TRENTON, NJ. December 23, 2017: Starting a small business, a quintessential part of the American dream, is the most rewarding enterprise one can embark on. Remember, no business starts off big. Bill Gates started off soldering motherboards in his garage and turned it into one of America’s largest computer software companies(MSFT).
Few people want to work for someone else, if they can help it.
It takes long tireless hours. Stress filled nights and a major headache or two to be a business owner. However, the downsides are reasonable trade-offs when considering the upsides. Vacation at your own discretion. Complete control of the profits from the hard work you put into the business, minus taxes of course.
And most of all, the risk of downsizing and layoffs are virtually nonexistent, but it takes hard work and a pathway to success.
Lots of people flirt with the idea, yet never start their own business. Either they are not sure what business to start, where to start looking, how to start it, or how to get the money needed to start it. Following are some of the initial steps you need to take. A few logistical avenues to people who have never done any serious research on the issue by providing some basic tips and starting points.
One can use these to get more detailed information on specific issues. This is a general guide that helps you weigh the options, and not a step-by-step manual.
Picking the right small business structure
Tip: Pick a business name that starts with the letter A, that way you get listed first whenever you are grouped in alphabetic order.
Picking the appropriate structure is as important as picking the right name for your small business. There are two basic options which have different scenarios built into their structure. These options depend on the source of financing for your enterprise.
Equity financing would require stock. Debt financing would require loans.
The person making the decision needs to weigh how much control over the starting capital they have, and ultimately intend to keep.
Someone with direct access to their own capital could easily start a sole proprietorship, or a partnership (two or more individuals).
Placing the capital, either cash or real property, into the name of the entity and conducting business, establishes this type of business.
This is perfect for lawyers, doctors, architects and most, if not all, billable-hour trades.
Limited LIability Partnership
Someone that needs access to start-up capital may opt for a Limited Liability Partnership (LLP).
A Limited Liability Company (LLC) or an S-Corp. as the titles imply, liability for debts while conducting business in the name of the entity are debts of that entity and that entity alone. Personal assets are not subject to liquidation in the event the business becomes insolvent. More on that later on.
Starting your Small Business
For the most basic small businesses, filing a name registration with the local clerk of your town, county; or with the secretary of state is your start. Depending on the structure you pick from the ones listed above (LLC, LLP, S-Corp) you may need some additional documents.
Limited Liability Companies and Limited Partnerships require a master document spelling out how profits and losses are handled; how partners enter and exit the agreement, called a limited partnership agreement or operating agreement.
In addition, articles of organization or certificate of partnership, which basically serves as the business registration, identifying all responsible parties and providing their contact information is filed.
It also specifies the business name and states the general purpose for establishing the business.
If you plan on hiring employees, you will need an Employer Identification Number or EIN. You can obtain this by visiting the IRS website. It is completed in 5 easy steps and any business entity can file for one, even a sole proprietorship.
An EIN is necessary for opening a business checking account.
Finding startup money for a small business
Most startups don’t 100,000 – 500,000 necessary to run a business at their immediate disposal. And generally most small business don’t turn a profit for the first three to five years. Plan on acquiring enough operating capital to cover all necessary day to day expenses for at least that long.
Equity financing is the most complex.
This is where entity structure really comes into play once again. S-Corps and C-corps allow equity investors to fund a business venture. S-corp is the easiest. C-Corps may require a prospectus filing with the SEC. However there are exceptions to SEC filing depending on the size of the offering and who the stock is offered to, or the sophistication of the buyers.
Debt financing is a little more straight forward.
SBA is the most sought after type of loan. because the federal government provides a loan guarantee. Small business definition varies by income and number of employees. If you have little of both you usually qualify for the designation. Which includes access to tax credits and prioritized government contracting.
Providing a detailed business plan to any lender or banking institution is usually not a guarantee but the best bet for securing this type of financing. There is no government filing requirement.
Loans however usually depend on the amount of collateral and the quality of the business plan. You have to prove the small business is competitive. Some companies even specialize in small business startup loans with bad credit.
Paying taxes and tax deductions
Federal income tax liability relates to the structure of the entity you create. For everything other than a C-corp, income flows through to the individual who pays taxes by filing a Schedule C. A Schedule C-EZ is for those with business expenses of 2,500 or less.
In the case of partnership the business, in addition to the individual, files an information only return.
C-corps are subject to state and federal income tax, (Form 1120). For individuals classified as self-employed self employment tax social security (6.2%) and medicare (1.45%) 15.3 percent of the first 128,400 is also required. The rate is doubled because self employed people pay both the employer and employee share.
Sales and use tax for businesses that produce a physical product is required by some, but not all states.
Finally, things you can deduct to make your tax liability smaller include the following:
- Advertising expenses
- Bad debt
- Car mileage
- Business trips
- Cell phone
- Office supplies and stationary.
Business start up cost are such a large ticket item, the IRS requires amortizing that amount.