Starting a small business can be an overwhelming process of filtering through information and requirements. It is easy for the newly self-employed to run into all kinds of issues they didn’t know existed. In order to start off on the right foot and avoid legal, tax and financial problems, consider the following tips:
- Create the right legal structure
One of the most asked questions by small business owners is whether they should operate as a sole proprietorship or as a corporate entity. Technically, you will automatically start out as a sole proprietor. Whether or not you continue to operate this way depends on your business and personal risk tolerance. Operating as a sole proprietor will not cost you as much money, since you are not required to pay and create corporate documents and tax returns. Even so, many business owners urge you to set up a corporation so you have some legal protection.
According to Don Mazzella, chief operating officer and publisher at Information Strategies Inc., a Ridgefield N.J. provider of publications for small business, “You’d be surprised at the liability you can engender when you set yourself up as a business owner. People may come at you with litigation or try to dun you for bills. If nothing else, it protects your personal credit rating”.
Keep in mind that a corporate entity is not necessary for everyone. You should first establish that you can be in business for yourself – incorporating is expensive. If you are truly the sole proprietor of your business, it might be best to stay that way. However, if more than one person with capital is involved, forming an entity detailing who is responsible for what, whether taxes are to be paid at individual or corporate level and who owns what may be best.
- Pay taxes – when it applies to you
Your decision on legal structure will then dictate how soon you need to begin paying taxes on your earnings. Keep in mind there can be some twists; it will require you doing a little research and keeping yourself informed. The general rule is that, if you operate as a sole proprietorship, you are not required to pay taxes immediately. Going by the letter of the law, you are supposed to file taxes quarterly if you make more than $400.
According to Certified Financial Planner David M. Williams, founding director of Business Enhancement Associates LLC, “There are no penalties if during the year you shift from being an employee to being self-employed and you don’t make quarterly tax payments”. However, if you have formed a corporate entity, this is not the case. A corporate entity is required to file taxes on income as it is earned; this will involve quarterly reports.
- Asses your self-employment taxes
When self-employed, you must consider what you need to set aside for taxes. When you are an employee, your employer withholds the percentage required for Social Security. You pay half out of pocket, while your employer covers the rest. Being self-employed, you are required to cover the entire amount.
- Consider if insurance is a necessity
For many startups, affording insurance isn’t always a possibility, nor do they really need it. As soon as you hire that first employee, however, you are going to need a lot of insurance. If you work from home, someone could fall or trip or your office equipment could be lost in a fire – you can acquire homeowners insurance. If your job has the potential for you to get sued, you might want to acquire liability insurance. In addition, if you sell a product that has the potential for people to get sick or injured, you will want to acquire product liability insurance.
- Research your business funding options
Business funding provides a small business with flexibility. As a small business startup, however, securing funding is not an easy task. In fact, the majority of traditional lending sources will categorize your business as being “high risk”. One way to get around this is to secure business funding with a high risk provider, like EMerchantBroker.com. A high risk specialist understands the obstacles you are up against and tailors their services to meet those needs. In order to grow and succeed, your business will need access to liquid assets – it can be a real game changer for any business.
- Make sure you get paid
What good is a business to you if you don’t get paid for the work that you are doing? Whenever it is possible, make sure that you collect 10 percent, 15 percent or 25 percent of your fee upfront. And always use contracts. You can tell a lot about a client based on their reaction to these requirements and whether or not they’re capable of paying you.
“By having a contract, you’re saying that you pay for real and that you’re someone whose business people need to take seriously”, says Alan Siege, president and CEO of Small Business Management Consulting in Brooklyn, N.Y.