Today we are going to talk about a very specific subject:
Starting a small business with a partner or partners.
The generally understood definition by the United States
government for a small business is a business that employs less than 500
people. There are financial considerations that also go along with that, but I
am not going to attempt to touch on those here.
With this in mind, the concept of the US economy being
powered by small business makes a lot more sense. A large majority of
businesses are small businesses.
I would venture to say that there is a sizable portion of
the population that if not already running a business, want to start one. Based
on that, I am going to provide some tips to get started and hopefully avoid
pitfalls that I have run across in my business dealings.
Partners
Select your partners well. This seems obvious, but you need
to ensure that goals are aligned, that you want the same things for the
business. Make sure that you can work with your partners. Make sure that your personalities
do not clash. Make sure that all partners are able to understand viewpoints that
are different from their own ideas and give them thoughtful consideration. Put
a plan together for how you will proceed and have everyone sign off on it.
Avoid partnerships where one or more partners are self-serving and attempt to
obstruct ideas that do not favor them.
Duties
Define the duties of each partner for the business before
investing any money, time, or effort. Agree on who does what and how it will be
done. Have each partner provide a plan for how they will accomplish their
duties. This seems a bit like overkill, but the effort put into this exercise
will pay dividends in the form of getting each partner to think about what they
will be doing and how they will be doing it. That alone is worth the exercise.
LLC or C-Corp
There are other types of legal entities, but this seems to
be the most common structure used for small businesses. Depending on the type of
business, you may be forced into using a C-Corp entity structure, such as a
manufacturing business with inventory. While I am not an attorney and I do not
play one on the internet, I am of the opinion that most small businesses are
best served by an LLC structure.
In an LLC structure, the entity is considered a pass-through
entity, so the profits of the company are passed through to the partners based
on shares of equity in the company, to be reported on their personal income
taxes.
With a C-Corp, the company is taxed, then dividends passed
on to the shareholders (partners) is taxed again.
Operating Agreement
This is also a big one. The operating agreement can be based
on the details pulled together in the Duties step. It just formalizes how the
company will operate and documents the what & how for each partner. It also
should contain exit strategies for each partner and for the company as a whole.
This is probably more geared towards an LLC entity, but also has relevance to
shareholders in a small private C-Corp.
Entity Name
If you already have a good idea for an entity name, then
obviously, use it. But if you don’t, there is no need to stress out over it.
Pick a name and as long as it is not already in use or trademarked, it will be
good. If you later want have specific company branding/marketing, you can
create a “Doing Business As” or DBA name. In most cases, all you have to do is
file a form with the state for it to be recognized.
Employer Identification Number (EIN)
The Internal Revenue Service (IRS) uses the employer
identification number or Tax ID as an identifier for businesses so they can track
income and revenue. It costs nothing and can easily be applied for online.
Business License
Depending on the nature of your business, you may need to
get a parish, county, or city business license. They are usually just a nominal
fee, but not a whole lot. (Caveat: larger cities may have more exorbitant fees).
Business Bank Account
Always use a business bank account for your business
finances. Keep your personal finances separate from your business finances. This
will help to keep track of how well your business is doing.
Accounting
For accounting purposes, you can start out tracking
everything in a spreadsheet. Document revenue, document expenses. Depending on
the nature of the business, you may need to do a little more than that and use
an accounting software program or service. Once you reach a level where revenue
and cash flow allow it, accounting tasks can be delegated to a book keeper.
I would also like to recommend using a CPA for filing your
taxes. Having a good CPA on board will keep you out of trouble. Especially if a
partner decides it is someone else’s job to get all documentation to said CPA
at tax time. The CPA will file an extension on your behalf to keep you out of
trouble.
And, as always, let me know what you think in the comments.
Ask questions, tell your story.
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