A few weeks ago I received a question from a woman who is starting a crafts business with two friends. She wondered if it was really necessary for them to start a business. Well, that’s kind of a trick question, because they are already “in business,” whether they start a formal business structure or not. When you start making products and selling them, or selling a service, like it or not, you are in business. And if you are doing either product sales or service providing with friends, you need a more formal business structure. Today and tomorrow, I’ll list the 10 reasons why you must create a “real” business from the 
beginning.
1. Saving on Taxes. If you go along selling products or services and having expenses, and you don’t formalize your business, you will have a bunch of income that you will have to pay taxes on come April 15. If you formalize your business and keep records on what you spent - for travel, for supplies, for office expenses - you can take all of those off your taxes and save money at tax time. While this is one of the primary reasons for starting a “real” business, it isn’t the most important.
2. Liability Protection. If you are a sole proprietor or you have a partnership, you have no protection from liability - for business debts and negligence. Especially when you are in business with several other people, it is important to have a formal business structure, such as a limited liability company or corporation, to protect you- the owners from liability. Without it, you are defenseless. If the business can’t pay its bills, you personally must pay. If the business is sued, you must pay the defense costs and the settlement costs. With a sole proprietorship or partnership, the bankruptcy of the business is the bankruptcy of the owners. Yikes!
3. Protecting Friendships. I have seen it happen over and over and over. People go into business together with the best of intentions, swearing they will get along and agree no matter what. But they don’t. If you are mixing business and personal relationships, I will guarantee you that the personal relationship will suffer. When money comes into the equation, everything changes. I’ve seen it in families, too, so don’t think going into business with your sister is going to be any different. Having a formal business structure and creating formal agreements (partnership agreement, LLC operating agreement, corporate by-laws, whatever) can answer all the “what if” questions and protect all of you from a big falling out when things go wrong…and they will.
4. Help with Financing Your Business. Let’s say you and a couple of friends start your business informally and for a while you’re doing great. But you decide you need money to expand. Without a formal business structure, and the agreements I talked about in #3 above, a bank will be much less likely to give you money. You know banks are very reluctant to lend money anyway. Why make it more difficult for them? If you go to a bank for a loan, I promise you will have to create that formal business structure to get the loan, so why not do it now?
5. Increases Your Credibility. As you start a business, credibility may not seem important. But if your business takes off, and you want to reach out to the community through advertisements and other marketing venues, having a formal business name, business structure, and real business accounting and procedures will make you much more credible as a real business person. A business card printed on your home printer saying, “Sheryl’s Crafts” doesn’t mean as much as a nicely printed business card with a logo and the letters “LLC” on the card.
Next, 5 more reasons why you need to start your business for real, and the best way to do that.
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