by Dr. Jean on March 26, 2010
If you are selling something, whether it is a product or service, to the public or to businesses, you are “in business.” This means you must act like you are really in business by creating a formal business structure and doing all the things real businesses do.
Last time, I presented 5 reasons why you should act like a real business. Today, 5 more:
1. Required for Paying Sales Taxes, Use Taxes, other Taxes
The business owner I mentioned in my last post is selling crafts at flea markets and craft fairs. She wondered if she must collect sales tax on her sales. Most likely YES! It depends on the state where she is selling. Most states require that sales tax be collected for most products, including hand-made products. So she is going to have to figure out a mechanism for collecting those taxes. This means she must (1) register with her state taxing authority, and (2) implement some kind of sales tax process, either by hand or computer. Many craft vendors use point-of-sale machines (little credit card processors). To do all of this, there are processes she must go through, including getting a business bank account, an employer ID number, and getting the equipment.
2. Saves Money on Attorney Fees
This is one of those “pay me now or pay me later” things. If you have an attorney help you set up your business, you will pay some money now. But it will save you from having to call an attorney in a panic later, and paying lots more money. For example, when something goes wrong and the business owners start to feud is not the time to put together a buyout (or buy-sell) agreement. And when you have a tax problem and realize you should have formed a corporation, you can’t do it for last year.
3. Same Goes For CPA and Tax Advisor Costs
Have a CPA (not just an accountant) help you set up your business financial structure, and get good tax advice, either from your CPA or someone else, from the beginning. What if you made lots of money the first year and you weren’t tracking deductions? You would pay a hefty amount to the IRS for taxes! It’s better to pay the CPA now than to pay that person more money later to help you fix the mess you’re in.
4. Makes Transitions Easier
When you start a business, you figure it will always go on as it has; no one likes change, and we try to avoid it. But stuff happens: one of the owners becomes disabled, or someone decides to get out of the business. What if one of the owners gets divorced and his/her spouse sues to get part of the company? This stuff can be a mess. If you go into business with others, I urge you to get a legal document that prepares you for transitions. This “what if” language can be in your LLC operating agreement, your partnership agreement, or your corporation’s by-laws, or it can be a separate agreement. But you need something that helps you get through this change by following what you have all agreed upon when things were not so hectic.
Next, the Most Important Reason to start a business “for real.”
by Dr. Jean on March 23, 2010
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.
