Initial steps for planning and starting a new business

Starting a business?!? What are the first 3 things that you must do to avoid mistakes and delays in the process?

This may seem counter-intuitive, but there are 3 critical steps that you must do at the very beginning of the process, when you are in the initial planning phase of developing your business concept. This is because there are 1-to-2-year milestones and time limits on some critical business assets that must be in place for your business to be considered legitimate.

1. Start the business on paper. Whether it is a Sole Proprietorship, a Partnership, a Limited Liability Corporation (LLC) or another type of corporation, the date you file the legal paperwork is considered “day one” in the life of your business, in most cases. Why is this important? Most other businesses, including banks and other financial institutions, do not consider you to be a “legitimate”, “established” business until your business has been “open” for over a year. Even scarier, the US Small Business Association (SBA) does not consider you to be a “legit business” until you have been open for over two years. Statistics are also in play here. Many businesses struggle and do not survive the first two years. If your entrepreneurial venture survives more than 18 months, then you will start earning the respect of your peers. It rarely happens before then. (Pro Tip: This is where you will name your business initially, don’t stress about it. First of all, I have seen many business partners create, agree upon and refine a business plan in a matter of hours, only to spend days arguing over what to call it. Secondly, what you originally considered to be your business concept very likely change between the time you envision it and when you achieve success. The name can be changed, or you cab file a DBA “doing business as”. It is not a big deal. My suggestion is to start simple and generic and don’t stress over it.)

2. Open a separate business bank account. (No, you should not repurpose your unused personal checking account.) This is another milestone that is considered important by the government and by other businesses. I have talked to many entrepreneurs that started a business and then later tried to get financing or other assistance and ran into a brick wall because they did not take this step well in advance. Another pitfall is making the mistake of combining your personal and your business finances together. It almost always leads to major financial hurdles and potential nasty tax burdens in the future.

3. Establish a web page and social media accounts. This does not need to be anything fancy, but you need a minimum of a one-page web site that says “Thanks for visiting. I am in the process of building my business and my web page. Please check back for amazing new stuff soon.” You also need to establish one or two social media accounts and link them to your web page. If you are planning to do e-commerce, build a basic store on any social media platform and link your business bank account. This ties everything together. The web site, the social media pages and the bank will all verify that everything is connected and that you look like an established business. In the business world this is proof that your business exists in the real world and online.

Planning, establishing and opening a business from scratch takes significant effort and time. If you did not think that opening a business was a long-term play, please let this article change your mind. Many entrepreneurs will also tell you that it ALWAYS takes more time than you initially think. It will also cost you more money than you think. You will make mistakes that you will need to recover from. Things will change and you will have to adapt to unforeseen challenges. If you spend a year and a half “getting things started” and then decide to incorporate, you are also restarting your business’s time clock over on the day you file the legal paperwork. There are many web sites and local firms that will file your incorporation or other paperwork for a reasonable flat fee. Your bank will be more than happy to open a new business checking account. So, spend a few hundred bucks, file the paperwork, make a minimum deposit into a new business checking account, and start the time clock in your favor while you finish planning and establishing your business.

Good news. The legal paperwork and the bank account should be “one and done”. You set it up once and then don’t worry about it. (Assuming that you do not let the bank account run out of money.)

The reality is. Establishing a web and social media presence takes months. It takes time and effort every day, or at least 2 or 3 times a week. It takes commitment. In an ideal situation, when you finally get your business open, operational, and making money, then you will have the legal paperwork, the financial presence, and the web presence to back it up. If you do not plan ahead for this then it will guarantee future delays in your business development.

Here are a few more things to consider.

• There is a cost to this. If the bank account requires monthly fees, then you will have to keep money in the account to cover those fees, or if you start with a higher balance, then there may be no fees at all. Social media and other accounts may also have monthly fees. It is very possible that you will be running your business “on paper” and paying for it, weeks or months before you make any money.

• Talk to a lawyer and a Certified Public Accountant (CPA) and or a business development consultant about the plans for your new business. Most do initial consultations for free. They will help you decide which type of business you should create, based on your vision, tax laws, state laws and their expertise. It is a good idea to get professional opinions that will keep you from making costly and time-consuming mistakes, as you are getting started. You will also then know which tax laws apply to you so you can plan for them as well.

• Create a budget and try to stick to it. If you know that you are going to have monthly expenses, then plan ahead for it.

• Starting a business has start-up costs. It may be your savings account and 10% of your day job paycheck for the next year, but these are necessary investments that you are making towards the future success of your business. Expect it and plan for it.

• It can be changed later if you do incorporate or form a business the “wrong” way at first, but it is best to avoid that.

• Keep it simple at first and call it something like “Bob’s Company” or “YourLastNameCo”. If your plans or your vision for the business changes, then it is not going be a problem when you get up and running. Your business may become “Bob’s Company” doing business as “Bob’s Pet Shop” at a later date, so you do not have to complicate matters when you start out. If six months in you decide to become a florist instead of a pet shop, then the change will be easy.

• Start your business on paper in January. Most businesses run their financials within a fiscal year (accounting time period) that starts in January and ends in December. This will make your life easier because the calendar, taxes and most other businesses run the same way. The easiest thing to do is to start your business in January, but that is not essential. If you do not start your business in January, then that is another reason to talk to a CPA so that you know what your options are.

• It is VERY important that you keep everything for your business financially separate from your personal life. Let’s say, for example, you want to start a clothing brand. If you are going to buy a sewing machine, some fabric and supplies to start working on your designs, then transfer the money you are going to spend into your business account (this is called a contribution), and make all of your business-related purchases with your business checking account and debit card. When my family started our first business, we used our personal accounts and our business accounts interchangeably. This made our bookkeeper insane (or you will become insane if you are the bookkeeper) and tax preparations for our first year were a major nightmare that also continued into year two. Remembering what you did and for what reason, last April, is not easy. If you keep your personal and your business financials separate from day one, then all of the complexity that we had to deal with is something that you will never encounter.

• Keep written records, get a bookkeeping app, use your bank’s app, or a spreadsheet. It doesn’t matter how you do it, it is just good business practice that you record the financial details of your business accurately, every day, from day one. Your life will be so much easier if you establish good habits from the start of your business.

• “Embrace The Suck” and plan for initial losses. If you follow these steps, at the end of your first year, your tax returns will likely show you putting money into the business, with little to no income or profits. In most cases, the money that you initially put into your business will be considered a “loss” and that is often a deduction, which is a tax credit or a refund that you can use towards the business in year two.

This article is intended to be informational for new entrepreneurs and is not to be considered legal, financial, or investment advice. Do not try to attempt this on your own without help. Talk to the appropriate professionals, including legal and financial experts, for assistance to ensure you are not making any costly mistakes that might also get you into legal trouble. Nobody starts a business with the intention of getting sued jailed or fined. Lack of planning is what will land you in hot water.