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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.
October 1, 2004
URL: http://www.entrepreneur.com/article/72808

As you get ready to launch your new business on eBay, your head is spinning with dozens of details to take care of, and questions about things you need to do. Should you incorporate? Will you need a lawyer? And just what should you call your company anyway?

Slow down, take a deep breath, and relax. Then read on. Our startup overview covers all the major factors you need to consider before you open for business.

Naming Your Business

While many of you are running businesses on eBay, at some point you may need to name an eBay Store. You don't need professional help to come up with a name. With a little creativity, anyone can use the same basic steps professional namers use.

Your company name should reinforce the key elements of your business, so start by defining the qualities you want your business to be identified with. Will customers seek you out for bargains or for one-of-a-kind art objects? If you're targeting young, single men, you'll emphasize different qualities than if your customers are middle-aged moms.

Begin brainstorming by looking in dictionaries, books and magazines to generate ideas. Get friends and relatives to help. Your name should be easy to pronounce (if people can't pronounce it, they'll avoid saying it). If you target global consumers, make sure your name has no negative connotations in other languages. Come up with five to 10 names you feel good about.

Before making your decision, do a trademark search. Enlisting a trademark attorney or trademark-search firm early on saves time, money and hassles down the road by ensuring that competitors cannot infringe on your business name. If it seems every existing word that could describe your business has already been trademarked, consider new spellings.

Another factor many businesses on eBay have to consider is a domain name. If you've decided to have a Web site, your first to-do item is to make a list of possible Web site names. Then go to your favorite search engine and type in "domain registration." You'll find a list of companies, such as www.namesecure.com, www.networksolutions.com, www.nomonthly.com, www.register.com and www.siteleader.com, all of which will guide you through domain registration. For a modest fee ($15 to $70), you can register a domain name for two years. Register.com is particularly helpful, because it not only tells you if the name you've chosen is taken, but it also goes a step further by offering a list of alternative names that are still available.

Once you've chosen a name, prompts on the domain registration site guide you through a simple registration procedure. You'll generally be offered one-, two- or three-year registration packages; choose based on whether you are completely happy with the name or think you'll want to switch in a year or so.

If you have an eBay Store, you can also register a personal domain name directly from the "Manage Your Store" page. Sellers can use their domain names to direct shoppers to their eBay Stores and to sign up for e-mail plans. For example, if Joe sells antiques from his eBay Store, he can register www.joesantiques.com, forward the domain to his eBay Store, and use joe@joesantiques.com as his e-mail address.

Choosing a Business Structure

The legal structure of your company is a key decision. Here are the most common options.

Sole Proprietorship: This is the simplest structure, and usually involves just one individual who owns and operates the enterprise. Tax-wise, this structure is appealing because business expenses and income are included on your personal income tax return, and business losses you suffer may offset other income.

Disadvantages: You're personally responsible for your company's liabilities, so your assets could be seized to satisfy a business debt or legal claim. Banks and other financing sources may be reluctant to make business loans to sole proprietorships.

Partnership: In a general partnership, the partners manage the company and are responsible for its debts. A limited partnership has both general and limited partners. The general partners own and operate the business and assume liability. The limited partners serve as investors only; they have no control over the company and aren'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 "passes through" profits or losses to the individual partners.

Disadvantages: General partners are personally liable for the partnership's obligations and debt. Each general partner can act on behalf of the partnership, making decisions that are binding on all the partners (if the partnership agreement permits). Partnerships also cost more to set up than sole proprietorships.

Corporation: Incorporation protects your personal assets from liability and makes it easier to raise money.

Disadvantages: Because a corporation follows more complex rules and regulations than a partnership or a sole proprietorship, it requires more accounting, tax and legal services. Owners of the corporation also pay a double tax: Corporations are subject to corporate income tax at both federal and state levels, and earnings distributed to shareholders as dividends are taxed at individual tax rates on their personal tax returns. (To soften the blow, pay the money out as salary instead of dividends.)

To incorporate, contact the secretary of state or the state office responsible for registering corporations in your state. Using a lawyer costs from $500 to $1,000, or you can file for incorporation on your own using books and software.

S Corporation: The S corporation has the liability protection of a regular (or C) corporation. Income and losses are passed through to shareholders and included on their individual tax returns, so there's just one level of federal tax.

Disadvantages: S corporations are subject to many of the same requirements as corporations, meaning greater legal and tax costs. Restrictions on S corporation stock can hinder efforts to raise capital.

Limited Liability Company (LLC): LLCs provide the liability protection of corporations, without the double taxation-earnings and losses pass through to the owners and are included on their personal tax returns. Unlike an S corporation, the LLC has no limitation on the number of shareholders. Any member of the LLC can have a full participatory role in the business's operation. To set up an LLC, file articles of organization with the secretary of state in the state where you intend to do business.

Buying Business Insurance

Failing to buy insurance for your startup can be a costly mistake. Most property and casualty companies offer special small-business insurance policies. A standard package combines liability; fire, wind and vehicle damage; burglary, and other common coverages. Typical qualifiers are that your business occupy less than 15,000 square feet, and the combined value of your building, operation and inventory be less than $3 million.

Basic package policies usually cover buildings, machinery, equipment and furnishings. That protects your company's computers, phones, desks, inventory and the like against loss due to robbery and employee theft, in addition to risks such as fire. A good policy pays full replacement costs. A package policy also includes business interruption coverage, which can provide enough to meet your overhead and other expenses if a disaster puts your business out of commission. Many policies also cover personal liability.

