Since I set up another business in Texas, PT Money Conference, LLC, I thought I’d share my experience with you guys. Hopefully, this post will help answer your questions on how to start a business or formalize the one you already have.
First things first, you’ll need a business idea. Then conduct market research and get feedback from customers (or potential customers) which will help you form a solid plan of action. Then make things legal by setting up a business entity like an LLC.
My first step, of course, was to have a successful business up and running. I doubt you need to go through any of the steps to make everything official before you’ve proven that you have a business that is going to make some money for at least a few years.
Initially, I ran this business, along with this blog which is my primary business, under PT Money, LLC. However, I decided that I needed a separate business structure to keep the two growing businesses and all their endeavors in two different buckets.
Thus, PT Money Conferences, LLC was born.
How to Start a Business
One of the great things about starting a business is that you don’t need a college degree or even business experience. What you do need is an idea, a strong plan, and the drive to make your dream a reality.
Wondering how to start a business and what to do next? I’ve got you covered. Here is a step-by-step guide to help you transform your idea from concept into a successful business.
Start with a Business Idea
Do you already have an awesome business idea? Great! You can skip this step and move on to the next section. If not, here are some ways you can brainstorm good ideas for your next venture:
- Look at emerging markets: Consider some of the big advancements on the horizon such as new technologies that are coming out. Can you join the revolution and offer a product or a service that compliments it? Do you have a product or an idea that will help consumers understand or use emerging technologies?
- Solve a problem: Many successful businesses solve a problem or satisfy a need. If you can solve a problem that many people would like fixed, then you have a viable business idea.
- Be better: Do you have a business idea that has been done before? This is your chance to offer the better, faster, cheaper, newer version that will beat out the competition.
Keep in mind that having a business idea that’s already been done is a good option. That’s because it means someone is already finding success with this business model. However, you need to put your own spin on it and differentiate yourself to have a chance of succeeding.
Do some research before you decide a market is saturated. Identify potential opportunities and brainstorm how you can offer a unique solution.
Conduct Market Research
Now that you have a potential business idea, it’s time to move on to the next step. For your idea to truly have the chance of turning into a business, you’ll need to validate it.
Start with some research to see what other companies are doing in the industry you’re targeting. Make a list of current industry leaders and potential competitors and figure out what they’re doing to earn the lion’s share of the market.
Does your product or idea deliver something other companies don’t? How will your business improve on what’s already out there? If you can figure out how you’ll stand out and market yourself, you have a solid business idea.
Before you go full-scale with a business or a product, it’s good to test and get feedback. Many times you’re so involved building that you miss obvious issues. Having a fresh set of eyes can help you identify and troubleshoot potential problems that you may have missed.
This works especially well with a product-based business. Build a prototype of the product and use it to tweak, test and perfect your idea. Having a physical version of your product can also help you secure funding since you can showcase it to potential investors to raise money.
Write a Business Plan
Now that you have a clear idea of your business, it’s time to put it on paper. This will help you organize your thoughts and put together a roadmap for how you’ll accomplish your goals. It’s basically an outline of how your business will evolve over time.
One of the good things about writing a business plan is that it forces you to think through some important questions. These include things like the purpose of your business, your ideal customer, your end goal, your business financing, your startup costs, and so on.
When you draft your business plan, you’ll want to include a thorough market research section that dives deep into your target niche and the demographics of potential clients. It’ll force you to think about their pain points and how to solve.
You’ll also need to think about how best to reach your ideal customer and what part of the consumer cycle you should target.
Look at the Financials
Not all businesses require upfront capital to get started. There are actually plenty of businesses that can be started with minimal investment on your part. However, other types such as a product-based business will require some funding.
Assess your funding needs and think about how you’re going to get the money, if necessary. This will help you define your next steps. Here are some ideas on how to fund your new venture without going into debt.
Obtaining funding for your business can depend largely on your business credit score. It’s a good idea to look into how to build business credit and take those steps. One tool for building business credit is Nav.
With Nav, business owners can build their business credit, get researched suggestions for their best financing options, and get free access to both personal and business credit scores. They are a great resource for entrepreneurs to protect and monitor their credit scores, helping to keep your business on solid financial ground.
Just as you build your personal credit over time, it’s beneficial to learn how to build your business credit as well. Solid business credit scores can help you to obtain more favorable interest rates on any loans you take out. (Check out Nav here.)
Depending on how much capital you need, you may want to consider finding investors or doing a fundraising campaign. Which funding route you choose will largely depend on your current financial situation, your business idea, your product, and your funding needs.
Selecting a Business Entity
As you can tell by my overuse of the term LLC, I chose the limited liability company (LLC) as the entity type. The four primary entity types are a sole proprietorship, general partnership, corporation, and limited liability company.
Here’s why I like the LLC structure: it’s easy to form (versus a corporation), helps create some separation of your personal and business assets (versus the sole proprietorship), and it’s very flexible when it comes time to file your taxes.
If you are thinking of formalizing your business structure, take some time to study the entity types and determine which one will serve you best now, at tax time, when you grow significantly, and when you eventually sell your business.
The majority of new business owners can make this decision on their own (or with the help of a mentor in your line of business), but I’m not going to knock the advice of a CPA or business attorney in this situation.
Because I grew up with a CPA for a father, he’s drilled entity types into my head since I was a teenager, so I have a leg up here.
