Every business owner needs to decide how the business will be operated. This will determine the success of the business and making the correct decision will allow the business owner to operate with as little stress as possible. Below are five tips that will help in making your business the success that you envisioned.
1. Creating the correct legal structure
One of the first decisions every small-business owner has to make is how the business will operate. This can range from everything from a sole proprietorship to a corporation “You automatically start out as a sole proprietorship,” says Certified Financial Planner David M. Williams, founding director of Business Enhancement Associates LLC in Cordova, Tenn. It must be emphasized that you should always consult an account or financial planner before making this decision because the choice of business structure depends on many factors including your financial situation and your goals. What follows is guide as the kinds business structures you may consider.
The most simple structure is a sole proprietorship. It costs no money because you don’t have to pay to create corporate documents and tax returns. Operating as a sole proprietor, however, is dependent on the type of business you are in and personal risk tolerance. “We always strongly urge people to set up a corporation because it gives you some legal protection,” says Don Mazzella, chief operating officer and publisher at Information Strategies Inc., a Ridgefield, N.J., provider of publications for small businesses. Operating as a sole proprietorship opens you up to all sorts of liability including business debts. Owners can be subject to lawsuits and collection actions. If nothing else operating as a corporation gives many legal protections and will aid in protecting your credit rating. But Williams isn’t convinced a corporate entity is the best alternative for every business. As he says, “I wouldn’t say you should run out and form a corporate entity until you know you can be in business for yourself,” He further explains, “It’s expensive, but it’s also a waste in both time and money. Once you know you can be successful, if you’re doing consulting work and are truly the sole proprietor of your company, staying a sole proprietorship is probably best. If there’s more than one person with capital involved — whether that’s cash or sweat equity — form an entity that spells out how much is owned, who is responsible for what, and whether taxes should be paid at the corporate or individual level.”
There are other ways to operate as business as well. This includes partnerships and limited liability companies (LLC). If you are a professional such as a doctor, lawyer or accountant, many states have a hybrid structure known as a professional corporation (PC). Cost shouldn’t be the most important factor the decision making process. “Many online sources allow you to create a corporate entity for just a few hundred dollars,” says Allen Bostrom, CPA, president and CEO of Universal Accounting Center in Salt Lake City, which trains accountants, tax preparers and bookkeepers. “You just put in your information, and they’ll create templates.” Just a few are Legalzoom.com, The Company Corp. and Incfile.com.
2. Paying taxes, or not
The structure of the business will go along way in determining how taxes will be paid on the profits, hopefully, of the business and when the taxes need to be paid. Even though there are many factors at play, being a sole proprietorship, you don’t need to pay taxes right away. “Going by the letter of the law, if you make more than the de minimus amount of $400, you’re supposed to file taxes quarterly,” says Williams. “But there are no penalties if during the year you shift from being an employee to being self-employed and you don’t make quarterly tax payments.” This is not the case if the business operates as a corporation. “Those entities must begin filing taxes on income as they earn it,” says Williams. “If you as an entity make money, you have to report it quarterly.”
3. Set aside self-employment taxes
If you are used to being a W-2 employee, withholding taxes are automatically taken out of your paycheck. Although this is annoying as you see your take home pay shrink, the employee does not have to worry about paying this to Uncle Sam. The employer withholds about 15.3 percent of your income to pay for Social Security and Medicare. You pay half out of your pocket, and your employer covers the other half. When you’re self-employed the business owner is now both employee and employer and must pay the whole amount, not just half. The business owner does not have to make these payments on a quarterly basis. However, if you do not regularly set aside money for this self employment tax, the business owner may face an unexpected tax liability on April 15 and no means to pay it.
4. What Insurance is necessary to run the business
Many small businesses, especially new ones, need to save every penny and sometimes insurance is luxury. Business owners can save some money by doing without unnecessary insurance “In general, you don’t need insurance until you hire your first employee, and then you’ll need a lot of insurance,” says Mazzella. “If you’re working out of your home and your only liability is someone tripping and falling during a visit or losing your office equipment in a fire, you can make sure your homeowners insurance covers that. If you’re operating outside your home, you’ll want a minimum of insurance on your office and assets.” Sometimes, small businesses need liability insurance. If you are professional, some states mandate that you have professional liability insurance. In all other cases, it really depends on the business. If the business provides a service provider that probably will not get sued, no matter how bad the service, such as a marketing consultant or a web designer, insurance will probably not be necessary. If the business sells products, the owner needs to evaluate the risk if the product is defective. “If you sell bottle corks, your liability would probably be limited to replacing bad bottle corks,” says Williams. “If you mass-produce cherry jam, you have the liability caused by people getting sick on your jam or breaking their teeth on a cherry pit. You wouldn’t want to self-insure that liability. You’d want product liabliity insurance.”
5. Make sure you get paid
Sometimes, one of the most difficult tasks a business owner has is asking the client for money. Even though it is stating the obvious, you are in business to make money and you cannot make money without being paid for the hard work. “Wherever possible, collect 10 (percent), 15 (percent) or 25 percent of your fee upfront,” says Bostrom. “Your clients’ reaction to that request will tell you a lot about whether they’re capable of paying you.”
Always use contracts, recommends Alan Siege, president and CEO of Small Business Management Consulting in Brooklyn, N.Y. “Specify clearly what the deliverables are and what and when people will pay you — and make people acknowledge it. By having a contract, you’re saying that you play for real and that you’re someone whose business people need to take seriously.” Also, by using the contract, it takes the uneasiness out of asking for money. It is right there in writing as part of the business’ standard form.