Do you dream of leaving your cubicle behind and working for yourself? Do you have an idea that you believe in, but aren’t sure how to turn that into a business? It takes a lot of guts to start your own company. More importantly, it takes smart planning. Here’s a few things you’ll need to do to make sure you’re setting your business up for success from the start, legally and financially.
1. Minimize Your Risk
Let’s assume you have decided that you are going to quit your job and make the leap of starting your own company, burning the TPS reports on your way out the door. The first thing you’ll want to do is minimize your risk. But how?
First, consider working on your new business after work hours and on your lunch break while you’re already employed, so that you have a head start before you leave your job. Drafting a business plan can help you outline reachable goals for your new venture. Try to generate some interest in your idea with your friends and family; you will need their support in the beginning. You should also look for a mentor who can guide you as you build your business. In fact, before you leave your employment, you’ll ideally have most of your company set up, along with a strong support system, which can minimize your risk by giving you more time and knowledge to execute.
2. Get Start Up Cash
Every business is different, but you’ll need to save enough money to float your new company for at least a few months – the longer the better. Building a business plan will help give you an idea of what your costs would look like, and it should also provide an outline of your business goals. The more efficiently you start your business, the easier it will be to maintain the organization, allowing you to spend more time on generating revenue and increasing your chance of success. If you have good credit and an asset or two, you can also look into applying for a line of credit to help give you some stability. Maybe you have a frugal Grandmother who will lend you some.
3. Name Your Business
It’s important to come up with the name of your business first to make sure nobody else is already using it. Come up with a name, logo and slogan, if you feel it is appropriate. Then search the name you have come up with. You can easily find out if someone is using that name by searching on Google. You can also search the Trademark Office and Copyright Office database to see if anyone has registered that name as a trademark or copyright, which would prevent you from using that name in a “confusingly similar” way.
For example, you can’t open a McDonuts or a Ben and Jerri’s without expecting to receive threatening letters from corporate attorneys. You can even hire a company for about $700 to do the search for you. This is an important step because you do not want to spend money on letterhead, business cards, etc., for a name you cannot use. Also, you want to have a unique name that you can copyright and trademark yourself, preventing anyone from infringing on the brand you are trying to create into the next worldwide phenomenon. Tip: You may want to search the name in other languages so that you don’t offend an entire nation when you go international by using an offensive foreign term.
At this point, it is highly recommended that you consider hiring an attorney and an accountant to help you decide whether you should file a corporation or LLC, file for copyrights or trademarks, and give you advice specific to your type of company and financial situation.
4. File and Organize Your Business
You need to file your business with the State you live in. Nowadays, you can get this done by a professional for approximately $500 for a corporation, and around double that if you are starting a Limited Liability Company (LLC), which is a separate decision you will need to make. The reason that an LLC costs more is that most states require that you publish in local newspapers that you are starting your business, as notice to the community.
A Limited Liability Company gives greater personal liability protection to the members of the business, as opposed to being the Owner and President of an S Corporation. Your attorney or accountant can help explain the liability and tax benefits of both types of corporations in greater detail based on your particular idea, and help you decide which one is more appropriate for you.
Once you have received your Corporate Kit and Certificate of Incorporation, you can go to http://www.irs.gov and file for your Employment Identification Number (EIN), or have your attorney do it for you. You may want your accountant, if you have one, to also fill out Form 2553 and elect to become what is called an “S Corp”, or S Corporation, which has tax advantages and can be easily filled out and filed with the Department of Treasury if you need to do it alone. This decision should be made at the same time you decide which corporation you wish to file.
At this point you can start a business corporate banking account, apply for a credit card and purchase office supplies. You want to make sure you keep your business and your personal finances separate. The purpose of starting the corporation is to protect yourself from being sued personally. A corporation protects you in the event a person gets hurt because of your product or business. They can only sue you through the corporation, and cannot sue you individually and go after your home and/or other assets to collect a judgment they may have won in Court. That is the purpose of a corporation in essence.
However, if you commingle your personal and business money, you risk losing that protection by allowing a person to “pierce the corporate veil”, as the law says, and sue you individually. It essentially means that you created a “shell” corporation just to protect yourself individually and you never really meant it to be a separate entity from yourself. So never use your business credit card to buy groceries and never use your personal credit cards to purchase office supplies.
5. Manage Your Money
Finally, set up an online accounting program, such as Quickbooks or PeachTree to keep all income and expenses in one place, accessible at any time. You can create customer accounts, vendor accounts and others to keep track of who you work with. You can create invoices as well as keep track of inventory.
There’s a lot that goes into starting a new business. Remember that minimizing your risk and making smart decisions are critical for any successful entrepreneur, but also know that you’ll never be able to achieve your dream of starting your business unless you take the first step, which is to just do it. Good luck to you.
Robert D. Siano, Esq. is co-founder of Libous & Siano, a Westchester based law firm that practices Criminal and Civil Law and Litigation in the New York City metropolitan area.