How to Register Your SaaS Business: LLC, C-Corp, S-Corp, or Sole Proprietorship?
Before you get started on that logo or get into coding your work, remember the important groundwork that must be done. Establish your SaaS business to avoid any penalties.
It’s not exactly glamorous to register your business, but trust us, as a founder, it’s necessary for your long-term success. We’ve outlined everything you need to know in a step by step format. With this guide, you’ll learn about:
- What legal structures are available for your business
- How to register your business and obtain an EIN
- How to set up your SaaS business with payment processing and sales tax management
This guide is not a substitute for professional legal and financial advice but does provide valuable information and a place for you to start. Laws and regulations are complex depending on many variables. If uncertain, consult with experts to ensure your business is fully compliant and protected.
Gather Data on Your Existing Customer Base
First of all, select the structure that aligns with your business needs. Choosing the right legal structure is a big decision that affects your taxes, liability, and fundraising potential. The most common options are:
- Sole Proprietorship: For the most simple option, choose to have your business legally one and the same. It’s also inexpensive to set up and gives you complete control. But your personal assets are at risk if the business faces any legal or financial trouble.
- Partnership: If you have any partnerships, this allows you to share responsibilities and resources. However, like sole proprietorship, it comes with unlimited personal liability for all partners if disagreements occur.
- Limited Liability Company (LLC): This is an admired choice for startups due to it’s limited liability protection for its owners. In this case, your personal assets are typically shielded from business debts or liabilities. Profits are taxed at the individual level, giving flexibility with management and taxation.
- C Corporation: This is favored for businesses looking for significant growth and seeking venture capital investment. It has limited liability and is easier for fundraising through stock issuance. Yet, the downside of double taxation is present so profits are taxed both at the corporate and individual levels.
- S Corporation: With the combination of limited liability of a corporation and the pass-through taxation of an LLC, profits are taxed at the individual level. Unfortunately, S Corporations have strict eligibility requirements, including limits on the number of shareholders and who can be a shareholder.
To help you with your decision, let’s look at the pros and cons of each structure:
|
Type of Structure |
Positives |
Negatives |
Recommended |
|
Sole Proprietorship |
Easy, less costly to set up, gives control |
Endless personal liability with assets at risk, fundraising options challenged |
Small, businesses with low risk and single owner |
|
Partnership |
Easy to create, shared responsibility and resources |
Uncapped personal liability for everyone, increased chance of disputes |
Businesses with several owners that share profits and losses |
|
Limited Liability Company (LLC) |
Protection is limited, but flexible management, pass-through taxation (profits taxed at the individual level) |
Complicated proprietorship, potential for self-employment taxes |
Startups, small businesses seeking liability protection |
|
C Corporation |
Liability is limited, easier to raise capital, potential for stock options |
Taxes are doubles(profits taxed at corporate and individual levels), more admin work |
High-growth startups seeking venture capital |
|
S Corporation |
Liability is less, pass-through taxation, potential for stock options (limited to 100 shareholders) |
Conservative eligibility requirements (US citizens/residents only), limited to one class of stock |
Small businesses that meet the S Corp criteria and want to avoid double taxation |
If you’re unclear about the structure that suits your business but need to start selling quickly, partner with a Merchant of Record (MoR). We work with SaaS businesses and individuals and greatly simplify the entire process. To begin, you need a functional website with a privacy policy, refund policy, and terms of service, as well as a great product.
Name Your Baby (Your Business, That Is)
First impressions matter so you don’t want to mess it up! This is where you can show your brand identity by choosing a name that speaks to your intended audience. Try the following to get started:
- Brainstorm: Be creative and think outside the box. Consider your brand identity and what your shoppers will find relatable.
- Check Availability: Do a little digging on your state’s business registry website and Google to see if your new moniker is already in use.
- Secure the Domain: Once you’ve found the perfect name, be sure to get the domain name that matches. This will help customers find you quicker online and gives professional vibes. Check domain availability on sites like GoDaddy or Namecheap.
