for Your New Business Startup
So youíre taking the
plunge and starting your own business! Congratulations!
It could be the best financial move youíve ever made . . . or the
worst! Itís very true that
youíll never make a fortune working for someone else.
You might be comfortable, you might have a great retirement, and some
people will get rich if they rise to the executive levels.
But most of us will never earn as much working for someone else as we
will with our own business. But if
we go into our new business unprepared, we could lose everything we have and
possibly even ruin our ability to reenter the job force on the same terms we
were on before. It can be more
difficult to land a good job after being self-employed for an extended period of
time. Of course, there are ways to
deal with this issue, but that is beyond the scope of this article. Anyway, our goal here is to get you prepared to succeed.
The Legal and Tax Aspects
are many legal forms for your new business to take.
You can be an unincorporated business and report your income for tax
purposes on Schedule C of your 1040. You
can incorporate and file form 1120 for the corporationís income.
If you are incorporated, you can make an S Corporation election, which
allows you to report the corporationís income on your individual tax return.
You can form a general partnership, which also allows you to report the
businessí income on your personal return.
You can form your business as a Limited Liability Company, which has many
of the best tax characteristics of an S Corporation and a partnership.
Which should you choose?
general terms, you want the income of the business to pass through to you and be
taxed on your personal return. This
is generally true for most small businesses.
If you are unincorporated, this happens automatically, but being
unincorporated is generally not the best idea from a legal standpoint.
youíre in business, you open yourself up to claims and risks that you donít
have as an employee. Your customers
or vendors might sue you. Your bank
might sue you. Competitors may
issue claims against you for copyright infringement or any number of other
things. You want to insulate yourself against these extra risks so
that third parties can come after your business but not your house or other
personal assets. Being
unincorporated doesnít help you. Organizing
your business as a partnership doesnít help you because you remain personally
liable. So you want to be either a
corporation or a Limited Liability Company.
Since we have established we want to pay taxes at the individual level,
we should also make the S Corporation election if we incorporate. The election must be made within 75 days of the corporation
beginning business or having assets, so donít delay in making the election.
If you miss the deadline, the election will be effective for the
following year but not the first. If
you choose to organize as a Limited Liability Company, you will pick up the
income on your personal return, so you donít have to worry about an election.
then, are we saying itís better to report the income of the business on your
personal return rather than on a business return?
Because if the income is reported at the corporate level, you will end up
being taxed twice on the profits: once at the corporate level and again as a
dividend when you take your profits out of the corporation.
The corporation does not get a deduction for dividends paid to its
shareholders. To avoid the double
taxation, you would have to be careful to pay yourself a salary each year equal
to the full profits of the corporation. This
can get tricky since you wonít always know the taxable income of the
corporation before yearend. If you
make the S Corporation election or organize as a Limited Liability Company, you
wonít have to worry about it.
you want to make sure your business is legal at the state, county and local
levels. Make sure your
organizational papers are properly filed with the Secretary of Stateís office
for your state. Check with your
county and local governments to determine what business use permits and
occupancy permits youíll need. If
youíre starting your business from home, make sure you check local zoning laws
to make sure youíre in compliance. If
youíre selling tangible products, file with your state for your sales tax
exemption number. Youíll need this to purchase products for resale without
paying the tax yourself. Some
wholesalers will not sell to you without this!
If youíre going to have employees, even if itís only you, set up your
income and unemployment tax accounts with your state and order your federal tax
deposit coupons from the Internal Revenue Service.
Donít shortcut any of these steps just because youíre starting out
from home. You can get into a world
of trouble by ignoring these steps and may lose your business.
Never attempt to finance your business by not paying your employment
taxes when they are due! If you
do, it will be the most expensive borrowing youíll ever do!
Your Business and Marketing Plans
that youíre legal and ready to roll, you need a plan.
I donít mean a plan you carry in your head, ideas youíve had over the
years in bits and pieces. I mean a
solid, written plan that lays out all the details about your business.
Describe your business, your products, your competition, your advantages,
your target market, demographic information, your marketing plan, your
management team, strategic alliances you have with other companies and your
financial forecasts. Do not cut
this process short! By doing the
research necessary to complete these steps you may find out that your business
cannot make it as you had originally planned.
You might discover changes you have to make. You will improve your chances of success.
might ask if you can use one of the many software packages on the market for
producing your business plan. It
depends on what youíre using the plan for.
If your plan is only for you to use internally, they are fine.
If you want to go after venture capital or bank financing, forget them!
Your business plan will look just like a thousand others theyíve seen
and will be lost in the clutter. To
obtain financing you want to create a distinctive business and marketing plan
that stands out from the rest and doesnít look like it was created via the
cookie-cutter approach. Resolve to
do it yourself from scratch or hire professionals to do it for you with your
input. If you hire professionals, be prepared to participate heavily
in the process since it is your business and you presumably know more about the
business than your consultants will. Another
benefit to using consultants is that they represent a sounding board for your
ideas. If you canít afford them,
do the plan yourself and use your friends and trusted business associates as
your sounding board.
Running and Monitoring Your Business
business is now organized and properly authorized to do business in your state
and locality. You now need to
consider how to monitor and account for your daily business transactions.
Too many businesses make the mistake of running their enterprise out of a
checkbook only. Accounting tasks
are rarely anyoneís idea of fun, nor are they considered important relative to
the other daily tasks of running a business.
