When you are starting a new business, it may be overwhelming. You may know exactly what products or services you will be offering and you are most likely an expert on that. But what about formalities? Here are some things you should consider.
I will be going over various parts in more detail in future posts, but this is a place to get started.
Business plan
When you get excited about a new idea, it’s easy to just jump un head first. That can backfire though, as you may have not thought your new enterprise through. That’s where a business plan comes in.
Writing down a business plan is a great idea when you want to start a business of your own! You have to sit down and described what it is that your business will be doing, perform market analysis, figure out how you’re going to market your product/ services, what sort of organizational structure you are planning and, of course, the money matters: how much it will cost and how much (and how soon!) money it will make.
Besides informing your own decisions, it will help convince others that you know what you are doing, including stakeholders and potential funders – both loans and equity. Oh, and partners. You may need partners in this endeavor and a clearly written plan may help them get on board. Not to mention any new employees during startup phase if you are trying to convince them to take below market pay in exchange for equity…
In short: figure out ins and outs of your business and write it down. This document will be useful.
Choose a business structure
This will have large impact on your personal liability and, of course, taxes. Your options are:
- Sole proprietorship
- Partnership
- Corporation
- S Corporation
- Limited Liability Company
Choose a tax year
You may have not been aware of this, but you don’t have to use December 31st as your year-end. I know that your first reaction may be ‘why wouldn’t I just use a calendar year?’ There are several possibilities. For example, US federal government has September 30th year end. If you are a federal contractor, it may be easier to have your year synced up with that of your primary funding source. Another example? If you run a business that revolves around Christmas, you may want to end your year in the first quarter, once dust settles from all the Christmas ‘madness’ and before you start preparing for the next year.
Apply for an Employer Identification Number (EIN)
Obviously, the IRS would love to hear about your new company! And tax it! How do they know that there is a new entity they could keep tabs on and get money from? Obviously through an Employer Identification Number (EIN). It’s a lot like your Social Security Number and has the same number of digits.
Visit your state’s website and get all necessary permits
Depending on what you’re doing, you may need a business license, food handling permits (I have never worked with food, but I know there is a lot of permitting that goes with it – which I appreciate, as I don’t want somebody to accidentally poison me due to storing food at incorrect temperatures or something). There are many permits you may be needing and it’s better to ask first, before you find out you got into trouble for missing some piece of paperwork.
Insurance
Always! There are many kinds of insurance, but I am here mostly thinking about insuring assets that you have (like the office and equipment), but there is also professional liability insurance and cybersecurity and many more. I am not an insurance professional, reach out to an agent or a broker for proper advice.
Cash or accrual basis?
When you start doing actual accounting for your business, you will need to decide whether you will use cash or accrual basis of accounting. Cash basis accounting records revenues and expenses when cash is received or paid. Accrual basis accounting, on the other hand, records revenue when earned and expenses when incurred, regardless of cash flow.
More details on the exact nature of each coming soon, but in the meantime, here are some things to consider:
- Business size and complexity – small businesses with straightforward transactions may prefer cash basis, while larger or more complex businesses may benefit from accrual basis. Since we are talking about just starting your own company, you may be tempted to just go with cash basis. You should probably give a thought to your planned trajectory. If you think it’s going to grow into a multi-million dollar behemoth, start with accrual basis.
- Regulatory requirements – check if your industry has specific reporting requirements. If somebody wants regular reports on accrual basis, you might as well start with that right away.
- Tax implications – always… You may want to check with a tax professional to understand how each method impacts taxes and compliance with tax laws.
- Financial reporting needs – who is going to look at your financial statements? Accrual basis reports are more comprehensive and potential lenders and investors may prefer that.
- Cash flow management – cash basis may provide a clearer picture of cash flows, while accrual basis focuses on overall financial performance.
Keep track of everything you do
I have worked for many years in public accounting and as an internal accountant. One truth is universal: it’s really hard, if not impossible, to recreate all the ins and outs of money down the line. You can set up your accounting system at a later date, but at the very least, keep the receipts! I have been given a shoebox of receipts before. It wasn’t great, but we had a starting point. I was handed paper ledgers before, too. It wasn’t ideal and when the elderly lady keeping those told me ‘it’s the same as accounting systems on the computer’, I had a really hard time not telling her ‘computers can’t have bad handwriting’.
Honestly, in this date and age, getting at least a simple bookkeeping software like QuickBooks Online is not hard and it’s relatively user-friendly. Both sides of your entries (more on that in the future) will have to tie, you can run reports and it’s easier for your future accountant to get you up to speed. Some bookkeeping softwares can also talk to tax software, such as TurboTax. Come tax season, you might be grateful for that!
Open a bank account
Keep your company’s money separate from your personal finances… I know you think it’s easier to have just one account and one credit card in your life. As tempting as it is, it may make keeping track of everything you do (see above) a lot harder.
Financing options
Let’s face it: you will need money to start a business. Different business require different levels of initial capital, but everything needs something. If it’s a consulting (like accounting?) business, you will have to start with some marketing to put yourself out there. On the other end of the spectrum, if you want to sell fixed goods, then you will need all the materials that go into it. So where do you go to get money?
- Yourself
- Friends and family
- Bootstrapping
- Bank loans
- Microloans
- Angel investors
- Venture capital
- Crowdfunding
- Grants and competitions
- Accelerators and incubators
Hiring consultants and employees
Do you need help in your business? Probably. Very few people can do it all by themselves. We also hope that your business becomes successful and grows, which will increase the likelihood of needing help. As an accountant, I know that usually that’s accounting and taxes. On the other hand, I am not particularly artistically inclined (or at least when it comes to visual arts), so I would probably look for help with that. But are you hiring a consultant or an employee? This subject has been hot for the IRS for a while and you need to tread carefully when it comes to the distinction. More details coming soon!
Conclusion
I know this is a lot! Starting a business is not for the faint of heart. In the upcoming posts, I will explore issues I touched on in this post in more details. If you’d like to discuss any of them personally, feel free to reach out!