Choose a name you love that aligns with your brand and don’t overthink it. You can change it later if needed.
Obtain an Identification Number
Now, to make things legal. Registering and getting an identification number formally establishes your company as a legal structure: this is necessary for when you open a bank account, pay taxes, and for protecting yourself from personal liability.
Find your state’s Secretary of State website and use it to file the necessary paperwork. If you’re registering an LLC, you’ll need to file Articles of Organization, while corporations will require Articles of Incorporation. Since each state has its own fees and requirements, be sure to follow the instructions as they ask.
Next, secure your Employer Identification Number (EIN) from the IRS. This unique nine-digit number will be used for tax purposes and is required for various tasks, like opening a bank account and filing taxes. It’s easy to apply for an EIN online through the IRS website for free. If you are a non-US resident, you can apply by phone, fax, or mail using Form SS-4.
Obtain Necessary Licenses and Permits
This step is much like creating a rulebook for your business. Think of your internal documents as a safety net to avoid disagreements later on. Admittedly not the most exciting part, but nevertheless very important!
Research the licenses and permits you’ll need to operate your SaaS business in your location. The SBA website has helpful resources for obtaining licenses and permits. Common licenses include a general business license, sales tax permit, and professional licenses (if applicable).
- For LLCs, an Operating Agreement is necessary: This document details who owns what percentage of the company, how profits and losses are distributed, who is responsible for decisions, and the process if a member wants to leave or join. You can find free LLC Operating Agreement Templates on websites such as eForms or Forbes Advisor.
- Bylaws: If you’ve chosen to form a corporation, Bylaws are required. They define how your company is governed, details about shareholder meetings, voting procedures, and the responsibilities of directors and officers. There are online resources that offer free bylaws templates, such as LawDepot and Rocket Lawyer.
- Partnership Agreement: This agreement outlines each partner’s rights and responsibilities, how profits are shared, and what happens if a partner leaves. There are free Partnership templates on websites such as PandaDoc and Docracy.
Even though there are templates online, consider having an attorney review them to be sure they’re accurate and legally sound. This is an investment that could prevent problems in the future.
Keep copies of all registration documents, tax IDs, licenses, and permits in a secure location. You’ll need them for future reference, especially for tax purposes and other legal matters.
Open a Bank Account
While taxes aren’t any fun, they’re part of life; but with proper planning, you can minimize the chances of costly surprises. Start by investigating the federal, state, and local taxes applicable to your SaaS business. Different structures and locations of business have a variety of tax obligations. To learn more about SaaS sales taxes head over to our detailed guide. You’ll better understand when, where, and how to calculate, file, and remit your sales taxes.
Calculate what you’ll owe in taxes and set aside money periodically to avoid struggling to pay a large tax time bill. If you’re self-employed or a business owner, you’ll have to make estimated tax payments quarterly or monthly.
If you don’t have the expertise in taxes, consult with a professional to help you file. Since countries have their own tax thresholds and regulations, a mistake can have serious consequences. Having an expert ensures compliance and decreases the chance of any penalties.
To avoid the complication sales tax compliance brings, opt for a Merchant of Record (MoR). An MoR manages the billing process, including sales tax calculation, collection, remittance, and compliance with local regulations, giving you the time to grow your SaaS business.
Select Your Payment Processor
Finding a reliable, secure payment solution is fundamental for any business that wants to get paid. For SaaS businesses, this is particularly important, because you’ll be handling recurring payments and subscriptions. So, before you start accepting payments online:
- Choose a Payment Processor: Research different solutions and find one that satisfies all your business needs. The common options are divided into PSPs and MoRs. Think about transaction fees, supported payment methods, ease of integration with your website or platform, and customer support.
- Integrate: Once you’ve selected your processor, integrate it with your website or app. Test the checkout process to be sure it is frictionless and user-friendly, clearly displays accepted payment methods, and has 24/7 customer support.