But you need to fight this idea if thatís the way you think.
Just as you wouldnít spend thousands of dollars a year without some
method of tracking the results of your efforts, (you wouldnít would you?
More on that later.), you canít run your business without some method
of tracking your daily results. A
checkbook register will not provide you with the information you need.
I wonít get into a long discourse about the differences in accrual and
cash accounting, but there are a few things you need to understand.
say you make sales of $2,500 on account on the last day of your first month in
business and these were your very first sales.
You wonít receive the cash for several days.
Did you have any sales for your first month?
On the cash basis of accounting, you didnít.
On the accrual basis of accounting, you did. Which is correct?
the other side of the coin, you purchased $2,000 of office supplies on the last
day of the month but didnít use any of them during the day.
This was the only expense you had during the month.
Did you have any expenses for your first month in business?
On the cash basis of accounting, you did.
On the accrual basis of accounting, you didnít.
Which is correct?
the cash basis of accounting you report income when received in cash and
expenses when paid in cash. There
are some exceptions, however, such as inventory purchases, which must still be
accounted for as inventory rather than an expense.
On the accrual basis of accounting you report income when earned
and expenses when incurred.
back to our question; which is correct? If
you ever need audited financial statements, your financial statements will have
to be prepared on the accrual basis of accounting because it more clearly
reflects income. If you need to
present your financial statements to third parties, you should have them
prepared on the accrual basis. If
you want to manage your business using financial data that is meaningful, you
need to have accrual basis financial statements.
probably protesting that youíd need to be an accountant to do this!
Well, you should have an accountant for a variety of reasons, but you
donít have to have one to keep your books on the accrual basis.
Itís simple. Get a software package to do the work for you.
An accounting software package does not simply give you an input screen
into which to put accounting transactions.
It will give you software that will allow you to input your business
transactions and will automatically create your books and records for you.
For example, you use a sales order entry screen to enter your sales
information; the accounting system will make the proper entries for you.
By entering the sales order information, youíre also getting the
ability to print professional looking sales orders, track sales orders, convert
the sales orders into invoices, record the invoices as receivables, and apply
cash receipts to those receivables. These
are all tools you need anyway to manage your business properly.
The accounting for the transactions happens behind the scenes
automatically. The same thing
happens with your payables, your payroll, your job costing, or whatever other
functions you require. Granted, you
may need some help in setting up your system to make all this occur seamlessly,
but once thatís done, you wonít have to worry about it anymore.
Anytime a third party needs your financial statements, you simply print
them out. Youíll have tools to
help you know where you stand financially, what your receivables are, what your
payables are, what the status of your orders are, what you have in inventory and
delay putting in an accounting system to help you run your business. Even the simplest off-the-shelf package will provide you with
the capabilities you need without spending a lot of money.
You can start with QuickBooks for less than $50; move up to QuickBooks
Pro when you need to, then on to more robust packages such as BusinessWorks and
MAS90 as your business grows.
Your Business and Marketing Plans
probably spent a great deal of time creating and polishing your business and
marketing plans. Donít let that
time go to waste by not following these plans.
Create task lists from your plans and use them every day to run your
business. Donít be shy about
making changes where necessary when events dictate that you do so.
Youíll find that your plans are fluid in the beginning.
Running your business in real life will help you see things you
couldnít see before. Compare your
actual results of operations with your projections that are included in your
business plan. If youíre not
hitting your targets, spend some time investigating why.
Understand what is different from the assumptions used to prepare your
projections. If you are doing
better than projected, understand that, too.
If youíve set up your accounting system, making your comparisons will
you need to concern yourself with tracking your marketing efforts.
If you have failed to meet your business projections, perhaps the problem
lies in your marketing efforts. Have
you devise a method to track your marketing results?
It is very important that you do. If
you receive orders by phone, make sure you or your employees ask where the
customer heard of you. Create a
form to record this information and keep ample supplies by the phone.
List all your advertising on the form to make it easier to record the
information quickly. Every week or
month you should summarize this data and compare it to your advertising costs.
Youíll come up with a cost per lead for each advertising source, which
will help you spend your marketing dollars more wisely.
you advertise on the Internet, it will be easier to track your results.
Programs exist that make such tracking very easy to perform.
We use ROIBOT. With ROIBOT, you set up unique URLs for each advertising
source. For example, if we were
advertising our free newsletters using four different lead sources, it would
you can see from the above, we are promoting the same URL, www.peakconsultinginc.com/newsletters
, using all four lead sources. But
when we advertise, the ROIBOT URL is used so that we know which lead source
generated the prospect. Of course,
all four ROIBOT URLs take the user to the same place. ROIBOT then provides campaign reports that show the source of
the clicks on your ads.
youíre interested in the ROIBOT service, you can sign up at here:
will cost you only $1 for the first month and $17 per month thereafter.
The service includes many other valuable tools such as an FFA submitter,
an autoresponder server, and a web page spy that allows you to keep up with what
your competitors are doing. There
are other similar services available, but in our opinion this is the best.
We are constantly evaluating new programs and services and will list
other choices here as we come across them.
At this time, it appears ROIBOT will no longer be accepting new customers.
Adminder offers a service that is similar, but more advanced than ROIBOT for
about the same price. You can check it out at
hope this article has been of help to you.
If you have additional questions, and Iím sure you do, please feel free
to call us at the Peak Small Business Center or submit a request form from the