So you've got a great idea for a small business and you're ready to launch. Congratulations! Owning a business is a lot of work, but it's also incredibly rewarding. Whether you're selling a product or a service, making money through by your own means is a great feeling.
Amid all the excitement, it's important to follow the proper steps to make sure your business is legally and financially legit. It's tempting to wait until you start making money, but it's waaaaay easier to get the proper documentation before you launch than it is to backtrack once you've already made sales. (And your bookkeeper will thank you for it!)
Follow these five steps to start your small business the right way!
How to Start a Legit Small Business
STEP 1: Choose a business name.
Before anything else, you need to choose your business name. Pick something that feels true to you, but also make sure it's easy to understand. The last thing you want is for your potential clients to have trouble spelling or pronouncing the name of your business.
After you've narrowed down your ideas, check these sources to make sure the name is available:
Your state's Secretary of State website. Make sure your business name is available to register in your state.
The United States Patent and Trademark Office. Search the trademark database to be sure no one else has trademarked your potential business name.
GoDaddy. You'll want to make sure your new business name is available as a domain so you can create a website. (Pro tip: Purchase the URL as soon as you register your business name. That way, no one else will be able to take it!)
Social media. If you're going to start a business, you'll need to market it. Social media is the easiest (and cheapest) way to get started. Make sure your potential business name is available as a handle on whichever platforms you plan to use. (Start with Facebook, Instagram, and Twitter.)
If your business name is available in all of these places, you're ready to go!
STEP 2: Choose an entity type and register your business.
Next, you'll need to choose an entity type and register your business. There are several options for entity types, each with their own advantages and disadvantages. These are the three main types I recommend to online business owners:
Sole Proprietorship. As a sole proprietor, you have total control over your business, but your business is not at all legally separated from you as an individual. You'll be able to register a trade name, but you'll be financially liable if your business is ever sued (meaning your personal assets are on the line). Banks are also hesitant to loan money to sole proprietors. This is a good choice if your business is low-risk and low-reward, but it's not a great option if you're looking to grow.
LLC. This is by far the most common option for online business owners. Unlike a sole proprietorship, an LLC (Limited Liability Company) allows you to separate your business and personal assets, meaning your personal property isn't in danger if someone sues your business. With an LLC, you'll be able to transfer money to and from your business and personal accounts with ease and have unlimited shareholders. You will, however, pay self-employment taxes, which differ by state.
S-Corp. With an S-corp, your business is still separated from you personal assets, but you won't have to pay a self-employment tax. While it may help you save money on taxes, S-corps require steady cash flow. As an S-corp, you'll need to put yourself on payroll meaning you need to enroll in a payroll service and pay those fees and pay payroll taxes on your salary. As an S-corp, you'll pay yourself a reasonable salary for the position you work in your company and can take distributions as the company grows. If you think you're ready to become an S-corp, talk to a tax professional to make sure it's the right move!
Once you've decided on your business entity type, it's time to register! You can do this yourself through your Secretary of State office, but I recommend investing in professional help for peace of mind.
Once you've registered, you'll get an EIN (Employer Identification Number) and be able to open a business bank account.
STEP 3: Open a business bank account.
If you want to save yourself (and your bookkeeper) a lot of trouble in the long run, keep your business and personal accounts separate from the get-go. Open a business bank account, and keep all business transactions within that account.
When choosing a bank, consider...
Fees. Some banks require annual fees for keeping accounts or credit cards open.
Ease of paying yourself. It may be easier to pay yourself if your business account and personal account are through the same bank. If you keep them at separate banks, be sure your business bank won't charge you fees to transfer money to your personal bank (no need to pay fees when paying yourself)!
Payment processing software. Most national banks integrate well with popular payment processors, but it's always a good idea to make sure before opening your account.
Ease of access. Do you want a bank with a mobile app or the option to deposit checks virtually? If so, choose a bank with these features.
Once you have a business bank account, you'll be able to start accepting payments, purchasing business necessities, and saving for upgrades. (Hello, new computer!)
STEP 4: Consider a trademark.
While it isn't necessary, trademarking your business name is a surefire way to protect your big, bright business idea. A trademark prevents others from taking (and possibly trademarking) your business name. If someone else trademarks your business name, they can legally force you to change yours. Avoid that nightmare and get yourself a trademark!
STEP 5: Invest in an accounting software.
Like I mentioned before, keeping track of your business finances from the start will save you tons of headaches down the line. Invest in an accounting software (like Quickbooks Online) to help you track payments, manage expenses, and save for taxes.
Are you starting a small business?
If you're starting a small business of your own, reach out! As a professional accountant, I help online business owners maximize their profits and manage their finances - without the stress of doing it themselves.
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