Entity Type and Taxes
One last thing about entity types: how they are taxed. The sole proprietorship is taxed on the Schedule C of your personal return (Form 1040) at your rate. The partnership is taxed on a separate Form 1065, where income passes down to the personal level and taxed at personal rates.
The corporation is taxed on a separate Form 1120 at corporate tax rates. The tax code also allows for another tax entity called the S-corporation, which has a slightly more complex tax structure and is reported on Form 1120s.
An important thing to note here is that the IRS doesn’t recognize the single-member LLC as a tax entity by default. The income “passes through” to your own tax return and it reported on the Schedule C.
Additionally, multi-member LLCs are by default taxed as a partnership (on a Form 1065). For an LLC to be taxed as a corporation, you need to file a Form 8832 and “elect” to be treated differently. Finally, for an LLC to be taxed as an S-corporation (or S-corp for short), you need to file a Form 2553.
My election was to be treated and taxed as an S-corp. Thus, I’m filing Form 2553. Why the S-corp treatment? The S-corp is great in that it is not taxed like a regular corporation (at those high corporate tax rates), and it is not taxed like an LLC in that you don’t pay self-employment tax on 100 percent of your company’s earnings.
The S-corp allows you to pay self-employment tax only on a reasonable salary that you pay yourself, and then you pay personal tax rates on the rest of the money that is passed down to you from the company.
Form the Entity with Your State
Once you’ve decided what type of entity you want to create, research the rules in your state regarding entity formation. The Secretary of State will usually have all of the information you need.
I filed for the formation of my LLC with Texas using Form 205, the Certificate of Formation for a Limited Liability Company. I ended up paying a one-time fee of $300. A couple of weeks later I received a copy of my Certificate of Filing.
Edit: As some of the comments have suggested, consider incorporating in other states that might be more advantageous for whatever reason.
How to Get an EIN
My next step was to request an employer identification number (EIN). This, along with the certificate of filing would allow me to open up a separate business bank account.
Getting your EIN is very easy these days. It’s free and can be completed online in less than five minutes.
Open Up a Separate Bank Account
Now that you have your business formed, you need to create a separate bank account to keep your business and personal funds separate (this is important whether you have an LLC or not).
Reserve at least an hour of your time to go through the bank account opening process. Again, you’ll need your EIN and evidence of filing with the state.
I chose to open this checking account at Chase, where I have my PT Money, LLC account. They were able to put it all under my same personal login. So now when I log into my Chase account online I can view our personal Chase Freedom credit card account, plus my now two business checking, saving, and credit accounts.
Additionally, with a separate account, I get separate checks and an attached credit card to use in the payment of expenses with this new business.
Related: Best Free Business Checking Accounts (Business accounts are towards the bottom of the list.)
Elect to Be Treated as an S-corp
In the final step of my setup process, I’m filing a Form 2553 with the IRS to elect for my LLC to be treated as an S-corp.
Be sure to do this in a timely fashion. There is a deadline to elect once your entity is formed and ID created.
If you are going to go the S-corp route, I would suggest hooking up with a CPA to help you with the increased tax requirements that go along with it.
Tips to Start a Business
Building a business is a challenging task. There’s a lot to know and do. In the process of starting up, mistakes can cost you money and time. Here are some tips to help you avoid mistakes and get it up and running right.
Create a Partnership Agreement
Create a partnership agreement, and a roles and responsibilities document. If you’re sharing the workload with someone else, this step is essential. I don’t have personal experience with this, as I am more prone to working alone, but this is as important as anything directly financial. The Wall Street Journal has a great piece on this topic. The key takeaway:
“Every agreement should address three crucial areas: compensation, exit clauses, and roles and responsibilities. Include who owns what percentage of the business, who is investing what, where the money is coming from, and how and when partners will be paid.”
We’ve all read horror stories about people who went into business together only to face an ugly split. Don’t risk losing all your money, getting trapped in a business arrangement that doesn’t work for you, or any number of catastrophes. Creating a solid partnership agreement, with everyone’s duties and compensation in writing can help you avoid those pitfalls.
Track Business Income and Expenses
Track your income and expenses using Quickbooks Online or other software. You can tie this software to your checking account, credit card, and payment account. This will help you to know where you stand with your business throughout the year and it makes tax time a lot easier for you and your accountant. You’ll get professional reports and invoicing as well.
Without clear bookkeeping and records for your business, how will you gauge your success? It’s essential to keep track of all expenses related to your business, just as you should for your personal life. Budgeting for your business can help you identify areas for improvement.
Save For Retirement
I get it, believe me. Your business is in its newer stages, so you might be worried about not making enough income to even think about retirement.
But don’t stay in that start-up phase for too long! Your retirement is too important to put off for years, so please make this a priority. At a minimum, as soon as you’re able, open up a Roth IRA and contribute the max each year. If you want to do more, consider a SEP IRA or Solo 401K (like me), which will help you shelter some of your business income from taxes.
Be sure to consider any permits or licenses that may be needed in your line of business.
Lastly, remember that the formation of a business doesn’t create a good business. High sales and low expenses create a good business. So, while forming a business can be a huge undertaking of its own, keep it in perspective.
I’m a bootstrapper, so I know nothing of the funding world or taking out loans. My businesses are pretty simple….I make sure I make more than I spend. If you follow one financial rule, that’s the one to choose. Focus on that as your primary business goal, and follow sound financial advice for the rest of the details.
How did you structure your small business, and why?