With the 5th lowest labor costs in the country, according to the newest WalletHub study, the “Land of Enchantment” state boasts a thriving small business community. According to the Small Business Administration (SBA), 99% of all businesses in New Mexico are small businesses. If you’ve been thinking about starting a business in New Mexico, here is a comprehensive look at the many things business owners should know and address to get their businesses up and running.
1. Nail Down Your Business Idea
Before spending time and money starting a business, entrepreneurs should do their due diligence to ensure their business concept has the potential to succeed. A feasibility study can help you reach an informed “go” or “no go” decision. Also, consider bouncing your idea by trusted advisors like SCORE mentors, business consultants, accountants, and attorneys who can help you identify red flags.
2. Create a Business Plan
With so many moving parts involved in starting a business in New Mexico, writing a business plan helps you focus on your business objectives and the strategies for achieving them. A business plan is a document that outlines and defines your goals and describes the efforts you will make to accomplish them. Some business plans should be in-depth and detailed, while others can be short and sweet. The complexity depends on the type of business you’re starting. If you plan to appeal to outside financial sources and get funded, you need a formal business plan.
3. Select a Name For Your Business
Besides choosing a business name that works well for marketing and branding purposes, ensuring the desired name is available in New Mexico is vital. To find out if any other New Mexico companies are using a business name, you can use CorpNet’s free Corporate Name Search tool. When registering an LLC or corporation in New Mexico, the business name becomes protected against another similar business using the name. Registering for a state trademark can offer additional peace of mind. When forming a legal business entity, a company must comply with the entity-specific name requirements (e.g., a Limited Liability Company must use an acceptable form of “LLC” behind it).
Sole Proprietorships and General Partnerships do not have to register their companies. Still, if they use a business name that doesn’t include the legal names of the business owners, they must file a Registration for Application of Trade Name.
Registering a business in a state only protects the company’s name within that state. So entrepreneurs who want to expand their businesses to other states or ensure their companies’ names are protected in all 50 states should conduct a trademark search, which helps identify if the desired name is available throughout the U.S. And if your trademark application is granted, it ensures similar businesses cannot use the name in other states.
4. Choose a Business Entity Type
Several business structure types are available in New Mexico: Sole Proprietorships, General Partnerships, For-Profit Corporations, Nonprofit Corporations, Limited Liability Companies (LLCs), Limited Partnerships (LPs), Registered Limited Liability Partnerships (RLLPs), and Limited Liability Limited Partnerships (LLLPs).
Which entity type will work best for your business? You’ll need to consider various factors, including the desire for personal liability protection, tax ramifications, ownership and management flexibility, and business compliance requirements. Let’s look at a few of the business entities and their characteristics.
- In New Mexico, Sole Proprietorships are not required to register their companies with the state.
- The business and its owner are considered the same entity in a Sole Proprietorship, which means the assets and liabilities of the company are those of the owner. While this creates simplicity operationally and from a tax perspective, it can also be a disadvantage. For example, if someone sues the company or the business can’t pay its bills, the owner risks losing their personal money and property.
- Another potential disadvantage of a Sole Proprietorship is that the business can only be transferred to the owner’s heirs to be continued, restructured, or dissolved if the owner dies.
- Sole Proprietorships also have limited funding options, so investors often hesitate to finance businesses not formally registered as statutory entities.
- Sole Proprietors report their business income and losses on their individual federal tax returns.
- The business owner doesn’t receive a company paycheck that withholds federal income tax and payroll taxes. So, they must submit quarterly estimated federal income tax payments, including self-employment taxes.
- The self-employment tax rate is 15.3%, which includes 12.4% for social security (old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance). In some situations, that self-employment tax burden can become lofty and prompt a Sole Proprietor to look at other business structures that can minimize those costs.
- A General Partnership is a non-registered business co-owned by two or more partners.
- Like Sole Proprietors, General Partners and their businesses are the same entity for legal and tax purposes and are not required to register with the state.
- A General Partnership is a simple and inexpensive way to form a multi-owner business. There are no state, federal, or local filings to register a partnership formally, and partners can easily make decisions without the meeting formalities required of corporations.
- In addition to the personal liability risk to business owners, other potential disadvantages of owning a general partnership include the limited funding possibilities, a heavy self-employment tax burden, and the cessation of the business if a partner leaves (unless the partnership agreement has provisions to remedy that).
Limited Liability Companies (LLCs)
- A Limited Liability Company (LLC) provides legal and financial separation between the owners (called members) and the business. An LLC structure offers peace of mind to business owners who don’t want to risk having their personal assets, including bank accounts and retirement savings, used to settle their company’s debts or legal problems.
- From a tax perspective, however, the LLC and its members are viewed as a single tax-paying entity. So the LLC’s profits and losses are reported through its owners’ federal personal tax returns.
- Single-member LLCs (called disregarded entities) get taxed as Sole Proprietorships, and multi-member LLCs get taxed as Partnerships.
- Federal income tax flexibility is one of the most attractive features of the LLC structure because an LLC (if it meets all IRS eligibility requirements) can elect to be taxed as an S Corporation or a C Corporation.
