10 Steps to Starting a Business the Right Way
Maybe you're already in business for yourself and just want to refresh, make sure that you went through the process, or maybe you are new to becoming an entrepreneur and you have no idea where to start. Hopefully, this will help you in that!
Sometimes, when clients bring their information to me for taxes, or maybe they've gotten an IRS letter and we started digging into their books, they just went straight from “I want to be a business owner” to making money and they didn't follow the steps in between. That can cause some havoc for your business, so I want to make sure that you are prepared and have everything that you need.
Step 1: Do Your Research
Becoming an entrepreneur is exciting. So, maybe you're a nine to five worker and you really enjoy your job but you think “hey, why am I working for this guy? I can go do this on my own and make more money.”
Well, first of all, that's not always true. But second of all, I want you to do your research because it's completely different becoming a business owner than what you might think. I want you to balance your dream of owning the business with the reality of it. Have a gut check with yourself and make sure that you're ready to take this step.
Make sure that what you’re doing in this business you want to start is going to make you happy. Mark Twain has the famous saying about finding a job that you enjoy dealing with and you'll never work a day in your life. If you pick a business that is just something that you think's going to make you a lot of money, but you're not really happy about it, then you're not going to do very well and it’s not going to be successful.
Also, I want you to think about what product or service you're offering to other people and make sure that it's something that other people need, not just something that you think is a good niche.
Step 2: Make a Plan
Your plan does not have to be fancy. I’m not telling you to go out and make a 50-page business plan - that is not necessary. You can pretty much just scratch down - and here are some things that you need to think about:
Think about whether or not you’re going to need a brick-and-mortar location for your new business venture, or can you work from home? If you are going to hire employees, are you familiar with HR laws? Is there any equipment that you know you're going to need right from the start?
During this time period, if you've already made the decision that you are going to go into business for yourself, I highly recommend that you go get a post office box. That may sound silly, but it's just a great way to keep all of your business and your personal stuff separate. It could be a small little box that costs you a very minimal amount of money. Then, your physical location is not out there for everyone to see - especially if you have a business working from home.
Step 3: Plan Your Finances
Businesses fail all the time because they do not properly plan their finances. A good rule of thumb in starting any type of business is to think about your expenses for the first 12 months that you're going to be in business. It could be rent, utilities, advertising, marketing, and payroll.
If your business is a restaurant and you don’t know the cost of the goods you need upfront, it’s going to be really hard to get started. You need to know what those amounts are and what different supplies cost. So again, back to step one: do your research.
You also need to make a decision whether or not you are going to quit your nine to five job to start your business. If that's the case, you need to replace your income to pay your personal bills. So, get your spreadsheet out, do some research on what those amounts are going to be on a monthly basis, and find an average of what you need and how much you need to sell in order to maintain your income.
Step 4: Choose Your Business Structure
So you've done your research, you've planned your finances, you know now that you are going to become an entrepreneur. There are so many options for you as far as your business structure or your entity type.
The first one which is probably the easiest and most people choose is to be a sole proprietor (aka a sole prop, a solopreneur, or however you want to word it) and that simply means you're in business for yourself. There's not a corporate veil over you or anything like that, it's just you doing business as whatever your business name is.
Your other option as a business entity is a limited liability corporation, also known as an LLC. These are becoming more popular because you have a corporate veil of protection in case something were to happen in your business. Someone could not sue you for your personal assets. As a side note, I'm not an attorney, that's just my understanding of LLC, and part of this process is to consult an attorney.
The third type of business entity is a corporation. With these three options, there come different tax implications. A sole proprietorship will go on your personal tax return. If you were an LLC, you have two options as far as how you want to be taxed - it will typically be taxed just like a sole proprietor and still goes on the personal tax return, or you can choose to have your LLC taxed as an S Corp after filing paperwork with the IRS to have them classify your business as an S Corp for tax purposes.
Then we have the corporation entity, and those can be taxed as either an S corp or a C Corp. The biggest difference between the two is with a C Corp, you file a corporate tax return and the corporation pays all taxes on the money that it makes. With an S Corp, you as an owner would be mandated to be put on payroll and would draw a salary of the corporation, then any profit or loss from the corporation is taxed.
So it really depends, but there's a rule of thumb that I usually like to go by when we are discussing whether to go with an S Corp or a C Corp and also when is it time to change an LLC from being taxed as a sole proprietor to switching it to an S corp. That's on an individual basis.
Step 5: Choose & Register a Business Name
You need to pick and register your business name. So, think of three different business names for your company, if you are going to file as an LLC, or a corporation. So if you're a Sole Proprietor, you don't really have to go through this little process of picking three names.