- Protect Your Customers: Security must be prioritized when it comes to payment processing. To keep your customers’ sensitive financial information safe, be sure the chosen system is Level 1 PCI DSS compliant.
Partnering with a Merchant of Record (MoR) like PayPro Global simplifies payment processing, subscription management, and global compliance, making it easier to get paid and scale your business. We offer fully personalized checkouts, no-code integration and ensure Level 1 PCI DSS compliance.
Compliance and Review
After you’ve registered your SaaS business there is still more to do. Now avoid any trouble and remain compliant to be in good standing with the government. Set reminders for deadlines and consider using professionals to help you with compliance tasks.
- Annual Filings: Most states require annual reports so make sure to stay on top of these to avoid penalties.
- Tax Deadlines: Use a calendar for important tax deadlines and file your returns on time.
- Legal Updates: Laws and regulations can change, so keep informed about things that affect your business.
Conclusion
Starting and running a SaaS business comes with its share of paperwork and legal hurdles. While this might seem like a lot, remember you don’t have to do it all alone. Find the help you need from attorneys, accountants, and any other professional when needed. If you need assistance with SaaS billing and sales taxes, we are here to help!
And most importantly, don’t let the paperwork overshadow your excitement for building your SaaS empire. Focus on your vision, create a quality product, and watch your business thrive. You’ve got this!
FAQ
-
A Limited Liability Company combines two structures to form a hybrid structure. A corporation with the tax benefits and a partnership or sole proprietorship with its flexibility creates the LLC. It’s a good option for SaaS startups because it’s simple and protects personal assets.
-
An S Corp is a kind of corporation that uses pass-through taxation. Profits and losses are passed to the shareholders’ personal tax returns, which evades double taxation. I does have strict eligibility requirements, such as limiting the number of shareholders who must be US citizens or residents to under 100.
-
The standard corporation structure is called the C Corp.It is perfect for businesses seeking venture capital or planning to go public and offers limited liability protection. Unfortunately, C Corps are subject to double taxation, meaning the profits are taxed at the individual and corporate level.
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This is the most basic business structure out there. You and the business exist as the same legal entity. There is no complex set up but unfortunately it is without personal liability protection, so be prepared for personal assets to be at risk if the business faces legal or financial issues.
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This depends on your business’ specific needs and goals. An LLC is a good starting point for startups because of their simplicity and liability protection. But if you plan to seek significant venture capital funding or go public, a C Corp may be more aligned with your needs. Seek legal or financial advice to decide the best fit for your situation.
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Registering an LLC entails choosing your business name, filing Articles of Organization with your state’s Secretary of State, obtaining an EIN, and developing an operating agreement. While the specific requirements vary by state, you can consult your state’s resources or seek professional guidance.
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It’s possible to create an LLC or corporation in the US even if you don’t live in the US. Follow the registration process as US residents, but be mindful you may need to appoint a registered agent in the state where the LLC is formed.
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It varies from state to state, but typically ranges anywhere from $50 to $500. There may be some additional fees for registered agent fees, publication costs (in some states), and any professional services you utilize.
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The main differences are found in taxation, ownership restrictions, and formalities. LLCs offer pass-through taxation and flexible ownership, while C Corps are subject to double taxation but are more attractive to investors. S Corps offer pass-through taxation like LLCs but have stricter ownership requirements.
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It is not mandatory for a SaaS business located in the US. But, there are many benefits to forming an LLC. For example, you can sell directly from your Canadian business as a sole proprietorship. However, you might need to file W8BENs with certain suppliers (payment processors, affiliates, etc.).
If you are unsure which business structure is the best for you, consult with an attorney or accountant.
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You can sell with a Merchant of Record (MoR). It acts as a reseller in most ways, handling the billing process, including taxes, payments, subscriptions, and compliance. You’ll just need a functional website with a privacy policy, refund policy, Terms of Service, and your product!
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