Pandemic-Proof Your Business
The COVID-19 pandemic has taken a huge toll on small business owners who didn’t take the proper steps to set up their business correctly. Without adequate documentation and records, many of the programs available to support business owners were unavailable to them.
IAW member Mitchell Tulloch is the founder of Any Time Tax Services and joins us on the blog to share the steps for setting up your business.
Choosing the Correct Entity for Your Business
- Sole proprietorship – This is the simplest business structure — an unincorporated business run by a single owner. If you choose to operate under a name different than your own, you will most likely be required to file a fictitious name, also known as an assumed name or DBA. This type of structure is easy to form and the owner maintains complete control.
- Limited liability company (LLC) – This is the popular choice for many new businesses and provides for personal asset protection as well as business and tax flexibility. An LLC can be taxed as a sole proprietorship or a partnership.
- Partnership – This structure allows two or more people to form a business relationship. Partners are liable for lawsuits filed against the business. Partnerships are usually registered with the state or states in which they do business, but the requirements vary from state to state.
- Incorporation – This is a great choice if you are thinking about raising capital, going public, or expecting a lot of shareholders.
Making Your Business Legitimate
Your business will need a name, address, and phone number. To register your business name, you will need to locate the corporate division within your state website.
Mitchell’s Tip: When naming your business, you will not be able to use a name that already exists within your state’s database. It is helpful to choose at least three names in case your first choice is unavailable or rejected due to potential overlap with another business.
It will be quicker to register your business online. As a sole proprietor, you can do this through your state’s website. If you incorporate, you will need to utilize a registered agent.
Each state will require various licenses to operate. You may need a sales tax license, health department inspection, or certain professional licenses.
Unless you form a legal entity, your business will need an Employer Identification Number (EIN), also known as a Federal Tax Identification Number, which can be requested for free online from the IRS.
Many businesses did not qualify for pandemic funding because they did not have payroll set up correctly. Even if you are only paying yourself, setting up a payroll process allows for accurate reporting when necessary.
- Obtain your state tax ID.
- Set up your payroll. You can choose to be a W-2 employee or a 1099 employee.
- You can hire someone you trust to do your payroll, do it yourself, or use an online software.
- Set up a Health Savings Account or a Medical Savings Account.
Mitchell’s Tip: Hire your children! They can make up to $12,000 per year without filing a tax return and you can still claim them as your dependent. You can learn more here.
General insurance is an absolute necessity for any type of business, and if you have employees you will want workers’ compensation insurance. Disability insurance is also important.
If you form a partnership, key man (person) life insurance will protect you in the event that your partner passes away. You can use the funds to purchase their share of the business.
Open a separate bank account for your business and keep all financial transactions separate. This will help to prevent tax headaches. A business credit card is helpful to identify business purchases easily and can help protect your personal credit from the activity of your business (many credit card issuers do not report activity to personal credit unless they default).
Mitchell’s Tip: Be sure to set up a method for keeping track of your business expenses and income. Programs like WaveApps and Quickbooks make this easy, or you may want to hire a bookkeeper or accountant.
Building Your Business Credit
Your business can build its own credit history, separate from your personal credit.
The first step in building your business credit is to apply for your DUNS number with Dun & Bradstreet. Start building your credit by acquiring at least five trade references for your business and paying your bills on time. Rather than paying by credit card, request that the vendor bill you to help establish your business credit history. Some commercial rent companies report to Dun & Bradstreet.
By taking the time to set up your business correctly and defining a process for record keeping, you will ensure that you are protected in the future!