The sky is your limit when it comes to starting your own business- or so you thought.
Many entrepreneurs can’t wait to hit the ground running with developing and growing their business idea, and as a result, many are caught off guard as they are unaware of what must be completed when it comes to correct business setup and planning for growth.
Part 1: Entity setup
Deciding a company’s entity type is one of the most important things a founder must do when starting a business. Not only does it impact tax liability and business organization, but, setting any of these initial tasks up incorrectly can cause major damage to your business in the future.
Here are three steps to ensuring that your entity is set up properly.
Choosing your entity type
Choosing your entity type is the most important thing you need to do. Each entity type has its own set of advantages or disadvantages depending on your long-term business goals and vision for growth. If you are unsure of which entity is best suited for you, ask both a legal and financial advisor for their advice so that you don’t experience problems as you continue to grow.
It is also important to make sure you register your company in the proper state(s). This could be your home state or even Delaware, where there are many corporation-friendly laws.
Part of setting up your entity is also registering for all of your identification numbers. This includes your federal employer identification number (EIN) and any state registration numbers. Other ID numbers such as payroll numbers are also important if you are planning on hiring employees.
If you are unsure of what applies to you and what does not, don’t be afraid to invest a few hundred dollars in professional advisory services. Even as little as $500 could help you avoid much larger legal and accounting fees in the future.
Part 2: Building Up
While the foundation must be solid, there are some things that you can grow into overtime. Not everything has to be perfect right away. Instead, spend time prioritizing tasks that will have the maximum impact with the minimum time commitment
Spend time wisely
Focus on spending time prioritizing tasks that will have the maximum impact with the minimum time commitment, especially as you are learning to juggle the many hats that come with starting your own business. For example, while accounting for all your transactions is very important, in this early phase of your business you likely won’t have many transactions. Tracking transactions in an excel sheet until you begin gaining more traction is completely okay. With an accounting professional, it could only take a few hours a month to take care of your transactions and prepare financial statements. You may not even need financials yet at this point.
Cash is king.
At the end of the day, successful cash management is your lifeline. The best way to ensure that you have enough cash to run your business month to month is to build a 12 projection. This can be as simple as having an excel sheet that states your monthly expenses and monthly income. You’ll have a strong idea of what your cash flow looks like, how you will grow financially, and what spending decisions must be made.
Part 3: Looking Forward
Even though you’re just getting started, you do need to start thinking about the future of your business. Some of your future decisions could impact the way you set up your company.
Consider whether or not you will plan to hire employees or outsource contractors. Even if you don’t need extra help right now, this decision could require action during this starting phase of your business. It plays into whether you need a payroll company, requires state registration and creates an extra step and cost- employer payroll tax cost- when recording transactions. You should start thinking about how you can use this time to prepare for the growth of your business.
As a budding company, it is also important to make connections with other businesses in your ecosystem. You never know when you may need legal help, advice from other players in your industry, or even exposure to new relationships. Establishing a relationship with a CPA firm from the start can help you avoid any surprise tax obligations, interest, and penalties in the future.