A friend of mine opened her online shop last spring and made $4,000 in her first month. Then her supplier sued her personally over a contract dispute, and she had no legal protection at all. That’s the gap most guides skip: not how to get customers, but how to set yourself up so the business doesn’t blow back on you the moment something goes wrong.
When you start a small business, the SBA defines “small” as under 500 employees, so almost every solo founder qualifies for federal programs and loans. But qualifying for help doesn’t matter much if you haven’t sorted the basic structure first. Most first-time founders skip that part because it feels like paperwork before the fun stuff. It is paperwork, sure, but it’s also what protects your savings account.
Average startup costs run somewhere between $3,000 and $5,000, according to Shopify and Kauffman Foundation research. Some businesses cost far less. The legal and financial setup steps cost almost nothing by comparison, so there’s really no good argument for putting them off.
Sole Proprietor vs LLC
A sole proprietorship is the default. You don’t file anything, you just start selling, and the IRS treats your business income as personal income. Simple, cheap, and genuinely fine for testing an idea. The problem is liability: if a customer sues you or a vendor comes after you for a contract issue, your personal assets (your car, your savings) are fair game.
An LLC builds that wall between you and the business. Forming one costs between $50 and $500 depending on the state. Wyoming and New Mexico are on the cheap end; California charges an $800 annual franchise tax on top of the filing fee, which catches a lot of people off guard. The protection isn’t perfect (courts can pierce the LLC veil if you’re sloppy about keeping finances separate), but it’s a real layer of defense a sole proprietorship simply can’t offer.
My honest take: if you’re doing anything with clients, contracts, or physical products, form the LLC early. If you’re testing a freelance skill for a few weeks, sole proprietor is fine to start. Just don’t stay there longer than you need to.
Free and Paid Setup Steps
Here’s where most people either overspend or miss a step entirely. The paid parts are state LLC filing fees and, optionally, a registered agent service, usually $50 to $150 per year. Some states also require a published notice in a local newspaper, which can run $100 to $200 in New York, so factor that in if you’re there.
The free parts people somehow still skip:
- EIN registration through IRS.gov, about ten minutes and costs nothing
- Filing a DBA if your LLC name differs from your trade name, usually $10 to $50 at the county level
- Checking your state’s business license requirements, which vary wildly by industry
Your EIN is basically a Social Security number for the business. Banks require it, clients may ask for it on a W-9, and it keeps your personal SSN off vendor paperwork. There’s no reason to pay a third-party service to get one. Go directly to IRS.gov, fill out the online form, and you’ll have the number the same day.
If you need funding later, the SBA’s microloan program caps at $50,000 as of 2024, which covers a lot of early-stage needs. Lenders will want to see a real business entity and a separate bank account before they’ll talk numbers with you, though.
First Financial Accounts to Open
This is the step that actually maintains your LLC protection. Mixing personal and business money is the fastest way to lose the liability separation you paid to create. Open a dedicated business checking account as soon as your LLC is formed, or honestly even as a sole proprietor if you’re taking it seriously. Most banks need your EIN and formation documents, so do those first.
A business account also makes tax time far less painful. When everything runs through one place, you (or a bookkeeper) can actually see what happened over the year. Chase, Relay, and Mercury are popular right now. Mercury is free and works well for online businesses; traditional banks sometimes offer better loan relationships if SBA financing is on your radar.
After checking, consider a basic business credit card. It builds credit history separately from your personal score, and spending records get categorized automatically. Don’t carry a balance on it early, though. Interest on even a $2,000 balance will quietly eat whatever margin you’ve built.
Before You Take Your First Payment
If you’re about to start a small business and haven’t done these steps yet, do them in this order: form your entity, get your EIN, open a bank account, check local license requirements. That’s the sequence. It takes a week or two total, maybe less if your state is quick about it. Skipping any of it doesn’t save real time; it just moves the problem to a worse moment, usually when money or a dispute is already on the table. The paperwork is boring. So is watching a lawsuit reach your personal account.
FAQs
How much money do I need to start a small business?
Most small businesses cost between $3,000 and $5,000 to launch, though lean service businesses can start for under $500 if you already have the tools and skills.
Do I need an LLC to start a small business?
No, but a sole proprietorship offers zero personal liability protection. An LLC costs $50 to $500 to form and is worth it once you’re dealing with clients or contracts.
How do I get an EIN for my business?
Apply directly at IRS.gov using the online form. It’s free and takes about ten minutes; you receive your EIN immediately after submitting.
