Launching a new business is an exciting adventure and a huge learning opportunity. This guide is designed as a quick overview of the business considerations you’ll need to make when starting out. It’s easy to become quickly overwhelmed with all the steps to do, but take on each one at a time. Remember, your business will constantly change over time, so you don’t have to perfect everything at the beginning. This list of 10 small business steps will give you an overview of setting up your business structure and some accounting steps to keep things on track.
1. Decide What Business Structure is Right for You
Choosing the right business structure is a crucial first step once you have your idea and business plan. There is no single best answer, and you need to desired which structure is right for you. There are hundreds of articles written on this topic, and I’ve provided links to some of the best ones to answer your questions. This guide contains specific links for business looking to start in Cook County, Illinois.
The major legal structures for businesses are
· Sole proprietorship
· Partnership
· Corporation
· S-Corporation
· Limited Liability Company (LLC)
Which Business Structure should I choose?
Registering a Doing Business As name as a Sole Proprietor
Registering a Doing Business As name in Cook County, Illinois
Setting up a Corporation in Illinois (You should find an attorney to file the paperwork):
Before you make a final decision, be sure to talk with an attorney to understand all the legal ramifications of your decision. While lawyer fees can be pricy, they will save you a huge headache down the road. Corporation and LLC filings are the most complicated, so don’t approach this on your own. Once you decide on your business structure, you can go about setting up the rest of your business practices.
2. Open a Bank Account
After you’ve legally registered your business, you’ll need to setup a bank account for your business. Having a separate bank account keeps records distinct and will make life easier come tax time. Note that LLCs, partnerships, and corporations are legally required to have a separate bank account for business. Sole proprietors don’t legally need a separate account, but it’s definitely recommended.
Start by opening up a business checking account, and then any savings accounts that will help you organize funds and plan for taxes. For instance, set up a savings account and squirrel away a percentage of each payment as your self-employed tax withholding. Next you’ll want to consider a business credit card to start building business credit. Corporations and LLCs are required to use a separate credit card to avoid commingling personal and business assets.
Before you talk to a bank about opening an account, do your homework. Shop around for business accounts and compare fee structures. Most business checking accounts have fees that are higher than personal banking, so pay close attention to what you’ll owe.
In order to open a business bank account, you’re required to have a business name, and usually be registered with your state or province. Check with the individual bank for what documents to bring to the appointment.
3. Track Your Expenses
The foundation of solid business record keeping is learning to track your expenses effectively. It’s a crucial step that allows you to monitor the growth of your business, build financial statements, keep track of deductible expenses, prepare tax returns, and support what you report on your tax return.
Right from the beginning, you should establish a system for organizing receipts and other important records. This process can be simple and old school (Using Excel) or you can use a service like ShoeBoxed.
There are five types of receipts that you should pay extra attention to:
Starting your business at home is a great way to keep overhead low, plus you’ll qualify for some unique tax breaks. You’re able to deduct the portion of your home that’s used for business, as well as your internet connection, cell phone, and transportation to and from work sites and for business errands. Any expense that’s used partly for personal life and partly for business must reflect the mixed use. For instance, if you have one cell phone, you can deduct the percentage you use the device for business. Gas mileage costs are 100% deductible, just be sure to hold on to all records and keep a log of your business miles (where you’re going and the purpose of the trip).
4. Develop a Bookkeeping System
Before we jump into establishing a bookkeeping system, it’s helpful to understand exactly what bookkeeping is, and how it differs from accounting. Bookkeeping is the day-to-day process of recording transactions, categorizing them, and reconciling bank statements.
Accounting is a high level process that looks at business progress and makes sense of the data compiled by the bookkeeper by building financial statements.
As a new business owner, you’ll need to determine which bookkeeping method to use:
You can choose to go the DIY route and use software like Quickbooks or Wave. Alternatively, you could use a simple Excel spreadsheet.
You have the option of using an outsourced or part-time bookkeeper that’s either local or cloud-based like Bench Accounting.
