For any entrepreneur, the road to starting a new business is paved with sleepless nights, endless cups of coffee, and the constant worry that things may not pan out. Risking personal time, effort and capital is no easy decision to make, and the last thing anyone in such a situation wants to be thinking about is paperwork and record-keeping. Our job is to help guide you through this process, while attempting to make it as pain free as possible. Clearly, we cannot determine the future success of a start-up company, but providing a roadmap will help alleviate concerns, and keep you focused on the day to day operations of running the company.
If you’ve been toying with the idea of starting your own business, but haven’t taken any substantial steps towards doing so, the following can be used as a checklist to ensure you’re getting off on the right foot:
Business Plan: This defines the Who, What, When, Where and How of the business, and the products/services you plan on providing. Be sure the following questions are answered:
- What are my financial resources?
- What products and services will I sell?
- How will I market those products and services?
- How will I manage the business on a day to day basis?
Select an Accountant and Attorney: Consulting with professionals in these fields will help with the formation of the business and enable the following to be answered:
- What kind of business would be best for me? Sole Proprietorship, Partnership, LLC, S-Corp, Corporation or perhaps Non-Profit? The nature of your business will have much to do with which entity type fits you best. Going over the pros and cons of each one with your accountant and lawyer will give you a better idea of which one will fulfill your needs, based on both taxation and liability stand points.
- Will I need to file legal and tax paperwork? Yes to both in just about every situation. Getting advice in this area will save you hours of headache and the nagging feeling that you’ve missed filing some important form, or have filled out an application incorrectly.
- Should my business have a calendar year end, or operate on a different fiscal schedule? Once again, this will be determined by the nature of your business. If the holidays are a big source of your revenue, you may not want your fiscal year end on December 31, and have to go through the hassle of counting inventory during your busiest time of year.
Obtain an Employer Identification Number: This is a number you will need to apply for and receive from the IRS. An employer identification number is not required for every new business, but is recommended for reporting vendor payments and is always required if you plan to have employees. This unique number, separate from your individual social security number, enables the IRS to track filings and payments for your business, employees and vendors.
Open a Business Bank Account: This is an important step, and the sooner you have segregated your business activity and expenses in a separate account, the better. If you are securing a loan to finance the start-up costs of the business, the bank will want to write the check to the business, not to your personal account. As things get under way, having a business account will also help you keep track of the in-flows and out-flows of cash to and from the business.
Employees and Independent Contractors: Depending on the nature of your business, you may not need employees right away, but as you grow they become an integral part of your success. However, there are many laws that you must comply with, from the hiring to the paying, and if necessary the firing of employees. If you are not ready to hire employees you maybe paying for outside consulting or other contract labor. There are rules to follow here too.
- An I-9 must be filled out by all prospective employees and retained in your company files. It ensures that all applicants are legal citizens and eligible to be employed in the U.S.
- Prior to paying an employee you must have them fill out the W-4, which tells you things such as how many dependents they have, and what the proper payroll tax withholding is required from their wages. Information regarding all new hires, including independent contractors, must be reported to a specified state agency within a certain timeframe.
- If your employees are W-2 workers, you will need to withhold federal income taxes from their pay, as well as other payroll taxes. You will also be required to pay payroll taxes on their behalf. Using the services of a payroll company can be a great asset as they will ensure you are in compliance with State and Federal laws. Moreover, you won’t be carrying all the liability if the IRS deems insufficient payroll taxes were paid by your business.
- If you are paying independent contractors, they must provide you with a signed form W-9, which certifies their tax identification number. You should retain this form for annual reporting of payments to them on form 1099.
Insurance: There are several types of insurance you may need, once again depending on the nature of your business.
- General liability insurance is something every business should have. It covers defense costs and damages if your products or services cause or are alleged to have caused bodily injury or property damage to a third party.
- Commercial auto insurance protects the business owned vehicles, and provides coverage for employees who may be driving them.
- Workers Compensation provides insurance to employees who may be injured on the job. In exchange for coverage that provides wage replacement and medical benefits, the employees give up their right to sue you as the employer for the incident. Workers compensation coverage is required inmost jurisdictions for most employees.
- Depending on which insurance agency you are with, you may be able to bundle several policies into one, and tailor it to fit your business needs. Working with your insurance agent will prevent you from attempting to haphazardly pick all the different coverage’s you think you might need.
Government Requirements: All commerce is regulated in some form or fashion by the federal government. Maintaining compliance with applicable standards such as OSHA, and the Americans with Disabilities Act for your business workplace is essential. Knowing what is required by these standards before you set up your place of business will also save you time and money in the long run, particularly if you need to make construction improvements to the premises.
Record Keeping: You’ll want to keep track of the daily financial transactions generated by your business. If you consider yourself computer savvy and good with numbers, there are a range of relatively inexpensive accounting programs that should suit your needs. This will enable you to not only keep track of the cash flows of your business for tax purposes, but most of the programs will easily generate reports which will show you how well your business is doing. Several examples of these reports are as follows:
- Income Statement: This shows your total revenues minus your total expenses, and consequently your net income or net loss for the period.
- Statement of Cash Flows: True to its name, this tracks the in-flows and out-flows of cash to and from your business throughout the period.
- Balance Sheet: This statement gives you the assets and liabilities of your company, and shows you how much equity (excess of assets over liabilities) your business has.
In addition, you will need to retain certain types of records for extended periods. Your accountant can fill you in on the requirements pertaining to your particular business situation. Just keep in mind that the IRS can go back into your records more than three years in some instances, if they believe that you owe additional taxes.
Undoubtedly, this is only the tip of the iceberg when it comes to starting up a business. However, lining all your ducks up in a row before you get the ball rolling will work wonders for stress relief. More importantly, missing steps in the business formation process can hurt the viability of your organization in the long run, as penalties and fines may be assessed by state and federal agencies. Understanding what you’ll need to get your business up and running before you start the process will give you peace of mind, and allow you to focus on what you do best: bringing your unique product or service to the public market.
This information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Any tax advice contained in this communication is not intended or written to be used and cannot be used by any taxpayer for the purpose of avoiding tax penalties. Please contact our office (603-627-3838) for more information on this subject and how it pertains to your specific tax or financial situation. Howe, Riley & Howe, PLLC would be happy to answer your tax and financial questions regarding these issues or other matters that may be of interest to you or your business.