If you’re at a point in life where you don’t want to continue on at your current company but still want to do the same type of work you’ve always been doing, you might want to consider starting your own business!
One person who has done just this is Greg Edlund, CEO and founder of CFO Unlimited. Greg recently sat down with us for an episode of Retirement Revealed with Jeremy Keil, where he shared his experience with the transition from being a corporate accountant to a successful business owner.
Now that Greg has been running his own company for over 10 years, he has lots of insight and tips to help others kick-start their own business journey.
In this blog, we’re sharing Greg’s 7 steps that every new business owner should know for setting up their business in a way that provides better means of tracking income and a higher degree of legal protection.
Read on to learn how you can set up your own company!
1. Determine the Structure of Your New Business
There are multiple business structures to choose from, each with its own unique advantages and disadvantages. It’s important to identify which one best fits your situation and needs.
Some of the most popular business structures are:
a) Sole Proprietorship and Partnership:
A sole proprietorship is the most popular form of business because it’s the easiest to establish. To set up this type of business, just set up your shop and/or your website — and that’s it! You’re not required to register with your state and can simply start running your business as soon as you’ve set up your shop or website.
A partnership, on the other hand, is where you run a joint business with someone else and split your assets and business income equally.
While these types of businesses offer relatively easy set-ups, they can potentially put your personal assets at risk. This is because, under these structures, the business is not considered a legally separate entity. That’s why Greg usually recommends opting for other forms of business.
b) Limited Liability Company (LLC):
An LLC is essentially like a sole proprietorship, but with an additional level of liability protection.
How does it add that protection? By giving your business the status of a separate legal entity. With this, if someone decides to sue your business for any reason, then your liability is limited to the assets of the business. This ensures that your personal assets are legally protected and cannot be used to pay off any claims.
An LLC acts as the first level of legal protection, and Greg highly recommends that even if you decide to be a sole proprietor, at least be an LLC!
Like an LLC, S-Corps also lists your business as a separate legal entity. However, they’re a bit more formal and rigid in their rules. With this business type, you need to conduct regular board meetings and there is an increased oversight both from the board and the state.
One of the biggest advantages of S-Corps is that the profits of the business are only subject to income taxes and not to employment taxes.
Although make sure you pay all your payroll and income taxes!
Also, if you’re paying yourself a regular salary through the business, you can choose to be an LLC and then apply for an S-Corp election. This allows you to enjoy the legal flexibility of being an LLC while also benefiting from the tax advantages offered by an S-Corp!
This is the level at which publicly traded companies operate. One of its key distinguishing features is that it is taxed at a corporate level, whereas all the other forms of business are taxed at an individual level.
This means that C-Corps file their own tax returns, and they get taxed only on the profits of the company. Furthermore, their tax rates are generally lower compared to the individual income tax rates, which provides them a distinct tax advantage.
Another huge benefit of being a C-Corp is that you can invite a large number of shareholders, unlike an S-Corp. This provides a greater potential for growth moving forward.
Hence, if you plan to take your company public one day, a C-Corp is the way to go!
2. Register Your Business with Your State
Once you’ve finalized the structure for your new business, you need to get registered with your state. In Wisconsin, you do this through the Department of Financial Institutions (DFI). When you go to register, keep in mind that during the process, you have to clearly mention the business structure that you are opting for.
3. Get an Employment Identification Number
Following the registration with the DFI, you need to visit the IRS website and get an employment identification number (EIN). You can get an EIN even if you’re running your business as a sole proprietor and have not registered with the state.
If you think that these steps, of getting registered and obtaining an EIN, are very time-consuming and tiresome, they’re really not! Believe it or not, but you can get them done in less than 30 minutes. It’s that simple!
4. Set up a Business Bank Account
This is a very crucial step! We’ll talk more about how it helps your business in step 7 listed below, but for now, let’s quickly take a look at what you’re required to do.
To set up a business account, you need to go to the bank and set up a separate account for your business. In order to do this, you’ll require two key pieces of information:
- Your articles of incorporation (you get them once you’ve registered)
- Your Employment Identification Number (EIN) letter
5. Establish a Board of Directors
Depending on the type of business structure that you’ve selected, you might need to form a board of directors.
If that is the case with your business, you must conduct your first board meeting immediately after the board of directors is established to discuss and record several important things that need to be taken care of before you can really start running your business.
6. Get Adequate Liability Insurance
As you’re just getting started with your business, you might hesitate to spend a lot of money on insurance, especially before you’re able to generate any revenue. But ultimately, you must get adequate liability insurance coverage.
Greg suggests that you get the insurance, even if you’re operating as an LLC. The reason for this is that when a company gets sued, then even if it’s registered as an LLC and has a separate business account, it might still be asked to pay the claim using the owner’s personal assets if he/she has failed to get adequate liability insurance.
7. Separate Business Money from Personal Money
In order to ensure complete legal protection of your personal assets, you must clearly distinguish them from your business assets.
How do you do that? By limiting all of your business transactions to your business bank account. This means that any income generated from your business must directly go into your business bank account. Similarly, all the business expenses must also be paid directly from that account.
If you’re co-mingling the funds, then the courts might find it difficult to distinguish business and personal and you have essentially pierced the veil of liability coverage given by the law.
Therefore, operating your business strictly through a separate bank account and getting adequate liability insurance are the two most important things to protect your personal assets from any business liability claims.
Following these 7 steps, you’ll be ready to kickstart your new business! And remember, we’re always there to guide you along the way. If you need any assistance in establishing your own company, feel free to contact us!
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