It’s never been easier to start a business. Websites like Facebook, LinkedIn, and Twitter, have made it impossibly easy to connect with lots of people. And all for free, I might add. Heck, who hasn’t sold something on eBay or Craigslist? I know I have! It was fun and I made decent little piece of money doing it, too.
At some point you might start thinking about turning that side hustle into a legitimate business. This is awesome because a business can be one of your greatest tools to help achieve true financial wealth. So when you’re ready to take the plunge, here are a few tips to help you along the way.
Tip #1: Incorporate, Incorporate, Incorporate
Creating a separate legal entity is arguably the most important step to forming and operating a business. It can provide a strong protective shield to prevent creditors from being able to touch your personal possessions. This requires some due diligence, especially from those who are administratively challenged, because there will be a lot of paperwork to file and keep up with throughout the year. Fortunately, there are now lots of companies and individuals offering virtual assistance for reasonable prices who can help with this.
Inevitably, someone out there is thinking that they can just wing it and operate as a sole proprietor. Before you do that, I would recommend that you think very hard about maybe NOT doing that. In our lawsuit-happy culture, you could be opening yourself up to huge unnecessary risk by not protecting your personal assets from someone looking to sue you.
With so many free resources out there (more on that below), it is very quick and painless to form a company. So create a separate legal entity to legally protect yourself from unknown risks that may lie ahead.
Tip #2: Don’t Pay Someone To File Simple Paperwork
It amazes me to see how many well meaning lawyers and CPAs are all too eager to file simple and basic paperwork to incorporate your business for a ridiculous fee. Most times you end up entering the SAME information on their forms that you would enter if you filed directly with the state that you are incorporating in, or if you utilized an online service. What’s even sillier is that they offer additional options like registered agent services, and obtaining a federal tax ID, again, attempting to capitalize on your fear of the unknown.
Most times, all of this is completely overkill. You can incorporate for free or low cost at websites like lawdepot.com. You can also google “incorporate in (state)” and scroll down until you find the official website of the state you are incorporating in. You will still have to pay the filing fees required by the state. That, you will not be able to get around. But at least you’re not paying mandatory filing fees on top of the hundreds or thousands of dollars required by some CPAs and lawyers.
To get a federal tax ID number, go to irs.gov, and do it online for free. It literally takes about 10 minutes to do. Seriously.
Tip #3: Set Up Your Tax Strategy
The perks of working from home are really great. It enables me to type this awe-inspiring piece of digital genius in some old sweat pants and my hair looking like WTF. But more importantly, it gives me a nice little tax write-off at the end of the year since I work from an office that is dedicated to my business.
The tax code is very business friendly, and even more so toward small businesses. There are so many write-offs for businesses, it’s no wonder why it can take years to see a “profit.” Write-offs for meals, car expenses, supplies, furniture, and even compensation for your child’s labor exist. (I’m still amazed at the child labor deduction. I’m literally trying to think of ways my 7 year old can contribute to legal research, or anything I can use to get him on the payroll.)
Here’s a pretty good article that gives more details about a few significant deductions that are available to businesses. Also, consulting with a CPA for a few hours to create a strategy may not be a bad idea either.
So get those free business cards ready to start passing out at your working lunch so you can grow your business, and take a write-off for the meal!
Tip #4: Don’t Screw with the IRS
Until you actually make enough money to hire a CPA to do your taxes, you may end up doing them yourself. There’s nothing wrong with this, and it probably will save you some money. But do so cautiously, and for the love of everything holy and pure, don’t try and cheat the government. It has virtually unlimited resources at its disposal, and you don’t want any of those resources being directed at you to nail you for under payments, tax evasion, or even fraud.
So, pay your taxes, and pay them throughout the year. Do not wait until the end of the year to figure out how much you owe, because you will probably owe penalties on amounts you underpaid throughout the year.
Be truthful and do not try and cheat on your taxes. If you are on the fence about a tax issue, err on the side of caution.
Accurately document your expenses. Notice the emphasis on accurate and document?
If you’re hiring people to help you, be very careful about designating them as independent contractors (i.e. “1099 consultants”) to avoid employment taxes and other expenses. A good rule of thumb is that if the worker does not have free reign to decide how, when, and where to get the job done, or if you will need them for long term, you probably need to pay them as an employee of the company (i.e. “W2 employee”).
If a company is found to have misclassified its workers, not only will the IRS come after you for back taxes along with the penalties and interest, the Department of Labor and former workers can come after you for back wages and damages.
So, remember these tips as you get out there and get your hustle on!
Know someone starting a business? Sharing is caring, so pass it along!