Thursday, December 20, 2007

Doing Business (2.) Lay the Groundwork

Planning and preparation -- you just can't get enough of either, as you start your new venture. Here are some basics every new business owner should take care of before launching the business.
Legal Structure You may need to do some research on this important basic, or talk to an accountant, lawyer, or small business counselor. Do not start a business without imagining the possibility of future growth and how that will impact your taxes, buying power, credit, business credibility. My advice is to organize your business as a separate entity from your personal and family finances. Keep it separate and keep tabs on sales, expenses, profit. A sole proprietorship is the simplest form of doing business, where there is no difference between the individual and the business. Your sales are counted as income, business expenses are written off on your taxes (with good documentation), and the profit or loss is considered in your personal income tax return.
Better to create the business as a separate entity, with it's own tax identification number. Consider the options carefully. Fifteen years ago, when I directed a Small Business Development Center and counselled start-ups, we used to recommend the simple form of a corporation: Sub-Chapter S Corp. That creates a separate entity, gives basic protection to the owner from lawsuits and liabilities created by the business failure or catastophe. That is the way my own business is organized, but more recently the LLC has become more popular. This, too, gives the owner some distance from any liabilities. Both are managed through separate bookkeeping, and the profit or loss is passed on to the owner at the end of the year. They are actually much simpler than the sole proprietorship's efforts to keep money allotted for business or family. I can't make a recommendation for you, though. This is an important step in establishing your business, and you need to get professional advice you trust.

Name of Business is important. Remember that this is how your efforts will be recognized and recalled in the future. I see so many people naming their business with little foresight. The name you choose will identify you to your customers, and more importantly, to potential customers. Choose a name which allows growth in the products you may sell in the future, and in possible future growth. Don't limit yourself to a product or align yourself too closely with a demographic. For instance, I see so many of my customers naming their businesses after their children. I'll use my dog's name as an example, so that would make me 'Teddy's Mom' or 'Mom to Teddy' or 'Teddy Bottoms' or 'Teddy Feet.' See how young those names look? how limited? They immediately announce that I am young, a mother first, a business woman last, and that I have a fixation on my kid's diapers or feet. Maybe what I wanted to say was that I sell handdyed yarn which could be used for diaper covers and socks. In ten years -- hopefully!-- I would look back and cringe at such cute names.

Tax Registration Once you've decided on the legal structure for your business and a good name which will allow your business to grow in the future and still have a good name, it is time to register your business with the government. Don't ignore this step! It will save you problems in the future. First, get a federal tax identification number. Go to and register online for a tax id using the name you have chosen and stating which legal structure you have chosen for your business. This step is important. Don't think immediately that if you have a tax id number then you will have to pay lots of taxes. Learn a little more. Expand your thinking. Having a business tax ID will immediately give your business credibility as you apply for credit with your suppliers, create a line of credit as your inventory demands, and keep your business and personal finances separate.

Also investigate your state's sales tax requirements. Internet business sales are taxed differently in each state. Here in Virginia, I pay sales tax only on Virginia sales, so I collect the sales tax from my customer and then pay it to the state. No expense to me, just passing on a tax.

Bank Account / Credit Card Once you get your Federal Tax ID number online, then open a new bank account in the name of the business. When you go to the bank, take a copy of the FID# with you for your banker. Get a credit card with low interest, too. This will probably not be one which pays you back in airline miles or credits for gifts. Remember, you are looking for the most efficient way to handle your business finances, so shop for a low interest credit card. NOT a debit card. Debit cards open your bank account to the possibility of fraud because they are a direct link into your account. Guard your credit information carefully. Create files for your bank account and credit card, and pay credit card charges each month to avoid paying interest. Keep a separate accounting of your business expenses and do not use company money for personal spending. I recommend getting a good computer bookkeeping program, and personally use QuickBooks Pro. Go to a big office supply store and spend some time reading the packages of these programs, and buy one and keep it up. Balance your checkbook every month, and go online and double check your business account to be sure that there are no fraudulent withdrawals against it, and no unnecessary bank service charges.
When my business went into a growth phase, I let slide the keeping tabs on my account except for end of the month reconciling. One month, when balancing the account, I saw a one dollar withdrawal for a middle east relief fund, $40 to a bank in Paris, $1,000 to an online word search, and $4,000 to an online financial investment company. None were authorized. All were fraudulent. It took a good six weeks for the money to be returned to my account, including filling out multiple forms for the bank on each fraudulent incident. A real headache. The one thing they all had in common was the use of my debit card number. That was an expensive lesson. Please learn from my mistake and get a credit card for your business account, not a debit card.

Internet Platform How you present yourself online is tied up with how much effort you are planning to put into your business at the beginning. Many of my customers hold down fulltime jobs and run their online businesses parttime. They dye yarns over weekends, skein and ship them in the evenings. There are business models which tell us what the profit points are when we should make a move towards more independence. You may want to start out with a 'cart' or 'store' on a host seller like eBay, HyenaCart, and Etsy. (I have links to HyenaCart and Etsy instructions for getting set up on my website LINKS page.) These are good ways to get started. They do the website work for you, and all you do is sign up, upload your pictures and descriptions, and start selling, basically. These are the easiest and most efficient forms of eCommerce.
A step up is a website of your own. In recent years, host companies have learned that they can make money and create loyal customers -- something we all strive to do in our business life -- by offering packages to the startup business. You can sign up with a host and create a simple website with them. Some even offer to program the site for you. Others have simple fill-in-the-blank types of programs. A couple of these host servers are and, and there are lots of others. They also have payment mechanisms to choose from.
PayPal is probably the most popular payment mechanism out there. It is actually very safe because once a person joins, they never enter their credit information again, just their password, and then have access to funds in their account or to use of a credit card attached to their account. Of course, nothing is perfect. I know. I used PayPal for the first few years of my business, and am now changing over to a more complex site and a true eCommerce site where I can accept any credit card I choose, with daily deposits into the business checking account. I have chosen to keep PayPal as an option, but not as the only form of customer payment. Let's face it: not everyone likes PayPal, so I want to create options. Of course, this is a more expensive option for me as a business owner, but the time and volume of sales warranted the move to a fully automated eCommerce site. Actually, I am a little behind the curve on this one and should have been at this point 18 months ago. My slow decisions were the result of not knowing enough about the possible programs, costs of changing the website over to a new one, benefits of eCommerce, and at what point I should have moved up to maximize profits. I learned a lot during the past 18 months.

Remember: plan, plan, plan. When we are in control of the facts, we have a more intelligent basis from which to act. Think of yourself as a business person and make business-like decisions. Look at the big guys. See how they have created a 'brand' for themselves and customer loyalty? It is all about planning, and these beginning steps are the basis of a well-run business.

1 comment:

RoxanneZYG said...

Hi Sheila...thoroughly enjoying your last 2 posts. Can you do a Canadian version too? :) Of course I just kid you - everything but the fine details translates to Canada too :) Keep it coming!