Lots of us are unemployed, underemployed, or insecure about future employment. For many people, this is the time to pursue a dream. While self-employment can be extremely rewarding on many levels, there are traps for the unwary. 1TaxFinancial offers a free consultation with neighbors who are beginning or building a small business, but here I offer some issues to consider.
As you start your own business, a number of key tasks & decisions await you:
- Will you operate as a Sole Proprietorship, a Partnership, an S Corporation, or a C Corporation? Each entity offers unique issues & opportunities with regard to organization & ownership, personal liability protection, taxation of profits & losses, and treatment of fringe benefits.
- Determine if you have state or local licensing requirements. The Ohio Business Gateway can help with this; Kentucky & Indiana have different systems.
- Develop a business plan for the first two or three years. You control the detail level, but it should cover the type of business, product, or service to be offered, potential or targeted customers, pricing, start-up capital needs & sources, revenue & expense forecasts and marketing plans.
- Open a business bank account. If you use a personal credit card, designate one and keep it clear of personal transactions. It is critical to separate business and personal funds for all types of business entities. For most businesses, this is required to preserve liability protection.
- Make sure your insurance coverage is adequate. If you plan to operate from home, you may need a special rider on homeowners or renters insurance to cover liability for your actions or product, business visitors and equipment. If you have a separate location, you need property and liability insurance on the premises and equipment.
- Be sure you understand the tax filing and payment requirements you have as a business owner.
- If you pay others to help you, you must determine whether they are employees or subcontractors. There are complex special rules that determine whether a worker is an employee or a subcontractor and penalties if you get it wrong.
- Are you planning to operate your business from your home? If so, will it be convenient for you, your customers, and other members of your household? Are there local restrictions on home-based businesses? Is there appropriate space for inventory and supplies?
- Set up a business recordkeeping system. Keep copies of invoices & receipts. Use an accounting system that’s only as complex as needed and that works for you. Don’t overdo it; if it becomes too complex, you won’t maintain it, and you won’t have the information you need to make decisions and file tax returns.
- Finally, cover the miscellaneous administrative aspects: furnishings & equipment, phone, fax, internet, voicemail, a post office box if necessary, office supplies, etc.