Business Foundation Setup
By VICKY BROWN
Now it’s time to talk about the foundation of your business. It’s really important that you build a solid foundation, and make sure your i’s are dotted and t’s are crossed. Because as one of my mentors once told me, you can’t fly with faulty wings.
But to put it in more black and white terms, you don’t want to be a year or two in, only to find out you have some sort of exposure because your legal structure isn’t properly in place, or you have a massive tax bill because your accounting was off.
In this episode, we’ll touch on all those areas. But the first, and most important foundation point is – well, it’s you.
You see, you’re the secret sauce. It all starts with you. After all, you’re launching a business based on an idea you had in your head. Don’t fool yourself, no one can get your company farther faster than you. And no one has the ability to do more damage, than you.
Another way to put it is – it’s all mindset. Your most important job is to power yourself to stay the course, have the confidence you need, and hold tight to your vision.
You’ll need patience – because very few things happen overnight – building a thriving business certainly doesn’t. So remember, it’s a long game. And remember, that every day will offer you something different – a different problem to solve, a different challenge to face. But that’s the life of an entrepreneur.
So, be ready. Clearly understand your vision. In fact, write it down. You’ll need it. It’s the thing you should refer back to when you don’t know which way to turn, or what decision to make. It’s the north star you’ll use when you feel like you aren’t enough, that everyone else is smarter than you, or destined to be more successful than you. It will ignite the fire in your belly when you want to give up because you’re exhausted and don’t think you can take another step forward.
Connecting, or re-connecting with your vision will work miracles. That’s why in last week’s episode I said you need to know how you’re helping people. That’s what’ll keep you going.
Now, on to the legal structure – what are the options, and which one will you choose. Oh, by the way, this is the part where I tell you again that I’m not an attorney, and this isn’t legal advice, and I absolutely recommend speaking with an attorney and accountant before you decide on a legal structure for your business.
You can choose to structure your company as a sole proprietorship, LLC (limited liability company), an S-Corporation or a C-Corporation. And in the last few years, something called a B-corp (or Benefit corporation) has joined the mix. It’s a specific type of certification that’s available to some for-profit companies that meet the criteria. I’ll leave it to your accounting and legal professionals to give you more detail if you want to explore that option.
All the legal structures I mentioned so far, sole proprietorship, LLCs, S and C corps are all considered for-profit legal entities. And your service business will most likely be a for-profit company – after all, that’s what we want right? Profit! So, I won’t really touch on the non-profit option.
Now, the main difference between the various for-profit options boils down to responsibility. When you’re a sole proprietorship, there isn’t a difference between you and the company. So, the company’s debts are your personal debts. The company’s responsibilities are your personal responsibilities. If the company has difficulty paying its bills, you’re personally liable to pay them – and if you can’t, the person the company owes can go after your personal assets… like your house.
“…if you’re wondering ‘what is a chart of accounts’ – then you should absolutely invest in a bookkeeper“
But, with LLCs, S corps and C corps – the business is considered a separate legal entity. So, unless you give a personal guarantee, your personal assets won’t be on the line for business responsibilities.
What’s a personal guarantee? Well, let’s say you take out a business loan, if the business doesn’t pay it back, the creditor can’t go after your personal assets, only the assets in the company. But, if you give a personal guarantee, then that puts you personally on the hook for paying back anything the company doesn’t. Right. I’m not a big fan of personal guarantees. And, the catch 22 here is that, when you’re a new company, with very little or no credit history, most lenders, or landlords or whatever, will in fact require a personal guarantee. So, make sure you always read every contract very carefully.
I’ve always tried my best to avoid issuing a personal guarantee. Oh sure, sometimes I couldn’t help it – after all, we needed the office space – but my attorney negotiated that after a certain number of years, the personal guarantee obligation would go away. See, that’s why you always want to loop the professionals in – they can protect you in so many ways you didn’t even think of.
And keep in mind, that although the basic requirements are set at the federal level, states have various laws that can impact how you establish your company as well. So again, talk to your professional advisors before you make a decision. Because in most cases, trying to change your corporate structure after the fact is a huge headache, and can cost a lot of money.
