Starting a small business – Frequently Asked Questions
Here are some of the questions about starting a business that come up frequently.
Q: I’m thinking about turning my hobby into a business. Do I have to form a corporation?
A: No, you don’t have to form a corporation to start a business. There are three basic business structures: sole proprietorship, partnership, and limited liability company (LLC). Most businesses start as sole proprietors, and then progress to becoming a partnership or LLC later.
Q: Are there any rules around how I name my business?
A: If you are the sole proprietor of a business, the legal name of your business is your full name. For partnerships, it is the name given in the partnership agreement or the last names of the partners. For LLCs, the legal name of your business is the one you have registered with the state government.
The legal name of your business is required on all government forms and applications, including your application for employer tax IDs, licenses and permits. However, if you want to open a shop or, sell your products under a name different to your own name, the names of you and your partners, or the officially register name of you LLC, then you might have to file a fictitious name registration form with your government agency. A fictitious name is also known as a DBA name (or ‘doing business as’ name).
Find out more about the requirements for filing a fictitious business name in your state, at Register Your Fictitious or “Doing Business As” (DBA) Name.
Q: How do I check if someone else is using my preferred ‘doing business as’ name?
A: You need to find out if someone else is already using your proposed name (or a very similar name) to market similar products or services. Check with your county clerk’s office to see whether your proposed name is already on the list of fictitious or names in your county. If you find that your chosen name (or a very similar one) is registered as a trademark or is listed on a fictitious or assumed name register, you shouldn’t use it.
Double-check by searching online and searching local business directories. If all these avenues show no one is using your preferred business name, you should be in the clear to go ahead. If by some unfortunate chance someone else is using the same name, you can at least show that you made a serious attempt to find a match.
Q: Must I register my business before I start up?
A: Corporations, nonprofits, partnerships and LLCs must register with their state government. Sole proprietors do not need to register their businesses at the state level. However, many states require sole proprietors to use their own name as their business name, unless they formally file a fictitious or DBA name.
To find out more about the requirements in your state, go to Registering your Business at State Agencies.
You may also need to get an Employer Identification Number (EIN) from the Internal Revenue Service. Use this simple checklist to see if you need one for your business. You can Apply for an EIN Online or phone the Internal Revenue Service: 1-800-829-4933.
Q: If I’m starting as a sole proprietor, should I open a separate bank account?
A: Yes, this will make life much easier for you and for your accountant, because it allows you to separate your business income and expenses from your private income and expenses. Visit your bank and ask for a separate account. Before the bank can open a separate business bank account, they will need valid government-issued photo identification and Social Security Numbers for all individuals who will be authorized to transact. It is likely that they will also require an Assumed Name Certificate (Doing Business As).
This separate business account will typically be named something like ‘Susan Smith conducting business as Susan Smith Web Design’, for example. Your business’s bank statements are usually the prime source of information for your accountant when they put together your accounts at the end of your first year in business.
Q: Should I use an accountant or attorney?
A: You can put in your own tax returns, or you can use an accountant. Ask friends already in business for recommendations and choose an accountant who works with other small businesses. Your accountant should be able to save you money and stress by advising on what you can claim and how.
It’s also a good idea to consult an attorney about your business intentions, particularly if you intend to sign a lease or any legal document. Depending on your business, an attorney might advise you to take out public liability insurance or other forms of protection.
Q: Should I approach the Internal Revenue Service?
A: Part of the Internal Revenue Service’s (IRS) job is to offer help and information, including to new businesses. You’ll find the Internal Revenue Service’s website useful for answering your basic questions about setting up a business and you can phone 1-800-829-4933 to ask business tax questions. The IRS website also lists various helpful publications you can order, pick up from your local IRS office, or download. There’s also a good FAQ (Frequently Asked Questions) section. Your tax dollars fund this service, so why not make full use of it? You can ask for free advice even if you’re just thinking about starting a business.
Q: Can you briefly explain the pros and cons of the different business structures?
A: At the risk of oversimplifying, here’s a broad outline of the differences.
