The moment we’ve all been waiting for! Ready? Say it with me…
You can officially pat yourself on the back because you’ve come up with something that inspires you and makes you want to conquer the world. That feeling is priceless and should be bottled up and sold for a lot of money (if you find a legal way of accomplishing this, I’m always looking for opportunities to become a millionaire, so…)
That said… we have a LOT of work ahead! But good thing you’ve got all these endorphins to help you out.
The Business Plan
First, you’re going to want a business plan. Yeah, I know, it’s not the first thing you’ll want to do, but it’ll be vital to accomplishing what you’re trying to do. Don’t spend a dime until you’ve nailed this down (which is really hard if you’re a doer, like me).
A business plan often includes:
- cover page and table of contents
- executive summary
- mission statement
- business description
- business environment analysis
- SWOT analysis (strengths, weaknesses, opportunities, and threats)
- industry background
- competitor analysis
- market analysis
- marketing plan
- operations plan
- management summary
- financial plan
- attachments and milestones
Don’t run away with your hands in the air just yet! A lot of this you may have already thought about and just need to get on paper. However, writing it down certainly helps you flesh out some of the important questions, be it for yourself or that investors would like to know. I’ve made a list of some of those questions here:
- How is this going to make money?
- How easy will it be to make that first sale in the first place?
- How many competitors are there, and how much of the market share do they have?
- How much will it cost for me to set this thing up?
- Will I realistically make enough money to cover my own salary in addition to the costs of making my product?
- Where is the money to fund this coming from?
- Do people need what I am making, and are the alternatives more or less appealing?
Obviously, these aren’t the only questions to answer — it’s not just about “can you survive today” but “will you survive five years from now?” Many, many questions will be answered by following a business plan’s guidelines.
If you’re not sure how to get this thing cranked out, there are a number of great resources on the Small Business Administration (SBA) website. For the shorter attention spans, an equally useful (but not as detailed or specific) two-page business plan can be found on the Freelancer’s Union website:
Legally Establishing the Business
Now that you know (or have an idea) what your business will do and how it will function, you are ready to establish the business legally. Be sure to do this early, because you could be audited for tax evasion if you operate without a legitimate business license (the state you live in might require an excise or business tax, aka “sales tax” on all revenue). You might also be sued big time for your own personal assets if your business practices are shady, or a client is unhappy with your work.
There are a number of possible ways to structure your business:
- Sole Proprietorship: In other words, you’re the lone ranger who owns the business. You’re the Bob of “Bob’s Doughnuts” or the Betty of “Betty’s Web Consulting.” This is the most common business entity in the U.S. The life of a sole proprietorship ends with the death of the owner.
- Pros: Sole proprietorships are the simplest to set up, with the lowest cost up front. Filing fees often costs around $50 (depending on your state). After excise tax, you also only pay tax once on your own earnings.
- Cons: There is no legal protection for your personal assets if an angry client or customer were to sue you for something. If a customer breaks his leg and asks for you to foot the bill, even if your business doesn’t make enough to foot the bill, your own personal assets are at risk. A sole proprietorship is also difficult to transfer from one owner to another compared to a corporation, and requires significant legal work. Not always the best choice for something that will ultimately be high growth and larger in size.
- Partnership: You are Bonnie & Clyde; or Fred & George; or Larry, Curly & Moe, and you split your earnings on some agreed-upon way (depending on your business plan). This partnership might also not be formally agreed upon – maybe your Mom suddenly decided to help around the store, and you eventually decided to reward her with 25% of the profits. In some states, implied partnerships – those which are not legally or formally recognized – may be as legally binding as formal partnerships. Be sure to look up regulations in your state. The life of a partnership ends with the death of the partners.
- Pros: Like sole proprietorships, partnerships are also a single-tax entity. Cost-wise, they are similar to sole proprietorships.
