Things are about to get real.
We’re up to chapter 4 of the HostGator Home Business Guide, and this is the stage when we go over the permits, licenses, tax documents, and other financial must-haves you need to set up your new business. Speaking from experience, it can be tempting to stall at this point, because dealing with paperwork can be tedious and time-consuming and because taking these steps makes your business a real entity. But this is also the exciting part, because once you have these ducks lined up and marching in order, you’re free to focus on your website, marketing, and sales. Here are the seven steps to get there.
1. Choose your business structure
This sounds complicated but most of the time it’s really easy. Sole proprietorship is the form most new businesses take, and it can be the best choice if you’re the only one running your business, you’re not selling something that costs a fortune to produce, and your business doesn’t involve a lot of financial risk or liability exposure.
The SBA has a great summary of the pros and cons of sole proprietor status. For example, you don’t have to file a separate federal tax return for your business, and you won’t need a lawyer to file startup documents. On the other hand, you’re fully liable for any debts your business racks up and for any actions by your employees that incur costs. Other business structure options include: partnerships, limited liability companies, corporations, and cooperatives.
2. Get your business permit, tax permit, and any necessary licenses
Your city or county will require you to get a permit to operate your business, and your state may require a license, too. If your business will collect sales tax, you’ll need a permit for this that you’ll be required to display where you make sales (including at your vendor table if you sell at various events). Depending on where you live, you may have to go to city hall or your county courthouse to get your local permit, but you should be able to get your state paperwork done online.
Some businesses require extra certification. For example, home childcare operators typically have a long list of state licensing requirements to make sure their homes are safe for the kids in their care. Home chefs and cooks may have to comply with food safety regulations. Find out what’s required for your business now so you don’t have to pay costly fines for noncompliance later.
3. Get your IRS Employer Identification Number
Yes, you’re an employer, even if you’re a solopreneur and your only employee is yourself. You’ll need an EIN to open your business bank account, and you can use your EIN instead of your Social Security Number on some forms (like W-9 forms for independent contractors) to safeguard your identity against hackers and loss. Small business owners can apply for an EIN online.
4. Open a business bank account
At the very least, you’ll need a business checking account with your local bank or credit union to avoid a tax-time nightmare of commingled personal and business funds. Shop around for account options that won’t cost you a fortune in fees each month, and make sure you’ll be able to download your transactions into QuickBooks or other accounting software. To keep more of your money for your new business, you may not need to buy paper checks for your new account, at least not right away. You can probably do just fine with a debit card, online bill pay, and a counter check when something absolutely has to be in paper check form.
5. Figure out your budget
You can set money aside in your business account for your startup costs and to cover ongoing expenses until your business is self-sustaining. We’ve put together a free budget template, based on the IRS Schedule C sole proprietorship profit and loss form, to help you plan for the most common expenses. Remember that every business is different, so you may need to remove some categories or add your own custom categories.
Click here to view the free Home Business Budget template.
Once you open the budget, click File > Make a copy... to add an editable version of the spreadsheet to your Google Drive. Alternately, you can click File > Download as... to download a version to edit offline. The template is set to automatically total up your income and expenses, and losses will be shown in red font.
Your expenses won’t be the same each month, of course, so it’s important to plan month by month to see when you can expect to earn and spend more (or less). Fixed costs, like insurance, your business phone plan, and any rental fees, are unlikely to change much. Variable costs, as Inc. explains in its detailed business-budget breakdown, change depending on your volume of sales. Expenses like postage, packing supplies, raw materials, and wholesale purchases usually rise when sales are strong and drop when sales are slow. On the other hand, you may spend more on ads and marketing campaigns when sales drop. Knowing what to expect over the course of several months or a year can help your business avoid running out of cash when high variable expenses coincide with slow sales.
If you can afford to consult with a CPA at this point, he or she can give you tips on how to organize your record keeping, point out any expenses you may have overlooked, maximize your potential deductions, and stay on the right side of IRS rules.
6. Protect your business
It’s a good idea to talk with the agent who handles your homeowners or renters insurance about your new business. You’ll want to learn if your business equipment, inventory stored at home, and anything else related to your new gig is covered under your current policy. If it’s not, find out what your coverage options are. If you offer services (such as web design, bookkeeping, or writing) you may want to look into professional liability insurance.
7. Choose your contracts
This step is for you if you’re a service provider or sell products to other businesses. Do some online research and talk to others in your field to learn what kind of client contract is standard in your industry. Find some templates and use them to customize a version for your business. (It’s always a good idea to have your standard contract reviewed by a lawyer before you start using it, and to stick very closely to a lawyer-approved document.)
There’s more, of course. For now, though, working through these steps will have you officially in business and ready to take the next step in the HostGator Home Business Guide – setting up your business website.