Those that have followed for a while know that my wife became self employed last year. That opportunity largely fell into her lap, but that doesn’t mean it was just do the work and sign the checks. Like any business we had to get some administration steps done to get her business off the ground. This post will focus on some of those steps for the budding entrepreneur. That is, the administrative steps of starting a business. This will be a 2 part post.
Assuming You Already Know Your Business Case
For the purpose of this post I am going to assume you already have a unique business case and know you’ll have customers. I’m also going to assume you know how to reach those customers. These were parts of the process my wife lucked into, as a customer asked her to do things for them. They are also well trodden, so today I’m going to focus more on the less well trodden path. Aka the administrative steps of starting a business.
Choosing a Business Name
Many people overlook the importance of assigning a business name. The problem is not necessarily even in the marketing of the name. No the issue is if you choose the wrong name you may be forced to change it at a later date. That can cause confusion with your customers. Essentially if the name is another company’s trademark they can force you to relinquish the name. To ensure a name is not already taken you should first check the federal trademark database. You should also check your state’s business entity search, to ensure no other company is doing business with your chosen name. Lastly I might recommend doing a quick internet search for the name. Once you ensure the name is unique you are free to use it.
Many states require you to get a business license to run a business in their state. Depending on the business structure, which we’ll talk about later, the costs and steps needed to do so can very. Peruse your states website for more information. Note this process will also likely tell you about any special state tax procedures. It is likely you will need your license number when filing your business taxes at the end of the year.
Trademarking a Business Name
Speaking of Trademark and licensing, you may or may not want to trademark your business name. Licensing your business in a state will ensure no other business in your state can use your business name. But this says nothing about outside your state. You have little protection for your brand name outside of your given state, so other companies can name themselves similar. If your brand is important to your business and you are doing business across states you should consider spending the money to trademark your business name. Note this can be expensive and requires you to be willing to defend that name if confusion arises at a later date. The cost of registering is is between $225- $400. However, you may need a lawyer to file depending on similarities to other company names. You will also be required to defend your business name against infringers in order for the trademark to stay active. This last part can also get costly. It really depends on the nature of your business whether you need to trademark it.
Start with Business Structure
You’ll likely need to decide on your business structure to apply for any applicable business licenses. It might also influence your business name.
- Sole Proprietorship
A sole Proprietorship is the simplest type of business. If your state doesn’t require a business license for your type of business then essentially you can say you have a sole proprietorship tomorrow. By doing so any business income you make is filed against your personal taxes after subtracting out self employment tax and business expenses (more on this in part 2). The problem of course is you are the business. You are 100% on the hook for its liabilities, lawsuits, or anything else that comes it’s way. Finally note business loans can be difficult for sole proprietorships. Still it’s simple and if you are the sole employee side hustling this is probably the one for you.
You may consider a Partnership if your business will be owned by multiple people. There are two types of potential partners. One are the general partners, these run the business and as a result hold the liabilities of the business like a sole proprietorship. Limited partners can also be added, they serve only as investors and thus have less liability. Limited partnership situations are rare since they require extra paperwork. In general you should only enter a partnership with someone you trust as all general partners are jointly responsible for the debts and liabilities of a company, and can also incur them.
In this situation the company and the people are separate. Similar to a company on the stock exchange the owners and the company activities are separated. In fact this configuration can even issue stock if desired. The big differences here are the taxes, debt, liabilities, and revenue are all considered the corporations. Only those funds explicitly paid out to an owner are the owners.
This has positives and negatives. The positive being you don’t have to pay out all the funds each year, so some of the profit can avoid individual taxation from year to year. The down side is potential double taxation, first at the corporate rate and then at the rate of the individual who is essentially drawing an income or dividends from the company. That income and dividends eventually ends up on their personal return.
A final thing to note on C-Corps, they can be expensive and complicated to setup and maintain depending on the state. If you need to go this way you should consult a lawyer. I would recommend most small single or few employee businesses are best served not using a C-Corp.
These operate very similar to C-Corps, except income and losses are passed through to the owners individual tax returns. This makes tax time easier while still giving the owner some legal and liability separation from the company. Of course all of the downsides except duplicate taxes remain. Also, they still can be expensive to setup and maintain. Again it depends here. If you are providing professional services you are probably better off with another option. If you are producing a product with employees you might find this structure advantageous. Honestly I believe LLCs, listed below, are a better solution for most of these type of businesses.
These are similar to the S-Corp except:
- There are less strict guidelines on ownership of an LLC.
- LLCs also have less ongoing overhead, and the management structures are different.
- Can have unlimited owners while an S-Corp is limited to 100 shareholders.
- Can be owned by Non US citizens/residents, an S-Corp cannot.
- A Corporate parent organization can own an LLC, they cannot own an S-Corp.
- Managed day to day by the owners while an S or C-corp’s day to day is managed by officers elected by a board of directors.
- An S-Corp, like a C-Corp, usually requires yearly paperwork about stock, by laws, minutes, director votes, etc. An LLC does not require these, though some of them may still be a good idea.
Think of an LLC as an S-Corp for a small to medium size business that wants the legality and liability separation of a corporation without all the headaches. In general I would recommend an LLC for situations with multiple owners or where the threat of company indebtness is large. I would only recommend it liability wise if the company is a non professional services organization. See later for a note on the legality aspect.
It’s important to be aware typically your personal insurance does not cover your business activities. Even Umbrella insurance likely won’t help if your business is sued. Your business structure can help to some degree as noted previously, but depending on the type of business it may not help you. If you personally provide the majority of the work for the company then technically you can be sued as an employee regardless of company structure. This would be similar to if someone sued you as an employee of your W-2 corporation for negligence. Unlike the corporate situation however, you have only your company to defend you. So you really should consider business insurance.
There are 2 main types of business insurance almost all businesses require:
- General Business Liability Insurance
Basically this insurance covers if you or your employees cause injury or death of someone else. It covers the damages as well as your defense in the case you are sued in such a circumstance. I would recommend every business have this type of insurance as without it you essentially have no protection. Even a customer coming to your house to discuss a business arrangement could potentially not be covered.
- Professional Liability Insurance
This insurance is also commonly know as errors and omissions insurance. This applies to professional firms and covers failure to provide a service or improperly providing a service. So for example if you work cutting someones hair. You cut it and it looks horrible. They choose to sue you. General Business Liability insurance would not cover you, but professional liability insurance would. As such if you are providing professional services, as most small businesses are, you should have both types of coverages.
Beyond these two others may apply if you have employees, your business has a store front or property, your company has vehicles, etc. Call your insurance agent for more information and a quote on the types above. If you have something more complex then a simple at home professional services business I would recommend doing some investigation into what other insurance you may require.
This will be a 2 part post with the second part next week discussing accounts, health care, and retirement.
For now do you have any questions about business structures or business insurance?
This post as always is for entertainment purposes only. Please do you own research when starting a business.