- Cons: They require a bit more work to set up (you may want a lawyer to help determine the exact details of your partnership, but it’s not required). Like sole proprietorships, liability is not limited to the firm’s assets, but can include the partners’ assets as well. It is also very difficult to transfer ownership because every member of a partnership must agree to a new partnership setup unanimously. Not always the best choice for something that will ultimately be high growth and larger in size.
- Limited Liability Company (LLC): LLC’s are the cat’s meow at the moment (Oh? No one says that anymore? OK). They’re a favorite of many companies because they are somewhat of a hybrid between corporations and sole proprietorships.
- Pros: Like sole proprietorships, they are a single-tax entity. Not only that, they are limited in their liability – angry customers can’t do a thing to your personal assets!
- Cons: Like corporations, they require a lot of paperwork to get set-up (for example, corporations have requirements like articles of incorporation, LLCs have requirements like articles of organization) and a higher cost compared to both partnerships & sole proprietorships. The tax benefits also dwindle as your income increases, and limit opportunities for external financing if you’re planning on becoming a high growth company.
- Corporation (C-Corp): This is the big one you’ve always heard about. Walmart. Target. Applebees. Corporations are their own legal entities separate from their owners. They often have a board of directors separate from their management team (but this can vary by company)
- Pros: They are easy to transfer ownership, and have perpetual life. They are great for high growth companies, because you can issue stock in an effort to raise equity. Like LLCs, liability is limited to the company, and personal assets are excluded entirely.
- Cons: Dual taxation – in other words, corporations are obligated to pay corporate taxes on earnings, and once the earnings are distributed (i.e. salary, dividends), they are taxed again as personal income. However, as stated before, this is only “bad” if the earnings are lower, or the firm is low-growth.
- Other forms of legal entities: S-Corp, Limited Partnership – S-Corps are rare, but have very specific guidelines on whether or not a company is eligible (i.e. number of shareholders, net profits). They are a single-tax entity and have a number of benefits that C-Corps do not have. Limited Partnerships are similar to LLCs but also have a number of specific guidelines. See your state laws and regulations for more details.
Phew, okay that was a lot, but depending on where you see your company going, one business entity might be more beneficial than another. Be sure you register so you don’t miss out on excise (business) tax payments. Taxes are super complicated, but don’t fear!
The Freelancer’s Union also has a great tax guide for those just starting to figure out taxes. Check it out here.
We have a business plan… we’ve registered as a business… now what?
GET TO WORK!!
Well, before that, there’s a few more things you’ll want to look into.
- Register your business (trade) name with the Department of Commerce and Consumer Affairs. This can be your own name or Burgerliciousness, Inc. Whatever it is, register it with the DCCA so you can protect your brand (and also make sure it doesn’t already exist).
- Separate your business expenses from your personal expenses!! For tax and accounting purposes, it’s very important to keep these two pots of money separate. Even if you’re a one-woman/one-man show, separation not only helps you track your money, but also keeps you from spending funds that have been designated for major expenses (i.e. buying a giant beer brewing kit, or a huge letterpress). Otherwise you’ll have a major headache when accounting season comes.
- Look into time-tracking tools. Even if you’re not a time-based service, knowing how much time you spend on tasks will help you figure out major pain points as you grow your business. It also helps you figure out your worth, and if your salary covers the time you’ve spent. It’ll also help you out big time if you ever take on employees.
- Manage your time like a ninja, look into project management tools. When you’re starting out, there are going to be a lot of things on your plate. Discipline will be vital to ensuring you’re meeting all your project deadlines, tax deadlines, and paying your employees.
- Sell the heck out of yourself on the Internet. Okay, I mean this figuratively, but then again, it’s sort of literal. If you haven’t made a Facebook Page or a website or an Etsy page, depending on your business, get on it. There are a number of cheap to free tools out there, but the point is to get a footprint where it costs the least and gives you the most bang for your buck. You can work out of your mildewy basement for all I care, but establishing your presence as a legitimate and active business will be vital.
So tell me your thoughts! What would you like to know more about? What did I miss? Does this help you out at all? I’d love to hear from you!