Congratulations, you have a great business idea. Now it’s time to turn it into a real business!
Here are the 9 steps I recommend and the advisors you may need to make your business a success.
If you’re not ready for these steps yet, then you may need to do further due diligence, including preparing a business model or financial model of your idea. Talk with a trusted business partner or other advisor who can help you with your business strategy, planning and budgeting, and to see if your idea is financially viable. I have written a short guide on a Startup Financial Model here: which can help you clarify your idea.
1. Register your business with the state and federal government
If you haven’t already done so, now is the time to think about business formation. You don’t have to do anything complicated in this area if you don’t want to. If you have been using your personal social security number for the business up until now and things are starting to pick up or are getting more complicated, it may be time to apply for a business Tax ID number (known as an Employer ID Number) with the IRS. The IRS does not charge for a Tax ID number and you can apply online. You should also think about registering your business in the state where you are doing business. You can visit your state secretary of state or department of revenue website and do this online for a nominal fee. You may want to consult with a lawyer or CPA for specific legal and tax questions.
2. Keep your books in order with QuickBooks Online and a bookkeeper
I usually recommend QuickBooks Online for my clients. This is more than sufficient for most small businesses until they reach a certain size or complexity. When the business grows, a more robust system like NetSuite, Sage, or Dynamics may be needed. One exception is for companies with a lot of SKUs and inventory movements which can be difficult to track in QuickBooks Online. QuickBooks will also handle the online credit card payments when your customers pay you (for a fee). I use QuickBooks Online for my own CFO consulting business and am a QuickBooks Online Advanced Certified ProAdvisor. Pro tip: if you use a bookkeeper who is Quickbooks certified, they can wrap the Quickbooks subscription into your regular monthly fees or extend a wholesale discount to you.
3. It’s time to lawyer up
I recommend finding a good lawyer. You don’t have to overpay, but in this area, you get what you pay for. Every business has specific risks it needs to manage so there is a real benefit in talking with an expert. Even for simple documents like supplier or customer agreements and employee/contractor engagement letters the low-cost websites don’t usually cut it. It’s a good idea to keep your lawyer and insurance broker in the loop with each other (see question 5 below). If there are specific risks that are not covered by your insurance, then your lawyer can make sure you have some protection in your contracts.
4. Make sure your employee payroll is running efficiently
I recommend my clients use a Professional Employer Organization (PEO). There are several out there like Justworks, Gusto, and Paychex that I’ve used and can recommend. Quickbooks Online has its own PEO as well that integrates directly with your accounting books. Shop around and look for features and costs that make sense for your business. A PEO handles all the compliance issues and legal complexities of paying employees, payroll taxes, and paycheck withholdings. Calculating all these amounts on your own can be quite challenging and time consuming and the risk of making a mistake is too costly. They can also do benefits administration and can offer some good discounts compared to what a small business can negotiate on its own. The time and risk of doing this yourself are not worth it since most PEOs charge per employee so costs are manageable and scalable. If you want to add a 401k plan, I recommend Guideline, which is a good low-cost provider.
5. Purchase Business Insurance
A business insurance policy is another must-have. At a minimum, you should have general liability and professional liability insurance. General liability insurance will cover your business if someone slips and falls in your business. Professional liability insurance (also called errors and omissions) will cover you if you make a mistake. If you have employees, you will also need Workers’ Compensation insurance, which can also be purchased through your PEO (see question 4 above). If you have merchandise, you need insurance to cover that too (see question 3 above about managing these risks). Talk to an insurance broker, or there are several websites that offer policies online. I have a professional liability policy through Hiscox.com which was very easy to buy online.
6. Review Sales Tax Compliance
The sales tax laws are complicated and differ by state. In general, there are a number of possible triggers that may require your business to register and collect sales tax in a state. The first, and easiest to understand is “physical presence”. If you or your business, employees, or inventory are located in a state then you trigger physical presence nexus and will have to collect sales tax if you, your customers, and your products/services are taxable. Most states have recently enacted “economic nexus” rules, which basically means if you sell more than a certain amount (typically $100,000) into the state from another state you also have to collect sales tax in that state too. There are other more complicated sales tax matters like click-through nexus, affiliate nexus, and marketplace facilitator requirements that are beyond the scope of this article. My advice when starting out is to make sure you are registered in any state where you have a physical presence. Then you should periodically review your sales into each state to see if economic nexus thresholds are met. Lastly, you should talk with a sales tax expert to see if you trigger any of the other requirements.
A small business can handle the requirements of their own state pretty easily with a little work. As additional states are added you may want to look at an outside service. Quickbooks has a Sales Tax tool which you may want to look at for simple tax calculations. There are other services like Avalara and TaxJar which handle the heavy lifting. When you get to more than 3-5 states it often becomes too much for a small business (or even a bookkeeper) to handle on their own, so it may be time to start looking at one of these services.
Here are some additional thoughts on sales tax nexus.
7. Get a CPA to do your taxes
A CPA can help you with your business and individual tax returns. Depending on how your business is formed (LLC vs S-Corp vs C-Corp or other) there may not be much of a distinction between your business and individual tax returns so it is helpful to keep both under the same roof. A CPA can also help you with more complicated things like preparing financial statements for lenders and investors. They can also help you with specific topics like the R&D tax credit that you may not be able to handle on your own. Some CPAs may also offer bookkeeping services. In my experience, it can be helpful to keep them separate as each is an expert in their own area. Furthermore, a CPA typically charges substantially more than a bookkeeper so you can lower your costs by going with a separate bookkeeper. Also, be aware that some CPAs outsource their clients bookkeeping offshore or use bookkeeping services as a loss leader to attract more lucrative work.
8. Build a small business website
The website falls under the overall marketing plan. The small business should first determine how the website will be used (is it transactional, like e-commerce or informational, like a billboard). If the business owner is technically savvy, they can design their own website. Squarespace has some good DIY templates. With a little more effort, you can customize your own WordPress theme. If this is more than you can handle, then it would be a good idea to hire someone to help. There are a lot of freelancers out there that can help you set up a quick website without spending a lot of money. This is also a good time to make sure you have a business profile set up on the major social media platforms including LinkedIn, Facebook, Instagram, and Twitter. Depending on who your customers are, you may want to look at some of the newer platforms like Snapchat and Tiktok.
9.Signing an office lease
If you want to set up an office, I recommend the business owner carefully review the lease before signing. This is another good example of legal costs you don’t want to scrimp on. As we have seen recently with everything going on with coronavirus, the business needs to make sure it is protected. Another area to watch out for in the lease is the buildout, in terms of what customizations to the space you are allowed to make, who pays for them, and what condition you have to return the premises to at the end of the lease. Also, watch out for unexpected operational expenses and automatic rent increases. You may be able to negotiate free months at the start of the lease, but if the monthly rent jumps after the first year you may no longer be able to afford it.
If you need any help setting up your small business, let me know. You can reach me at www.sackermanconsulting.com and scott@sackermanconsulting.com.