When your business is big enough you can opt to hire an in-house bookkeeper and/or accountant. With so many options out there, you’re sure to find a bookkeeping solution that will suit your needs.
Business owners need to determine whether they’ll use the cash or accrual method of accounting. Let’s take a look at the difference between the two methods here:
Business owners can use cash based accounting if revenues are under USD $5M, otherwise they must use the accrual method.
5. Set up a Payroll System
As a new online store owner, you’ll likely be a one-person show. However, maybe you’ll hire a part-time employee to help you out, or a freelancer to design your logo. Right away, you need to establish whether that individual is an employee or an independent contractor. For employees, you’ll need to decide on a payroll schedule and ensure that you’re withholding the correct taxes; ZenPayroll is a great, easy to use service to get started. For independent contractors, be sure to track how much you’re paying each person. You may be required to file 1099s for each contractor at year end (you’ll also need to keep their name and address on file for this!).
6. Determine How You’ll Get Paid
When sales start rolling in, you’ll need a way to accept the payments. eCommerce platforms like Shopify or Squarespace allow you to accept credit card payments and like it to your bank account. If it doesn’t, you can use a third party payment processor like PayPal. If you use a third party payment processor, the fees are generally around 2.9% + $0.30 per transaction. You can consult this list to help you find a payment gateway that will work for you.
7. Establish Sales Tax Procedures
The world of eCommerce has shaken up sales tax regulations and they are admittedly a bit confusing due to location issues. When a customer walks into a brick and mortar retail shop, they pay the sales tax of whatever state or province they make the purchase in, no matter if they live in that city, or they’re visiting from across the world. However, when you sell online, you’re often selling to customers who live in different states/provinces, and even countries.
Illinois Tax Information
8. Determine Your Tax Obligations
Tax obligations vary depending on the legal structure of the business. If you’re self-employed (sole proprietorship, LLC, partnership), you’ll claim business income on your personal tax return. Corporations, on the other hand, are separate tax entities and are taxed independently from owners. Your income from the corporation is taxed as an employee.
Self-employed people need to withhold taxes from their income, and remit these to the government in lieu of the withholding that an employer would normally conduct. For store owners, you’ll need to pay estimated quarterly taxes if you’ll owe more than $1,000 in taxes this year.
9. Calculate Gross Margins
Improving your store’s gross margin is the first step towards earning more income overall. In order to calculate gross margin, you need to know the costs incurred to produce your product. To understand this better, let’s quickly define both Cost of Goods Sold (COGS) and gross margin.
Here’s how you can go about calculating gross margin:
Gross Margin (%) = (Revenue - COGS) / Revenue
The difference between how much you sell a product for, and how much the business actually takes home at the end of the day is what truly determines your ability to keep the doors open.
10. Constantly Re-evaluate Your Methods
When you first start out you may opt to use a simple spreadsheet to manage your books but as you grow you’ll want to consider more advanced methods like Quickbooks or Bench. As you keep growing, it’s good to continually reassess the amount of time you’re spending on your books, and how much that time is costing your business. The right bookkeeping solution means you can invest more time in the business with bookkeeping no longer on your plate, and potentially save the business money.
Conclusion
Starting a business can be an overwhelming process, but if you follow this list, you’ll have a good start to organizing your business. From choosing your business structure to setting up your accounting system, these tasks will help your business succeed.
1. Decide What Business Structure is Right for You
Choosing the right business structure is a crucial first step once you have your idea and business plan. There is no single best answer, and you need to desired which structure is right for you. There are hundreds of articles written on this topic, and I’ve provided links to some of the best ones to answer your questions. This guide contains specific links for business looking to start in Cook County, Illinois.
The major legal structures for businesses are
· Sole proprietorship
· Partnership
· Corporation
· S-Corporation
· Limited Liability Company (LLC)
Which Business Structure should I choose?
