The steps to starting a business are really straightforward.
Starting a business is as simple as saying – “I'm a business.”
Every citizen has a Social Security Number and can immediately start a sole proprietorship. It gives you the least amount of legal cover, since you are personally liable as a sole proprietor, but you don't have to file anything. You can register a sole proprietorship but it's really not necessary. Any money you earn will be claimed on your Schedule C and you're off to the races.
If there's not much liability in your business, you should just be a Sole Proprietorship and figure out the business first. If you're a blogger, don't worry about filing stuff – just start writing. Or recording. Whatever it is you will be doing, just start doing it and getting better.
As you earn income and expose yourself to more liability, you'll want to form a business entity and separate your business from yourself.
It's a super simple process and you don't have to pay anyone to do it for you.
It doesn't include all the business related tasks you need to do, like coming up with a business plan or creating your products, but meant to cover the boring filing and financial obligations you have.
Get an Employer Identification Number
An Employer Identification Number is like a Social Security number for your business.
It's super easy to get and free.
You'll have one in minutes and it's the first step.
How to Find Your Existing EIN
Did you get an EIN previously but you've completely forgot what it was? Maybe you started a business a few years ago, abandoned it, and want to use it?
First, it's OK to get a new one. This happens a lot where you may change the structure of your business (going from sole proprietorship to a LLC or something), so getting a new EIN is not a big deal.
Second, finding it could be as simple as looking at some old documents. Any IRS form will include it as the identification number. This includes forms you filled out or were sent to you, like Form 1099s, as well as actual tax returns. It will also be on financial documents, perhaps partially hidden, like bank accounts.
If you never used it and thus never received any forms, you can contact the IRS to get your EIN. About a year ago, I needed an official IRS document with the EIN on it. My original was lost so I requested a new copy and it arrived in a few weeks.
Form a Limited Liability Company
Forming a Limited Liability Company, or an LLC, is as simple as filing a form with your state's proper department.
In Maryland, you register your business with the Maryland Department of Assessments and Taxation. You fill out a form, pay the filing fee, and then wait for them to approve it. In Maryland, this can be done entirely online for a Maryland LLC. Your state might be different.
As confirmation, get the department to mail you a paper confirmation with a raised seal.
If you're wondering where to incorporate, the simplest option is your home state. You will need to have a Registered Agent, which is just someone in the state that they can talk to in the state you are incorporated, and that can be you. If you incorporate in another state, you will need to pay for a Registered Agent.
If you're considering incorporated in another state, it's important to do your homework and know exactly why. There are advantages and disadvantages to doing this and you want to make sure the advantages outweight the disadvantages.
For example, some people have heard that Delaware does not collect state corporate income tax for companies formed in Delaware but don't do business there. That sounds great until you realize that your home state will require you to pay taxes anyway so incorporating there doesn't get you past the income tax. It also will cost you the fee to hiring a Registered Agent! (there may, however, be other advantages that makes sense for your business)
When you form an LLC, you're “official.” You will have to start sending in annual forms. In Maryland, each LLC needs to file a Business Personal Property return with a minimum $300 fee. Each state is different so review this carefully.
Open A Business Bank Account
The first step to separating liability is creating that business entity – you can check that box.
The second step is separating the money.
For that, you'll want to open a business checking account. You'll want to do your homework and understand what the different fees are with a business checking account. Business checking accounts work a lot like personal checking accounts with minimum daily/monthly balances to avoid a monthly fee. They will have fees for overdrafts and other similar items.
If you have a cash-heavy business or process a lot of transactions, check how many are included in each statement period. Some banks will give you 200 transactions and process $15,000 in cash. Others may give you 500 transactions and process $50,000 in cash. Extra transactions and cash processing will change the fee structure.
If you're a blogger, you won't have hundreds of transactions and you won't be dealing with cash. You can just find a good promotion (I'm quite partial to this $300 Chase Business Total Checking promotion) and move on.
If you need a copy of your Articles of Incorporation, call your state tax department.
