So, you dream of starting a small business but have no idea where to begin? Here are the top things to consider before moving full steam ahead.
Develop a business plan
Make sure you figure out factors like the market size, the cost or monthly burn rate, the size of the opportunity, the ideal customer, a competitive analysis, your competitive distinction, and how much money the business needs before it becomes profitable, to name a few things.
While all sorts of interesting options come up when you type “How do I write a business plan” in the search bar of Google, resources like the Small Business Administration (SBA) are a smart place to start. Also, asking to be mentored by entrepreneurs who have done it before can’t hurt.
Company structure & formation
Before a business can operate, you must select and form a new business entity. There are a variety of ways to create a business.
- An individual can operate as a sole proprietor, single member LLC, S corporation or C corporation.
- Two or more individuals can form a partnership, LLC, S corporation or C corporation.
You should consider a variety of facts and circumstances. When selecting an entity type, analyze both legal and tax implications.
Consider consulting with an attorney and a CPA. Each state has different laws in place. There are different legal and tax filing requirements. Yes, getting professional help can be expensive, but think of it like building your house on a solid foundation.
Some good resources to read to understand these issues better are:
- Your state government’s website
- The IRS’s Starting a Business webpage
- LegalZoom and Nolo, which also offer useful information for free
Once you’ve selected an entity, you must file the necessary paperwork with the respective state to get your company started.
Other must-dos when starting a small business
Obtain an EIN
Any new business must obtain an employer identification number (EIN) from the IRS. You can do this step online in less than an hour.
An EIN must be obtained to open a business bank account. It is important for the business to keep separate records from the individual owners.
Although some business entities provide legal protection, business owners should consider obtaining insurance. The standard recommended types of insurance vary by industry.
Property and liability insurance
Two of the most common kinds are property insurance and liability insurance. If a business has a physical location, it should have property insurance. Liability insurance covers a business against general claims and lawsuits.
Some businesses, like construction, operate in a high-risk environment. Insurance premiums are more expensive for businesses operating in dangerous industries.
Errors and omissions insurance
Tax, accounting, law, insurance, real estate, engineering, architecture and other professional service business should obtain errors and omissions insurance. This covers professionals against negligent or inadequate work.
Accounting and finance
Many new small-business owners get tripped up by accounting. A common mistake new business owners make is not keeping adequate and accurate accounting records.
New business owners should familiarize themselves with accounting before starting operations. They should also talk with a CPA or a professional who will prepare their business tax return. The tax preparer will be able to share best accounting practices and provide a template for you. It will make the tax preparation process faster, easier and less expensive.
Depending on your specific circumstances, you may want to consider hiring a bookkeeper or outsourcing the task. Consulting with an experienced professional will ensure you establish a sufficient accounting system. If you are completely unfamiliar with accounting, consider taking a class or reading a book.
Small business owners should keep accurate accounting records so they know exactly where their business stands financially throughout the year. An up-to-date balance sheet and income statement provide a valuable financial overview.
Accounting enables business owners to see a snapshot of where a business stands and whether it is profitable. Clean records also make life easier and save time when filing tax returns.
Business owners should adopt an accounting system early on. You should use Excel, QuickBooks or other software. Whichever you choose, be consistent! Also, keep track of organizational and startup costs. They are tax deductible.
Taxes are one of the most confusing aspects of starting a new business. Small-business owners have unique talents and skills. They know their product or service – their craft – and can sell it, but taxes are a foreign concept.
However, business owners should know the basic concepts. Different entities file different tax forms, and you might need to complete various schedules.
Don’t get in trouble with the government. Business owners should familiarize themselves with the tax preparation process so they can better understand their responsibilities and obligations.
Income tax and self-employment tax
Business owners are subject to income tax and self-employment tax, and they may have to make quarterly estimated tax payments.
Self-employment tax is often overlooked and blindsides many small business taxpayers when they file their income tax returns. Business owners are often shocked when they see the additional tax from self-employment.
The self-employment tax is 15.3%, which consists of 12.4% for Social Security and 2.9% for Medicare. Although business owners aren’t happy about paying the extra amount, they will theoretically reap the benefits in retirement.
Since business owners do not have taxes withheld from their checks, they should make estimated tax payments quarterly based on their business net income.
Be aware that there are different filing requirements in each state. Some localities have filing requirements.
Many government laws, rules and regulations apply when owning and operating a business. Keep in mind that some businesses are subject to sales tax, and that payroll tax is required when hiring employees.
Other considerations & tips
A great way to start advertising, marketing and branding is through social media. You can reach your customers, clients and prospects directly.
Developing and growing a business takes time. If you're thinking of starting a small business yourself, keep these tips in mind:
- Keep your costs as low as possible
- Reinvest in your business
- Connect, engage and network with other professionals
- Build relationships with the community
- Get involved with local organizations
- Take calculated risks
- Offer quality products and services
- Prioritize customer and client service
- Be patient and persistent
Starting, owning and operating a small business is invaluable. Nothing can truly prepare a new business owner for what he or she will experience. It’s a learning process with ups and downs like a roller coaster. Some days you will feel on top of the world, while other days you will be down in the dumps. Every day will present a new challenge. Embrace the journey and enjoy the ride!
This article is not intended as legal, accounting, tax, investment or financial advice. Please consult the appropriate advisor for assistance.