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Don't Start a Business Until You Consider These 5 Things Thinking about starting a business? Here's what you need to know before you get registered, invest in your startup costs or make your first sale.

By Ginny Silver Edited by Micah Zimmerman

Key Takeaways

  • Consider creating a formal business plan to provide structure, organize your goals, and start planning the logistics for starting your business.
  • Starting and growing a business is an incredible journey, and with proper planning, consistency, time and dedication, you are well on your way to building the business of your dreams.

Opinions expressed by Entrepreneur contributors are their own.

If you are considering starting a business, don't take the big leap from dreamer to entrepreneur. One common mistake new business owners make is not understanding the five critical essentials before they dive into the world of starting a business. Knowing these critical pieces of information can mean the difference between starting a thriving, successful business or crashing and burning out before your entrepreneurial plane can even get off the runway.

Read these five essentials carefully to understand how to prepare yourself and pave the way for building a successful business.

1. Determine the difference between a hobby and a business

Many believe that if you are making minimal sales or not selling full-time, you do not have a business and instead have a hobby. It's important to understand both the national and local rules regarding your sales to make sure you are compliant and avoid unexpected penalties and fees.

The IRS states that if you earn $400 or more after your expenses are taken out (known as your net income), then your income is NOT considered a hobby, and all of your self-employed income must be claimed on your tax return.

Additionally, most cities and counties state in their information for new businesses that you must register your business before starting any business operations. This means that if you intend to make sales to customers, in most cases, you do not have a hobby; you do, in fact, have a business, and this will require several steps to be completed before you can make any sales.

Related: Shows All Entrepreneurs Should Be Watching

2. Understand your legal obligations

To determine what you are legally obligated to do to register your business and stay compliant, you must first decide what type of business structure you will have. A business structure defines how a business is registered and operates and what type of taxation options it may have.

The most common form of new business is either a sole proprietorship or an LLC. Deciding which type of business you will operate is important because each type has different registrations and tax implications.

Once you have determined the type of business structure you would like to start, you will need to register your business. The types of registrations and permits required differ depending on whether you are starting a sole proprietorship or an LLC, the type of business you will be starting, and where you are located. Research your county's information on starting a business. Often, counties have a particular resource area on their website that will outline your obligations and where to obtain required permits.

Related: 5 Common Legal Mistakes Start-Ups Make When Launching Their Business - And How To Avoid Them

3. Understand your finances

Registering your business will require various fees to ensure that your business operates legally according to city, county and state requirements. These fees vary depending on your location. Additionally, some industries require specific licenses and registrations that must be renewed regularly.

4. Understand taxes

Businesses are obligated to file and pay three different types of income taxes: self-employment tax, federal income tax and state income tax. An LLC is also required to pay an annual LLC tax. These taxes are calculated and paid when you file your end-of-year tax return. If you expect to owe $1000 or more in self-employed taxes, you are also required to pay estimated quarterly taxes – which is a prepaid estimated amount of what you think you will owe at tax time, spaced out into four equal payments throughout the year.

If you sell tangible goods, you are obligated to collect and remit sales tax on those goods. This will mean applying for a seller's permit, collecting sales tax from your customers and filing/paying sales and use tax returns.

Next, plan a method for keeping business financial records. You are obligated to keep business financial records — this means tracking your sales and expenses and the cash flow in and out of your business. This can be done through using a software such as quickbooks or xero, hiring a professional CPA or bookkeeper or keeping a simple spreadsheet to track your cash flow.

LLCs will also be required to have business bank accounts — no personal transactions can be conducted using your business bank accounts. It's important to track all business expenses so that you can enter them into your tax return — this will lower your taxable income.

Related: Five Tips for Small Business Owners this Tax Season

5. Operational obligations

Creating your products, conducting services and making sales are important parts of your business; however, operating a business on a day-to-day basis has many other elements required in order to keep your business up, running and growing. Think through and make a plan for how you will handle important things such as:

  • marketing
  • bookkeeping
  • inventory
  • shipping
  • customer service
  • scheduling
  • operational software
  • booking, scheduling and contracts
  • invoicing and payments

Ready to start a business?

Congratulations if you have carefully considered these important factors and are ready to start! The decision to start a business and the planning involved deserve to be celebrated. Consider creating a formal business plan to provide structure, organize your goals and start planning the logistics of starting your business. Starting and growing a business is an incredible journey, and with proper planning, consistency, time and dedication, you are well on your way to building the business of your dreams.

Ginny Silver

Founder, California Entrepreneur Collective

Ginny Silver is the Founder of the California Entrepreneur Collective and a business coach who specializes in breaking down the process of growing a business into clear, actionable steps. As seen in Calmatters, KTVU, ABC, Yahoo, and 13M+ viewership on YouTube.

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