Business Startup Basics Starting a business can seem overwhelming, but don't let the details the best of you. From choosing the right form of business to avoiding tax tangles, here's everything you need to know to get started.
By Rieva Lesonsky •
Opinions expressed by Entrepreneur contributors are their own.
As you get ready to launch your new business on eBay, your headis spinning with dozens of details to take care of, and questionsabout things you need to do. Should you incorporate? Will you needa lawyer? And just what should you call your company anyway?
Slow down, take a deep breath, and relax. Then read on. Ourstartup overview covers all the major factors you need to considerbefore you open for business.
Naming Your Business
While many of you are running businesses on eBay, at some pointyou may need to name an eBay Store. You don't need professionalhelp to come up with a name. With a little creativity, anyone canuse the same basic steps professional namers use.
Your company name should reinforce the key elements of yourbusiness, so start by defining the qualities you want your businessto be identified with. Will customers seek you out for bargains orfor one-of-a-kind art objects? If you're targeting young,single men, you'll emphasize different qualities than if yourcustomers are middle-aged moms.
Begin brainstorming by looking in dictionaries, books andmagazines to generate ideas. Get friends and relatives to help.Your name should be easy to pronounce (if people can'tpronounce it, they'll avoid saying it). If you target globalconsumers, make sure your name has no negative connotations inother languages. Come up with five to 10 names you feel goodabout.
Before making your decision, do a trademark search. Enlisting atrademark attorney or trademark-search firm early on saves time,money and hassles down the road by ensuring that competitors cannotinfringe on your business name. If it seems every existing wordthat could describe your business has already been trademarked,consider new spellings.
Another factor many businesses on eBay have to consider is adomain name. If you've decided to have a Web site, your firstto-do item is to make a list of possible Web site names. Then go toyour favorite search engine and type in "domainregistration." You'll find a list of companies, such aswww.namesecure.com, www.networksolutions.com, www.nomonthly.com,www.register.com and www.siteleader.com, all of which will guide youthrough domain registration. For a modest fee ($15 to $70), you canregister a domain name for two years. Register.com is particularlyhelpful, because it not only tells you if the name you'vechosen is taken, but it also goes a step further by offering a listof alternative names that are still available.
Once you've chosen a name, prompts on the domainregistration site guide you through a simple registrationprocedure. You'll generally be offered one-, two- or three-yearregistration packages; choose based on whether you are completelyhappy with the name or think you'll want to switch in a year orso.
If you have an eBay Store, you can also register a personaldomain name directly from the "Manage Your Store" page.Sellers can use their domain names to direct shoppers to their eBayStores and to sign up for e-mail plans. For example, if Joe sellsantiques from his eBay Store, he can register www.joesantiques.com,forward the domain to his eBay Store, and use joe@joesantiques.comas his e-mail address.
Choosing a Business Structure
The legal structure of your company is a key decision. Here arethe most common options.
Sole Proprietorship:This is the simplest structure, and usually involves just oneindividual who owns and operates the enterprise. Tax-wise, thisstructure is appealing because business expenses and income areincluded on your personal income tax return, and business lossesyou suffer may offset other income.
Disadvantages: You're personally responsible for yourcompany's liabilities, so your assets could be seized tosatisfy a business debt or legal claim. Banks and other financingsources may be reluctant to make business loans to soleproprietorships.
Partnership: In ageneral partnership, the partners manage the company and areresponsible for its debts. A limited partnership has both generaland limited partners. The general partners own and operate thebusiness and assume liability. The limited partners serve asinvestors only; they have no control over the company andaren't subject to the same liabilities as general partners.This is usually not the best choice for a new business.
A partnership does not pay tax on its income but "passesthrough" profits or losses to the individual partners.
Disadvantages: General partners are personally liable forthe partnership's obligations and debt. Each general partnercan act on behalf of the partnership, making decisions that arebinding on all the partners (if the partnership agreement permits).Partnerships also cost more to set up than soleproprietorships.
Corporation:Incorporation protects your personal assets from liability andmakes it easier to raise money.
