Where to Start When Setting Up a Small Business
Part 1: The Basics
So, you’ve started a small business. Congratulations! You’re an entrepreneur. Now the real work can begin – setting up a foundation to ensure you’ll be able to manage the business as it grows and thrives.
To start, you’ll need to define the business structure, register your business, and set up basic financial structure and procedures.
Step 1 – What Will the Tax Setup Be?
The very first decision you should make, even before you’ve picked a name for the business, is what the best legal and tax setup will be. Are you going to be an LLC, a sole proprietorship, or a partnership? If you’re going the corporation route, should you be an S-Corp or a C-Corp?
These are big questions, and there’s no single right answer. It’s going to depend on:
- How much you expect your business to generate in the short term
- How much you expect it to generate in the long-term
- Who your customers are
- If you will have employees
- How many owners, partners or investors there will be
- The liability issues created by your business
- Your overall vision for the business
Most accountants are open to a quick consultation about selecting a business tax type. It’s always a good idea to get some professional advice especially if this is your first business.
Step 2 – File a DBA Name in Your County – This can often be a confusing topic! I will try to explain in an easily understandble way!
If the owners of a company want to do business using a name that is different from the original name used to form the business, they must register the secondary name. For sole proprietorships and partnerships, the original name is the actual name of the owner or partners. The secondary name doesn’t replace the original name but acts as an additional, legal name for the business. This name is known by several terms such as trade name, fictitious business name and assumed name or the doing business as name.
For example, if Jane Doe, owner os a sole proprietorship wants to do business as “Best Carpet Cleaners” rather than Jane Doe, then she has to file a DBA.
A DBA is normally filed with the County Clerk where your business is located.
On another note, if an LLC or corporation wishes to operate under one or more names other than the corporation’s true name, it must complete and file a Certificate of Assumed Name with the state where the business was formed.
For example, if Jane Doe created a corporation called “Jane Doe’s Master Services” and then opened a store named “Best Carpet Cleaners”, she would need to file that Certificate of Assumed Name with her state AND a DBA with her county.
Obviously, this can get a bit sticky – so, when you are ever unclear or in doubt, it’s always best to consult a professional for advice.
Step 3 – Open a Checking Account
Now that you have a business name, you can open a bank account under that name. It’s important that all transactions for the business go through this separate account, for several reasons. Keeping all your business transactions running through your business bank account:
- Makes it possible to integrate it with your bookkeeping software
- Helps you manage taxes to your advantage
- Adds a layer of protection between business and personal finances
- Avoids confusion in the event of an audit
Your business bank account is the foundation for the establishing business credit, should you need it, now or later, such as a business credit card or a line of credit.
Step 4 – Start Keeping Track of Money Going In and Out
It is vitally important to keep track of the money you and any of your partners put into the business, as well as the money the business earns. Expenses and payments all need to be tracked as well.
This needs to start on day one, even before you’ve organized a proper system to do so. Your bank statement isn’t enough. Why? Because your bank statement doesn’t say what the amounts are for or where they came from. Untracked income and expenses have implications not only for tax purposes, but also for long-term understanding of the profit (and losses) of your business which is vital to it’s longevity.
You will need to make a decision on how you’re going to formally track the money coming in and going out. If you’re just starting out with a new business, you may decide that it makes sense to just use a notebook. If you’re organized enough to do it, then that’s perfect. Bookkeepers and accountants can work with a well-organized ledger or notebook, come tax time, as long as it’s clear what all the numbers mean and where they came from.
If you prefer tracking your finances on your computer to so it can do the adding and subtracting for you, a spreadsheet can be used. Check out the amazing FREE resource I created for exactly this purpose here. It’s the Easy Peasy <Just Start Now> Biz $$ Tracker and comes with three tutorial videos offering guidance from me. If you require or prefer a more detailed system, there a number of good options for low-cost bookkeeping software that could make your bookkeeping quite a bit easier. QuickBooks Desktop, Quickbooks Online, Peachtree Accounting and Xero are some popular options.
You can always change systems later, but the key here is to find a system that you are comfortable using, so you can get started tracking your business finances right from DAY ONE and stay on track with it. An accountability partner, calendar reminder prompts or reminder service are great ways to stay on track.
That’s it for the basics of getting started! In part 2 we’ll talk about some of the basics of cash flow in a business, and how to make sure it all works to your advantage.