START-UP CONSIDERATIONS
Checklist for Creating a Business Entity
1) Consult an accountant. Compare the tax aspects of entities. See the Entity Comparison Chart.
2) Choose a business entity.
3) Consult an attorney regarding federal and state laws governing creation, ownership, and
operation of the entity.
4) Draft and execute agreement among principals. Target the business start date. See Pre-
Incorporation/LLC/Partnership Agreements.
5) File with state for certificate of assumed name (DBA).
6) Obtain a federal employer identification number (EIN). See inside front cover for information
on obtaining an EIN.
7) File incorporation, limited liability company (LLC), or partnership documents with state. For
entity electing Subchapter S status, file IRS Form 2553. See S Corporation Election (Form 2553) and
LLCs and Entity Classification.
8) Obtain state tax identification numbers. File required documents with state unemployment and
sales tax authorities.
9) Obtain required city/county/local business licenses/permits.
10) Establish a business checking account.
11) Fund the entity. Corporations issue stock certificates. See Capital Contributions. See Basis
for partnerships.
12) Conduct necessary corporate or other organizational meetings. Elect board of directors.
13) Establish books (accounting records) for the new entity. Close books of previous entity if
changing the form of business.
14) Send notification of the business name and business start date to customers, vendors, bankers,
etc.
15) Consult with an insurance professional to obtain business liability and workers’
compensation coverage.
16) Review wills and estate plans of the owners.
17) Hire employees. See Employer Checklist.
18) Set up records/files of documents mentioned above and any other applicable business records,
such as corporate minutes (see Corporate Considerations).
19) Start business operations.
Caution: Unforeseen consequences can occur when a business is purchased or the name or type of
entity is changed.
Business purchase considerations:
- Corporate stock acquisitions and reorganizations can trigger taxable income if not properly
structured. See Corporate Reorganizations.
Changes in stock ownership can terminate S corporation status. See Ineligible shareholders. - Successor liability laws can trigger unseen obligations. See Successor Liability Laws.
- Business insurance might not automatically transfer to a new owner (or business entity) if a
business is acquired or if a name change occurs. - A favorable state unemployment tax experience rating may be lost if ownership changes.
Generally, an asset acquisition has more advantages to the buyer than a stock purchase.
Corporate Considerations
Note: Recent changes made by the Tax Cuts and Jobs Act (TCJA) present important
opportunities for taxpayers to evaluate existing business entity choices as well as potential new
business entity choices. The 21% corporate income tax rate is substantially lower than the maximum
individual tax rate of 37%. However, the potential Section 199A qualified business income (QBI)
deduction for individuals reduces the difference between corporate and individual
rates. Changes in tax rates should be one factor, but not the only factor, to consider when
deciding upon a choice of entity.
Deciding whether to convert to a corporation to take advantage of the lower 21% corporate rate
requires decisions about both short and long-term business goals, growth expectations, owner exit
timing, distributions, and estate planning. The Section 199A 20% QBI deduction available to
noncorporate taxpayers helps to lower the differential in tax rates, but it doesn’t fully eliminate
the difference between corporate and individual rates. Many pass-through businesses may not qualify
for the Section 199A deduction given the carve-out for specified service trades or businesses and
the wage and qualified property basis limitations. See Qualified Business Income (QBI) Deduction
and Qualified Business Income (QBI) Deduction for coverage of the deduction.
The double taxation at the corporate level may be lessened if the corporation pays reasonable
compensation to the shareholders, along with certain nontaxable fringe benefits. The TCJA Section
199A deduction and 37% top individual tax rate will expire after 2025. An analysis to convert to C
corporation status is highly fact intensive, and no two analyses are exactly the same.
A corporation holds legal status separate and distinct from its shareholders. Individuals
considering incorporating a business must be familiar with and willing to adhere to corporate
formalities.
New business considerations:
- The corporate checkbook is owned by the corporation, not the shareholder. A personal expense
paid with a corporate check is treated as a distribution to the shareholder. Such a distribution is
taxed as a dividend from a C corporation. In an S corporation, the distribution reduces the
shareholder’s basis. - Each time a shareholder makes a contribution to capital in exchange for stock, the
corporation must issue a stock certificate signed by the officers. The shareholder should keep a
detailed record of all capital contributions since a taxpayer who is unable to prove cost/basis is
deemed to have a basis of zero. - A double-entry bookkeeping system should be maintained, as a balance sheet is generally required
for the corporate tax return. - Shareholders performing services for a corporation are generally treated as employees. The
corporation must file state and federal payroll tax returns, and issue a Form W-2 to each employee.
At least annually, a corporation must conduct shareholder meetings and maintain corporate minutes
documenting shareholder discussions. State law specifies the procedures to be followed.
Caution: Certain events or improper actions by the corporation can automatically terminate S
corporation status. See Terminations.
Subjects to be addressed in the corporate minutes:
- Proper meeting notice as required by bylaws or state statute.
- Quorum present or waiver of quorum.
- Acceptance of prior meeting’s minutes. Election of officers and board of directors.
- Officer’s review of corporate results for the year.
- Ratification of significant officer actions for the prior year.
- Listing of officers’ salaries for next year, and reasonableness of the compensation when the
- officer is also a shareholder. If inadequate compensation paid, document the intent to make- up
- compensation in the future.
- Approval and accrual of officers’ bonuses.
- Approval of loans (and terms) from/to employees and shareholders.
- Detailed presentation of the need to accumulate earnings for specific future business needs.
- Determination and approval of retirement plan or profit-sharing contributions.
- Establishment of employee benefit plans. Review of legal status of corporation.
- Annual valuation by the board of directors of the business for buy/sell agreement purposes.
- Approval for stock issuance, redemption, and bonuses. Approval for sale, liquidation, or
- reorganization.
- Discussion of any Section 351 asset transfers.
- Discussion on election or termination of S corporation status.
- Declaration of dividends to shareholders and how the payment amounts were set or reasons for not
- paying dividends.
- Approval and discussion of material business transactions including leases, loans and business
- interest/asset acquisitions.
- Board approval by the end of tax year of charitable contributions to be paid within 3½ months after
- year-end (C corporations only).
- Discussion and documentation of taxable transactions between the corporation and its shareholders.
Small Business Tax Information
The IRS provides various publications and phone resources on starting a business, recordkeeping,
preparing business tax returns, and computing and reporting self-employment tax and employment
taxes. hone resources go to www.irs.gov and
search “Pub. 4591.”