SO YOU WANT TO START A BUSINESS?
Congratulations! For most people the process is relatively easy and the payoff can be huge. Owning your own business can be tremendously challenging but it can also be extremely rewarding, and not just in the income sense.
This article is an attempt to describe a few of the activities that most people going into business will experience or need to be aware of. It is meant to be brief and cannot possibly cover everything the new business person will encounter. Though I talk about taxes, this is not meant as tax advice. Each person’s situation is different and each should seek advice where needed.
What I hope to help with here is getting people over the first hump in getting their business started. That said, AFS is always available to offer consults for startups or other business issues.
What I want to talk about here is the simplest form of business startup which is usually one person, but could be more than one, with a goal of providing something to others for a fee. That something could be a product or a service or consultation or whatever. From dog walker to Uber driver to auto mechanic to tutor to ……
Following are a few steps most will encounter in setting up their own business.
Some minimal planning is necessary.
- What will you do to earn the income?
- Where will you do it (your home, on the web, in client’s homes, in a rented space?)
- What do you need to start?
- Maybe tools if you’re a mechanic or contractor of some sort
- Maybe a certification of some sort if you’re wanting to provide a service (notary, hair stylist, tax preparer, bookkeeper, plumber or other contractor, tutor, etc.)
- A location; your garage or home office, in client’s home, in a rented space, in your car if you’re an on-demand driver, or ….
- A fee schedule for your services or products
- Clients- how are you going to direct people to your product or service, word-of-mouth, paid advertising, a website, all of the above?…
- A budget, including both time and materials
Let’s start with a simple idea. You’re a good auto mechanic. You have a garage available at your home. You want to charge $60 per hour plus parts. You think you can work 10-20 hours per week. So, potential income for let’s say 40 weeks (you can’t work all of the time) is up to $48000 per year (40 weeks x 20 hours x $60 per hour). Not bad.
So, assuming there are no zoning violations for setting up this kind of business in your garage, you have a good business idea with a saleable skill, a never-ending demand and a very nice stream of potential income. The hardest thing will probably be keeping a steady client stream and there will be a cost to that in advertising or website costs. You’re also going to need tools, probably expensive ones. There may be additional heating or cooling or ventilation costs in your garage that aren’t part of your budget right now. And, there may be cleanup costs to keep oil and other contaminants cleaned up and contained. I’m sure there are many more expenses that I’m not thinking of but you get the idea. All of these are ordinary and necessary expenses of doing business. To minimize taxes, I’m assuming that you want to keep good records and recording those expenses is part of that (we’ll talk about bookkeeping later).
Then you estimate the costs and find the funding. It might be savings, a loan, fund-as-you-go or whatever? NOTE: Don’t think you’re going to get a business loan. I’ve never heard of a business receiving bank loans without at least 2 years of profits prior to the request (except for recent PPP loans and emergency SBA loans). Generally, new business loans require some collateral or need to be guaranteed by the owner of the business and are thus considered personal loans. If you’ve been realistic in your planning, any loans you may have to procure will be covered by your business income and you won’t have to dip into your personal savings or other household income. That’s the idea though it doesn’t always work out that way.
Now you’re about to start the formal process of starting your business. You’re not in business yet which is an important distinction that I’ll explain later (think deductions).
Business Name, Licensing and Registration
- Informal process – your name is Joe Smith, your business name could be Joe Smith’s Business and you will simply report income and expenses at year end on a Schedule C which will be part of your tax return.
- You should register your business with your city or town (watch out for zoning issues). It’s generally inexpensive (less than $50 for all that I have worked with).
- As an example, here is the link to the Aurora Business Licensing Site.
- Once you get your license, expect to file quarterly sales and use tax reports. In the simplest terms, you will pay sales tax on retail sales but not on service sales. Use tax is tax paid for products bought outside of Aurora for which no sales tax has been paid.
- At this point, you’re ready to take on clients and you’re in business. Spend $50 on business cards and start advertising.
- In this example I assume Joe is conducting business as a sole proprietor. The income or losses will be reported on Joe’s next tax filing on a Schedule C, which is part of the 1040 tax return series. Income and expenses will be reported there. If you have a profit, you’ll pay more in taxes. If your expenses are greater than your income, you’ll have a loss. Losses can reduce other taxable income in your household or be carried over to a future business year.
- You’ve started a business. It’s really that simple. There will be complications that come later but you’ll deal with them as they come.
LLC’s – Limited Liability Companies – a bit more formal but still easy!
- Lots of people think they need an LLC. The lawyers have been great at pushing that idea. I like LLC’s in certain instances and think they can provide a bit of help from time to time but what most startups need is liability insurance. That’s my spiel on that. If you’re concerned about liability issues, see a lawyer. So, here is how you setup your business as an LLC, it’s still pretty simple.
- Note that LLC’s are a state construct that and are not recognized by the IRS. It does give the business owner some liability protection but it is our belief that liability insurance is still necessary. We’re not lawyers but LLC’s do not provide protection against negligence, fraud, torts, etc. so, I’ll say it again. If liability is a concern, seek legal advice.
- You can setup an LLC in CO by registering at the CO Secretary of State website.
- You’ll first need to do a name availability search to make sure no one else has named their business the same as you would like to name yours, for obvious reasons.
- Once you are sure the name you want has not been taken, you can file a business document at this CO SOS File A Document Website, where you’ll file a form to create a NEW record
- Under LLCs, Corporations and Trade Names you’ll see a Limited Liability Company (LLC) choice
- Click on that, answer the questions, pay the fee and you will be registered as an LLC in the State of CO. You can pay $400-$500 or more for this service but the last I looked, I think the CO fee was $100. After that, you can renew annually online for $10 (watch out for the people that will charge you $150 for your renewal).
- That’s it, you’re now an LLC. Go make money.
More Complex Entities – Corporations (C or S), Partnerships, Multi-Member LLC’s, & Non-Profits
- Different entities meet different needs. From a tax standpoint, they’re a bit more complex as they meet circumstances much different than those of a typical sole proprietor. Think of them as another tool in your belt to help you run your business in a way that maximizes profit and benefits to owners and employees. For a comparison of entities, see our entity comparison page.
We’ve helped setup dozens of businesses for our clients and nearly all of them ask about the same things. So, we’ve put together a few handouts that you can download at no charge. Each handout is 2-3 pages that describes the following subjects:
- Business Expense Worksheets
- Business Owners-Taking Money out of a Business
- Business Use of Home
- Expense Reimbursements for Employees
- Mileage and Expense log
- Recordkeeping for Tax Purposes
- Self-Employment Tax
- Starting a Business
- Vehicles-Business Use
Here’s free business information on Tax Concerns for New Businesses.
There are many other subjects that we write about in our Blog that have to do with startups and/or small businesses! For example, here are some Blog articles you might find helpful:
- This Blog article provides clarification on how LLC’s are taxed.
- This Blog article describes startup expenses, a common issue with new businesses.
Claiming Business Expense Deductions Before You Are in Business
If you’re starting up a business and want some help putting it all together, CALL US for a free 30-minute consultation. We’ll help you get off on the right foot!
Call us at (303) 745-3962
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