To start a service business, you choose a legal structure, file formation paperwork with your state, get a federal tax ID from the IRS, line up the licenses and insurance your trade requires, open a separate business bank account, and set yourself up to pay taxes on your own schedule. Learning how to start a service business is mostly a sequence problem: each step unlocks the next, and skipping one usually means redoing work later. If you use state online portals, the core filings can be done in a few days, though professional licensing can stretch the timeline out considerably.
Pick a Legal Structure First
The structure you choose determines how much personal risk you carry, how you pay taxes, and how much ongoing paperwork you deal with. Fixing this later is expensive, so it’s worth some thought up front.
If you simply start offering services without filing anything, you are a sole proprietorship by default. You and the business are legally the same, which means every business debt is your personal debt. A general partnership works the same way for two or more owners who share profits and liability. Neither structure requires state formation filings beyond basic local registrations, and neither offers any liability protection.
A limited liability company puts a legal wall between your personal assets and the business’s debts. If a client sues the LLC, your house and savings are generally off-limits, provided you’ve kept the separation clean. LLCs also give you flexibility in how you’re taxed, which starts to matter as income grows. Corporations offer similar liability protection but come with more rigid governance: a board of directors, formal officer roles, annual meetings. For most solo service providers, an LLC strikes the right balance.
Choose and Clear a Business Name
Every state requires your business name to be distinguishable from entities already on file with the Secretary of State. The standard is stricter than just avoiding identical names; a minor word change or abbreviation often isn’t enough. Run a search on your state’s Secretary of State database before you fall in love with a name.
If you plan to operate under a name different from your legal entity name or your own personal name, you’ll likely need a “doing business as” registration, sometimes called a fictitious business name or trade name filing. It’s usually a separate filing with your county or state and carries a small fee. Skipping it causes problems opening bank accounts and enforcing contracts, because the name on your invoices won’t match your legal records.
Also check the U.S. Patent and Trademark Office database. A name can be available at the state level and still infringe a federal trademark, which invites a cease-and-desist letter after you’ve already printed cards and built a site.
File Your Formation Documents
Before you open the form, gather a few pieces of information nearly every state asks for:
- A registered agent with a physical street address in the state, available during normal business hours to accept legal documents. You can serve as your own, hire a service, or appoint someone you trust.
- A principal office address where the business keeps its records. It doesn’t have to be in the state of formation, but it must be a real address.
- A business purpose. Most states accept a general statement like “any lawful business activity,” which is usually the best choice. Narrowing it can create problems if you expand later.
- The members or directors. For an LLC, list the initial members or managers; for a corporation, the initial directors.
- Duration. Nearly everyone chooses “perpetual.”
The document itself is called Articles of Organization for an LLC or Articles of Incorporation for a corporation. These are short forms available on the Secretary of State’s website.
Most states now offer online portals that approve filings within a few business days, sometimes within 24 hours. Mail submissions take weeks. Expedited processing is available in most states for an extra fee. Filing fees typically range from $50 to $500 depending on state and entity type, with LLCs usually in the $50 to $200 range. Expedited service adds anywhere from $25 to $500 on top.
Once approved, you’ll receive a stamped or certified copy of your formation documents. That paper is your proof the business exists, and you’ll need it again and again: for a bank account, a commercial lease, professional licenses, vendor accounts. Keep both digital and physical copies.
One trap worth flagging. A handful of states, including New York, Arizona, and Nebraska, require newly formed LLCs to publish a notice of formation in local newspapers within a set window after filing. Failing to publish can cost the LLC its authority to do business in that state. If you’re forming in one of those states, check the specific publication rules the moment your approval comes through.
