Making your own decisions. Doing something you love. Spending more time with the family. Participating in the American dream. Starting a business is awesome. Paperwork. Legal fees. Invoices. More paperwork. Taxes. Starting a business sucks. The Particletree team is about to incorporate its second business and have come to the conclusion that, while everyone seems to be pretty good at giving sage advice about running a business, most fail to get to the specifics on starting one.
In an attempt to reduce the number of frustrating hours searching the web for what you need, we’ve written this article to help you with the small business paperwork, the basics of accounting, and an overview of some legal considerations. The topics aren’t sexy, but they’ll get you headed in the right direction if you’re tired of working for the man and want to get out on your own. Before going further, we want to apologize to our foreign readers. Most of the resources noted here are relevant to United States businesses only.
Our Favorites First
There are too many sites and too many books out there trying to take advantage of the apparent complexity of business. Before we really get into it, we’d like to recommend our favorite digital source and our favorite analog source of information for this stuff.
The first comes from the Lords of Paperwork themselves, the IRS. Surprising, I know, but it’s in the IRS’ and the economy’s best interest to make this information easy to find and easy to use. Their Small Business and Self-Employed One-Stop Resource is unquestionably a perfect place to get the official word on all of these issues. It’s one of the best federal government web sites out there. It’s all very well organized and very easy to read. They even offer free broadband video streams for a number of their tax training courses.
The second is a guidebook for businesses dealing with creative and communication services titled The Business Side of Creativity by Cameron S. Foote.
>The most comprehensive business companion available for those just starting out or expanding operations in the design field, this updated edition of an industry standard furnishes all freelance graphic designers, art directors, illustrators, copywriters, and design-shop principals with the tools needed to move ahead in the design business. From getting launched to running a multiperson shop to retiring comfortably, this book covers it all and includes sample business forms.
>Amazon Book Description
This book is chock full of some of the most practical and forward advice we’ve seen on all of the topics below and even includes additional material on pricing, customer relationships, and time management. We can’t praise it enough around here-it’s just too good.
After you know what you’re going to do and with whom, there are three important tasks to accomplish when creating a small business. 1) decide on a business structure, 2) determine if an EIN number is necessary, and 3) open up a business bank account. After completing these tasks, the groundwork for your business is set and you’re on your way to becoming the next Steve Jobs.
Choosing a Structure - Once you decide to go into business, you’ll have to choose a business structure to see what kind of paperwork you’ll have to fill out to make your business a legal entity. There’s a lot of variance among the structures in regards to their tax implications and personal liability. A sole proprietorship or partnership might be all you need to quickly and inexpensively start a business, but they leave you personally vulnerable. On the other hand, a corporation could provide you with less personal risk and liability, but cost more time and money than you’re willing to invest. Spend some time understanding the different types of structures, since they all have their pros and cons. To learn more about the different business structures, check out entrepreneur.com, and the Small Business Administration.
After choosing a structure, you may need to decide where you’ll want to incorporate. A lot of companies do not incorporate in the state in which the founders reside. Different states have different laws that may prove beneficial or detrimental, depending on what you’re hoping to accomplish. Three of the most popular states to incorporate in are Delaware, Nevada, and Florida. We can see you all starting to Google your way to an informed decision, and what you’ll find is a lot of people trying to sell you incorporation services. Incorporating is actually an easy process and can even be done on the web or on the phone with some firms. Incorporating Particletree (Florida S Corp) online cost around $450 through Spiegel & Utrera, P.A. and our new company (Delaware C Corp) will cost about $600 through a law firm. You’ll get all the paperwork set up for you with cookie cutter agreements, minutes, and anything else you need to become an official entity. Should you decide to incorporate, we recommend sitting down with a lawyer or accountant with your goals before making a decision. This might run you a hundred bucks or so, but provides some peace of mind.
Employer Identification Number - Once a business structure is selected, your company might need an employer identification number or EIN. An EIN is a unique number the IRS assigns to your company for tax purposes. Think of it as a social security number for your business. The IRS provides information for determining if you need an EIN, applying for an EIN, and a detailed PDF on EIN’s. Most incorporation services will fill out the appropriate form for you to mail off to the IRS.
Business Bank Account - Once the company is official, head on over to the bank and create an account dedicated to your business. While you can use a personal bank account for some forms of business, it just isn’t a good idea. A business bank account allows you to separate business and personal finances and provide a good level of transparency should you ever be audited. Besides, setting up a business bank account is cheap and sometimes even free, depending on the bank. Right now, Bank of America offers free checking if you meet the monthly requirements. If you don’t, it’s around $16 a month.
Soon after your business is official, strange tax forms will start to show up in your mailbox. People tend to believe the government to be a bureaucracy moving at the speed of slug, but the IRS becomes the epitome of efficiency after an EIN number is assigned. After an EIN is issued and the mail starts rolling in, you might want to learn a little about number crunching and hire an accountant.
It’s possible to learn the ins and outs of accounting by yourself, but unless you dream of becoming a business superhero, you will probably want to stick to what you do best and hire an accountant to do what they do best. Some accountants are even open to the idea of trading services, and you can definitely create a web site faster than you can become a CPA.
Choosing an Accountant - When searching for an accountant, you’re really looking for a new team member. A quality CPA can provide you with tax planning, business advice, personal finance advice, and of course, number crunching. Don’t just settle on any accountant, but look for someone who understands your company and its goals. The best approach to finding an accountant is to ask similar companies who they use and how their experience has been. You could also search for accountants in your neck of the woods. Make a list of potential accountants and take them out to dinner one night. How to choose your accountant or Hiring a CPA will get you started on how to select the right accountant for your business.