If you need a copy of the confirmation of Form SS-4, call the IRS Business & Specialty Tax Line at 800-829-4933. You will need to provide your EIN, company name, your name, business address, month and year of incorporation, last month of the accounting year, and title to help confirm your identity. If your address changed, now is a good time to update that too. It takes 10-14 business days to receive it in the mail or they can fax it to you.
Open a Business Credit Card
Once you have a checking account, you'll have a debit card you can use for electronic transactions. This is enough to separate liability since you can charge all business expenses (and only business expenses) onto the debit card.
If you want to earn cash back or other rewards, you will want to open a business credit card. I like earning rewards.
The two cards I use are the Southwest Airlines Rapid Rewards(R) Premier Business Credit Card and the Ink Business Preferred Credit Card.
I use the Southwest Airlines Rapid Rewards(R) Premier Business Credit Card because it ties into the Southwest Rapid Rewards program and the best airline perk ever, Companion Pass. The perks themselves are meh – you can get 60,000 points after spending $3,000 in the first 3 months – that gets you well on your way to the 110,000 you need for Companion Pass. The rewards system is standard and the annual fee is $99.
The business card I really like is the Ink Business Preferred Credit Card because it's a phenomenal business credit card. The 80,000 bonus points when you spend $5,000 on purchases in the first 3 months is gangbusters. You also get 3 points per $1 on the first $150,000 spend on travel and select business categories (including online advertising through Facebook and Adwords) and then 1 point per dollar on everything else with no limit. The annual fee is just $95.
Can you use a personal credit card as a business card? Yes. Business and personal cards can differ in terms of consumer protections and other rules, but they're still credit cards. To keep things separate, open a new personal credit card for your business and only use it for your business. Don't co-mingle.
About Business Plans & Common Mistakes
We've covered the nuts and bolts, but what about the qualitative issues? What about a business plan or partnerships? While these tricky questions have no clear answer, we can offer some guidance and direction.
For that, we turned to Dr. Ralph Jagodka, Professor of Business Management at Mt. San Antonio College.
Do you think it is important for every business to have a business plan? Why or why not?
I do not think a business plan is necessary for every business. A summary plan may become a very important part of your loan package for some businesses seeking bank financing. If you are not seeking financing, it is not required. I think it also depends upon the complexity of the business. A simple service business may not need one, while, a manufacturing firm should have one to organize asset allocations.
I think it is vital that every business consider completion of a feasibility study and business model analysis. These two processes will help the business owner think through essential elements of the business.
Should I look for a partner in my new venture?
Bringing in a partner can be a wonderful move, expanding on both expertise and resources. Partners do not have to be brought into a partnership. You can also be partners in a corporation. Many sub S corporations still see the benefit of a pass-through account and work with one or several partners. The advantage of the corporate form is limited liability.
If we start a General Partnership, we need to worry about unlimited liability with joint and several liability issues. Under these circumstances, it would be vital to select a good partner and vet them well.
What are some things many first time entrepreneurs focus too much on?
I think they sometimes focus too much on the details of products and services before they truly understand what the customers and market demand. Many entrepreneurs do not find out who their customers really are until after the startup. I think that what many entrepreneurs call the “startup” is actually more akin to a “test market”. In most cases we don’t really know who our customers are and what they want until we have tested the market and completed pivots.
What are some things many first time entrepreneurs overlook?
I think entrepreneurs often underplay the importance of networking. Business is networking! We need to network with everyone, about everything, all the time. Talk with your vendors to learn about new trends. Talk with your banker, accountant, lawyer, customers, employees, friends and associates to glean insight. The best way to get started in benchmarking (learning best practices from others) is to network. To learn more about networking fundamentals, check out our web resource at http://consultapedia.com/main/networking.php
You don't need to pay a company to help you set up your company. I've listed the basics for what you'll need to start a business in this post and it's yours for free.
Your next steps are to start making money and then consult an accountant so you do your taxes right. Taxes aren't hard either, they can just be a little confusing until you know the lingo. But speaking with an accountant, and many offer free consults to new businesses, will clear those problems right up.
If you have any questions, contact me and I'll be happy to answer them.