Registering a Doing Business As name as a Sole Proprietor
Registering a Doing Business As name in Cook County, Illinois
Setting up a Corporation in Illinois (You should find an attorney to file the paperwork):
Before you make a final decision, be sure to talk with an attorney to understand all the legal ramifications of your decision. While lawyer fees can be pricy, they will save you a huge headache down the road. Corporation and LLC filings are the most complicated, so don’t approach this on your own. Once you decide on your business structure, you can go about setting up the rest of your business practices.
2. Open a Bank Account
After you’ve legally registered your business, you’ll need to setup a bank account for your business. Having a separate bank account keeps records distinct and will make life easier come tax time. Note that LLCs, partnerships, and corporations are legally required to have a separate bank account for business. Sole proprietors don’t legally need a separate account, but it’s definitely recommended.
Start by opening up a business checking account, and then any savings accounts that will help you organize funds and plan for taxes. For instance, set up a savings account and squirrel away a percentage of each payment as your self-employed tax withholding. Next you’ll want to consider a business credit card to start building business credit. Corporations and LLCs are required to use a separate credit card to avoid commingling personal and business assets.
Before you talk to a bank about opening an account, do your homework. Shop around for business accounts and compare fee structures. Most business checking accounts have fees that are higher than personal banking, so pay close attention to what you’ll owe.
In order to open a business bank account, you’re required to have a business name, and usually be registered with your state or province. Check with the individual bank for what documents to bring to the appointment.
3. Track Your Expenses
The foundation of solid business record keeping is learning to track your expenses effectively. It’s a crucial step that allows you to monitor the growth of your business, build financial statements, keep track of deductible expenses, prepare tax returns, and support what you report on your tax return.
Right from the beginning, you should establish a system for organizing receipts and other important records. This process can be simple and old school (Using Excel) or you can use a service like ShoeBoxed.
There are five types of receipts that you should pay extra attention to:
- Meals and Entertainment: Conducting a business meeting in a cafe or restaurant is a great option, just be sure to document it well. On the back of the receipt, record who attended and the purpose of the meal or outing.
- Out of Town Business Travel: The IRS is wary of people claiming personal activities as business expenses. Thankfully, your receipts also provide a paper trail of your business activities while away.
- Vehicle Related Expenses: Record where, when, and why you used the vehicle for business, and then apply the percentage of use to vehicle related expenses.
- Receipts for Gifts: For gifts like tickets to a concert, it matters whether the gift giver goes to the event with the recipient. If they do, then the expense would be categorized as entertainment, rather than a gift. Note these details on the receipt.
- Home Office Receipts: Similar to the vehicle expenses, you need to calculate what percentage of your home is used for business and then apply that percentage to home related expenses.
Starting your business at home is a great way to keep overhead low, plus you’ll qualify for some unique tax breaks. You’re able to deduct the portion of your home that’s used for business, as well as your internet connection, cell phone, and transportation to and from work sites and for business errands. Any expense that’s used partly for personal life and partly for business must reflect the mixed use. For instance, if you have one cell phone, you can deduct the percentage you use the device for business. Gas mileage costs are 100% deductible, just be sure to hold on to all records and keep a log of your business miles (where you’re going and the purpose of the trip).
4. Develop a Bookkeeping System
Before we jump into establishing a bookkeeping system, it’s helpful to understand exactly what bookkeeping is, and how it differs from accounting. Bookkeeping is the day-to-day process of recording transactions, categorizing them, and reconciling bank statements.
Accounting is a high level process that looks at business progress and makes sense of the data compiled by the bookkeeper by building financial statements.
As a new business owner, you’ll need to determine which bookkeeping method to use:
You can choose to go the DIY route and use software like Quickbooks or Wave. Alternatively, you could use a simple Excel spreadsheet.
You have the option of using an outsourced or part-time bookkeeper that’s either local or cloud-based like Bench Accounting.
When your business is big enough you can opt to hire an in-house bookkeeper and/or accountant. With so many options out there, you’re sure to find a bookkeeping solution that will suit your needs.