Note that if you are only testing the entrepreneurial waters and are not ready to shell out the big bucks for a CPA and all their business advice, an enrolled agent can give you all the help you need come tax season. If you keep up with the books, you should be able to have your taxes done for a couple hundred dollars.
Bookkeeping - Keeping good books is essential to a company since they tell you how much profit you make, monitor the progress of your company, help to recognize cycles in the market, are necessary for tax preparation, and provide detailed records when applying for a loans or selling the company. A good CPA provides a wealth of business and tax advice, but they might not be the person to record your daily financial transactions. CPAs are expensive and bookkeeping is a fairly easy, if tedious, task. For a small business, personally recording the books initially could prove beneficial as it helps with understanding basics of financial accounting. Not to mention that saving money is often a priority of small start-up companies. If you do choose to hire a bookkeeper, it’s not a bad idea to go over the numbers with your bookkeeper to gain an understanding of what is going on.
To start you off with bookkeeping, the U.S. Small Business Administration provides tutorials on basic bookkeeping and accounting. Additionally, learning about single entry bookkeeping, double entry bookkeeping, and the accounting equation will help you become a master of the books in no time.
For the actual bookkeeping process, you can use good ol’ pencil and paper, or a bookkeeping software program such as Quickbooks. Before hiring a bookkeeper or taking on the task yourself, talk to your accountant for bookkeeping recommendations.
Taxes - Taxes are boring, sometimes painful, and generally best left to the accountants. Your tax responsibilities vary from business to business and from year to year. If you would like to learn more about taxes, here are some of the best resources the IRS has to offer.
Contact the IRS - You can contact the IRS for free basic tax advice. Be advised, if you call them on the day your estimated taxes are due, be prepared to listen to a busy signal. Don’t ask me how I know this.
IRS Online Classrooms - View a streaming video of an IRS Small Business Workshop, take an IRS course, or complete an online self-directed version of a workshop taught live around the country. There are also links to additional resources, including learning experiences for small business owners produced by some of our partners.
Tax Guide for Small Businesses - A publication by the IRS dedicated to small businesses and taxes. This is actually a pretty good read and gives you an overview of your tax liabilities.
Filing and Tax Needs - Includes links to EIN numbers, late fees, estimated taxes, and all kinds of other tax goodies.
IRS Forms and Publications - The official source of IRS tax products including many valuable forms and publications. The links provide methods to access and acquire both electronic and print media.
Deductions - You may have just skipped the section on taxes, and I don’t blame you. That’s what accountants are for. That being said, you should learn about deductions, or expenses that can be subtracted from taxable income. Deducting ordinary and necessary business expenses, such as computer equipment or business travel, can lower your overall tax liability and save your small business thousands of dollars.
For example, if you earn $1000 in revenues and buy a business computer for $600, your tax liability is only $400 rather than the $1000 it would normally be. If you are paying a 25 percent income tax, your tax liability is $100 instead of $250.
You may choose to allow your accountant to handle all of the tax work, but a basic knowledge of deductions helps you make informed purchasing decisions. Your accountant will not hold your hand through every purchase, and it’s a good idea to understand why courtside Lakers tickets are not ordinary and necessary, but a nice meal with a client or partner could be. A great book for learning about deductions is Deduct It, but if you’re looking to take the cheap road, the IRS has provided an exciting 58-page PDF on deductions.
You’re inevitably going to have some standard legal questions when starting a business. Will I need a lawyer? What type of contract should I use? Is a copyright necessary? Hopefully, the following sections will help out with basic legal worries.
Lawyers - Lawyers and accountants are similar to web designers in some aspects. They may use all the right catch phrases, but some just suck. Just like with an accountant, find a lawyer who understands your business and has some relevant experience with similar companies. Take time to meet a lawyer in person and try to build a working relationship. While not essential, a lawyer can help you create a corporation or review documents used to create your company. You could do this all on your own, but someone more knowledgeable on the subject provides peace of mind. Besides, if you ever get into real legal trouble, a knowledgeable lawyer is a good contact to have.
Copyright - A copyright helps to legally protect your works. Your code or illustration is actually automatically copyrighted upon creation, but obtaining an official copyright can save you a lot of trouble. For more information on obtaining a copyright, check out the Copyright homepage, copyright registration for computer programs, and copyright registration for online works.
Contracts and Letters of Agreement - Before performing any client work, you’re going to want a contract or a letter of agreement detailing the work to be provided, project timeframe, payment information, and all of the other legal stuff. A contract or letter of agreement is standard business practice and helps to remind you what services must be performed just as much as it helps the client understand what they are paying for. A few resources on contracts and letters of agreement can be found below.
Although you can find many contract forms and user agreements on the web, it is recommended you have a lawyer double check it (at their hourly rate, of course).
Invoices - Billing clients is a fairly painless process. Actually getting them to pay might not always be so easy. Blinksale is free for starters, and is an excellent way to send invoices online.
If you’re ever in doubt, remember there is help available to your small business. In case you missed the link in the tax section, the IRS has a phone line ready to help with your tax calls and online classes detailing tax basics. The Small Business Administration is another fantastic resource providing a number of courses aimed at helping your small business succeed. Finally, SCORE is another completely free business resource compromised of thousands of business owners and former business owners dedicated to helping people like you start out. When you run into a problem, SCORE provides a learning center and also allows you to submit a question to be answered within 48 hours.
We like roundups at Particletree, so here’s a Getting Started Roundup. Most of you in the circle will probably have already read all of these articles, but they’re always a great set of perspectives on what other people have gone through starting a business in web development. There are a lot of ways to start a business and a lot of different ways to run one. We recommend understanding as many styles as you can before deciding on the methods that will best fit you and your goals.