Many businesses fail every year mainly because people are unfamiliar with the basics of running a business. All businesses involve risks, consult certified accountant and lawyer prior to investing in a venture. The very first thing you ought to think about when starting a business is the legal entity you will be operating as.
Each type has its own advantages and disadvantages.
There are essentially four types: sole proprietorship, partnership, limited partnership, and corporation. One of the major reasons for a business to fail is because the founder wastes startup capital on frills like expensive office and furnishings. If you want your business to be successful, you must have a tight rein on your expenses.
Anything that does not safeguard your investment or make money for you, should not be purchased at this time. Naturally, this applies to the expenses of setting up your business. Unless you have a partnership and start your company as such, the only genuine benefit of forming a corporation would be to protect the property you personally own. Yet, if you are found guilty of misusing corporate funds, your creditors can come after your possessions.
However, if you invest everything you have in your business, you do not actually need a corporation since you have nothing to protect. Basically, your personal asset is already protected by the homestead provision of the Federal Bankruptcy Act, and cannot be taken away from you. As a sole proprietor or a business partner, you will be paying taxes on your overall earnings, as if you were holding down a salaried job. Whether you draw out money as salary or not will have no impact on your business earnings and tax return.
The advantage of incorporating is that you can control your salary to minimize on tax.
When your company is successful and starts to make a lot of money, you should look into incorporating. There are also disadvantages of incorporating. Corporation pays higher taxes, reports more detailed accounts, has stricter business laws.
Hence, your accounting and legal fees are higher as a corporation than as a sole proprietor or a partnership. As a sole proprietor or partnership, there will be many areas that will require your registered business name, such as opening a business bank account. Choosing a business name is very important, especially relative to marketing. Your business name should describe the service or product you offer.
Should you purchase, lease, or rent a space for your business? Be prudent before you make any decision as businesses tend to either grow quickly or they never get off the ground. Purchasing a property gives you the ownership of the property regardless of what happens to your business. Leasing a property over any length of time will tie you down to paying for that space regardless of what happens to your business.
For starting out, it is good idea to rent with a choice to lease in future.
Next, you must open a business bank account. Different banks specialize in different types of businesses. Choose one that is convenient to your business location.
You will want to set up the handling of major credit cards with your bank. Having the ability to accept credit card transactions will greatly increase your sales volume. For corporations, you will require a corporate resolution authorizing of the opening of your business account. Every state’s regulations on sales tax permits and licenses vary widely.
Many suppliers will not sell to you at wholesale prices until you can show them your sales tax permit. If your business sells in other states, you are not required to collect taxes other than in those where you have stores or offices. Check with your local IRS if your business requires the collection of Federal Excise Taxes. Some states require certain businesses to hold “occupational permits”.
Any interstate business is subjected to federal regulations through the Federal Trade Commission.
Any business that sells or distributes food in any manner will always require a county health department permit. Any business that handle flammable materials or attract large crowds of people will require inspection by a fire marshal. The local fire department has the authority to inspect your premises whenever they want.
Any business that burns anything, discharges anything into sewers, or use any gas-producing product will require an air or water pollution control permit. Each city has its own rules on display signs, check before you have a sign made for your business. Some other things to consider before opening for business is if you intend to employ employees. If so, you will be required to deduct Federal Income Taxes, and Social Security payments from their salaries.
This will require your filing for a Federal Tax Number. To protect your business investment, you will need business insurance. Basically, you need a policy that covers general liability, fire, workmen’s compensation, business interruption, vehicle, burglary, robbery, life & accident, key man, and fidelity bonds. Any variety of bad things can really toss your business into a tailspin, however if you have set up a detailed business plan before starting, your losses will be minimal.
The most crucial component of your ultimate success will be your business preparation. Success takes planning.