Checklist for Setting Up a Small Business

Busines Entity

The first thing you must do is pick the type of entity you want to operate under. Generally you have four choices:

• Sole Proprietorship
• Partnership
• Corporation (S Corporation or C Corporation)
• Limited Liability Company and Limited Liability Partnership (LLC or LLP)

The IRS discusses the tax implications of these entities at:
http://www.irs.gov/businesses/small/article/0,,id=98359,00.html

The final decision usually hinges on legal liability and size of business.

The chant at the following website will help you with your selection.
http://www.incorporate.com/business_structure_comparison_chart.html

Decide on a Name

People have a right to know who they are dealing with. If you are a Corporation or LLC, when your attorney sets up the entity, it will be registered with the Secretary of State in your state. If you are a partnership or sole proprietorship you have to file a certificate so that people know who the individuals are behind the name. In most states this is done with the county clerk, but, in some states it is done at the state level. This document is known as the assumed name certificate or the DBA (doing business as).

If your name is John Smith and you want to do business under the name of "John's, Johns" you would file an assumed name certificate with the county clerk in the county you are doing business. Anyone who does business with John's, John could go to the county clerk's office and find out who to owner is. The same is true for partnerships. LLCs and Corporations can either do business under their legal name they filed with the Secretary of State or they could do it under an assumed name. So a corporation named "Joe, Inc." Could do business under "Joe, Inc." or it could file an assumed name certificate and do business under "John's Johns." In most states these are filed with the Secretary of State.

Federal Identification Number ( also know as Employer's Identification Number or EIN)

If you are a partnership, LLC with more than one member, or a corporation you will need a Federal Identification number. Also, sole proprietorships and single member LLC will need a Federal Identification Number if they are going to have payroll. You can apply online at the following website:

http://www.irs.gov/businesses/small/article/0,,id=97860,00.html

Bank Account

Now that you have your name and EIN you can open a bank account. Everything should flow though this account. Do not cash checks customers paid you with. Deposit all your sales (cash, check and even credit card) into this account. Sometimes it is easier to set up a separate account for credit card sales. In the event your books and records are ever destroyed by fire or some other catastrophic event, you will be able to reconstruct your books. Do not pay for any significant expenses with cash, use a check so it is recorded with your bank. If you purchase small things with cash, write a check to yourself or "petty cash" for the exact amount that these purchases total.

Payroll

If you are going to have a payroll you will need to address the following:

• EIN (this was discussed above)
• W-4 Form- It is necessary to have each employee fill out a W-4 form, Employee's Withholding Allowance Certificate
• I-9 Form- employers are now required to document that everyone they hire are eligible for employment in the United States.
• Federal Withholding, FICA, Medicare – Generally a 941 form is due every quarter.
• State Unemployment Insurance- It most likely is necessary to apply for a registration number with your State Unemployment Insurance Division.
• State Unemployment Taxes- Most likely a tax return is due every quarter with your state unemployment insurance department.
• Federal Unemployment- a form 940 is due every January. Usually payments are due every quarter.
• Workers' Compensation- In most cases workers' compensation insurance is necessary.
• Disability- most, if not all states require disability insurance.
• Forms W-2 and W-3- The employee must be given a W-2 form in January each year; a copy is also mailed to the Social Security Administration along with a W-3, which is the transmittal form.
• Payroll Records- an employer is required to keep good payroll records. If you elect to be a corporation, you will need to pay a salary to yourself and most if not all of the above are necessary. Operating as a sole proprietorship or partnership can avoid these if you do not have any other employees.

The above list or payroll filings is a bit overwhelming; if you are going to have a significant payroll it may be advisable to use a payroll service. They will help with all of the above. In our area, Paychex ( http://www.paychex.com/ )is the dominate payroll service provider. You may want to consider them. We find their reports are the easily to follow and their representatives are very assessable.

Sales Tax

Register with the sales tax department.

Review the sales tax laws for the type of items you are selling. More businesses go out of business because of sales tax problems than income tax problems. The reason for this is simple. Sales tax is based upon the largest number in your financial statements - SALES. You could be operating at a loss so income tax is not a problem, but , sales tax still can be a problem. Make sure you are keeping the proper records as required by Sales Tax Department. If not, they can use some method to estimate your sales and if their estimate is more you will have to pay the difference. A cash register with an tape may be required. Keep the tapes for as long as required in your state. In most cases that is at least 3 years after the tax returns are filed. In may be as many as 6 or 7 years.

Make sure you understand what is taxable and what is not. If you fail to collect sales tax on any significant product line because you did not understand the law, an audit could bankrupt your business.

If you collect sales tax and use it to pay other bills, you can be held personally responsible. Operating as a corporation of LLC may not protect you.

Meet With an Accountant

With your accountant's help, you should:

• Set up and accounting system
• Define and determine the bookkeeping responsibilities
• Establish your accounting and record keeping system
• Chose your accounting methods
• Make any necessary tax elections

Select a good accountant. For a large business that will be required to give financial statements to a bank or others the accountant should be a CPA. For a smaller business, you accountant should be either a CPA, PA, or Enrolled Agent.

Licenses

Depending on the type of business you may need some sort of license or permits; this could be at the federal, state, or local level.

Business Plan

I left this for last. Most business writers and educators would put this near the top of the list. Writing a good business plan may force you to think about what you are doing. If you need a loan bankers are impressed by business plans. Sometimes things that surface during this process may point out that your plan is not going to work. The truth is that most business do not take the time to write a plan. This may not be a problem if it is going to be a small business, but the larger the business the more important the plan is. Also, if there are several people involved in organizing the business the only way you will have synergy is to put the plan in writing

Don't just write a plan; constantly review it and follow it.

There are several good blogs on this topic. I am not going to repeat what has already been written. Please take a look at these: