When you are thinking of starting a small business of your own, it is understandable that you are very excited. However, before you jump in the deep end, you should ensure that you have considered all the factors necessary for starting a business.
Perhaps one of the most difficult parts of your business journey will be starting and surviving the first six months. Give yourself the best chance of making it through with flying colors by understanding beforehand what company formation entails and what the other factors to consider are.
Business Idea
A small business is born from an idea. It is critical to take your business idea and convert it into a fully-fledged plan. There are a couple of ways to go about this.
You can start working on a detailed business plan that outlines everything that your would-be company stands for, as well as details such as a 3-5 year projection, an executive summary, market analysis, organizational hierarchy, funding request plans, and more. However, the truth is that you will only need such a robust business plan if you are vying for funding or investment in your small business.
If you are just testing to see if your business idea will work, it might be better to start with a smaller one-page plan which enlists your company’s vision, objectives, your mission, and basic strategies to achieve this goal. Lastly, create an action plan to actively begin achieving the objectives you have listed. If seeking funds is on the cards for you, create an in-depth business plan so you have the best chance of getting the loan or investment from venture capitalists.
Legal Structure
Before company formation gets underway, you need to first determine what type of a business structure you would like to establish. Depending on the legal structure of your small business, you will have to fill out a specific IT return form and file it.
Based on your business needs, decide whether you need to register a sole proprietorship, a partnership company, a limited liability company (LLC), or corporation. This is a factor that you need to consider before starting a small business as your personal assets/liabilities and those of your business ought to be kept separated for your protection. Most small businesses, however, start out as a sole proprietorship which has a higher personal risk. Ensure that you get proper legal advice before deciding.
Company Name
Before you finalize your company name, remember that rebranding can be a very expensive process. Think about a name that you would like to be recognized by for a long time to come. Your company name will be the first thing that most potential customers see, so make sure that you pick a unique one that will leave a lasting impression.
Whether you intend to set up an online venture or a conventional brick-and-mortar one, you will need a website for your small business. Make sure that the company name and domain name you have chosen are available for use so as to avoid back and forth decision-making.
Location of Business
When it is time to form a company, you have to deal with some very practical factors. Where exactly will your business be located? If you intend to start a brick-and-mortar small business office, then you have to ensure that the location you choose provides ample exposure to the clientele you are aiming for, that any suppliers you need are in close proximity, that you are following zoning regulations when you make your choice, etc.
Factor in the property taxes and sales taxes that you will be needed to pay before settling on any one location. Furthermore, there are very few locations that are completely up and ready—you will have to factor in expenses for system upgrades, renovations, new connections, and so on.
Paperwork
Nobody particularly enjoys doing paperwork. But the truth is that it is an integral part of company formation, and if you want to run your small business smoothly, you need to ensure that all your paperwork is in place. Depending on the legal structure of your business, you will have to complete different types of forms and filings.
A partnership business would require you to create a watertight partner agreement. Starting an LLC would mean creating the necessary articles of organization, while an incorporation structure will require you to fill out an article of incorporation that mentions the name, purpose, structure, stock information, etc. of the business.
You could file your small business paperwork on your own. If you are not sure about what to do, foresee any complications, or just do not want the hassle, it is a fabulous idea to get an attorney’s help with reviewing all the paperwork to ensure that everything is as it should be. Depending on your business’ legal structure, the paperwork might actually be quite complicated. A business lawyer will not only help to fill out the forms and submit them, but also answer all your questions about the process so there is no confusion.
Licenses, Permits, and Insurance
Licensing and permits are two other types of paperwork that your small business setup would require. Depending on the type of business you are starting, check if your local authorities (city, county, municipality, and state) require you to procure a license. Along with this, you will need to get a basic business license and a tax registration certificate.
While sole proprietorships are not required to do so, it is a good idea to get your employer identification number or EIN from the IRS. Your small business might need a specific federal or state permit to operate, find out if there is any such limitation on your line of business.
By law, you are required to have an active employers’ liability insurance if you have any employees. Furthermore, if you will be seeing the footfall of customers or suppliers at your small business office, you will also need public liability insurance. For small businesses selling products, product liability insurance is a must.
You will also have to insure any car/vehicle you use for business transportation purposes. If these and other insurances like property insurance are not in place, it is possible that you will be susceptible in case you get sued. For most small businesses, general liability insurance may suffice. General liability or business owner’s policy covers personal injury to a third party or you, physical injury, as well as property damage.
Tax Reporting and Accounting
Depending on the legal structure of your small business, you may have to create a tax reporting system that accounts for federal, state and local taxes, self-employment tax, payroll taxes, sales and use taxes, and so forth. Arrange your business finances and accounting in a way that is completely separate from your personal finances. This means opening a new business account. If your business needs a capital investment from a third party, this is the time to step up your search for funding via bank loans or organizational loan programs like the SBA (Small Business Administration), and so on.
Your business transactions which include all disbursements, invoices raised, payments received, accounts payable/receivable, and this list continues which need to be recorded accurately. Decide on the accounting method that your small business will be using—cash or accrual.
A cash method would mean you are recording income and expenses when cash exchanges hands, while an accrual method means the details are entered when the amounts are incurred even if the cash has not exchanged hands as yet. Decide between using a system that recognizes the fiscal tax year or one that works in a calendar tax year. You can either hire an accountant or bookkeeper to handle your business finances or try to do it yourself with the help of bookkeeping software.
Employees/independent Contractors
Setting up a small business and hiring staff means that you will have to take into account the needs of your employees. From HR forms, employment forms, to creating a staff handbook, as an employer, you will be responsible for creating and recording the details. If you intend to hire employees or independent contractors, you will also be required to have an employer identification number.
As an employer, your small business will have to make provision for workers’ compensation, payroll taxes, and so on. As per the IRS, your business has to keep employment tax records for at least 4 years. Your small business will require federal income tax withholding, federal wage and tax statements, as well as state income tax withholding.
Other considerations are filing the employee eligibility verification (form I-9) and registering with the new hire reporting program of your state. Some workplaces have set government regulations and guidelines that need to be followed to ensure the safety and legal status of the company. Becoming a stellar small business employer does not just stop at filling out forms and paying your taxes. Create a healthy workplace for your employees, be transparent about your policies, and maintain a fair distribution of labor.