The next thing to think about is how will you get money, how will you track it, where will you put it when you have it, and how will you spend it. In English – set up a business bank account and get an accounting system, or better yet, an accounting person.
OK, so generally when you’re just starting out, hiring a bookkeeper or accountant is an expense you’ll want to put off. But even if you do decide to do your bookkeeping yourself, you should definitely invest in a good accountant to do your year end and tax filings. You absolutely do not want to do that yourself – unless your service is bookkeeping and accounting.
A lot of people get bookkeeping and accounting mixed up, or think they’re the same thing. They are not.
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Once you decide on a legal structure for your business, you’ll need to register with your state – specifically the Secretary of State’s office. You can usually find specific requirements on their website.
One thing to be particularly careful of – be sure you’ve spoken to legal counsel or done some very good research on what might be required for you to offer your service. Some service business industries require that you get an insurance bond; or you may need a specific type of license, or there may be some other requirement. Just know that offering your expertise as a business may have different requirements than when you were at your 9 to 5, even though you may have been actually doing the same thing.
All these agencies, and regulations are in place to protect the customer – your customer – from unqualified, or ill-equipped people taking advantage of them. Now, that’s certainly not you – but the agencies and regulators don’t know that. So be prepared to jump through some hoops if you have to.
There are lots of ways to register – you can go the do it yourself route, you can let your attorney do it, or you can take the middle ground and use one of the many registration companies like BizFilings.com or Legalzoom or countless others. Whichever way you decide to go, just be sure you’ve done your homework. Again, you don’t want to do this wrong, because untangling it can be costly.
You should also register with the IRS for an Employer Identification Number. Now you’re probably saying to yourself, ‘but I don’t even have any employees’. Well, the EIN isn’t just for employment, it’s used as your tax identification number on all sorts of things – like your business tax return. And when you’re dealing with vendors, they will often ask for your EIN. So yes, you do need one – and you should get it at the same time you register with your state. That way you can be sure your company is properly set up and ready to go.
An accountant is a certified professional, and while they can do other work, their main service is preparing and filing taxes. In fact, a good accountant can sometimes save you a lot of money by pointing out deductions or tax credits your business is eligible for that you didn’t even know existed.
A bookkeeper on the other hand, may or may not hold a certification. And while they don’t do tax prep or filing, they will take care of the time consuming task of keeping your accounting books up to date. They’ll do things like enter and pay bills, prepare and send out invoices to clients, follow up with clients on past due amounts, balance your bank statements each month and code money in and money out to the proper chart of accounts line. And if you’re wondering ‘what is a chart of accounts’ – then you should absolutely invest in a bookkeeper.
I know when we’re just starting out, we’re watching every penny – but that’s the point. You don’t want to lose track of any of the pennies; and believe me, if you’re doing your own bookkeeping – unless you’re an expert – some of those pennies will get lost. Even if you’re a super detailed person – you won’t have the time, or frankly, the expertise, to properly track every line item. So, my suggestion is to invest in a bookkeeper as early as possible.
And if you can’t handle the ongoing investment, then at least engage a bookkeeper to set up your Quickbooks or Honeybook program, so you get started on the right foot. And for goodness sake, don’t even think of trying to do your business bookkeeping by just using an Excel spreadsheet. It’s just not the right tool for the job. You’ll need some sort of accounting application. And there are a ton out there, so take your time, get referrals, look at the demos and trials, and choose the one that’s right for you.
Now, I will say that the vast majority of new businesses start with Quickbooks, so you might start your research there.
One other thing – I mentioned setting up a business bank account – once you do that, never – and I mean never – co mingle your business and personal money. That is a recipe for disaster. It makes your tax filing a nightmare, and worst case scenario – may cause some IRS problems for you. So always remember to keep everything separate. Let things the business buys come from the business bank account, and things for you personally come from your personal bank account or credit card. And if there is something you end of paying for that actually should be a business purchase, do an expense report and expense it back to the business and let the business reimburse you for it.
I know it sounds like a lot of steps, but again, you have to be sure you are keeping those banking and money lines very separate.