Starting a new business can feel overwhelming. Besides the stress associated with the unknowns of starting a business, you must adhere to government compliance requirements. This article will go through the basics of setting up and creating the foundation for your new business.
Choose an Entity
You’ll want to decide which legal entity to use for your business. There are pros and cons for the various types of legal entities, which most commonly include a limited liability company (LLC), C Corporation, or an S Corporation. If you choose not to form an entity, by default, your business is classified as a sole proprietorship if you are the only owner. The LLC, C Corporation, & S Corporation offer certain liability protection. Depending on the industry and if sufficient business insurance is obtained, it may not be necessary to form a legal entity for liability protection purposes. There are different tax consequences for the various entities, which should be considered before selecting the preferred legal entity (or sole proprietorship if no legal entity). I should also note that certain professions require a particular type of entity, such as a Professional Limited Liability Company or Professional Association.
Keep Track of Start-up and Organizational Expenses
If you choose to legally form a new entity to start your business, there will be costs such as legal fees and state processing fees. The expenses to legally create an entity are referred to as “organizational” costs. Most likely, these costs would be paid out of your pocket since a business checking account wouldn’t exist yet. You’ll want to make sure to keep track of these expenses because they are deductible as business expenses once the business starts operating. Similarly, you could pay other “start-up” costs out of pocket before the company has a checking account. You will want to keep a record of these expenses to deduct them once the business begins operations.
Open a Bank Account
You will want to open a business checking account as early as possible in the process of setting up the business. Once the account is set up, all business expenses should be paid using that account. Paying all business expenses out of a business checking account will make it easier to track all costs to ensure no tax deductions are missed.
Apply for Licenses & Permits
Depending on the industry and location of your business, there could be various licenses and permits that will need to be obtained before you can open the business. For example, a restaurant could need a health department permit and alcohol license. Certain professions such as doctors & attorneys could require additional permits from a state board or government body before practicing.
Register for Payroll
If you hire employees, you will need to register with the state(s) in which the business will operate to withhold & remit payroll taxes and pay state unemployment insurance. You should also look at the worker’s compensation rules for the particular state(s) in which you will be operating and obtain the necessary coverage. I do not recommend handling payroll on your own. Instead, use either a full-service company like Paychex or ADP or a cloud-based service such as OnPay or Gusto.
Register for Sales Tax
Depending on the industry, you may be required to collect and remit sales tax. Sales tax rules can get complicated if you are selling into multiple states. You should obtain further guidance from a CPA to make sure you are registered and filing in all of the required states & local jurisdictions.
Setup a Bookkeeping System
To track the financial performance of your business, you’ll want to set up a bookkeeping system. Having a bookkeeping system in place is also essential to tax planning. It will be necessary at year-end to have sufficient records for when your taxes are prepared. In most cases, I’d recommend using cloud-based accounting software, such as QuickBooks Online or Xero. There are different subscription plan levels for QuickBooks Online. In most cases, one of the more basic, lower-priced plans may be sufficient when just starting. Besides accumulating and tracking income and expenses, you can use cloud-based accounting software for invoicing customers and keeping track of accounts payable.
Setup a Budget
When starting a business, you will want to set up a budget to plan for the anticipated income and expenses of the company and make sure there will be sufficient funding available. A budget helps project out the anticipated revenue that is expected to be generated and the expenses that will be necessary to keep the business running. Most companies operate at a loss when just starting. Hence, a budget is essential to ensure that there will be enough cash to keep the business going while it is getting off the ground.
Obtain Business Insurance
I briefly mentioned business insurance when choosing the type of entity for your business. However, regardless of the entity selected, you will still want to obtain the proper insurance coverage for your business. I’d recommend speaking with an insurance broker to get the necessary coverage for your business, which could vary depending on the industry.
Seek Additional Help
The above overview should give you an idea of some of the steps involved in starting a new business. There are undoubtedly other considerations, and I’d recommend seeking the help of a CPA and attorney before launching a new business. It can feel like an overwhelming process, but you can set your business up for success from the outset with the proper planning.