5 Things to Know Before Starting a Business
You may have a great idea for launching a company, but before you do, there are some things you ought to know. The following five areas to consider can get you started off on the right foot and maximize your chances of success!
1. Being a business owner means having lots of varied responsibilities. Being in business is more than just providing a service or selling goods to customers. Being a business owner means wearing many hats and juggling many tasks. These business responsibilities include:
- Customer service, including responding to problem situations and reaching out to new customers
- Finances, including banking and merchant services (for credit/debit card processing)
- Human resources and payroll if you have employees
- Legal matters, including licensing, contracts, and agreements
- Marketing, including social media and advertising
- Planning, including business plans and long-term strategic planning
- Risk management, including insurance coverage, disaster recovery plans, and actions to minimize or avoid lawsuits
- Taxes on the federal, state, and local levels, including income taxes, payroll taxes, sales taxes, business taxes, and more.
2. Choice of entity matters. How you set up your business from a legal standpoint has many implications. For example, unless you incorporate or form a limited liability company (LLC), you remain personally liable for business debts; your home, family car, and other assets can be reached by business creditors. Choice of entity also impacts your taxes: when and how you file, whether payments to you are subject to payroll taxes or self-employment tax, and what tax-advantaged fringe benefits you can use for yourself.
Your basic choices for your business entity are:
- Sole proprietor
- Partnership (if you have at least one co-owner)
- S corporation
- C corporation
It's a good idea to discuss with an attorney or other advisor regarding which entity choice is the one for you. Then take the necessary steps to form the entity before you open your doors and conduct business.
3. Insurance coverage is needed. While the law may not require you to have liability protection and other coverage, it would be a mistake to operate without it. Most small businesses use a Business Owners Policy (BOP) to provide liability coverage for third-party claims and property coverage in case your equipment or other business property is stolen, damaged, or destroyed. If you operate from home, don't assume your homeowners' policy will protect you; check with your agent. If you use your personal vehicle for business driving, check with your insurance company to see whether any changes in the policy are needed.
4. Separating your business life from your personal life is essential. As you get started and rely to some extent on your personal resources to underwrite your business activity, don't be casual when it comes to money. Be sure to separate your personal finances from your business activity. Get a separate bank account and separate credit card for your business, even if you operate as a sole proprietor under your own name. There are important reasons for separating your finances:
- Assessing your business activity. Having separate business accounts enables you to see your expenses, the cash on hand to pay your bills, and whether you're making a profit.
- Simplifying tax return preparation. You need to report your business income and can write-off various expenses as long as you can clearly identity them as being for business; separate business accounts help you do this.
If you operate your business from home, find a spot you can devote exclusively to business. This will allow you to claim a home office deduction (assuming you meet certain tax law tests).
5. Keeping track of your activities is mandatory. While you can be informal about your personal income and expenses, the tax law requires a business to keep records. You don't have to be an accountant or a numbers whiz to do it. You can easily keep your books and records with software or cloud solutions. You can do it yourself or use someone, such as a bookkeeper, to handle this chore.
In starting a business, you probably have many questions. Don't hesitate to ask a professional — an attorney, CPA, insurance agent, IT expert, payroll advisor — for assistance. Understanding what you're getting into and arming yourself with good information can go a long way in avoiding problems so you can focus on growing your business.