With every state, there can only be one LLC or corporation with that specific name. So for me, for example, there can only be one Calculated Profits registered as an LLC in the state of Georgia. When I was picking my names, one of the things that I did was take off the ‘S’ in ‘Profits,’ so maybe Calculated Profit would be option #2, and option #3 would be to maybe put my name at the end of it.
This way, when you're going to register your name, you have several options and you don't feel like you're going back to the drawing board all the time. It is also important that, if you need a website, you go and look at the domain registry to see if it is available.
Step 6: Gather ID Numbers
Now it's time to go and get your identification numbers. The first thing that you're going to need is a federal tax ID number, and I highly recommend this for anyone who is in business - even if you are selling makeup online or you just have a small boutique. The reason for that is so that you don’t have to give out your social security number to other people who may pay you and be required to give you a 1099 at the end of the year.
Make note that if you're a sole proprietor, and you have been in a business before (maybe you've owned a business five years ago and you shut that business down, but now you're wanting to open up another business) your federal ID number will remain the same. You just have to tell them the new code for your business and the type of business you're in.
After you get a federal ID number then we move along to your state number. For state, if you are going to be selling any type of merchandise and collecting sales tax, you will need a sales tax number for the state that you are in and if you are going to have any employees you will also need a withholding tax number. If you're going to have employees, you will also need to apply for a Department of Labor number in the state where you reside.
Maybe you're going to have a restaurant and you need some food permits, or you need to get an alcohol license by chance. You’ll need those things as well and don't forget your business license - that could be a county license or that could be a city license in addition.
Step 7: Open a Business Bank Account
This one is huge - open a business bank account! Lots of clients come to me and their business and their personal finances are all co-mingled. Perhaps they never took the time to get a business bank account or maybe they did open a business bank account and they are paying their personal house payment out of that account. They’re buying those pumpkin spice lattes with a debit card on that account - anything that's not business-related should be separate. My advice is to try really hard to keep your business and your personal items in two different accounts.
The easiest way that I have found to explain to businesses how to do that is all money that is business-related, goes into that business banking account. You pay all the business bills out of that account, and then when you need money on the personal side (hopefully you did all your planning in the beginning so you know how much you can take out every month) is a paycheck to you or withdrawal to you.
Personal expenses, groceries, your car payment, different things of that nature should come from the personal account. Trust me, I know it's a pain in the butt. I have to do it too. However, it is the best way to keep your books in line and after a while, you just get in a habit of doing it and it becomes second nature!
Step 8: Choose Your Accounting System
Don't skip this step! It might be easier to think “It's just January, I'm starting my business. I've got 12 months to get everything in order before I have to file my taxes.” But that is not the only reason that you should get control of your accounting system!
Get to know your books - remember, your books tell your story and are the way you can make calculated decisions within your business. If you wait until the end of the year and you have no clue what's going on with your finances, you're going to be a mess, a big mess.
Don't think about it as finance accounting = tax. That's not the case at all. Keeping up with your finances on a regular basis is going to help with budgeting, and is going to help you know what your cost analysis is.
Recently, I had an analysis call with a new client. Within 10 minutes of that call, I found where she could save $36,000 a year by making ONE change to her business. She has been in business for a while and she never really took a look at her numbers. Planning is so important because any amount of money saved is more money in your pocket. If you're on payroll, or you have payroll, the payroll tax deposits are coming out of your account on a timely basis, sales tax is coming out of your account on a timely basis, so keep up with your books.
If you need help, I do have a guide for you. It’s my Calculated Tax Planner. I want you to know your finances and be successful business owners so that you're happy. Save yourself hours of paper-shuffling, heaps of stress and endless frustration come tax time by downloading the Calculated Tax Planner - it’s the only financial planning spreadsheet you’ll ever need, and it costs less than just a single month of QuickBooks! Download it here: https://calculatedprofits.ck.page/products/calculated-tax-planner
Step 9: Set Your Plan in Motion
You've done all the backbreaking work, all the boring stuff, and now it's time to set that plan in motion. If you have a brick-and-mortar, it's time to start advertising your new business and hiring those employees. Find those items for your boutique. Setting up shop, per se, this is the exciting part. This is the part that you're looking forward to!
So many people skip steps 1-8 and they just jump straight into 9. But as you can see, it's a lot more to starting a business than just saying “Hey, I want to be in business, let's start a business.”
Step 10: Make Money
Making money means you're making a profit, you're not just switching hours for money. You were doing that as an employee - don't do that anymore. Now is the time to make money and be happy and really thrive as an entrepreneur.
Those are my 10 steps to starting a business the right way. If you skipped any steps along the way, you can still go back and fix those things! It's not too late, and you'll be amazed at how much better your business will operate efficiently by doing so. If you hit and snag and have questions for me along the way, book a call here: https://www.calculatedprofits.com/book-a-consultation.
