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Registering a Business? Watch Out for Scams

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Registering a Business? Watch Out for Scams

Published: June 8, 2010

Do you understand the business registration process? Are you aware of small business scams you may be vulnerable to? Read on to understand the legal process and safeguard your business from registration scams.

1. Register Your Business as a Legal Entity

    The first step in registering your business is deciding whether you are going to form a sole proprietorship, partnership, LLC, corporation, non-profit or cooperative. Once you determine the structure of your business, you will have to register your business and file certain documents with your state government. Each state has its own fees, forms, and schedules, so follow the state-by-state links in Business.go;s Business Incorporate Guide.

    • Fraud Alert- Filing Fees. You receive an official-looking letter with a seal requesting a payment for an annual filing fee. If you do not pay accordingly, the letter cites that a statute will declare your business entity filing in default. Telltale scam signs include reference numbers that do not match your state assigned number, statutes that are not applicable to your business type, and a filing fee paid to a third-party business. No business is required to go through a third party in order to file documents or pay fees to the government. In fact, the California Secretary of State has issued a fraud alert regarding misleading solicitations to California businesses on this topic. Learn more from one of our Community members.

    2. Register Your Business Name

      Many states require a business name registration. If you own an LLC, you have already registered your business name when you incorporated with your state. If you own a sole proprietorship or a partnership, you need to contact your secretary of state to register. If you decide to use a fictitious name or DBA - any business name other than the legal name of the business owner(s) - use this chart from Business.gov to understand how to register your business name in your state.

      Once you understand the business name registration process, be alert to these common fraud schemes:

      • Fraud Alert - DBA Renewal. Similar to the registration scam, you receive a DBA or fictitious name renewal form from a company requiring payment to renew your business name. Though it appears official and cites state statutes, know that you can renew directly with your government office, and do not need to pay a third party to renew your business name. If you receive a suspicious renewal letter, contact your state government office to confirm its legitimacy.
      • Fraud Alert - Domain Name Registration. You receive an invoice or email to register or renew the domain name for your online business. The scammer either wants you to sign up for a recurring service or secure a one-time payment. To sidestep this fraud, check if your domain name exactly matches the one mentioned. For example, there is a difference between a .net and a .com. Also, make sure the sender is the same company you initially registered with. Note the actual expiration date from your files.

      3. Register for State and Federal Taxes

        You must register with the IRS for an Employer Identification Number (EIN) if you have employees, are a partnership, corporation, or non-profit. Use the EIN checker at IRS.gov to see if your organization needs an EIN. Once you verify that you need one, you can apply for an EIN online at IRS.gov.

        You must also register your business with your state's revenue office. Most states require that your business pays income and employment taxes. If you collect sales tax, you may need to apply for a tax permit as well. Check with your stat-s tax requirements at Business.gov.

        Some companies claim that you can avoid registering with the IRS and paying taxes. Steer clear of these popular tax scams:

        • Fraud Alert - Employment Tax Evasion. The scammer instructs you to stop withholding federal income and employment taxes. If you do so, you can be responsible for back payments, penalties, and interest.
        • Fraud Alert - Exempt Organization Tax Avoidance. Some for-profit organizations may use your tax-exempt status in business transactions to avoid taxes. Read more about abusive tax avoidance transactions (ATATs) at IRS.gov.

        4. Register for Licenses and Permits

          Most businesses need some sort of license or permit to operate within the law - typically business licenses, tax permits, building permits, zoning permits, and health and safety permits. If your business falls under a federally regulated or state-regulated industry, you need to apply for additional licenses or permits to stay compliant. For example, if you plan to run a restaurant business in New York, you must also apply for a food service establishment license with your state government. You can use License and Permit Tool to check the licenses and permits needed to run your business.

          • Fraud Alert - Work Permit Fees. A multinational company abroad contacts you to complete a difficult, but well-paid project. While the company promises to compensate you well and pay for accommodations, it requires you to pay for work permits, visas, and immigration fees. The offer is tempting because they tailor the message specifically towards your business based on research. Furthermore, the company lists itself on legitimate job sites to increase its credibility. As the State Department warns, advance-fee scams often sound too good to be true. Learn more about international financial scams at State.gov.
          • Fraud Alert' Restaurant Inspection. A scammer posing as a health official calls to schedule a health inspection appointment and threatens to fine you if you do not. Some'inspector' have been known to bribe restaurants in exchange for a passing inspection. Legitimate health inspectors will carry state or county government-issued photo identification and usually do not schedule inspections in advance. Read more about regulations in the restaurant industry in Part One and Part Two in this series on restaurant compliance.

          Other Scams' Work-At-Home Scams

          Home-based businesses are especially susceptible to scams. Work-at-home scams target home-based businesses and the self-employed through internet ads and mailings. The most popular ones include medical billing, envelope stuffing, and packaging scams. Read more about Spotting Work-At-Home Scams at Business.gov.

          What Should I Do If I Fall for a Scam?

          Your first line of defense should be educating yourself to avoid scams. In the unfortunate event that you do fall for one of these scams, you probably will not be able to recover the lost money. However, you can file and report the scam to the following authorities:

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