Week 33 - What I Need to Know About Starting a Business
Recently, I've been playing around with the idea of starting a t-shirt business. While it initially started as just designing some t-shirts and looking into if I could just print a few for myself, it quickly evolved into something more.
Sure, I haven't done the market research yet, but with this and another business idea with my friend Willie, I figured it was time for me to start looking into what it takes to start a business.
But in the end, the best way to learn about what it takes to start a business is to actually do it. Also, bring a mentor or two that have done it themselves.
Disclaimer: I personally have no experience in starting a business nor have I worked with other people in doing so. Take that as you will.
When it comes to starting a business, you don't actually have to have everything figured out before you get started. It's like the idea of you'll never be 100% prepared for everything or the idea that you're just waiting for the perfect moment.
Spoiler alert: there is no perfect moment.
1. Don't wait for the perfect name (you can change it later)
It can be a lot of fun spending hours every day brainstorming the perfect name for your business. Trust me, we do that all the time at work when we're trying to figure out catchy blog names for our clients.
But the issue with doing this, at least in the case of starting a business, is that it's stopping you from actually starting a business. Which means it's also stopping you from making money. Since as we all know, the business of business is business.
The main idea here is to get something in place for now so you can set up a legal business quick. Then, when you have that eureka moment later, you can always just change the name to whatever you were inspired with.
2. Apply for an Employer Identification Number (EIN)
An employer identification number is like a social security number for a business and is used/assigned by the IRS for identification and tax purposes.
It's relatively easy to apply for an Employer Identification Number. Just go to the IRS website and submit your application.
3. Register your trade name
A trade name is basically an informal version of your company name. For example, when you register your LLC as PatrickEng, LLC, you are registering the legal name of the company. But I can also register a Doing Business As (DBA) to be Patrick's Shirts, a T-Shirt Store. This name doesn't require the legal business structure type, think LLC, Inc, Corporation, etc to be used in the name.
4. Get a business license
Regardless of where you are in the U.S., your city or county will require you to have a business license. In VA's case, this is also known as a business, professional and occupational license (BPOL) and needs to be renewed each year.
5. Fill out your business personal property tax form
If your business purchases any tangible property, you'll need to submit a business personal property tax. This could range from furniture to fax machines. Make sure to keep a record of all company purchases each year.
6. Figure out other needed permits
Depending on what type of business you're trying to start, you'll need various licenses and permits. Your counties website should have a comprehensive list of everything you need, from contractor licenses to swimming pool permits.
8. Open a business bank account
The IRS wants your money. Don't make it easy for them
Make sure that when starting your business, you keep your personal bank accounts separate from business ones. Using your name and EIN, you can set up a business account at your local bank or credit union.
9. Setup basic accounting
Numbers, numbers, numbers.
Any business, especially one that wants to actually work, needs to have some level of revenue reporting and accounting in place. At first, this can be a simple spreadsheet of your revenue and expenses and then can be adjusted later.
There are plenty of accounting software out there to make this easy but don't bite off more than you can chew. It's better to have something simple at first and then get more complicated as your foundation gets stronger.
Overall, what I've found is that no one is actually able to give you a clear answer on how to start a business. The best thing I think you can do is contact your county and state officials directly who are in charge of all this registration and licensing, and find other business owners who have already done it. They can help you through the process and avoid any potholes they might have fallen into during their time.
Since essentially every post on the internet just gives generic information on how to start a business (i.e., they all say to contact your local government and research what you need), I wanted to see what it would take to start a business specifically in Virginia.
Hopefully this way the information will be a little more helpful.
Forming the LLC
Naming
The first step in forming your LLC is to actually name it. Since this is an LLC, the legal name needs to have either LLC or L.L.C. in the name itself. It also can't be named something that sounds like a government agency, and in cases where you want to use specific words like bank, attorney, or university, you'll have to submit additional paperwork.
Before you get too attached to that perfect name though, make sure it doesn't already exist. You can search through all Virginia business entities here.
Also, make sure that a URL is available using that same name. While you might not be planning to set up a website just yet, you'll want to make sure you have the domain under control for later uses. Plus, if you're a company without a website, you essentially don't exist.
Agents
VA LLCs are required to have registered agents. These agents are any persons or companies that agree to send and receive legal documents on your behalf. A VA LLC's agent needs to be either a resident of VA or an organization that is approved to operate in VA. You can even set yourself as your own registered agent.
Companies like Northwest and LegalZoom make starting a business much easier, but at a price.
Business Organization Structure
In this fictional scenario, we are forming an LLC. In order to register it as such, we need to file Articles of Organization that specify whether this LLC will be member-managed or manager-managed.
In short, you'll want to be member-managed when your LLC is small and each member is willing and able to be involved in all day-to-day operations. If that's not the case and you have many members who don't want to be involved in all operations, then you'd go with a manager-managed structure.
