Every day, people pursue their dreams by launching a business. For some, it’s their first entrepreneurial undertaking, full of promise and excitement. But along with the thrill of chasing a dream come certain financial, legal and tax realities that can undo any well-intention newcomer.
To help ensure your successful business launch, here are five tips to get you off to a great start:
1. Choose the right structure.
Deciding whether you want to operate as a sole proprietorship or a corporate entity depends, in part, on what your business entails and how many people are involved in its operation. The upside to a sole proprietorship is that you won’t have to pay to create corporate documents and tax returns. This option can work well for people whose personal brand carries the business, such as a freelance writer or graphic designer who don’t employ staff. However, running any business entails risk and liability issues, and even incorporating as a very basic limited liability company (LLC) can offer some protections—even if it’s just your personal credit rating being protected. A general rule of thumb for sole proprietors is to wait until you know for certain that you can be successful in your business, then look into forming an LLC to offset risks.
If there are two or more people involved—especially if they’re contributing capital to the business’ creation—you’ll want to form an entity that specifies how much is owned, who is responsible for what, and whether taxes should be paid at the corporate or individual levels.
If you’re worried about legal costs, don’t be. There are many online alternatives to hiring a lawyer, such as Legal Zoom, incfile.com and many others. It’s better to determine your entity structure correctly upfront, than to quibble over minor expenses. Also, many attorneys will cut you a break on the front end, knowing they’ll make money with you down the road.
2. Stay current on your taxes.
In the U.S., how your business is structured will determine when you need to start paying taxes on your earnings. Although there can be exceptions, sole proprietorships usually don’t need to begin paying taxes right away. If you make more than $400, you’re supposed to pay taxes quarterly. If during the year, however, you shift from being an employee to being self-employed, there are no penalties for failing to make quarterly tax payments.
Corporate entities, on the other hand, must begin filing taxes on income as they earn it. If your entity makes money, you have to report it quarterly.
3. Don’t forget your self-employment tax.
Above and beyond paying significant taxes on earnings, entrepreneurs based in the U.S. must set aside self-employment taxes. Think of it this way: when you were an employee, your employer withheld a little over 15% of your income to fund Social Security. They paid half; you covered the rest of it out of pocket. Now that you’re an entrepreneur free from your job, the government expects you to cover the full amount. Although you don’t have to make quarterly payments to cover the tax, it’s a good idea to set aside these funds so you don’t get caught off-guard come tax season.
4. Figure out if you really need insurance.
One of your first executive decisions will be to decide whether or not you really need to spend money you don’t have on insurance. For most startups operating out of the business owners’ home, homeowners insurance will cover things like someone tripping and falling during a meeting, or fire damage to office equipment. Just be sure to confirm it with your insurance carrier before forgoing coverage.
Depending on the type of work you do, you may wish to purchase liability insurance. But weigh this decision carefully. Many service providers—from proofreaders to graphic designers to bookkeepers—are very rarely sued no matter how poorly they perform. So, why carry that expense?
As a general rule, you won’t truly need insurance until you hire your first employee. That is, unless you sell physical products that could potentially harm someone, in which case you’ll want liability insurance.
5. Get what you’re owed.
Many entrepreneurs and small businesses have found themselves stiffed out of money they were owed, either because the client couldn’t afford to pay them, or they didn’t have the money to pursue payment through legal channels. As a general rule, it’s a good idea to require partial payment (10%-50%) in advance of doing any work. How the client responds to this request will speak volumes about their ability to pay you.
In addition, always have your client sign a contract that specifies the deliverables, as well as how much and when payments will be made. Think of it this way: having a legally binding contract makes the relationship real and signals that you’re a vendor who must be taken seriously. It’s the best way to position your business right out of the gate.
Starting a business is always an exciting venture. By following these five tips, you’ll avoid some of the financial, legal and tax challenges that will ensnare your less prepared competitors.