- Domestic LLCs in New Mexico are required to register with the New Mexico Secretary of State and file Articles of Organization. New Mexico does not require LLCs to file an annual report; however, LLCs must file Form PTE, the New Mexico Information Return for Pass-Through Entities, through the NM Taxation & Revenue Department.
- New Mexico allows registration of Series LLCs, which are variations of the LLC structure, providing each series with its own membership interests, assets, and operations. Each series has its name in a Series LLC and operates independently with a separate bank account and financial records.
Limited Partnerships (LP)
- A Limited Partnership has general partners and limited partners.
- General partners are the owners who manage the company. They face the same personal liability risks as in a General Partnership because there’s no separation between the individuals and the businesses.
- Limited partners do not manage the company. Instead, their role is to fund the business. Therefore, their personal liability is limited to the amount of their investment in the company.
- Some potential disadvantages to an L.P. are that it can get complicated to run from an accounting standpoint, and limited partners have no say in how the company is operated after they’ve made their investments. Plus, an L.P. can become costly to form and operate.
- New Mexico Limited Partnerships are required to file an annual report.
- Businesses operating as C Corporations in New Mexico offer the owners (shareholders) the highest degree of personal liability protection to the owners (shareholders).
- The C Corporation is a separate entity legally and for tax purposes. Accordingly, it reports and pays federal income tax on its profits on its own tax return.
- C Corporations must appoint a board of directors to oversee the company’s affairs and ensure the business is managed with the interests of its shareholders and stakeholders in mind.
- C Corporations have more financing options, too. For example, they can sell stock to raise capital, and investors typically show more interest and confidence in funding businesses registered as Corporations.
- The double taxation on C Corporations sometimes dissuades entrepreneurs from choosing this entity type. That term refers to how company profits that get distributed to shareholders as dividends are taxed twice: 1) once to the corporation at the corporate tax rate; and 2) again to the individual shareholder at the applicable individual tax rate.
- Corporations that meet the Internal Revenue Service’s (IRS) eligibility requirements can opt for S Corporation tax treatment to avoid double taxation (see next section).
- Other potential disadvantages of the C Corporation structure include its higher formation costs and more extensive ongoing compliance responsibilities (such as submitting annual reports, holding shareholder and board of directors’ meetings, and other requirements).
- New Mexico C Corporations are required to file a biennial report.
- As noted in the LLC and Profit Corporation overviews, an S Corporation is a tax election option, not an entity type.
- LLCs or C Corporations that qualify can file for an S Corporation election by submitting IRS Form 2553.
- If a C Corporation opts for an S Corp election, the corporation gets pass-through tax treatment, eliminating double taxation.
- If an LLC opts for an S Corp election, it retains its underlying legal structure, so compliance requirements remain minimal. It also maintains pass-through tax treatment, but unlike the default LLC taxation, not all business profits are subject to self-employment taxes.
- Only an S Corporation’s owners’ wages and salaries are subject to Social Security and Medicare taxes; owner income from the company’s profit distributions is not subject to those taxes.
5. Appoint a Registered Agent in New Mexico
Businesses registered in New Mexico must designate a Registered Agent in the state. The Registered Agent must have a physical address in New Mexico and be available to accept “service of process” (official government documents, legal papers, etc.) for the business Monday through Friday from 9 a.m. to 5 p.m.
The ramifications are serious if an LLC, corporation, or other registered business entity fails to maintain a Registered Agent.
CorpNet offers Registered Agent services in New Mexico and throughout the U.S., which saves businesses that want to expand into other states the trouble and expenses of looking for a Registered Agent in each state.
6. Register your business entity
Here’s a run-down of some of the initial paperwork required when starting a business in New Mexico:
- Sole proprietorships – Business owners don’t have to file organization documents to operate as sole proprietors in New Mexico. Note that a trade name (sometimes called “doing business as” or “fictitious name”) filing is required if the business’s name is other than the owner’s first and last name. Also, like formally registered businesses, sole proprietorships must obtain the necessary licenses and permits to operate legally in the state and local jurisdictions.
- General Partnerships – New Mexico does not require general partnerships to formally register their businesses. If they use a business name that does not reflect the legal names of the business partners, the partnership must file a DBA. Also, although not required by state law, partners should consider having a written partnership agreement drawn up to document all the business partners’ responsibilities and rights. General Partnerships in New Mexico must obtain all the necessary licenses and permits to operate legally in the state, county, and local municipalities.
- Limited Liability Partnerships – A Limited Liability Partnership may be formed by the general partners by creating a partnership agreement, filing a Limited Liability Partnership form with the New Mexico Secretary of State, and paying a $50 filing fee.
- Limited Liability Companies – To form an LLC in New Mexico, Articles of Organization must be filed in the state, and the LLC must pay a filing fee of $50. In addition, a name reservation form and a $20 registration fee must be filed. Go to Corporations and Business Services to file formation documents online. LLC members should consider creating an operating agreement. The state doesn’t mandate this, but operating agreements serve a critical role in defining how the LLC should be run and describing the responsibilities of the LLC’s members (and managers).