If you have employees, you'll also need workers' compensation insurance. Because insurance agents aren't always up-to-date on workers' comp laws, check with your state's department of insurance or insurance commissioner's office to see what you need.

Look for an insurance agent familiar with small business; ask your peers for recommendations. Some trade associations provide referrals and may even offer group coverage with attractive rates. Make sure the company your agent selects or represents is highly rated. Worldwide insurance-rating and information agency A.M. Best provides ratings of the financial strength of insurance companies.

Mother, May I?
Forgetting to obtain licenses and permits could come back to haunt you. Here's what you may need:
  • Fictitious Name (dba): If you have a sole proprietorship or partnership and want to operate under a name other than your own (for instance, Carol Axelrod doing business as "Carol's Collectibles"), you can choose a fictitious business name or dba ("doing business as"). The county, city or state may require you to register your fictitious name. Procedures vary; contact your county clerk's office for information.
  • Business License: Contact your city's business license 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, you will need a county health department permit.
  • Fire Department Permit: If your business uses flammable materials or will be open to the public, you may need a fire department permit.
  • Air and Water Pollution Control Permit: Check with your state environmental protection agency to see if any state or city regulations apply to your business.
  • County Permits: County governments often require the same types of permits and licenses as cities. If your business is outside of any city or town's jurisdiction, these permits apply to you.

Bookkeeping Basics

Successful entrepreneurs are proficient in all aspects of their ventures, including the numbers. There are many easy-to-use bookkeeping packages on the market. Some of the most popular include Accpac's Simply Accounting, Intuit's QuickBooks Pro and Peachtree's Complete Accounting. When choosing software, consider the track record of the manufacturer and the system, the technical assistance the manufacturer provides, the system's compatibility with your other software, and, of course, compatibility with PayPal, the eBay service that allows you to accept online payments from credit cards or bank accounts. (PayPal Account activity can be downloaded to Quicken and many spreadsheet programs.)

Most software programs include tutorials and help screens that walk you through the programs and give you a handle on the components of an accounting system. These typically include the chart of accounts, general ledger, accounts receivable, inventory, fixed-asset accounting, accounts payable and payroll (if applicable).

As a business with inventory, you will need to use the accrual basis method of accounting (not the cash method). This means income and expenses are recorded as they occur, regardless of whether cash actually changes hands. A sale is entered into the books when the invoice is generated, not when the cash is collected. An expense occurs when materials are ordered.

Most community colleges offer basic accounting and finance courses, as well as training in specific software programs, such as Microsoft Office. Signing up for a course is well worth the cost.

Understanding Taxes

eBay does not track or report taxes for its sellers, so it's your responsibility to make sure you're complying with federal and state tax laws, and tax planning with your accountant to reduce your business's tax burden.

Tax Compliance: In most cases, your taxpayer identification number is your Social Security number. But if you have employees, a corporation or partnership, or a Keogh plan, you need a nine-digit Employer Identification Number. Visit the IRS Web site, for more information.

If you hire employees, work with your accountant to be sure you handle payroll taxes properly. Many entrepreneurs use independent contractors, rather than hire full-time employees. But if the person you consider an independent contractor is determined by the IRS to be an employee, you could owe substantial penalties and back taxes. Visit www.irs.gov for information on making this determination.

Your federal tax-filing obligations and due dates generally are based on your business's legal structure. In addition to your annual tax return, many self-employed individuals make quarterly estimated tax payments. For specifics, consult with your tax professional or visit www.irs.gov.

Sales taxes can be a sticky area for online sellers. Many large retailers now collect sales tax on Internet sales. Whether you need to 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's revenue service to be sure you understand your state's rules. If you do charge sales tax, you need a sales tax ID number (also called a reseller's permit). Contact your state's department of revenue for more information.

Tax Planning: Periodically review your tax situation with your accountant and look for deductions that can offset income. Just beware, many deductions have restrictions, so consult your tax professional before claiming one. Some possible deductions:

The IRS' Small Business Tax Education Program provides tax education to small-business owners; call (800) 829-1040, and ask for the Taxpayer Education Coordinator. The IRS also offers dozens of free downloadable publications at www.irs.gov. While you're there, visit the Small Business and Self-Employed One-Stop Resource for a variety of tax resources, including their "Online Classroom" page, which offers a series of self-directed workshops.

For more detailed information on these and other aspects of starting a business, visit Entrepreneur.com's "How to Start Your Own Business" guide.

Expert Advice
A lawyer and an accountant can get your startup off on the right foot. Consult a lawyer about any decision with legal ramifications-including setting up a partnership or corporation, checking for compliance with regulations, exporting or selling products in other states, and collecting bad debts. Accountants can work with you to create a financial plan, set up accounting systems, and provide tax planning advice and auditing services.

To find a lawyer or an accountant, get recommendations from business owners in your industry or from professionals such as bankers. You can also contact your local Bar Association for referrals to attorneys, and your state's Society of Certified Public Accountants for referrals to accountants. (The CPA title is awarded only to people who pass a rigorous two-day, standardized test.)

Narrow your list to the top five most promising attorneys and accountants, and interview each. Be ready to describe your business and its legal or accounting needs. Look for someone experienced in small business (and your industry in particular). Make sure the firm offers the services you need, and that the accountant or attorney you meet is the one who will handle your business. Ask for references, and call them.

The best way to cut costs is to understand how your lawyer or accountant bills, so ask about fees upfront. But don't choose based on hourly fees alone, because an inexperienced professional may take twice as long to complete a project as an experienced one.


Adapted from Start Your Own Business: The Only Start-Up Book You'll Ever Need, Third Editionby Rieva Lesonsky and the editors of Entrepreneur magazine