Something we get asked all the time is…How do I start a small business? Before jumping right in, we recommend you have some sort of business plan for your new business. Let’s assume your business plan is ready and now you are looking at how to start a small business. Here are 5 Steps to start a small business today.
1. Create an LLC
Most articles out there will say choose a business entity for your new business. Although you should choose the correct entity for your new business, we believe an LLC is the most flexible and easiest entity to set up.
Reasons you should Start with an LLC:
- It’s simple to setup
- It offers Liability protection by separating your personal and business assets
- It sounds like a legitimate business—-”Your Business, LLC” Has a nice ring to it, doesn’t it?
- It offers you flexibility on the tax side of your business. Initially if you are a single member (owner), then you will be taxed like a sole proprietor or multiple members (owners) like a partnership but still getting the benefits of liability protection. As you start to increase your net income and find that being taxed as an S-Corp is better, then you can make the request from the IRS and upon approval, your LLC is now taxed just like an S-Corp business. Read more about How an LLC is Taxed.
How to Setup your LLC
- Pay a company to do it for you. Legal Zoom offers packages to choose from to setup an LLC in your state. They charge anywhere from $149 – $349 + state fees.
- Do it yourself—-You can typically do this online through your state website.
Go to your state website and complete the online application. Once you have completed the application, it typically takes a couple business days to get approved. Once approved you will receive a confirmation letter via email or through the mail.
2.Get an EIN from the IRS
An employer Identification number is essentially your businesses social security number. It identifies your LLC or company for the IRS.
How to Get an EIN from the IRS
1. Follow this link
Once you complete the application, you can choose the email option and you will get emailed an approved pdf EIN letter.
3. Understand Your Tax Reporting Requirements
When you start a new business there a couple of areas of taxation that you may be responsible for. Having a little understanding of each one will help you not fall behind.
These taxes are typically:
- Quarterly Estimated Taxes– If you plan to make a profit this year, then you will want to make sure you read about quarterly estimated tax payments and the safe harbors to avoid penalties. These are personal estimated taxes, not business taxes.
- Payroll Taxes- If you plan to hire employees this year, you will be responsible for filing payroll tax returns and remitting payroll taxes. Pro Tip: Use a Payroll Service Like Gusto Payroll that will make your life much easier.
- Sales Taxes- if you plan to buy products and then resell them or mark them up, then you will need to sign up for sales tax through your state. Check your state website where you set up the LLC for an electronic sales tax application. This is also where you will get your resale certificate, so you can purchase items without having to pay sales tax upfront. You can file a basic sales tax return yourself or use software like Taxjar to do it for you.
- Federal and State Taxes- How is an LLC taxed? If you are the only member of the LLC, then you default to a sole proprietor tax return. Which is adding a schedule C form to your personal tax return.
- Local License and Permits- Check with your local tax authority to see what licenses (if any) that you need to operate your new business.
4. Open a Business Bank Account and Credit Card (Maybe)
A business bank account is important for a couple of reasons.
- Organization: To keep all of your business expenses and income in one account so you can determine how your business performed
- Professional: To be able to write checks to pay suppliers or other vendors from your business account
Documents you Need to Open Your Business Bank Account
- LLC Articles of Organization- these will be provided via email or mail once your state approves your LLC.
- EIN Letter from the IRS- At the end of your application submission, they will offer to email you this immediately.
- Identification- you will need your ID
- 2 Hours of your Time at a local branch- most banks require you to visit a branch to open a business bank account. Expect that to take awhile. The best way to make it go quicker is by making an appointment at the branch.
How many accounts do you need?
The banker almost always tries to have you open multiple accounts. If you are truly just starting out, one business bank accounts is likely enough. You can always open up more later.
I usually don’t recommend opening a business credit card right away because you should be trying to minimize your business expenses until you have proven your service or product business. A lot of beginning business owners want to go out and spend a lot on various items to get started. Although your business may require that, we recommend scrutinizing every expense until you have proven income.
If you know that you will have some larger expenses (i.e. $5,000 within 3 months) for start-up and want to maximize your benefits, then opening a points credit card could be a good decision. The one I recommend and have is the Chase business Card. As of June 29, 2017, they offer 80,000 points if you spend $5,000 in the first 3 months with a $95 annual fee. (You can get a lot of Southwest trips out of 80,000 points)
5. Setup your Accounting
Accounting is really important when starting a new business as it allows you to stay organized as well as track all of your business transactions. If you have a business bank account and credit card, the monthly transactions can really start adding up.
Pro Tip: Keep your personal expenses separate from your business expenses. Businesses that commingle expenses always miss tax deductions and tend to have a harder time trying to file their taxes.
What Accounting Should You Use?
- Excel Spreadsheet- if you know that you will have minimal bank transactions the first year, then starting with an excel spreadsheet is a viable option.
- Xero Accounting– Our preferred recommendation. If you are planning to be a legitimate business, then setting up a proper accounting system will be a necessity. Xero connects to most banks and as you spend or receive money in your accounts, they will import those bank transactions automatically. It really can make your job of tracking your business activity much easier. Plus they offer many other benefits like sending professional invoices and financial reports for you to review your business. They offer a starter plan for $9/ month.
The above post will help you quickly start a small business today. Follow the 5 steps above to get started and good luck with your new business.