If starting a small business is on your new year’s resolution list, this guest blog from John Gordon, founder of USA Corporate Services Inc, will be of particular interest:
Congratulations! You have a great business idea and you’re eager to get started. Here are the first 6 steps to take to start out with a firm foundation.
- Decide how you want to incorporate. LLC or Corporation?
If you’re not planning on becoming publicly traded, consider an LLC. It combines the limited liability protection of a business corporation with the flexible tax and organizational structure of a partnership.
The owners of an LLC are called “members” and they work under an Operating Agreement. Income and taxes are passed through to the members, meaning your accountant will generate a Schedule K-1 at the end of the year for each member and each will report their share of the company earnings as part of their personal taxes. If there is only one member, then the LLC’s profits and losses are recorded on the owner’s own income tax return.
Members are insulated from liability such as unpaid bills, if they are not also managing the company, and if they follow proper procedure to separate personal and business matters.
LLCs have a calendar fiscal year, so your books will close on December 31st.
If you expect to grow very large and possibly go public at some point, you need a Corporation. There are two main types:
C Corporation: Is any corporation that is taxed as a separate entity, based on its income. Owners can hired by the corporation or receive dividends on their shares. S Corporation: If you will have 100 or fewer shareholders, your corporation can elect to be treated as an S corporation, and avoid corporate taxation. Like an LLC, the income is taxed on the returns of the individual owners.
- Pick a state to incorporate in
Even though the US has a federal government, individual states have different legal requirements for the businesses incorporated in them. It’s usually best to incorporate in the state where you have a physical presence and plan to do business. Incorporating in another state may cause difficulties opening a business bank account, may require you to appoint a registered agent, or entail fees for operating as a “foreign entity” in your own state. Nevertheless, many companies incorporate in Delaware or Nevada. Delaware does not charge income tax, inheritance tax, or sales tax for out of state companies. Nevada offers low filing fees and no state corporate income tax or personal income taxes.
- Check with a local Attorney
Online legal document filing services let you avoid using an attorney to form an LLC or Corporation, but there are a couple of things to know: they are prohibited from giving you legal or accounting advice regarding your specific situation.
If you’re selling a taxable product or service, you should speak with an attorney and accountant in your area about dealing with sales tax and other local requirements. Tax and tariff laws are constantly changing and vary from state to state. (Florida has no state tax but makes up for it with local taxes that vary by city to county
If you have a particularly complex partnership or financial situation, seek special expertise. For instance, our company assists foreign clients in company formation, immigration, import-export, international tax, real estate and supply chain.
If you’re limited on start-up funds, ask an attorney for a flat fee. Explain that you will be using an online service but would like them to double-check.
- Decide on a bookkeeping and accountancy practice
One of the most important steps is deciding how you will keep track of your billing and expenses. You must keep your personal and business expenses separate, so proof of a separate accounting system for your business is fundamental protection from liability.
There are two types of bookkeeping: cash and accrual. Cash accounting means the money is tracked when a sale or payment occurs. Accrual tracks the money when the invoice or bill is recorded. For example, you may bill a client on May 1st, but not receive payment until June 10th. In cash accounting, the income would be credited as a June payment. In accrual, it would appear as a May payment.
If you use an online service, such as Quickbooks, it will save money in the long run if you work with your accountant to set up the billing categories. Explain your business and how income and payments flow in and out. If you track income and expenses properly throughout the year, it will make tax preparation less expensive because your accountant will not need to spend time categorizing.
- Set up a bank account
Once you have incorporated and received your federal tax number, you can open a bank account. They vary widely in their features and charges so research will save you hassle. If you will need to make regular payments to overseas entities, check whether the bank requires a different level of account or limits the number of international transactions. If you qualify for a line of credit, it can help in the future with a temporary cash flow problem. Determine who will have access to the account and be approved to make payments.
- Get Insured.
The insurance you will need depends on the type of company you are forming and the services you offer. All companies have physical insurance needs against fire or theft, and worker’s compensation in the event of an accident at work. If you have customers on premise, you will need general liability and possibly slip-and-fall. For service business, your clients may require you to show proof of liability, errors and omissions, or other insurance. Insurance is highly specialized so you need to speak with a local expert who knows the regulations in your state.
If you start out right with these six steps, then no matter what kind of business you are starting, you will feel confident going forward. Taking care of these essentials will give you peace of mind so you can focus on your customers, your products, and your services. Good luck!
Guest blogger John Gordon is founder of USA Corporate Services Inc., a company to help foreign entrepreneurs establish companies in the USA by addressing tax, immigration and legal obstacles. USA Corporate Services has assembled a network of experts who know what they are doing, to help a wide range of SMEs, startups and even international NGOs to get off to a successful start in the USA.