Starting a business is both thrilling and terrifying. For most first-time business owners, the road ahead is filled with new learning opportunities. But sometimes in the excitement of getting started, it can be tempting to ignore certain things you may not know or understand until a later date.
If this is you, understand that you’re not alone. When we first launched our business, we faced the same tendencies. But, because we’re lawyers, we had an advantage most people don’t when they start their own endeavor. Because of that, we want to share our thoughts on at least five things you should consider before making too much progress as an entrepreneur.
(Also, as lawyers, we’re obligated to tell you that there are many more than these five things to think about, but this is a good place to start).
1. Choosing A Legal Entity
Before doing anything, it is absolutely essential that you decide how your business will operate from a legal standpoint. There are a number of different options you can choose, including corporations, sole proprietorships, partnerships and limited liability companies. Each of these operates in very different ways (and can have substantial tax implications). To learn more about these different entities and how they operate, click here.
Ultimately, the advantage of choosing the right legal entity for your business is that it can reduce the risk of you being held personally for such things as your business’ debts or your employees conduct. Without forming some sort of entity, you run a very high risk of unnecessarily exposing yourself to personal liability.
2. Obtaining Tax ID Numbers
In addition to setting up your preferred legal entity, you will need to obtain a federal tax identification number that is unique to your business. This lets the IRS know that your business is separate from you and responsible for its own tax reporting. Depending on your business, you will also likely need a separate tax identification number from your state for local tax purposes.
Once you’ve been issued a Federal Tax ID Number, it will basically operate as your business’ social security number. This becomes particularly important when opening a bank account in your business’ name. In most cases, a bank won’t allow a business to open an account until it has obtained this number.
3. Obtaining Necessary Permits or Licenses
Generally, most businesses offering goods, services or property rental to the public will need some sort of license or permit. For example, a photographer may need a business license to operate in the town in which they’re situated. Or someone renting their home on Airbnb may need a permit from the county health department. Failing to obtain necessary permits and licenses can result in fines or the business being shut down. That being the case, it’s essential to determine what particular permitting and/or licenses are necessary for your type of business.
4. Obtaining a Proper Contract
For the majority of entrepreneurs, this is the most over-looked step in starting a business. The types of contracts vary from business to business, but are generally the same in concept. For example, if you’re starting anything from a lawn maintenance company to a vacation rental business to a photography business, you will want a contract for new clients to sign that contains (among other things) (i) a clear statement of how much is being charged, (ii) what services are being performed and (iii) who is responsible for legal fees (if it ever comes to that). Also, it would be very wise to include language that releases you and your business from liability if something unexpected were to go wrong.
If you’re in the business of selling, renting or providing a service, you’ll probably need a contract at some point (or possibly in the regular course of your business). And if you do, make sure you get a good one – one that fits your business closely. Using one that you’ve found or purchased online is often riskier than not having anything at all.
5. Obtaining Insurance Coverage
This is essential for nearly every business owner, no matter what type of business you’ve got. Certain professions require insurance, but most do not. Simply because it’s not required by law doesn’t mean you shouldn’t have it. The cost of paying a premium for a reasonable amount of insurance will be far cheaper than paying out of pocket if something happens. Coverage can protect you from losing your business assets, lost or missed income (if you end up being unable to work) and certain liabilities that may arise involving third parties. At the very least, it would be wise to consult with an insurance agent to discuss what your options are.
6. Bonus Point - Talk to an Accountant
Accounting and owning a business go hand in hand. But unless you’ve got a strong background in accounting, chances are you have a lot of learning to do (just like we did). That’s why talking with a professional is key. Although payroll matters and other tax concerns can be very intimidating, you don’t want to put yourself at odds with the IRS or your state. Taxes are always worth taking seriously.
Hopefully these tips give you some direction moving forward. Owning a business can be incredibly rewarding and if you take time now to get these bases covered, you’ll be able to give yourself a lot more peace of mind.
If you have any questions about this or other matters, we invite you to contact us.