How to Legally Start a Business

How to Legally Start a Business: Step-by-Step

To legally start a business, you need to choose a business structure, register with the appropriate government authorities, obtain a tax identification number, open a business bank account, and secure any required licenses or permits. While the idea and product get all the excitement, getting the legal foundation right protects your personal assets, enables you to operate lawfully, and positions you to raise capital or sell the business later.

Step 1: Choose Your Business Structure

Your business structure determines your legal liability, tax treatment, and ability to raise investment. The most common options are:

Structure	Liability Protection	Taxation	Best For
Sole Proprietorship	None	Personal tax return	Freelancers, side projects
LLC	Yes	Pass-through (flexible)	Small businesses, early startups
S-Corp	Yes	Pass-through	Profitable small businesses
C-Corp	Yes	Corporate tax (double taxation)	Venture-funded startups
Partnership	Varies (GP vs LP)	Pass-through	Professional firms, joint ventures

For a thorough comparison of all business entity types including international options, read our guide on types of companies explained.

Quick decision framework: If you are building a venture-backable startup that will raise capital from institutional investors, incorporate as a Delaware C-Corp. Venture capital funds are structured to invest in C-Corps, and converting from an LLC to a C-Corp later is expensive and messy. If you are bootstrapping or building a lifestyle business, an LLC provides liability protection with simpler taxation.

Step 2: Register Your Business

Registration requirements depend on your structure and location:

• LLC: File Articles of Organization with your state''s Secretary of State office. Filing fees range from $50 (Kentucky) to $500 (Massachusetts). Most states also require an annual report or franchise tax.
• Corporation: File Articles of Incorporation (or a Certificate of Incorporation in Delaware). Delaware filing costs about $89 plus a registered agent fee of $100–$300/year. You also need to register as a foreign corporation in your home state if it differs from Delaware.
• Sole Proprietorship: No state filing required in most states, but you may need a DBA ("Doing Business As") filing if operating under a trade name.

Services like Stripe Atlas ($500), Clerky, and Firstbase streamline the incorporation process for startups. They handle Delaware incorporation, registered agent, EIN, and initial legal documents in a single package.

Step 3: Get Your EIN (Tax ID)

An Employer Identification Number (EIN) is like a Social Security number for your business. You need it to open a business bank account, hire employees, and file taxes. Applying is free and takes about 5 minutes on the IRS website (irs.gov). You receive your EIN immediately upon completing the online application.

Even if you have no employees, get an EIN. Using your personal SSN for business purposes exposes you to identity theft risk and makes the business look less professional to banks and vendors.

Step 4: Draft Your Operating Agreement or Bylaws

• LLCs should have an Operating Agreement that defines ownership percentages, profit distribution, management structure, voting rights, and procedures for adding/removing members. Even single-member LLCs should have one — it strengthens the legal separation between you and the business.
• Corporations need Bylaws that establish how the company is governed: board composition, meeting procedures, officer roles, and stock issuance rules. For C-Corps, you also need board resolutions for major decisions.

Do not skip this step. Without an operating agreement, your state''s default rules apply — and they rarely match what co-founders actually intend. Many startup disputes (and lawsuits) stem from ambiguous or nonexistent operating agreements.

Step 5: Open a Business Bank Account

Open a dedicated business checking account and credit card immediately. This is not optional — it is a legal requirement for maintaining the liability protection of your LLC or corporation. If you mix personal and business funds (called "commingling"), a court can "pierce the corporate veil" and hold you personally liable for business debts.

Recommended startup-friendly banks: Mercury (designed for startups, integrates with accounting tools), Brex (combined banking and credit for startups), Relay (designed for small business), and traditional options like Chase or SVB (now First Citizens).

Step 6: Obtain Licenses and Permits

Required licenses depend on your industry, location, and business activities:

• Business License: Most cities and counties require a general business license. Cost: $25–$200/year.
• Sales Tax Permit: Required if you sell taxable goods or services. Apply through your state''s Department of Revenue.
• Professional Licenses: Required for regulated industries (healthcare, legal, finance, real estate, food service).
• Home Occupation Permit: Required in some municipalities if you run a business from home.
• Zoning Permits: Needed if you lease commercial space to ensure the space is zoned for your use.

Use the SBA''s license and permit tool (sba.gov) to find requirements specific to your location and industry.

Step 7: Set Up Compliance Basics

Once your business is legally formed, maintain compliance to keep your protections intact:

• Annual reports: Most states require annual (or biennial) filings and a small fee to keep your entity in good standing.
• Registered agent: You must maintain a registered agent in your state of incorporation at all times. This is the person or company that receives legal notices on your behalf.
• Record keeping: Keep formation documents, meeting minutes, financial records, and contracts organized. Learn more about financial record keeping in our guide on how businesses track money.
• Tax obligations: File quarterly estimated taxes (if applicable), annual returns, and payroll taxes (if you have employees).
• Insurance: At minimum, consider general liability insurance. If you have employees, workers'' compensation is legally required in most states.

Common Legal Mistakes Founders Make

• Waiting too long to incorporate: Building a product with co-founders without a legal entity creates dangerous ambiguity about IP ownership and equity.
• Skipping co-founder agreements: Even if you trust your co-founder completely, document equity splits, vesting schedules, roles, and exit scenarios.
• Ignoring IP assignment: Ensure all founders and early employees sign IP assignment agreements so the company owns the code and designs. This is non-negotiable for investors. See our IP basics guide for details.
• Not using vesting: All founder equity should vest over 4 years with a 1-year cliff. Without vesting, a co-founder who leaves after 3 months still owns their full stake.
• Handshake deals instead of contracts: Always put agreements in writing, even with friends and family. Our guide on contracts for founders covers the essentials.

When to Hire a Lawyer

You do not need a lawyer for basic incorporation (use Stripe Atlas or Clerky for standard setups). You do need a lawyer for:

• Co-founder agreements with non-standard terms
• Your first funding round (SAFE notes are standard, but review terms carefully)
• Employment contracts and equity compensation plans (stock option plans, 409A valuations)
• Any contract worth more than $50K or with long-term commitments
• Regulatory compliance in regulated industries

Startup-specialist law firms (Cooley, Gunderson, Orrick, Wilson Sonsini) often offer deferred-fee packages for early-stage companies. Expect to pay $3,000–$10,000 for a full incorporation package including founder agreements and IP assignment.