A Complete Guide to Starting a Business
Turning an idea or passion into a business is an exciting endeavor. In the formative stages, you must make many decisions that can prove costly down the road without careful planning. What type of corporate structure should you choose? Do you need insurance? How do you conduct day to day business?
You’ve got questions? We’ve got answers and it won’t cost you a dime.
How to Fund Your Business
Business Loans vs Out-of-pocket
How to finance your business idea is the first key decision you need to make. Financing is the undisputed champion when it comes to knocking many business ideas out cold as soon as the bell rings. Your finance option will have long term implications.
Business Loans provide more capital for faster growth but almost always require that you personally guarantee the loan. If your business fails, there is no easy way to cut your losses. If you use loans from outside investors, your ownership interest may be diluted.
For many entrepreneurs starting your business with your own funds means slower growth in the short term, but you can cut your losses at any time.
Deciding which finance option is best for you is dependent on the 1) type of business, 2) your current financial situation and 3) your credit rating. If you have deficiencies in any of these areas, this decision may be made for you unfortunately.
Crowdfunding is also a finance option with popular intermediaries such as Kickstarter and GoFundMe. The two major types of crowdfunding are 1) rewards crowdfunding and 2) equity crowdfunding. Rewards crowdfunding is essentially a presell of a product or service which allows the launch of your concept without incurring debt or sacrificing business equity. Equity crowdfunding requires you to surrender shares or equity in exchange for the money invested.
Choosing Your Corporate Structure
It is possible your hobby has unknowingly become a business. Have you bought and sold items online, at a trade show, or started to charge for those delicious ribs you make for your friends? Congratulations, you’re in business and North Carolina considers you a sole proprietor.
The problem is, you don’t want to be a sole proprietor. Sole proprietorships have no limited liability and offer no protection for your personal assets. The filing fee for an LLC is $125. Spend the money and sleep well at night.
Choosing your business structure is one of the first major decisions you need to make when starting your small business. The costs to incorporate are minimal and the benefits are numerous. What are your choices?
Two or more persons owning and operating a business. All partners share in profits, losses, and management. In most cases, all partners are liable for their own actions as well as the actions as the other partners. There is no limited liability in a general partnership. An LLC or S-Corp is almost always preferred to a general partnership.
A corporation is a separate legal entity from the individuals who form it. The owners of a corporation are its stockholders. Owners in most cases have limited liability with regards to business debts. A corporation files a separate tax return from the individual. There are two major types of corporations that you’ll need to decide between.
An S-Corporation is created through a tax election which allows profits to be taxed at individual tax rates of each shareholder. Any shareholder who works for the company must pay him or herself reasonable compensation. S-Corps are limited to 100 shareholders. They are preferred over C-Corporations for smaller organizations.
Taxed as a separate business entity. C-corporations profits are taxed twice. The complexity of a C-Corporation is overkill for small corporations but can become a necessity for businesses with 100+ shareholders.
LLCs are the preferred entity for many small businesses. They provide the limited liability of a corporation with the tax advantages of a sole proprietorship or partnership. An LLC unfortunately can show its seams as the size of ownership grows. There are also tax advantages to be had with corporations that LLCs don’t provide.
Partnerships that allows for some limited liability protections, however, S-Corps and LLCs do almost everything LPs and LLPs do better and easier.
Professional Corps (PC, PLLC, PA)
Organizations for professionals (doctors, lawyers, therapists, etc.) that can’t completely limit their individual liability.
A corporation formed for formed for religious, charitable, scientific, literary, or educational purposes. Non-profits in North Carolina must have one director
How Limited is Your Liability
Piercing the corporate veil
In rare cases, the limited liability of your corporation or LLC can be ignored. Abuse of your corporate entity to commit wrongdoing in combination with inadequate capitalization, non-compliance with corporate formalities, or excessive fragmentation can result in individual liability regardless of your entity. Don’t over concern yourself with this as this happens in rare cases. But your corporation is not a get-out-of-jail free card or a tool you can use to defraud or break the law.
