You want to start up a small business, but you don’t know where to start. Join the club with the millions of other Americans who start up small businesses, but don’t set them up properly. Too many people are incorporating when they don’t need to, or vice versa. Here are three major questions you need to ask yourself when starting up a small business.
1. Do you need to incorporate to start a business?
No! Don’t believe the late-night television shows that keep trying to get you to start an LLC or other corporate form. You can start out as a sole proprietor. Just start doing business and comply with any city or state legal requirements such as getting a business license as necessary or filing for a “DBA” of “fictitious statement”. Basically, if you want a business with a name other than yourself, you’ll need to file for a “doing business as” statement, which identifies that you are John Smith, doing business as “Johnny Ace’s Sub Shop”. For your taxes, you file a schedule C on your personal income statement to report business income. It’s cheap and simple. Don’t incorporate until it’s necessary.
2. When should I incorporate and what is the best corporate form?
You should incorporate when the time is right. I know, that sounds like I didn’t answer your question at all. The fact is that every business is different, and every business is at a different phase of its life. You need to consult with an attorney and an accountant to figure out when the best time for your business would be to incorporate based on your current revenue, projected revenue, and personal liability exposure from your business. The best thing about incorporating is that your business becomes its own entity. It’s no longer directly attached to you. Someone can sue your business, but they can’t sue you. Because of the legal ramifications, pay the money to consult an attorney before deciding to incorporate your business.
You can form a “C” corporation, a “S” corporation, and an LLC (Limited Liability Corporation).
- “C” corporation: a “C” corporation is what most larger businesses are set up as, and the company files its own taxes. You should not look into this type of corporation until it has matured into a larger business with more employees and larger revenues. If you are the only shareholder, then you’ll be taxing yourself twice. You’ll pay taxes on the profit of the company, plus you’ll pay taxes on the salary that you pay yourself.
- “S” Corporation: An “S” Corporation is a great way to shield yourself from personal liability without being taxed separately. An S- corp does not pay taxes on its own. It passes its tax liability through to its shareholders, and the shareholder claims the profits on his or her own income tax return. If you are the only shareholder, you’ll shield your personal liability from the company and pay only one tax.
- Limited Liability Company: This is the best option for those of you who are still a one-man show, but your business carries a lot of personal liability. It offers limited liability, but you won’t be taxed twice. It acts like a corporation, but it’s cheaper to set up and there is much less paperwork involved. You don’t have to hold a general assembly meeting for all of the shareholders, and there is no loss of power to a board of directors. I think this is the best option for those small operations that generate a bunch of income such as professional firms and high-powered home-based businesses.
3. What’s a Federal Tax ID number, and do I need one?
If your business has employees, is a corporation or LLC, you’ll need a federal tax identification number. It’s required in these situations to apply for one of these numbers. Think of it as a social security number for your business. After all, we’re all just a number to the government, right? If you’re a sole proprietor, you might want to apply for one of these numbers as well. Otherwise, you’re using your personal social security number as identification. Nowadays, you don’t want to be putting your SSN in more places than it needs to be. Plus, some wholesalers won’t sell to you without having an EIN. It’s easy and free to get an EIN. Go to www.irs.gov, put “EIN” in the keyword search box and follow the directions.
Be prepared to do some paperwork when making your business a legitimate one. If you’re not serious about following the steps necessary by your city and state to create a business, then you aren’t serious about the business. Set it up the right way from the start, and you’ll reap the benefits in the future.