Here is a step-by-step guide to starting your new business.
1. Meet with an accountant experienced in business tax law to determine what type of business entity would best suit you and your business. (See the article entitled Business Entity Comparison at www.starrcochran.com for a brief description of the various types of entities.)
2. Choose a business entity.
3. Choose your company’s name and product name (if applicable). Check with your state’s corporation commission to find out if the company name is available. At the same time, check to see if the company and product name are available as domain names at www.GoDaddy.com. Once you’ve made your decision, register your domain name. If you will be operating as a sole proprietorship, you may also register your company name with your state’s Secretary of State office.
4. If a corporation, partnership or limited liability company (LLC) is your choice, consult with an attorney or research state laws on-line governing the creation, ownership and operation of the entity. If you decide to use an attorney, pick one specializing in business or tax law. They can answer all your questions and prepare the necessary paperwork. Otherwise, begin your research on your state’s Web site. Check out the instructions for the tax forms of the entity you’ve picked and look for a link that will explain how to conduct business in your state.
5. Create and sign the business agreement. If you’re doing this yourself, there are many sites offering standard forms. Read them carefully. Make sure they reflect your intentions and those of your partner(s), if applicable.
6. File the Articles of Incorporation, LLC or partnership agreement with the Secretary of State.
7. Obtain a Federal Employer Identification Number (EIN). Go to www.irs.gov, type in “EIN” in the search box located in the upper right corner of the Web site then click on “Apply for an Employer Identification Number online.” Or, you could call the Internal Revenue Service at 800-829-4933 to obtain an EIN over the phone.
8. Obtain state and local identification numbers for sales tax and payroll reports. This may also be done through your state’s Web site. Look for tabs labeled “business.” You’ll find forms and instructions. You could always call the toll-free number listed for assistance.
9. Obtain local/city/county business licenses and permits. Again, Web sites for each of these governmental entities provide you with the necessary information as to which, if any, licenses and/permits you’ll need to conduct business in your area.
10. Establish a business checking account. Resist the temptation to run the business income and expenses through your personal checking account. This important step says you’re serious about running your business like a business. (It’s also one of the criteria that the IRS reviews to determine whether you are indeed running a business.) Fees vary widely for these types of accounts and are generally higher than for personal accounts. Start where you bank personally. Inquire about fees, minimum and maximum balances. Do you need to maintain a specific balance in the business account? Or, can the value of all of your accounts be combined for a fee waiver? How many transactions are you permitted before there is a charge? How much is it? What can you do to avoid a monthly service charge? Can you deposit checks electronically? How user-friendly is their online banking site? Meet with other business banking account managers and ask them the same questions. There are also online institutions that offer business checking accounts, which may work for you. Low cost is important, but so is convenience.
11. Deposit money into your new business checking account. The amount depends on your anticipated expenses in the immediate future. This is considered “contributed capital” so it is not considered income for bookkeeping purposes. Once your business can afford to pay you back for this contribution, it is also not income to you.
12. Conduct necessary meetings and elect a Board of Directors. This step is for corporations, which are required to meet regularly and have a board of directors.
13. Create the books. You need to make a couple of decisions here. Do you want to keep track of income and expenses yourself? Use accounting software or paper? Do you wish to use the services of an accountant? Are you going to use the cash method or accrual method of accounting? The cash method is the most commonly used and the one you’re probably most familiar with. You record income when you receive it and deduct expenses when you pay them. Using the accrual method requires you to record income when the business earns it and deducts expenses when they are incurred. The choice is made depending on several factors. If you choose to maintain the books yourself, consult with an accountant to help you decide which method is best suited for your business.
14. Contact insurance professionals to obtain the necessary liability and professional coverage. The type of business and exposure to various types of liability will determine the type and amount of insurance coverage you’ll need to protect your assets. You may need errors and omissions insurance to protect you, employees and board members; business property insurance to cover real property and contents, and/or an umbrella policy, which protects your personal assets.
15. Consider a buy-sell agreement. Death, illness, divorce, bankruptcy, sale or the retirement of an owner can have devastating consequences to a small company or family business. Buy-sell agreements are essential for the smooth transition of ownership upon the occurrence of such events. Consult with a business or tax attorney specializing in these documents to help you choose the right type and draft it.
16. Hire employees. Although you may not need to hire employees right away, as your business grows you will need help. Your state’s labor laws can be found on the state Web site, and the U.S. Department of Labor offers an online guide here: http://www.dol.gov/compliance/guide/index.htm
17. Start operations. A “soft opening” lets you work out processes and train employees before the “grand opening” of your business. A grand opening can help you reach your customers with news coverage, ads, and other marketing efforts.