- C Corporations: The state requires businesses that want to incorporate in New Mexico to file Articles of Incorporation. The filing fee is a minimum of $100 and a maximum of $1,000, depending on the number of authorized shares. Profit Corporations in New Mexico must appoint a Board of Directors, adopt bylaws, and have regular board meetings. In addition, every New Mexico business corporation must designate in its certificate of incorporation the number of shares it will have the authority to issue.
7. Obtain an Employer Identification Number
Any business that hires employees must get a Federal Tax ID Number or Employer Identification Number (EIN), a 9-digit I.D. number obtained from the IRS. Often, a bank will require a company to have an EIN before opening a business bank account, even if it doesn’t have any employees. Other official paperwork may ask for a business’s EIN, as well. The IRS issues EINs for free. CorpNet can help companies by completing and submitting the application (Form SS-4) for them. The IRS is revising the EIN application process to enhance security.
8. Open a Business Bank Account
Keeping a business entity’s financial accounts, documents, and records separate from those of the business owners is imperative for accurate bookkeeping and legal reasons. Setting up bank accounts, credit card accounts, etc., exclusively for company use helps ensure this separation. If an LLC, LP, C Corporation, or other registered company commingles personal and business expenses and income, the owners jeopardize their personal liability protection and may incur additional penalties.
9. Understand New Mexico’s Business Taxes
The State of New Mexico has a 4.8% to 5.9% corporate income tax rate and must also pay an annual $50 Franchise Tax. The New Mexico Corporate Franchise Tax is required for every domestic and foreign corporation, including S corporations, that either engages in business in New Mexico or exercises its corporate franchise in this state, whether actively engaged in business or not.
- Annual Report Fee – The filing fee is $25.
- State Sales Tax – New Mexico’s sales tax rate is currently 5%. Localities may charge an additional sales tax of up to 3.813%.
- Employer Taxes – New Mexico manages state payroll taxes through its NM Taxation & Revenue Department.
- Income taxes: New Mexico has a progressive income tax from 1.7% to 5.9%.
- In addition, counties and municipalities may impose their own local gross receipts taxes.
- Unemployment Insurance (U.I.): New Mexico State Unemployment Insurance (SUI) varies by calendar year. 2023 rates range from 0.33% to 6.4%. New employers pay a rate of 1% to 1.06%.
- New Mexico corporations pay a flat 4.8% to 5.9% corporate tax rate. Your accountant or tax advisor can also help you identify your tax obligations.
- Employers pay a workers’ compensation assessment fee to the NM Taxation & Revenue Department. (This is not the same as the Workers’ Comp insurance premium.) The fee, similar to a tax, is $4.30 per employee per calendar quarter (employers pay $2.30 and deduct $2 per employee).
10. Obtain Business Licenses and Permits
Businesses may need specific licenses, permits, or other federal, state, or local government authorizations, depending on their industry.
All individuals and companies doing business in New Mexico must obtain a New Mexico tax identification number known as a CRS (Combined Reporting System) Identification Number. This number is used to report and pay state and local gross receipts taxes and New Mexico withholding tax.
You can also turn to CorpNet to help you identify and apply for the business licenses and permits required in the area where you plan to operate your business.
11. Research Other Business Essentials
Other business considerations for New Mexico startups:
- Businesses physically located in New Mexico must comply with their local municipality’s zoning regulations.
- To protect your business in the event of unforeseen and unfortunate circumstances, research the types of insurance you want, need, or are required for your industry.
- Will you need to apply for loans, seek investors, or get additional money to launch your business?
- If your business plans to hire employees, there are many human resource-related responsibilities and regulations you must follow. Learn more about registering for payroll taxes in New Mexico to help get you started with your new staff.
12. Stay in Compliance
Businesses must stay current on their annual report and tax filing requirements to stay in good standing and operate legally in New Mexico. If you’re unsure of your obligations to maintain corporate compliance, ask your attorney and tax professional for guidance. One convenient way to track future filings is using CorpNet’s Compliance Portal. The free online portal makes tracking license renewal and annual report deadlines easy.
13. Keep a Resource List Handy
You don’t have to go it alone when starting and running a business. Keep a list of resources that provide information and insight. Here are a few helpful ones:
- New Mexico Secretary of State
- NM Taxation & Revenue Department
- New Mexico Small Business Development Center
- NAWBO New Mexico
- IRS Website
- New Mexico Department of Workforce Solutions
- S. Patent and Trademark Office
- SCORE Albuquerque
- New Mexico U.S. Small Business Administration
- New Mexico Business Portal
- Business in New Mexico
- New Mexico Economic Development Department
Lastly, CorpNet is here to help you with your business registration and compliance filings after you consult with your legal and accounting experts to determine what to do. We’ll save you time and legal costs while ensuring your filings are done accurately and on time.
Choosing a business structure can be a tough decision for the new business owner. CorpNet wants to make the process easier.
This free, online tool helps small business owners navigate the process of picking the right business structure for their new business.