So, you dream of starting a small business but have no idea where to begin? I get it. Every day, I help clients who are in the same boat.
I took the leap two years ago. I had a business background and could navigate the process almost entirely on my own. But what if you don’t? Here are the top things to consider before moving full steam ahead.
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You Need a Business Plan
Before you can start a business, you obviously need a product or service to sell. What may be less obvious is that you need a well-thought-out business plan.
I can’t stress enough how often I see people with a great idea, but no research on the nuts and bolts.
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, I think 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.
What Company Structure and Formation Makes Sense?
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.
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Other Must-Dos When Starting a Small Business
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 in order 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.
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 business operating in dangerous industries.
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Meanwhile, 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.
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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.
I have yet to meet a business owner who enjoys paying taxes, but it’s necessary. And if you’re paying taxes, it also means you’re making money.
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.
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 percent, which consists of 12.4 percent for Social Security and 2.9 percent 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 business are subject to sales tax, and that payroll tax is required when hiring employees.
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Other Considerations and Tips for Starting a Small Business
A great way to start advertising, marketing, and branding is through social media. You can directly 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!