Running a small business or working for yourself requires some business skill and administrative duties. A well-run, efficient business allows you to spend most of your work-time in billable activities and less time on non-billable administrative chores. The previous chapters covered most of what you need to know to get started and maintain a small mini-business. This chapter will cover the more involved issues you'll run into as you grow your business, add customers, and even take on employees. Most of these areas are optional and will not apply to your situation. There is no set order to accomplishing these tasks — some people prefer to write their business plans first, while others set up their business structures. As your business develops, you'll know which steps you need to grow.
The first two segments of this chapter, Taxes and Liability, are required reading. These issues affect you no matter what type of work you are doing or how many hours you put in. If you earn money, you must file taxes. If you sell a product or service, you might also need to pay sales tax to your city, county, or state. If you are handling products, people, or equipment, you will need to understand your liability risks. Do not skip these sections, as making a mistake with taxes or insurance coverage can cost you a lot of time and money.
The remaining sections will cover more complex issues, and it might feel a bit like sitting in econ class. Some people find these nitty-gritty business details interesting while others dread even thinking about it. If you fall into the latter category, this chapter might be painful for you, but you must get through it if you're serious about running your own business. So, get yourself a latte or cold soda, and wade through until you have a basic understanding of the concepts.
An A+ Online Business Guide: the United States Small Business Administration or SBA
Every issue in this chapter is explained on the SBA’s website (www.sba.gov). The website is easy to navigate with numerous links, templates, and even chat rooms moderated by successful businesspeople. Your taxes pay for this tool, so put it to good use.
This chapter will provide you with a beginner’s understanding. It is highly recommended that you seek more detailed information or find a professional to help you. Look for someone with experience helping small business owners who can handle more than one area of assistance, as this will save you money in consulting fees and appointment times.
Taxes
Taxes are monies collected by every level of government to pay for services they provide, such as schools, roads, and other public services. People pay taxes on everything from property to retail purchases. Most of these taxes are built into the final price you pay, so you might not realize you're paying a tax. When you start earning money, you will need to report your income and file an income tax form every year. The government then collects a percentage of this income as taxes — numerous deductions, income limits, and other restrictions limit the amount you're required to pay.
Income tax
When you work at a regular job, your employer deducts payroll taxes from your wages before issuing your paycheck. These taxes are divided into Social Security tax, federal or state withholding, and Medicare tax, and your employer sends the money to the appropriate government agency. At the end of the year, you will receive a W-2 form with the total tax deductions shown. This form then is used to fill out your income tax form, which must be filed on or before April 15. This form allows you to enter deductions such as school, business, or health expenses, which will reduce the amount of income you are taxed on. In most cases, young people end up getting a tax refund because they do not make enough to require a tax payment. Yes, you can get money back from the government!
When you are a self-employed person, no one is going to send you a W-2 or deduct taxes from your paycheck. You, however, still will be required to file taxes and pay regular income tax and self-employment Social Security tax. If you don't make the payment, you will be fined, so it is wise to set aside a portion of your earnings as the year goes on even if you don't think you will owe money. A good rule of thumb is to assume you will owe 10 to 20 percent of your total income. If you have a profitable year, it could be more than 20 percent. Once you get to that level of taxes, you'll probably start paying estimated taxes every three months. Your accountant can help you determine if quarterly filing will work better for you.
If you're working as an independent contractor or consultant, your customers might send you a 1099-Form showing how much they paid you during the year, but if you're working for a lot of different people or taking in small amounts of money, you won't have forms for all of your income. Your records and checkbook will be the only evidence of income. You will need to claim all your income, whether you receive a form or not. You might be exempt from income taxes in some circumstances such as when you are working for your parents or as a household employee. Check with your tax preparer for more information regarding these situations.
TIP!
If you hire employees, you might be required to collect payroll taxes or issue them a 1099 at the end of the year. Be sure to check with your accountant to determine how you should handle employee taxes.
Basic taxes or simple self-employment forms are easy to prepare, and most people file a 1040 form or the 1040EZ form. Tax forms are available at your local library or online, and they come with thorough instruction books to walk you through each step. You can also use a software program such as TurboTax® or ask your parents to help you fill out the forms. If you have kept good records, this job is doable by anyone — and it is even easier if you have used a software program to categorize and manage your books.
If you have a lot of business expenses, a large amount of revenue, or other extenuating circumstances, it's probably best to hire a certified public accountant (CPA) to prepare your taxes. These folks are on top of the ever-changing tax laws and know how to find the most deductions. More advanced tax issues such as capital gains tax from stock sales or profit-and-loss business statements require expertise that only CPAs can offer. Typically, you can get your taxes prepared for less than $100, so it's worth the money to get it done right and avoid the headache of wading through government forms. Make sure to schedule your appointment early, as accountants get booked up as the April 15 filing deadline approaches. Organize your records well, and go to the meeting with everything in order, especially if your CPA charges by the hour.
Sales tax
As mentioned at the end of Chapter 7, sales tax is a consumption-based tax charged by cities, counties, states, or all three. This tax is a percentage of the product or service price. The customer pays it, and the seller collects it. The seller then sends the sales tax to the appropriate government collection agency. The requirements and amounts for sales tax vary. Some places exempt food or clothing from sales tax, while others charge sales tax for prepared meals or “luxury” foods such as soda.
