The following article illustrates some of the pitfalls associated
with starting up a business. Please call me to discuss your
particular situation and to develop a plan for starting your
business the right way.
Starting Your Own Business - It's Deceptively
Simple!
Leaving a 9-5 job to set up your own business is a dream for
many of us. Unfortunately, it can quickly turn into a nightmare if
you do not plan things carefully.
Most people who start a small business do so with a limited
budget. While they will probably allocate large amounts of their
budget to inventory, equipment and payroll, little or no money
will be spent on planning and professional services. This type of
spending (or lack thereof) can be a fatal mistake.
Before taking the plunge, a small business owner must plan
ahead. To begin with, this will mean preparing a business plan. If
you’re not sure how to prepare a business plan, you can get a lot
of help from various books and software packages on the market.
After you have prepared your initial draft of the plan, you should
then consult your attorney and accountant. If you don’t have an
attorney or an accountant – GET ONE! Nobody likes spending money
on attorneys or accountants. Furthermore, setting up a new
business is deceptively simple (I emphasize "deceptively"), so why
bother with an accountant or a lawyer? The answer is simple – your
accountant and lawyer will be able to make sure, at a minimum,
that: (1) you choose the right entity (e.g., corporation, limited
liability company, partnership or sole proprietorship); (2) you
form the entity correctly; (3) you make all necessary tax
elections with the IRS; (4) you set up your accounting records
correctly; and (5) you set up your payroll correctly. If you try
to do it on your own, you might be lucky and do it right. However,
chances are that you will make a mistake, the remedy for which
will cost you much more in attorney fees, accountant fees and
unnecessary tax payments than if you had consulted an attorney and
accountant in the first place.
Let me give you an example. Joe decides to start his own
business in Florida. He has heard from friends that you should
always form a corporation, preferably a Delaware corporation –
because that’s where all the Fortune 500 companies incorporate.
Therefore, he calls up a 1-800 number corporation formation
service and forms a Delaware corporation. He conducts business in
Florida under the Delaware corporation’s name and has a successful
year. Finally, he goes to an accountant to prepare his tax
returns. Unfortunately, the accountant has bad news for Joe - all
his profits are going to be subject to double taxation (i.e., both
at the corporate and shareholder level) because he didn’t file an
"S" election on a timely basis with the IRS (something the
accountant could have done for him if he had been retained at the
beginning). The accountant also asks if Joe has qualified the
Delaware corporation to do business in Florida. Faced with a blank
look in response, the accountant suggests that Joe consult an
attorney.
Joe’s visit to the attorney doesn’t go much better. The
attorney informs Joe that he should have qualified the Delaware
corporation in Florida before starting the business there. Since
he failed to do so, he will have to pay a penalty of up to $1,000.
Furthermore, the attorney suggests that it makes no sense to have
the corporation in Delaware since Joe’s company is not publicly
owned. The only effect of the Delaware incorporation is that Joe
now has to pay annual government and registered agent fees in two
states, instead of one.
The bottom line - if you’re going to start a business, make
sure that you consult a good accountant and attorney before taking
the plunge. The amount you spend in professional fees will pale in
comparison with the amounts you could pay if you make a mistake.
