One reason some small businesses fail is that new entrepreneurs can get so excited about the creative side of the enterprise that they neglect some of the basics of setting up and running a business.
If you started your small business basically by the seat of your pants, it’s time to make it official. Here are six steps any serious business owner should take:
1. Get Business Insurance
It’s essential to obtain business insurance to protect your small business from risks, including property damage, theft, and liability. Business insurance Helps protects your property — from your building to your computers and office furniture — from storms, fires, and other disasters that can damage your business. Business insurance also helps cover you if you get sued — for example, if a customer trips and falls while visiting your shop.
Your coverage also should include lost income insurance, which reimburses you if your business has to shut down temporarily due to a fire, storm, or other covered situation. Being properly covered also could prevent you from losing out on new business, says David Waring, co-founder of FitSmallBusiness.com. “If your small business does business with larger corporations, they will often request proof of insurance,” he says.
2. Open a Business Bank Account
Opening a business checking account can help you keep your business funds separate from your personal money. It’s also essential to get a small business credit card or to keep a separate personal card just for business use, Waring says.
Failing to keep business and personal funds separate “creates a nightmare at tax time,” Waring says, noting that you’ll have to spend hours combing through your personal bank statements to try to pick out business expenses and income.
A clean separation of business funds also can save time, headaches, and financial costs if you ever face an IRS audit. And, if you have a money-making enterprise that some people treat as a hobby — for example, jewelry making or photography — establishing a separate bank account can show the IRS you mean business.
3. Request a Tax ID Number
If you’re a sole proprietor, the IRS might not require you to have an Employer Identification Number (EIN), also known as a federal tax ID number. In fact, some sole proprietors use their own Social Security numbers on business forms for years. But getting an EIN takes seconds and can instantly up your professionalism.
Procuring an EIN from the IRS also helps to protect you from business identity theft by shielding your personal SSN from too many prying eyes. While a thief could steal your EIN, they could not use it to harm your personal credit.
4. Implement the Right Business Structure
It’s important to get advice from multiple sources and, if you have any question about the correct structure, seek counsel from an attorney who understands your type of business.
The structure you choose will affect the type of taxes you pay, how many people can own the company and whether you as the owner can be held personally liable for the debts and obligations of the business. That’s why it pays to choose your structure wisely. Here are four examples of common business structures:
Sole proprietor — A sole proprietorship is the simplest structure for a solo small business owner. The main downside is that the owner’s business and personal assets mix.
Partnership — A partnership is a structure that allows two people to run a business together. The amount of liability of each partner is determined by the setup of the partnership.
Limited liability company (LLC) — An LLC allows the owner to separate personal and business assets without the complexity of a corporation.
Corporation — There are different types of corporations designated by letters (S, B and C, for example) with different rules and requirements. Generally, a corporation offers the most protection from liability but also involves more administrative headaches and cost than other structures.
If you are a sole proprietor, you may want to consider making your business an LLC to shield your personal assets from liability, Waring recommends. “With a service like LegalZoom, you can do this online for a few hundred bucks,” he says.
5. Hire an Accountant
Some small business owners start out crunching numbers on spreadsheets, but switching to an accountant — sooner rather than later — can improve your productivity and professionalism. An accountant can save you hours each week and lots of frustration. Instead of pulling your hair out over a math mistake, you can use your day more efficiently, focusing on revenue-generating activities and the big picture of your business.
It took Charlotte O’Hara, owner of web design and development firm Charlotte O’Hara Designs, over a year to hire an accountant. “I held off on hiring an accountant because, at first, I naively thought it wouldn’t be that hard to keep track of my earnings and expenses and that I could DIY it all,” O’Hara says. “I was so busy focusing on growing my business that I wasn’t focused on the administrative side of things.”
Recently, she hired an accountant to do her business taxes and she plans to continue to get accounting help on an as-needed basis. “It’s worth the expense because you end up pocketing more money come tax time,” she says.
6. Procure Official Stamps of Approval
If your industry requires any type of certification or licensing, don’t delay. Requirements vary from state to state, so find out if a business license is required in your state for your type of business.
Getting the proper credentialing not only keeps you on the right side of the law, but also shows prospective clients and customers that you’re conscientious, and sets you apart from the hobbyists and part-timers, much as getting business insurance does. For example, many homeowners look to hire a licensed, bonded, and insured contractor rather than an unlicensed handyman.
Following these steps as soon as possible after starting your business can help you operate more professionally, stand out from competitors, and pave your way to success. “If you set these things up correctly from the beginning, it will save you time, hassle, and headaches down the road,” Waring says.