Get Your EIN From the IRS
An Employer Identification Number is the federal tax ID for your business. You need it before you can open a business bank account, hire employees, or file business tax returns. The fastest route is the IRS online application at IRS.gov/EIN, which issues the number immediately on approval. The paper version, Form SS-4, is used for fax or mail applications and takes four to five weeks by mail.1Internal Revenue Service. Instructions for Form SS-4
To apply, you’ll need the Social Security number or individual taxpayer identification number of the “responsible party,” meaning the person who controls or manages the entity and its finances. The application asks for the legal name of the business, the entity type, and a physical mailing address.2Internal Revenue Service. Get an Employer Identification Number
The online application must be completed in one session and expires after 15 minutes of inactivity. Have your information ready before you start. Once approved, print the confirmation letter immediately. Banks and government agencies will ask for it when verifying your business.2Internal Revenue Service. Get an Employer Identification Number
Line Up Licenses Before You Open the Doors
A general business license or local tax certificate is a baseline requirement in most cities and counties. It’s essentially a local registration that puts your commercial activity on the municipality’s books. The fees are modest and the process straightforward.
Professional licensing is a different story. Trades like plumbing, electrical work, accounting, legal services, cosmetology, and healthcare are regulated by state licensing boards that set education, examination, and experience requirements. Operating without the required professional license can lead to fines, injunctions, and in some industries criminal charges.
Depending on the trade, you may also need a surety bond or specific insurance minimums before the board will issue your credentials. Some professions require supervised apprenticeship hours before you qualify for a full license. Once licensed, you’ll need to complete continuing education and pay renewal fees on schedule. Letting a professional license lapse, even briefly, can send parts of the application process back to the start.
Sales Tax Registration
Whether your service business collects sales tax depends on what you do and where. Five states impose no general sales tax. Of the rest, a small number tax most services by default, while the majority tax only services specifically listed in their tax code. Common taxable categories include repair and maintenance, janitorial services, landscaping, and in some jurisdictions, consulting. Check with your state’s department of revenue, and register for a sales tax permit if your service falls on the taxable list.
Understand the Taxes You Now Owe Yourself
When you worked for an employer, taxes came out of each paycheck automatically. When you run a service business, nobody withholds anything, and the IRS still expects to be paid as you go. This is where new owners most often get caught out.
Self-Employment Tax
If your business is a sole proprietorship, partnership, or single-member LLC taxed by default, your net business income is subject to self-employment tax at a combined rate of 15.3%: 12.4% for Social Security and 2.9% for Medicare.3Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes) The Social Security portion applies only to the first $184,500 of combined earnings in 2026.4Social Security Administration. Contribution and Benefit Base The Medicare portion has no cap, and an additional 0.9% Medicare surtax applies to earnings above $200,000 for single filers.
You can deduct the employer-equivalent half of your self-employment tax when calculating your adjusted gross income, which softens the hit.5Office of the Law Revision Counsel. 26 US Code 1402 – Definitions But 15.3% on top of income tax still catches people off guard that first year.
Quarterly Estimated Payments
The IRS requires self-employed individuals to make estimated tax payments four times a year, covering both income tax and self-employment tax. For calendar-year taxpayers, due dates are April 15, June 15, September 15, and January 15 of the following year.6Internal Revenue Service. Estimated Tax
Miss these deadlines and you face an underpayment penalty based on the IRS’s quarterly interest rate. You can generally avoid the penalty if you owe less than $1,000 at filing, or if you’ve paid at least 90% of the current year’s tax liability or 100% of the prior year’s tax (110% if your adjusted gross income exceeded $150,000).7Internal Revenue Service. Underpayment of Estimated Tax by Individuals Penalty In your first year, with no prior-year business return, the 90% current-year method is your only safe harbor.
The S Corporation Election
Once income grows, electing S corporation tax status by filing IRS Form 2553 can reduce the self-employment tax bill. As an S corp, you pay yourself a reasonable salary (subject to payroll taxes) and take remaining profits as distributions that aren’t hit with the 15.3%. The election must be filed no later than two months and 15 days after the start of the tax year you want it to apply, or any time in the preceding tax year. The entity can have no more than 100 shareholders, all U.S. residents, and only one class of stock. The strategy makes sense once net income comfortably exceeds a reasonable salary for your work, so talk with a tax advisor before filing.
Buy the Insurance That Actually Matters
Liability protection from your business structure is only one layer. Insurance covers what an LLC or corporation can’t, and some types are legally required.
