You’re finally ready to take the plunge and start your company. But starting a business takes more than picking a name and putting up a Facebook page.
Before you sell (or code) your first widget, you need a proper business structure. At both the federal and state government level, there are steps you need to follow when starting a business – and your municipality may have rules as well, even for small home-based businesses.
“Beginning as an entrepreneur is such an exciting time,” says Jo Anna M. Fellon, a certified public accountant and principal at Friendman LLP in New Jersey. “It’s important to not get caught up in the moment [when] that first dollar that comes in the door.”
Even a one-person business needs the advice of a lawyer and an accountant to decide what business structure to use. Should you be a sole proprietor? Set up a partnership? Create a limited liability corporation?
The type of entity you choose is important because it will determine how you pay taxes and what legal steps you must follow to set up your company. There is no one-size-fits-all answer.
“Get everyone on the line and start working through the pros and cons of the structuring,” Fellon says. “Don’t make the business entity structure choice based on what someone else you know has done.”
The right structure will depend on the type of business you’re creating, what state you live in (or where the business will be based), how many people are involved and the personal tax situation of the owners, which is why it’s helpful to have both a lawyer and an accountant advising you.
“It can be difficult for small businesses to incur these fees for professionals, but they tend to pay off,” says Bill Smith, managing director of CBIZ MHM’s national tax office in Bethesda, Maryland.
The structure may also depend on your goals for the business. Will it stay a one-person business that provides personal services? Or do you expect to hire employees and seek venture capital? Or will you and a partner operate a company with a physical location, such as an office, store or restaurant?
“Make sure you’re directing your organization, as small as it might be, the direction you’re intending,” Fellon says. “Get granular. Obtain a granular understanding of what your future business is going to look like.”
If you’re going into business with other people, you also need an agreement in writing about which work each partner will do, how the profits or losses will be split and what happens if one of you wants to leave – essentially a business prenup. You should also discuss how you will bring new partners aboard.
“You want to know what’s going to happen if everything falls apart once you bring another person in,” Smith says.
For your tax needs, the Internal Revenue Services has a useful portal for small business owners and the self-employed. You also need to learn your state’s tax rules. You may need a license (state or local), a fictitious name or corporate filing, plus you may deal with sales tax, workers’ compensation and payroll withholding.
Building a team of knowledgeable professionals before you start can pay off in many ways. “You just never know where business comes from and how they can assist your growth,” Fellon says.
Here are nine steps you need to take to properly start your small business.
Choose your business entity. This is something you should discuss with both your attorney and your accountant. “The entity of choice these days is the LLC. It gives you a layer of liability protection,” Smith says. But laws vary by state, and whether an LLC is the right choice for your small business depends on multiple factors.
Register with the state and the city, if necessary. Exactly what type of registration is required depends on your state and the type of entity. If you incorporate, your attorney may handle the basic filings for you. If you are a sole proprietor, you can probably handle the filings yourself. Some cities may also require registration.
Check for licensing and other state requirements. If you plan to work as a hairdresser, for example, you may need a license. If you’re going to sell products, you will need to collect and remit sales tax in most states. If you will have employees, you’ll need to withhold taxes and pay workers’ compensation. Your lawyer and accountant will know some of these rules, as will your professional organizations. Make sure you learn which ones that apply to you.
Know the difference between employees and contractors. The IRS has rules about when someone can be considered an independent contractor, to whom you will issue a 1099 form at the end of the year and when someone is an employee, subject to withholding and state employment law. State laws may also apply.
Investigate business insurance. While your corporate structure may provide some liability protection, you may also need business insurance. Find a good insurance broker who understands what makes sense for your situation. “Your homeowners policy is unlikely to cover your business risks,” Smith says, even if you do all your work at home.
Get an employer identification number. An EIN is the equivalent of a Social Security number for a business, and you can get it online from the IRS.
Open a business bank account. You don’t want to commingle your personal and business funds. You usually need the business formation papers and the EIN to open a business account. Making friends with a local bank official also can be helpful.
Set up a bookkeeping system. To keep an ongoing record of financial activity, most businesses use a program such as Quickbooks, which you can operate on your computer or in the cloud, but other programs may also work for your purposes. “Right now is the best time to start with a cloud-based bookkeeping program,” Smith says. “Everything is going to the cloud in the future. If you can afford a good bookkeeper, even better.” Keep good records from the beginning of everything you invest.
Join professional groups. These days, you can find professional groups both in person and online. Networking with other small business people can provide you with invaluable advice as well as business contacts and referrals.
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