INITIAL STEPS TO OPENING YOUR BUSINESS
By: Jeffrey Skolnick, CPA, M.S. Taxation
This blog is meant to start you out on the right path when you open your business. I will cover the basic steps that should be followed.
The steps are shown below:
Write a business plan. This is a blueprint of the way you will run your business. Although not the sexiest of things to do (most new business owners are passionate about their products and services), however writing a business plan will force you to consider many areas in a more structured way which will increase your chances of success. A business plan will include a description of your products/services, the type of entity structure you are operating under (i.e., sole proprietorship, partnership, S or C corporation), market analysis, funding requirements and projections among other things. For more information on business, plans see my podcast on business plans or go to my website www.jeffcpaworld.com and check out my blog.
Determine and entity type. Before you begin your business, you must determine whether you will operate as a sole proprietorship, partnership, LLC, S or C corporation. There are advantages and disadvantages to each, and you must decide which entity form is most beneficial to your situation. This is an area where you no doubt should work with a tax professional. Some things to consider are your overall tax liability, legal liability, and complexity of each entity type. For more information on entity structure, see my podcast on choosing an entity structure or go to my website www.jeffcpaworld.com and check out my blog.
Form with the appropriate state or states. Once you’ve determined the entity structure type that you would like for your business you must register with your state. Most states require you to perform a name search before you open. This is to avoid two businesses with the same name or having names so close that it confuses the public. Upon formation, you will receive some type of Certificate of Formation or Articles of Incorporation. This is a step that sole proprietorships can typically avoid. I would also include filing a DBA (Doing Business As) or Alternative Name as well. These are used when the entity is formed under one name (possibly the name of the owners), but the business operates under a different name. Once your entity is formed, you will now be recorded with the Secretary of State. You will form in only one state, but if you do business in multiple state you will most likely have to register in each state.
Register with the Federal government and the appropriate state or states. Once you’ve legally formed your organization, you must obtain an Employer Identification Number (EIN) from the IRS (this step is not a requirement of sole proprietors unless they have payroll). This can be done online and typically only takes under 15 minutes. You must also register for taxes with the state. This is a separate step from forming your organization. Every business should register for tax purposes, including sole proprietorships. The most common types of taxes you will register for are income, payroll, and sales, and use taxes. There can be other taxes as well, but again these are the most common. I want to mention again that it is possible that you may be required to register with several states aside from your state of organization.
Order a corporate book. You must order a corporate book if you form as a corporation or an LLC. Partnerships and sole proprietors are not required to maintain a corporate book. A corporate book will contain your Articles of Incorporation or Certificate of Formation, by-laws, operating agreement, minutes and certificates issued to shareholders or members. The reason for a corporate book is that since there is legal protection offered by your entity structure if you are a corporation or an LLC, you must treat your company as a separate entity. In other words, when you spend money from your corporation or LLC you should document that your members or shareholders (even if it’s only you) consent to you spending this money. Corporations are required to have annual shareholder meetings. The corporate book is where you would record the minutes of such meetings. If legally it can be proven that although your company was incorporated or formed as an LLC but you are treating the organization as your own personal piggy bank then if you are sued, the plaintiff my be able to “pierce the corporate veil” meaning you lose the liability protection normally offered by these entity types. The reason sole proprietorships and partnerships are not required to have a corporate book is there is no legal liability protection in these entities, to begin with.
Prepare your by-laws or operating agreement. Whether you’ve formed a corporation and are writing your by-laws or a partnership or LLC writing an operating agreement, this is one of the most important documents you can have. These are the rules by which your organization is to be run. This will explain titles, responsibilities, and requirements for the shareholders, partners, or members. These will cover items such as what happens if additional capital is required, how to deal with the death of a shareholder or member, and how to dissolve the organization. Very often, lenders may ask for an operating agreement. It is also vital that these agreements are written when the entity is formed. Far too often, I run into individuals that did not want to spend the time on this when they formed their entity, and it is too late to write them once a dispute has arisen.
Establish a bank account. Once you’ve received your EIN, open a bank account in the name of your business. Sole proprietorships that do not obtain an EIN (they are operating under the taxpayer’s social security number) should still have a separate bank account for their business.
Check on other miscellaneous items that affect your business. Don’t be fooled by the fact that I use the term miscellaneous. These can be very important. The areas I am thinking of here are insurance needs and licensing or permit requirements. I believe you should speak with an insurance professional to determine your needs and be careful to make sure you are aware of all licensing and permit requirements for each jurisdiction in which you operate.
Consider your funding sources. Most start-up businesses will require cash infusions in their early stages while building their organization. Make sure you have considered where this money will come from; savings, home equity line of credit, business line of credit, family or friends, and last resort credit cards. Please keep in mind if you are going to borrow the money you will be required to show financial statements and will almost certainly have to personally guarantee the loan.
Establish a proper system for accounting. Now you’ve formed your business and performed each of the steps I’ve outlined, the next area you need to address is a bookkeeping system. I always tell my clients to use a system like QuickBooks. It is by far the most widely used small business program; all small business accountants are familiar with it, it’s user-friendly and relatively inexpensive. I also tell my clients that the main reason for keeping your records on QuickBooks is not to give me information in February or March, but it is to assist you in managing your business. A proper set of books will show you trends of your busy and slow periods and help you analyze items of income and expense in order to make informed decisions. A proper accounting system, in my opinion, should also include a system to file sales invoices, paid bills, bank reconciliations, tax filings, insurance policies, employee personnel files, subcontractor files, and any contracts entered into by the business.
Conclusion. I will repeat myself here. The steps required to setup a business are not the most exciting part of starting your business. I am very aware of this. I do believe, however, that taking the time to set your business up correctly will make you say more than once, “I’m glad I took care of that.”
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