Disadvantages: Because a corporation follows more complexrules and regulations than a partnership or a sole proprietorship,it requires more accounting, tax and legal services. Owners of thecorporation also pay a double tax: Corporations are subject tocorporate income tax at both federal and state levels, and earningsdistributed to shareholders as dividends are taxed at individualtax rates on their personal tax returns. (To soften the blow, paythe money out as salary instead of dividends.)
To incorporate, contact the secretary of state or the stateoffice responsible for registering corporations in your state.Using a lawyer costs from $500 to $1,000, or you can file forincorporation on your own using books and software.
S Corporation: The Scorporation has the liability protection of a regular (or C)corporation. Income and losses are passed through to shareholdersand included on their individual tax returns, so there's justone level of federal tax.
Disadvantages: S corporations are subject to many of thesame requirements as corporations, meaning greater legal and taxcosts. Restrictions on S corporation stock can hinder efforts toraise capital.
Limited Liability Company(LLC): LLCs provide the liability protection ofcorporations, without the double taxation-earnings and losses passthrough to the owners and are included on their personal taxreturns. Unlike an S corporation, the LLC has no limitation on thenumber of shareholders. Any member of the LLC can have a fullparticipatory role in the business's operation. To set up anLLC, file articles of organization with the secretary of state inthe state where you intend to do business.
Buying Business Insurance
Failing to buy insurance for your startup can be a costlymistake. Most property and casualty companies offer specialsmall-business insurance policies. A standard package combinesliability; fire, wind and vehicle damage; burglary, and othercommon coverages. Typical qualifiers are that your business occupyless than 15,000 square feet, and the combined value of yourbuilding, operation and inventory be less than $3 million.
Basic package policies usually cover buildings, machinery,equipment and furnishings. That protects your company'scomputers, phones, desks, inventory and the like against loss dueto robbery and employee theft, in addition to risks such as fire. Agood policy pays full replacement costs. A package policy alsoincludes business interruption coverage, which can provide enoughto meet your overhead and other expenses if a disaster puts yourbusiness out of commission. Many policies also cover personalliability.
If you have employees, you'll also need workers'compensation insurance. Because insurance agents aren't alwaysup-to-date on workers' comp laws, check with your state'sdepartment of insurance or insurance commissioner's office tosee what you need.
Look for an insurance agent familiar with small business; askyour peers for recommendations. Some trade associations providereferrals and may even offer group coverage with attractive rates.Make sure the company your agent selects or represents is highlyrated. Worldwide insurance-rating and information agency A.M. Best providesratings of the financial strength of insurance companies.
- Fictitious Name (dba): If you have a sole proprietorshipor partnership and want to operate under a name other than your own(for instance, Carol Axelrod doing business as "Carol'sCollectibles"), you can choose a fictitious business name ordba ("doing business as"). The county, city or state mayrequire you to register your fictitious name. Procedures vary;contact your county clerk's office for information.
- Business License: Contact your city's businesslicense department to find out about getting a business license,which grants you the right to operate in that city.
- Health Department Permit: If you plan to sell food, youwill need a county health department permit.
- Fire Department Permit: If your business uses flammablematerials or will be open to the public, you may need a firedepartment permit.
- Air and Water Pollution Control Permit: Check with yourstate environmental protection agency to see if any state or cityregulations apply to your business.
- County Permits: County governments often require thesame types of permits and licenses as cities. If your business isoutside of any city or town's jurisdiction, these permits applyto you.
Bookkeeping Basics
Successful entrepreneurs are proficient in all aspects of theirventures, including the numbers. There are many easy-to-usebookkeeping packages on the market. Some of the most popularinclude Accpac's Simply Accounting, Intuit's QuickBooks Proand Peachtree's Complete Accounting. When choosing software,consider the track record of the manufacturer and the system, thetechnical assistance the manufacturer provides, the system'scompatibility with your other software, and, of course,compatibility with PayPal, the eBay service that allows you toaccept online payments from credit cards or bank accounts. (PayPalAccount activity can be downloaded to Quicken and many spreadsheetprograms.)
Most software programs include tutorials and help screens thatwalk you through the programs and give you a handle on thecomponents of an accounting system. These typically include thechart of accounts, general ledger, accounts receivable, inventory,fixed-asset accounting, accounts payable and payroll (ifapplicable).
