Cities like Chicago offer tremendous opportunities for people who want to become their own bosses by opening a business. Deciding to make the leap into business ownership is not the only decision the new entrepreneur must make. Business formation requires complying with state laws and regulations before the doors to the new business can open to welcome the first customer.
Choosing a Business Structure
The type of business structure or entity chosen for the enterprise determines factors such as ease of formation, management, taxation and protection of the owners from personal liability. The most popular business entities are sole proprietorships, partnerships and corporations.
A sole proprietorship is the easiest business structure to form and operate. A sole owner can open for business without any formalities other than filing a certificate with a local government authority if the name chosen for the new business is a fictitious name instead of the name of the owner. The owner makes all management decisions, reports and pays taxes on the business income on her personal income tax return, and is personally liable for business debts and obligations.
A partnership is two or more people who agree to operate a business to make a profit. A partnership operating under a name that is not that of the owners must file a fictitious name certificate; otherwise, there are no other formalities to the formation of a partnership. Each partner is responsible to report his share of profits and losses on his personal income tax return and is personally liable for business debts and obligations.
Business formation as a corporation is more complex than a sole proprietorship or partnership, but offers more protection for the owners from personal liability. Corporations are created by filing articles of incorporation with the state. Once created, the corporation is a legal entity – a person – that exists separate and apart from its owners. For this reason, the owners – called shareholders – are not personally liable for the debts or other obligations of the business.
Obtain an Employer Identification Number (EIN)
Also known as a Federal Tax Identification Number, an EIN is how the IRS identifies a particular business. Once the business entity is created through its home state, an EIN may be obtained online, in person or over the telephone from the IRS without cost.
Registration with the State Taxing Authority
Businesses that have employees or are required to collect sales tax on services or merchandise must register with the taxing authority in the state in which it will be doing business. New business ventures in Chicago must register with the Illinois Department of Revenue.
Licenses and Permits
Some businesses or professions must have licenses or permits before opening for business. The business formation process includes checking with the state and local government offices that handle licenses and permits for the particular type of business.
After all registrations and filings are complete and its licenses and permits are in hand, the new commercial venture is ready to open its doors for business.