if there are two Bob’s Plumbing companies). Your secretary of state’s office will do the search and give you clearance if the name is available.
• Choose a registered agent. This is a person who will accept legal service and notifications on behalf of your LLC. It doesn’t have to be you or any other member; it just has to be someone within the state willing to accept those documents (there are registered agent companies you can contract with). Choosing someone else frees you up from having to be available for service.
• File your articles of organization. To make your LLC official, you’ll need to fill out an articles of organization form from your state that includes the LLC name, registered agent, names of members, and other basic information. You’ll file this with the secretary of state, often in the corporation division. There will be a filing fee that is usually under $100.
• Write an operating agreement. Use your business plan to create an operating agreement for your LLC. This does not have to be filed with the state, but it is an essential document you will rely on. An operating agreement includes identifying information about the company, a statement of the company’s intent, the business purpose of the LLC, the term of the LLC, how it chooses to be taxed, and how new members will be admitted, as well as other general operating provisions.
• Comply with local requirements. Be sure to complete any local licensing or registration requirements for businesses in your county or city. In certain locations, you may be required to file a DBA (or “doing business as”) document that identifies the individuals behind the LLC.

Managing your LLC

Now that you’ve set up your LLC, you can get down to the business of actually running it—and that means working with the other members successfully. There are two different ways you can choose to manage your LLC:

• Member management. In this method, the members are the ones actually doing the hands-on management. All the members vote on decisions and work in the business. This means you’ll need to have a clear business structure and defined roles. Your operating agreement should set out what each member’s responsibilities are and how the business will actually run.
• Manager management. In this method, the members select one or more members or bring in an outside person (such as a CEO or COO) who will take on the responsibility for day-to-day management of the LLC. The members who are not in managing roles don’t actually control how the business runs. Instead, they function more like investors who have put up their money and are waiting to see their profits. Only those people who are named as managers are able to vote on management decisions and do business on behalf of the LLC.

Liability protection

The main reason most people decide to form their small business as an LLC is to protect themselves from liability. An LLC shields you from liability for the company’s business debts and claims. So, if your business gets behind on a business line of credit, the bank can sue only your company and reach only your company’s assets. It can’t sue you personally or try to take your house or your car or anything you own in your own name.

You are on the hook, though, for any money you’ve invested in the LLC—because those funds belong to the LLC, but your liability is limited after that point.

The exceptions to the rule

LLC personal liability protection can be a great shield, but it doesn’t protect you from everything. Personal liability exceptions to LLC liability protection are the same as those faced by corporations.

You can still be personally liable as an LLC member if you:

• Personally injure another person directly
• Give a personal guarantee for a loan or debt for your LLC and the LLC then defaults on it
• Do not pay the taxes your LLC withholds from your employees’ pay
• Cause harm to the LLC or another person by intentionally doing something fraudulent or illegal

The biggest pitfall that will expose you to liability is failing to keep the LLC and your personal affairs separate. You have to take your own LLC seriously if you want other people to.

If you’re just using your LLC bank account as your own personal checking account or you don’t pay your business bills from that account, then it’s going to be clear that the LLC truly is not a separate entity. In your own mind, you need to think of it as separate and act accordingly.

How to separate your LLC from your life

In your mind, work is just part of your life, so it can be hard to keep your LLC separate and keep a clear line between your personal life and your company. It’s essential you do so, though, if you want to enjoy the limited liability protections.

To protect your LLC status:

• Have an operating agreement. Set out your business details in writing, so you and the other members are clear on your mission and your procedures and practices.
• Bank separately. Use a business bank account for your LLC, deposit all business checks there, and pay all business expenses out of it.
• Fund your business. You and the other members should invest enough money so that your LLC can run itself, pay its expenses, and be financially independent.
• Be legit. Get a federal employer identification number (EIN) for the LLC and keep a clear account of your business’s finances, so there can be no question that it is a separate entity.
• Be honest. Don’t misrepresent the state of your company’s finances to creditors or vendors. 

Business insurance

Business insurance can be an added layer of liability protection for you from your LLC. An insurance policy will cover liability that might affect you personally.

For example, if you own a hair salon and accidentally graze a client’s face with your scissors, you could be personally liable, since it is a personal act that caused harm to another person. But a good business insurance policy will cover this mistake and help protect your personal assets.

Business insurance also protects the LLC itself from lawsuits and claims. For example, if you own a landscaping business and one of your mowers accidentally hits a client’s marble stone lion and damages it, your business insurance will pay the claim. However, business insurance only covers liability for negligence—it doesn’t cover unpaid business debts.

LLC taxes

While an LLC offers some tax advantages, you’ll still be paying taxes, and it’s important to do so on time and accurately. The LLC itself must file IRS Form 1065 yearly. This is the same form used by partnerships and it reports each member’s share of the profits and losses from the LLC.

Learn more about how to file your LLC taxes in this article.

Although it must file a form each year, your LLC enjoys pass-through tax liability. This means the LLC itself does not pay taxes. Instead, the LLC members are responsible for paying taxes, and each member pays their own share. So, if you have two members who are equal owners, each will be responsible for reporting half of the profits or losses for the LLC on their own personal tax returns. You’ll have to make quarterly tax payments so long as you own the LLC, so be sure to stay on top of that.

Closing your LLC

Should you reach the point where you’re ready to close the doors to your business, there are some steps you’ll need to take to officially end your LLC. In most states, unless your operating agreement says otherwise, when one member wants to leave the LLC, it must be dissolved. If more than one member wants to leave, you have the same result. And if you’re the sole member, it’s up to you.

If you want to avoid the problem of having to close down because one member wants out, you can include buy-sell guidelines in your operating agreement that set out what will happen if one member wants out, decides to retire, dies, or becomes disabled.

To close down the LLC, you need to pay off remaining business debt, fulfill any remaining obligations (such as shipping orders), and decide if you will sell business assets (such as real estate or equipment) or divide them among the members. You must pay all tax responsibilities and notify all of your creditors that you will be closing.

You must file to dissolve the LLC with your state as well. Then the members must divide any remaining assets or profits among themselves, in proportion to their ownership amounts. One or more members can decide to open a new LLC if they choose, and this may be the thing that makes the most sense if you’ve been forced to close down due to one member leaving.

Is forming an LLC right for me?

Only you can answer that question, after taking into consideration your business goals and financial needs—including what types of liability issues could arise specific to the services you provide.

Whether you’re a solopreneur or building a fast-growing startup, forming an LLC can be an effective way to combine business liability protection with a flexible form of organization that’s easier to manage.

When you’re ready to form an LLC, you’ll also want to decide whether to handle the filing and paperwork on your own, or to ask a provider like LegalZoom to help.