- As a sole proprietor, you are the business and the business is you. Most people start this way because it offers low-cost, easy entry, but the disadvantage is that you are totally responsible for the debts and liabilities of your business. You’ll be taxed on your income from the business at individual tax rates. Learn more about the tax forms a sole proprietor needs to file here.
- A partnership is a business where two or more people share ownership. Partnerships are generally simple and inexpensive to form, though developing the partnership agreement can take some time. All partners contribute to the business, often bringing complementary skills and resources or pooled finances, and all partners share in the profits and losses of the business. There are three general types of partnerships: General, Limited, and Joint Ventures. You are taxed at individual tax rates on your income from the partnership. The disadvantages are your personal liability not only for your own debts and business decisions, but also for partnership debts incurred and business decisions made by your partner(s). In addition, partnerships come with the risk of disagreements and disputes between partners. Read more about partnerships here.
- When you form an LLC, you get the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership. The ‘Limited Liability’ aspect means that as a member in the company, you are not personally liable for the company’s debts or if the LLC is sued. However, because the liability is limited, you can be liable for your or your employee’s tort actions. The disadvantages are that an LLC can have a limited life, because in many states, when a member leaves an LLC, the business is dissolved. In addition, members of an LLC are considered self-employed and must pay the self-employment tax contributions towards Medicare and social security. The entire net income of the LLC is subject to this tax. Read more about LLCs here.
Q: How do I register a corporation, and can I do it myself?
A: To form a corporation, you’ll first need to establish your business name, which you register with your state government. Laws vary from state to state, but corporations usually must include a corporate designation (Corporation, Incorporated, Limited) at the end of their business name.
To register your business as a corporation, you will need to file certain documents with your state’s Secretary of State office. Find out about the specific filing requirements in the state where your business will be formed.
Once your business is registered, you must obtain business licenses and permits. Regulations vary by industry, state and locality. Use this tool to find out what federal, state and local permits, licenses, and registrations you’ll need to run a business.
Q: Should I write a Business Plan for my business?
A: Creating a Business Plan is a good idea, for several reasons. First, the research and thought you’ll have to put into writing the business plan will help you to sharpen and/or adjust your ideas. In addition, any lending institution that you approach for funds, such as a bank, will want evidence that you’ve done your homework and thought through your business concept.
Finally, the business plan provides a road map for your business. It lays out what you intend to do, how you intend to do it, the resources you need, and your action deadlines for each stage. The business plan forms a ‘living document’ that you can then revisit at regular intervals and modify according to your progress or changing circumstances.
Q: What help and/or funding is available for small businesses?
A: Unfortunately, there is not much funding available to commercial organizations. Grants from the federal government are only available to noncommercial organizations, such as nonprofits and educational institutions. Some business grants are available through state and local programs, nonprofit organizations and other groups, but business may be expected to match funds to access these types of grants. However, both federal and state government agencies provide financial assistance programs that help small business owners obtain low-interest loans and venture capital financing from commercial lenders.
Q: Do I need business skills or experience to start a small business?
A: The failure rate of small business start-ups is high. One major reason is lack of business skills. Therefore, yes, you should systematically set about improving your business skills.
Perhaps the most important ingredient you need to succeed is enthusiasm and drive, backed by persistence and a determination to achieve your goals no matter how much hard work is involved. But you’ll greatly improve your chances of success if you have good business skills. These include the skills to market your business in a creative and sustained way and the skills to build and manage efficient business systems that enable the business to operate smoothly.
Many people start small businesses because they’re good at something or can offer specialist knowledge. They often fail because their other business skills are poor, or they spent little time on the ‘boring’ aspects of their business. It seems more fun to do what you enjoy doing than to keep the book work up to date, chase debtors, invoice promptly, do a cash flow forecast, or manage tax liabilities, so these tasks are neglected, and the business suffers.
Another major reason for failure is lack of experience in the chosen industry. The solution is to work in the industry before you start or buy a business in that industry – even if you have to work for low wages or just for the work experience. The idea of running a Bed & Breakfast might seem like an easy way to make money, until you’ve actually tried it and learned about the hard work and energy required. Managing a coffee shop might seem great until you experience the long hours and pressure that hospitality work often involves. Learn about the advantages and the disadvantages of the industry you’re interested in before you take the plunge.