Operating Agreements
Operating agreements are either written or verbal legal agreements that outline how the LLC is owned and operated. This agreement makes sure that all necessary parties are on the same page right at the beginning and can be used to prevent conflict further down the road.
Applying for an EIN
Employer Identification Numbers are simply a businesses ID. You need to have an EIN to open a business bank account, submit your business taxes, and hire new employees. You can get an EIN for free at the IRS website.
Post-Formation
Open Your Business Bank Account
Now that you have your EIN, you can apply for a business bank account. Separation of business and personal accounts is necessary for any sort of asset protection and reduces your chance of getting sued and/or losing personal assets.
Plus, it just makes it easier to file taxes and keep track of everything in terms of accounting. You'll also want to get a company credit card so you can keep those expenses separate from your personal accounts and build your company credit history. Just remember, credit cards are the same as taking out loans. So pay it off quickly and consistently.
Accounting
All businesses have expenses, revenue, cash flow, assets, and liabilities (to just name a few). You need to know how to track all these items if you want to know how your company is doing financially. Plus, if you're a public company or plan to go public, all of this information needs to be available to stakeholders.
There are plenty of accounting softwares you can use as well as certified public accountants that you can consult with.
Register for State Taxes
Any company that wants to sell a physical product in Virginia needs to register for a seller's permit. This permit allows you to collect tax on your sold merchandise on behalf of the state and local governments. The amount of tax will change based on where the sale actually occurs.
Acquire Additional Licenses and Permits
Companies must abide by federal, state, and local regulations. A pain, I know.
Each entity enforces different regulations, so, unfortunately, if you don't hire someone to figure it all out, you're going to be doing a lot of research.
Insurance
Like cars, houses, life, and health, your business needs insurance as well. There are various types of business insurance, but the three most common are general liability, professional liability, and worker's compensation.
Hiring
Growing your company is always exciting. But before you go out and hire all your best friends, you need to make sure that you abide by all laws each time. This includes each employee being approved to work in the U.S., new hires being reported to the state, employees getting insurance, and then even withholding their taxes.
Why does so much revolve around taxes...
Maintaining the LLC
Annual Registration Fees
VA requires an LLC to pay a $50 fee each year to the State Corporate Commission. This fee is due the first day of the second-month preceding when the company was formed and is subject to late fees. Your LLC could even be automatically dissolved if you don't pay within three months of the deadline.
Income Reporting
And here we are at taxes again. Just like your normal job, you are required to report all your earnings to the IRS. If you're a single member LLC, you'll be submitting a 1040 Schedule C. If you're a multi-member LLC, you'll be submitting a 1065 Partnership Return.
Avoiding Dissolution
Like mentioned earlier, failure to pay your annual registration fee could result in the dissolution of your LLC. This can be the case for any of the state filings that your LLC is bound to follow, so make sure you stay up-to-date on all deadlines or use a registered agent to keep track for you.
Additional Information
Certificate of Good Standing
Now that you're LLC is legally formed and well maintained, you can apply for a Certificate of Good Standing. This certificate can help you secure additional funding, expand your LLC into other states, and apply for or renew other licenses and permits.
Let's say you need to finally dissolve your LLC after many years of operation. While this is a sad moment to come to, you need to do it properly so you can avoid various penalties and liabilities.
In short, you'll need to close all your business tax accounts and then file the articles of dissolution.
Expanding your LLC
On the flip side, let's say your LLC is thriving and needs to expand into other states. To do so, you'll need to register as a Foreign LLC. Simply mail a completed LLC-1052 to the State Corporation Commission and wait for approval.
Since reading about how to start a business barely only scratches the surface, the next best thing (besides going out and doing it), is to learn from those who have already done it.
Hopefully, I can learn from their mistakes and never make them in the first place.
Operation vs Passion
Let’s say you started your dog jewelry business because you love dogs and want to make them look beautiful. And maybe even start your own dog fashion show one day. The reality of all this is even though you're a skilled jeweler and love dogs, most of your time will be involved in doing other things. Think, marketing, accounting, sales, client meetings, and general administration.
Just because you started the business to make diamond rings for chihuahuas doesn't mean you'll be able to do that every day. There's a lot to do just to keep the business running.
Are you helping people or just taking their money?
Why did you start your business in the first place, and why do you keep working with the clients you have? Is it because you saw a need and wanted to address it, or is it because you saw a chance to make some good money?
If it's the latter, you're in for a rough ride.
Yes, businesses do need to make money so they can keep existing, but if you just do what you do for the money, your end product or service will never succeed. People are the clients, and if their issues aren't being addressed, resolved, and constantly inquired about, they'll never be loyal customers.
So in the end, helping people is what generates higher quality cash flow.
Managing that cash flow
Assets, liabilities, and shareholder equity. The three basic building blocks of your balance sheet. If you don't know what a balance sheet is, then you should probably go take an accounting class as this is extremely important for your business.