As a business with inventory, you will need to use the accrualbasis method of accounting (not the cash method). This means incomeand expenses are recorded as they occur, regardless of whether cashactually changes hands. A sale is entered into the books when theinvoice is generated, not when the cash is collected. An expenseoccurs when materials are ordered.
Most community colleges offer basic accounting and financecourses, as well as training in specific software programs, such asMicrosoft Office. Signing up for a course is well worth thecost.
Understanding Taxes
eBay does not track or report taxes for its sellers, so it'syour responsibility to make sure you're complying with federaland state tax laws, and tax planning with your accountant to reduceyour business's tax burden.
Tax Compliance: In most cases, your taxpayeridentification number is your Social Security number. But if youhave employees, a corporation or partnership, or a Keogh plan, youneed a nine-digit Employer Identification Number. Visit theIRS Web site, formore information.
If you hire employees, work with your accountant to be sure youhandle payroll taxes properly. Many entrepreneurs use independentcontractors, rather than hire full-time employees. But if theperson you consider an independent contractor is determined by theIRS to be an employee, you could owe substantial penalties and backtaxes. Visit www.irs.gov for information on making thisdetermination.
Your federal tax-filing obligations and due dates generally arebased on your business's legal structure. In addition to yourannual tax return, many self-employed individuals make quarterlyestimated tax payments. For specifics, consult with your taxprofessional or visit www.irs.gov.
Sales taxes can be a sticky area for online sellers. Many largeretailers now collect sales tax on Internet sales. Whether you needto collect state and local sales tax depends on several factors,including your products, your location and your customers'locations. Talk to your accountant or contact your state'srevenue service to be sure you understand your state's rules.If you do charge sales tax, you need a sales tax ID number (alsocalled a reseller's permit). Contact your state'sdepartment of revenue for more information.
Tax Planning: Periodically review your tax situation withyour accountant and look for deductions that can offset income.Just beware, many deductions have restrictions, so consult your taxprofessional before claiming one. Some possible deductions:
- Equipment Purchases: check with your tax professionalfor the amount you can deduct
- Business Expenses: advertising expenses, employeebenefit programs, insurance, legal and professional services,telephone and utilities, rent, office supplies, employee wages,membership dues to professional associations, business publicationsubscriptions
- Auto Expenses: use of your car for businesspurposes
- Meal and Entertainment Expenses: fifty percent of thecost of qualifying meals and entertainment
- Travel Expenses: "ordinary and necessary"expenses incurred while traveling on business
- Home Office: possible deduction if you use a portion ofyour home exclusively and regularly for business purposes
- Startup Costs: startup advertising expenses; market orproduct research can be amortized over 60 months or more and usedas deductions
The IRS' Small Business Tax Education Program provides taxeducation to small-business owners; call (800) 829-1040, and askfor the Taxpayer Education Coordinator. The IRS also offers dozensof free downloadable publications at www.irs.gov. While you'rethere, visit the Small Business and Self-Employed One-StopResource for a variety of tax resources, including their"Online Classroom" page, which offers a series ofself-directed workshops.
For more detailed information on these and other aspects ofstarting a business, visit Entrepreneur.com's "How to Start Your Own Business"guide.
To find a lawyer or an accountant, get recommendations frombusiness owners in your industry or from professionals such asbankers. You can also contact your local Bar Association forreferrals to attorneys, and your state's Society of CertifiedPublic Accountants for referrals to accountants. (The CPA title isawarded only to people who pass a rigorous two-day, standardizedtest.)
Narrow your list to the top five most promising attorneys andaccountants, and interview each. Be ready to describe your businessand its legal or accounting needs. Look for someone experienced insmall business (and your industry in particular). Make sure thefirm offers the services you need, and that the accountant orattorney you meet is the one who will handle your business. Ask forreferences, and call them.
The best way to cut costs is to understand how your lawyer oraccountant bills, so ask about fees upfront. But don't choosebased on hourly fees alone, because an inexperienced professionalmay take twice as long to complete a project as an experiencedone.
Adapted from Start Your Own Business: The Only Start-Up BookYou'll Ever Need, Third Editionby Rieva Lesonsky andthe editors of Entrepreneur magazine
