Be your own boss- Live on easy street. Or not.

On Easy StreetThinking of starting a business?  In this rough economic climate lots of people are.  Here are some tips to get started.

Coming up with a viable business idea to begin with can be tricky. It must be a product or service that people not only want or need, but are willing to pay for. You may think you have a fantastic and unique idea because no else around is selling it, but you might want to consider that perhaps no one is selling it because no one is buying it. Take lots of time before actually launching your business to talk to people and solicit brutally honest opinions (that tough skin you’ll begin to develop will come in handy later). Consider creating what my colleagues call a “French club,” a group of friends who are willing to give you feedback in exchange for a discount on your services or product.

Crunch the numbers, then crunch them again, to look at just how much product or service you will need to sell to cover your expenses, and then to cover a salary for you. After all, you don’t want to work for free.

Main Street #2

Don’t be this guy.

Estimate your overhead costs (such as rent, phone, utilities and insurance) and variable expenses related to the cost of manufacturing or distributing your product or service (such as inventory, supplies, marketing, and packaging). Limit your commitment to fixed overhead as much as possible at first, to be adaptable to market conditions as well as changes that develop in the early stages of your business. Set a goal of how much you want to take home from the business, and back into the amount of gross sales you will need, considering projected expenses and taxes.

Sometimes when I see a dollar store I mentally calculate how many items they need to sell in a month just to cover the rent — and sometimes it’s a number that’s physically impossible to sell. Don’t overestimate the demand for your product and don’t underestimate how much of your time it will take.

Once you’ve developed your idea, you’ll need to write a business plan, set goals, come up with funding, and make more decisions than you probably ever have before all at once.

One of those decisions is what entity to choose for your business. Will you operate as a sole proprietor, an LLC, a corporation? This is a decision that involves legal, tax and financial considerations, and I recommend consulting both an accountant and an attorney before choosing.

I can’t speak of the legal aspects but some of the things to think about financially are: Will you start out with multiple owners or shareholders? Will you start out alone but want to have the option of adding shareholders later? Will you need to purchase health benefits for yourself through the company? Your entity choice will dictate how you pay yourself and how your company is taxed.

The simplest form of business structure is the sole proprietorship. With a sole proprietorship there is no entity to choose per se; you just operate as the owner with no corporate structure and file a Schedule C on your personal tax return showing your income and expenses. Your profit or loss is included on your return with your other personal income.

To add a layer of legal protection, many businesses choose to form a Limited Liability Company, better known as an LLC. Once again, I highly advise consulting an attorney on what kind of protection this might offer your business. One advantage of an LLC with a single member (owner) is that you may choose by default to be taxed as if you were a sole proprietor on a Schedule C. You may instead elect to have your LLC taxed as a corporation or a sub chapter S corporation (S Corp), but they come with additional complexity that I will address in another post. For our purposes here, let’s assume the choice is a sole proprietorship.

Building an open source businessYour first stop in making your business official is the Pennsylvania Open 4 Business website where you can register your fictitious name, register your enterprise with the state and register for taxes you may need, such as employment or sales tax.

While you may operate your business as a sole proprietor under your social security number, you might want to have an Employer Identification Number from the IRS to use for banking and official purposes. If you hire employees, you must have an EIN. You can apply online at and in most cases receive your number immediately.

You should use a separate business bank account for your income and expenses, not your personal bank account. I recommend two accounts; an operating account and a separate tax account, which is where you can deposit a portion of your profit to cover self-employment and income taxes and make quarterly tax payments from this account. Your accountant can help you decide on an amount.

You’ll need liability insurance, workers’ compensation if you have employees, and possibly other coverage such as professional liability. Consult a commercial insurance agent to get the right coverage. If you’re working from home, let your homeowners’ insurance agent know.

Keeping the books correct is critical. Quickbooks can be a good system for those who want to maintain their own books, once it is set up correctly. I strongly recommend professional assistance at least for initial set up. If you make errors in the beginning, it can be difficult and time consuming to fix later. Keep receipts to document expenses, and track miles, even for the little trips that add up. If you have a smartphone- there are apps for that. Be sure to note beginning and end of year odometer readings. Review income statements regularly; don’t wait until year end to see if your business is profitable. Seek professional advice to interpret the reports if you don’t understand them, or for a second opinion. Being aware of your business health enables you to see what’s working and what isn’t, and make necessary changes along the way.

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Part 2A & B of Form ADV: Firm Brochure