The balance sheet is broad view of how your business is doing financially. By carefully tracking how much money is flowing in and out of the business, you can know whether you need to cut back on spending or are able to hire another employee.
The easiest way to manage all this is to make a budget and stick with it. Then, justify every expense so that you know that your money is being put to good use.
Plan for failure, but don't embrace it
Starting a business is difficult. Keeping it running is even more so.
When you constantly hear about the various percentages of businesses that fail within their first few years, you might be a little discouraged (and as you do it, you might see why). But how can you plan for this rough road before you even head down it?
Well, for starters, do as much research and planning as possible while you still have a normal job. Of course, this is assuming you already have one. Staying at your current job gives you peace of mind financially, and can allow you to work on your business as a side hustle until it's ready to take off. Make sure to save up some financial cushion, which is always good to have, and see if people are even interested in your idea.
But then, even if you decide to go full-time with your own business and it does fail, you just gained a shit ton of experience and knowledge that you can use next time.
You're either go lone wolf or need to join a wolf pack
Even if you worked for a small company, say 10 people, you probably experienced some sort of community and shared work.
But as a entrepreneur, you don't get that just yet. When you start your own business, it is very likely that you're doing it alone. Be ready to feel isolated. And when that crushing isolation hits and you regret ever doing this, make sure you have a strong safety net of support setup to catch you. Whether that be family, friends, mentors, or other business owners.
What is growth?
Are you happy that you just doubled your office space, added 4 new employees, and are now offering dental? Well, you should be. But is that really growth?
When it comes to your business growing, you should measure it based on how pleased customers are with your product and how many new customers you are generating. It's as simple as that.
Sure, since you are growing, you're now able to add more employees and get a bigger office, but that's only because you are adding more customers and giving them a good product that they want.
The gig economy
While working another job might seem self-destructive when launching your business, it's actually more helpful than you might think. Similar to planning your business while still working at your usual job, working in the gig economy while still launching your business is a great way to bring peace of mind financially.
Sure, this could just be some freelance work here and there, but it's at least a way to stay afloat until the real money comes in.
Work smarter…
Powerful software and outsourcing. Two of your best friends when it comes to launching and maintaining your business.
Yeah, I know, it's easy to think that when you give work to other people that they'll probably do it wrong and that you're the only one who knows what to do. But, your time is precious, and spending hours learning about graphic design to make your logo could easily be outsourced to an actual graphic designer. Leaving you with more time to do what is within your skill set.
Or, if you need to be pumping out content every week, you can make use of freelance writers. They do the research, writing, and proofing, and you get the credit. Good ol' ghostwriting.
Engagement
Customers, and even potential customers, wanted to be noticed and feel valuable. Their voices want to be heard, and their issues resolved. The best way to do that is by speaking with them directly.
The best brands today know the importance of engaging with their audience. They acknowledge their complaints and work for a quick and efficient resolution. People love that, and because of that, they become brand evangelists.
As cliche as it sounds, your company should be customer-obsessed (note, this does not mean obsessed over getting new customers).
Engaging with your customers not only makes them feel heard and valued, it also gives you a better idea of what they want and what they don't. Which then helps you build an even better product.
Rejuvenate
Running a business is hard, I don’t know if you’ve picked up on that yet or not. It's even harder when you don't take time to recharge and step away from it all. When you're constantly on the go and never take a break, you end up hurting yourself (looking at you Elon).
Take a Friday off, go for a hike or to the beach, and disconnect. Life outside of work helps you recenter yourself and give you a fresh look at everything you've accomplished and what still needs to be done.
To be honest, people need to learn how to take a vacation. It's a skill that we all need, and something we need to value too. If you go to the Bahamas but are still stressing about what needs to be done at the office, we have a problem on our hands.
Too Long; Didn't Read
When it comes to starting your business, you have two sides of a coin: the beginning legal work, and the drive to keep moving forward (and later succeed).
While there are plenty of professional platforms that can help you establish your business legally, like Northwest or LegalZoom, a lot of the work you can do yourself pretty easily (and for free too). For example, getting an EIN can be done pretty quickly through the IRS website and lots of the licenses and permits can be figured out simply by talking with the local government.
After your a legally established business though, the hard part kicks in. Not only will dealing with immense loneliness, stress, and not knowing if you'll be able to pay the bills, you also won't be doing the thing that you originally started the business for.
So even though you started a cat sweater knitting company, most of your time will probably revolve around day-to-day operations, and not actually knitting those sick-ass sweaters. But that's what the gig economy is for - hiring people to do things they are good at (and you aren't), at a reasonable price. Whether that be website development, logo design, or just managing your finances. There are plenty of ways to automate and outsource these tasks so you can focus on what you're passionate about.
And make sure to take some time for yourself and learn how to take a vacation. As someone who runs the business, you need to make sure you’re at peak performance. Please realize that this doesn’t look like working 80 hour work weeks.