How to Execute Contracts Properly
It is essential that when you sign an agreement on behalf of your corporate entity that you make it clear you are signing for the company and not yourself personally. The proper way to sign would be your name, followed by your title, and the name of the LLC or corporation. For example if you owned Big C Waffles, you would sign:
Carl Richardson, President – Big C Waffles
Essentially the other party involved in the transaction must be able to ascertain from your signature that you are signing in your capacity as an owner/executive of your business. Signing with just your name can potentially put your personal assets at risk.
Liability for the Acts of Others
Vicarious liability is a legal concept that results in liability for your business as a result of the acts of one of your employees or officers. If an employee injures another person during the scope of their employment, your business may be jeopardy. Maintaining a solid insurance policy, being diligent in hiring, and implementing and enforcing quality control standards can minimize your risks.
Employer Identification Number
Shortly after forming your business you must apply for an Employer Identification Number (EIN), also known as a tax identification number. You will need your EIN to open a business account and for IRS identification purposes. Single-member LLCs that elect to be treated as a sole proprietorship for tax purposes can use their social security number as their LLC EIN. For more information on how to apply for an EIN, the IRS has an extremely helpful guide.
General Liability Insurance
General liability insurance covers you from bodily injury, property damage, personal injury, advertising injury, and related claims that can arise in the ordinary course of business. These policies are typically reasonably priced for substantial coverage. Failure to maintain general liability insurance can leave you one claim away from being forced to close your doors permanently. If you own a business, you’re doing your business a great disservice if you don’t maintain general liability insurance.
If you employ three or more employees you must provide workers’ compensation coverage. To be clear, this is not optional. The penalties are stiff if you fail to carry workers’ comp. insurance including fines, being charged with a crime, or imprisonment.
Calling someone an “independent contractor” is not a viable workaround in many cases, as they can still be considered “employees” in certain scenarios. The rule is simple; three or more employees, get Workers’ Comp. Insurance.
A succession plan should specify what happens if a shareholder/member divorces, dies, wants out or is in some other way divested of his interest. Issues to address include taxation, identifying active/non-active roles for family members, cross-purchase and entity purchase agreements.
Divorces can cause havoc on your business without proper planning. If any business owner used marital funds to purchase a share of the business, a portion of their share may be marital.
The death or incapacity of a business owner can result in heirs who know nothing about a business in leadership positions.
The number of options for a succession plan are broad and beyond the scope of this article. The point to take from this is a succession plan in writing allows you to control what happens to your business if you or a partner experiences an event that can alter ownership roles.
Using social media to market your business is an affordable, efficient, and targeted way to reach potential customers. Facebook allows you to take advantage of user likes and demographics to put highly targeted ads in front of people most likely to have interest in your product or services. Using Google you can directly market to people searching for keywords related to your business. While most other social media outlets aren’t as focused, they present an opportunity to gain exposure for your brand.
Must have social media accounts:
Yelp, Instagram (for food service)
Instagram, Twitter, Google+, Linkedin, Pinterest
It doesn’t hurt to setup a page for your business on every social media platform. Consider applications like Hootsuite to manage multiple accounts at one time.
Blogging is a necessity if you want your site to appear in more online searches. Creating unique and frequent blogs helps your positioning in long-tail keyword searches, factors into your search engine placement, and can assist in building backlinks to your site. Many business owners can’t find the time to blog, but if you’re serious about building your social media presence and performing better in organic searches, it may be worth it to invest in a content writer.
Industry specific online directories are a quick and easy way to reach customers seeking to purchase your product or retain your services. Popular directories like Google, Angieslist, Thumbtack, and Yelp, make finding providers easy and allow you to submit and read business reviews.
Starting a business can be a complex endeavor. Doing your homework beforehand can save you money down the line once your business is established.
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– J. Patrick Williams of Batch, Poore & Williams, PC appeared on “Give Me Liberty Give Me Law” on WSHA 88.9 FM to discuss this topic on July 18th. The show will be rebroadcast on Saturday, July 22nd at 11am. Click here for more information about WSHA 88.9 FM, which now broadcasts in Rocky Mount, NC on 102.1 FM and Fayetteville 102.3 FM