Business owners need to determine whether they’ll use the cash or accrual method of accounting. Let’s take a look at the difference between the two methods here:
- Cash Method: Revenues and expenses are recognized at the time they are actually received or paid.
- Accrual Method: Revenues and expenses are recognized when the transaction occurs (even if the cash isn’t in or out of the bank yet) and requires tracking receivables and payables.
Business owners can use cash based accounting if revenues are under USD $5M, otherwise they must use the accrual method.
5. Set up a Payroll System
As a new online store owner, you’ll likely be a one-person show. However, maybe you’ll hire a part-time employee to help you out, or a freelancer to design your logo. Right away, you need to establish whether that individual is an employee or an independent contractor. For employees, you’ll need to decide on a payroll schedule and ensure that you’re withholding the correct taxes; ZenPayroll is a great, easy to use service to get started. For independent contractors, be sure to track how much you’re paying each person. You may be required to file 1099s for each contractor at year end (you’ll also need to keep their name and address on file for this!).
6. Determine How You’ll Get Paid
When sales start rolling in, you’ll need a way to accept the payments. eCommerce platforms like Shopify or Squarespace allow you to accept credit card payments and like it to your bank account. If it doesn’t, you can use a third party payment processor like PayPal. If you use a third party payment processor, the fees are generally around 2.9% + $0.30 per transaction. You can consult this list to help you find a payment gateway that will work for you.
7. Establish Sales Tax Procedures
The world of eCommerce has shaken up sales tax regulations and they are admittedly a bit confusing due to location issues. When a customer walks into a brick and mortar retail shop, they pay the sales tax of whatever state or province they make the purchase in, no matter if they live in that city, or they’re visiting from across the world. However, when you sell online, you’re often selling to customers who live in different states/provinces, and even countries.
Illinois Tax Information
8. Determine Your Tax Obligations
Tax obligations vary depending on the legal structure of the business. If you’re self-employed (sole proprietorship, LLC, partnership), you’ll claim business income on your personal tax return. Corporations, on the other hand, are separate tax entities and are taxed independently from owners. Your income from the corporation is taxed as an employee.
Self-employed people need to withhold taxes from their income, and remit these to the government in lieu of the withholding that an employer would normally conduct. For store owners, you’ll need to pay estimated quarterly taxes if you’ll owe more than $1,000 in taxes this year.
9. Calculate Gross Margins
Improving your store’s gross margin is the first step towards earning more income overall. In order to calculate gross margin, you need to know the costs incurred to produce your product. To understand this better, let’s quickly define both Cost of Goods Sold (COGS) and gross margin.
- Cost of Goods Sold (COGS): These are the direct costs incurred in producing products sold by a company. This includes both materials and direct labor costs.
- Gross Margin: This number represents the total sales revenue that’s kept after the business incurs all direct costs to produce the product or service.
Here’s how you can go about calculating gross margin:
Gross Margin (%) = (Revenue - COGS) / Revenue
The difference between how much you sell a product for, and how much the business actually takes home at the end of the day is what truly determines your ability to keep the doors open.
10. Constantly Re-evaluate Your Methods
When you first start out you may opt to use a simple spreadsheet to manage your books but as you grow you’ll want to consider more advanced methods like Quickbooks or Bench. As you keep growing, it’s good to continually reassess the amount of time you’re spending on your books, and how much that time is costing your business. The right bookkeeping solution means you can invest more time in the business with bookkeeping no longer on your plate, and potentially save the business money.
Conclusion
Starting a business can be an overwhelming process, but if you follow this list, you’ll have a good start to organizing your business. From choosing your business structure to setting up your accounting system, these tasks will help your business succeed.
Practical Startup was founded by Jordan Buckner and focuses on producing the absolute most practical how to guides to help entrepreneurs start their own business. The information is based on my own experience launching two companies and reading through thousands of “advice” articles. |