General liability covers the physical risks of running a business: a client trips in your office, your work damages someone’s property, or you face a claim like advertising injury. If clients visit your location or you visit theirs, this coverage is essentially non-negotiable, and many commercial landlords and larger clients will demand proof before signing.
Professional liability, also called errors and omissions coverage, protects against claims that your work caused a client financial harm. A bookkeeper who makes a costly clerical error, an IT consultant whose code crashes a client’s system, or an accountant who files an incorrect return all face claims this policy covers. If you give advice or deliver specialized work, professional liability is as important as general liability.
Workers’ compensation enters the picture the moment you hire. The trigger varies by state. Most require coverage with a single employee. Others set the threshold at three, four, or five, and some vary the requirement by industry, with construction facing stricter rules. Texas is the only state where private employers can opt out entirely, though doing so strips important legal protections. Operating without required workers’ comp can bring fines, criminal penalties, and personal liability for workplace injuries.
Separate Your Business Finances From Day One
Opening a dedicated business bank account is the single most important step for preserving the liability protection your LLC or corporation provides. Courts deciding whether to “pierce the corporate veil” and hold owners personally liable look at whether the business was treated as genuinely separate. Commingling personal and business funds is the fastest way to lose that protection.
To open the account, most banks ask for your approved formation documents, your EIN confirmation letter, and a resolution authorizing the account (a written record showing the business decided to open it and who has signing authority). Some banks accept the operating agreement or bylaws instead.
From the first transaction, run every business dollar through this account. Pay yourself a distribution or salary by transfer rather than reaching into business funds for personal expenses. Use a dedicated bookkeeping system. Sloppy records in year one create problems that compound, both at tax time and if anyone challenges your liability shield.
If You Hire, Classify the Worker Correctly
Many service businesses bring on help as independent contractors, assuming that avoids payroll tax and workers’ comp obligations. That’s true only if the worker actually qualifies. The IRS evaluates three categories of evidence: behavioral control, financial control, and the nature of the relationship.8Internal Revenue Service. Independent Contractor (Self-Employed) or Employee?
If you control how and when work gets done, provide the tools, and the worker performs services that are core to your business on an ongoing basis, the IRS is likely to call that person an employee no matter what your contract says. Misclassifying exposes you to back payroll taxes, penalties, interest, and potential liability under state labor laws. No single factor controls the outcome, and contract language can’t override economic reality.
When you do hire employees, you’ll register for state unemployment insurance, set up payroll tax withholding with the IRS and your state tax agency, and begin reporting wages quarterly. Many owners use a payroll service or accountant for this.
Keep the Entity Alive
Filing formation documents is the beginning, not the end. Every state imposes continuing requirements, and falling behind can quietly undo the liability protection you set up.
Most states require LLCs and corporations to file an annual or biennial report updating basic information like registered agent address and principal office location. Fees range from $0 in states with no requirement to several hundred dollars. Some states also impose a minimum franchise or privilege tax regardless of profit. Missing the deadline typically triggers late fees from $10 to $300 or more, followed by loss of good standing. Leave reports unfiled long enough and the state will administratively dissolve the entity.
Dissolution is not just a paperwork headache. Anyone who continues doing business on behalf of a dissolved entity can be held personally liable for debts and obligations incurred during that period. The liability shield effectively vanishes until you get reinstated, which means filing all past-due reports, paying accumulated penalties and back taxes, and sometimes a separate reinstatement fee. If another business claimed your name while you were dissolved, you’ll need a new one.
Corporations in most states must hold annual meetings of shareholders and directors and keep written minutes. LLCs face fewer formal requirements but should still document major decisions in writing. These records matter most when someone challenges your liability protection. A company with no minutes, no operating agreement, and no documented decisions looks a lot like a personal bank account with a fancy name.
Keep formation documents, operating agreements or bylaws, meeting minutes, tax returns, and financial records organized and accessible. Seven years of retention covers the standard IRS audit window. If you plan to sell the business someday, hold them longer.