It’s an exciting time for you- you’ve started running a business, which includes booking jobs, taking payments, and paying your team. It all happened sort of quickly, and you didn’t really have a “business plan” down on paper...but hey, you’re making money! Now you just need to learn how to manage it all so you can grow!
This is not an unusual place to find yourself in- in fact, it’s where a lot of business owners begin! But now it’s time to pause and take a closer look at what you’ve been up to. There are several key steps that you should take to protect the business...and yourself!
Thankfully, the government gets it- lots of businesses spring up and are off to the races! That’s why anytime that you start performing business transactions outside of a “typical job”, the government automatically considers you a Sole Proprietor, or a business unto yourself.
This means that “starting a business” is easy, but there are a few things you should keep in mind. When you’re running and operating a business as a Sole Proprietor, you don’t have any protections in place that could help cover you if issues arise. You and the business are considered the same “entity”, so you’re personally responsible (liable) for any debts or claims that someone makes on the business.
Picture this- you’re out supervising a crew on a job, and a piece of equipment falls right on the customer’s prized show dog, which was running around the property. Poor little Snickerdoodle needs multiple (expensive) surgeries, and the angry customer is coming after you for the bill! Hopefully your insurance covers it...but if the customer wins a judgement against you, any payments not covered by insurance are on your head! If the business doesn’t have enough assets to cover it, that means the next stop for collections will be the assets that you own personally (like your savings, your car, or…*gulp* your house!)
While crushing a prized show dog may not seem like the likeliest of scenarios, there are a variety of issues that can pop up which get businesses in trouble- like an employee injury, un-anticipated tax bill, or a big job that doesn’t pay (even though you’ve already racked up some materials bills with your vendors)! If you’re part of a partnership, any debts that your partner accrues can be tacked on to you, too.
Who would say no to some extra protection and extra peace of mind?
Step 1: Get “Organized”
Sole Proprietorships and Partnerships, in their simplest forms, don’t offer you very much protection. That’s why the concept of a Limited Liability Company came onto the scene, “limiting” your risk to the money and assets earned or put into the business.
There are several advantages- LLCs are usually pretty simple to form (“organize” as) and simple to administer. You can be an LLC if you’re a single owner, or many! It makes your business look more professional, and of course it also limits the amount of assets ($) that you personally have at risk. It also grants you exclusive use to your business name in the area that you organize.
So how do you make the leap and become an LLC? It varies from state to state, but searching the web for “ Form an LLC in XYZ State” will get you off to a great start. Some people like to enlist the services of an attorney in getting themselves organized, but this isn’t a requirement.
Many states have made the process of forming a company like an LLC very easy- with a simple online application. Sometimes the state will even provide you with boiler-plate documents like your “Articles of Organization”, and they charge a (usually small) filing fee for organizing your business.
(Looking to formalize your business, but still uncertain exactly how to proceed? We Can Help)
While organizing your business, you will need to be prepared with information such as a consistent mailing address for the business (it can be your home address) as well as know who you want to be the “Registered Agent”. This is a person who is responsible for receiving and giving a timely response to business correspondence from the government, and you don’t have to look too far for your agent- it’s usually you!
(Tips to Remember: When you move, it’s important to update the state business commission with your new address. They always need a way to reach you!)
Step 2: Register for Your Employer Identification Number (EIN)
After you’ve jumped through a few hoops and registered with your state, there are a couple more items to address- namely, getting your Employer Identification Number from the IRS.
Thankfully, it’s another easy one. You just have to click here and follow the instructions. When you’re finished inputting the necessary information, you will receive an EIN, along with a nifty letter from the IRS explaining that it has been assigned to your business.
(Tip: Even though it’s an online portal, this EIN application only works during the IRS Business Hours of M-F 7am-10pm EST)
Save a copy of that letter with your permanent business records, and print a copy of it so that you can take it with you for the next step:
Step 3: Open a Business Bank Account
Now it’s time to log off of your computer and put in some face-time with your local banker. You’ll probably need to call and make an appointment, letting them know that you’re interested in opening a business checking account.
They should give you a list of required documents, which generally includes proof of identity, a print out of your records showing that you formally organized your business with the state, and a copy of your EIN letter.
With these at your disposal, business banking is within your reach!
Now, why is it so important to go open a business bank account, you may ask? Registering with the state makes sense, but I like to keep all of my money in one place!
And that’s just it- your bank account is for your money. If you want for your business to be treated as a separate entity from yourself, for all of the reasons that we discussed at the beginning of this article (DEBT COLLECTORS), you have to keep the finances of the business and your personal life separate.
If you keep things intermingled, the state or the IRS may come back later and decide that you didn’t really intend for the business to be separate from your personal belongings, so it’s all fair game when it comes to collections.
Aside from the above, having a dedicated business bank account (and credit cards too) is the first big step in maintaining the consistent business records needed to file taxes, understand how much money you’re making (and spending), as well as being a vital component in receiving electronic payments from customers.
Step 4: Register for Any Local Business Licenses
Many towns and cities have their own requirements for operating a business in their limits. Be sure you look into the local regulations, and register where needed.
Oftentimes, this is a similar process to filing your business formation with the state. Typically you register through an online portal, and may pay a small annual fee. The pay-off? You are now running a professional, licensed business!
Step 5: A Couple of other Considerations
Once you have completed Steps 1-4, you will have come a very long way towards protecting your assets, and running a respectable business. These few simple steps will open so many doors for you- including the potential customer base who would shy away from working with someone who isn’t a “legitimate business”! Take a moment to congratulate yourself on the work that got you this far.
What’s next? Running your business comes with additional considerations, like your tax obligations (local, state, federal, and when you hire employees). You also want to remain organized in how you track your customers, income, and expenses. Being proactive about how you keep these records can save you a lot of headaches (and a lot of $) down the line!
As your business grows, you may also want to consider “electing” to treat your business slightly differently with the IRS...keep an eye out for Part II of this article, about Electing to be an S-Corp!