Check with your state’s revenue office for details on the necessary sales tax collection as it relates to your product or service. Visit the website www.sba.gov, and look for the link to your state’s revenue office. Be sure to check the rules for every state you do business in, as these laws apply to where the sale is made and not where the seller lives. Sales tax also can apply to Internet sales, and legislation is moving through many state governments to address this issue. As most laws stand now, it's the buyer’s responsibility to pay sales tax for purchases made over the Internet.
Liability
When you are in charge of a business, you're also responsible for anything that goes wrong. This means you are “liable” for repairing, replacing, or remedying any situations that occur while you are in charge. Sometimes these situations can be extreme or expensive, such a car accident or a home burglary. You'll also be expected to understand and hold the necessary permits or licenses, such as a food permit for selling food. Additionally, you can be sued for using someone else’s name, logo, or business idea without permission, sometimes referred to as “infringement.” Conversely, you might develop an idea or business name that needs to be protected from others. All these issues are considered liabilities because they can incur large expenses and even lawsuits if not covered through insurance, licensing, or patents. Seek the help of a professional to make sure you have the necessary coverage. These coverages might involve additional expenses, so be sure to include those in your budgeting.
Insurance
People take out insurance to cover the costs of unexpected and potentially expensive events such as a home fire, a burglary, or a catastrophic illness. Insurance companies write a policy that agrees to provide payment for remedying the situation either through a cash payment or reimbursement and replacement of the loss. You pay a premium for this policy, and the value of the item you are insuring determines the cost of the premium. Many policies come with a “deductible,” a set amount you will be required to pay before the insurance coverage kicks in. You can buy an insurance policy for just about anything — big movie stars even insure their hair, legs, or voice. The most common policies applicable to your situation will be:
- Auto insurance. This covers your vehicle, occupants and drivers of the vehicle, and other vehicles or people involved in accidents. Most states require insurance coverage on all vehicles. Some policies include additional elements such as roadside assistance.
- Homeowner’s or renter’s insurance. These policies cover the home, the contents of the home, personal injury accidents that occur on the property, and losses due to fire, burglary, or natural disasters. Equipment used for business or space used for conducting business usually are excluded from the basic homeowner’s policy.
- Business or liability insurance. If you are dealing with people such as children or pets or purchasing expensive equipment that is exempt from homeowner’s insurance, you will need a separate business policy. This will cover replacing your equipment or paying for injuries or lawsuits that occur while you are caring for others.
- Warranties. These are not true insurance policies, but they are worth mentioning if you're buying expensive equipment. Most purchases are covered by a replacement or repair warranty — be sure to review the terms of the warranty, register your purchase, and file the documents for easy access if something breaks down. By registering your purchase, you'll also be notified if the item is recalled or needs safety upgrades.
Policy coverage and restrictions vary widely by insurance company, your personal situation, and the requirements of your city or state. Review the exemptions and exclusions carefully before purchasing a policy, as some have a waiting period before the policy takes effect. In most situations, your parents’ current policy should cover you. Check with your parents and their insurance agent to confirm any coverage issues. If you do need to buy insurance coverage, shop around for the best deal, and make sure to record this as a business expense, as it will be tax deductible.
Licenses and permits
Each job listing talked about the circumstances in which you might need a license or permit to operate your business. These can include everything from a basic driver’s license to a tour guide operator’s permit. As a small, one-person operation, licensing and permits are not critical to your business unless you are selling food or operating in an industry with health and safety risks. However, if you decide to make your business more official, you'll need a federal, state, or local license to operate. The type of license you need depends on where you live and the type of business you are doing.
Driver’s license
If you're operating a passenger vehicle, you will need a valid driver’s license. Some states put restrictions on young drivers, such as allowing only one passenger for the first six months or no driving after a certain time. Make sure you understand the requirements and restrictions related to your driving situation. If you will be operating large equipment such as a tractor or commercial vehicle, you probably will need an advanced license. Check with your local Department of Motor Vehicles to learn more.
Food, health, or safety permit
If you're working in a field that affects public safety such as preparing food, you will need special training, a permit, a license, or all three. Without these permits in place, you can be fined or shut down. Check with your local extension office or your state’s Department of Health for more information. Most of these licenses require special training, so give yourself a few months to acquire the permit.
Industry-specific licenses and permits
Many cities, counties, and states set their own limits on the types of businesses that need licenses to operate. These often are focused on businesses that affect others, such as day cares; those that could harm the environment, such as mining or farming; and those that could be disruptive to other businesses, such as musicians or tour guides. Inquire at your city hall or ask others in your field of work.
TIP!
Most licenses are not transferable if the business changes ownership, and only those with proper training can operate under the permit.
The SBA website offers an easy search tool to determine if you need a license for your business. You can search by your zip code, your state, and your industry. You'll also find everything you need to know about applying for and working under licensure. Visit the link at: www.sba.gov/content/business-licenses-and-permits.
Acquiring and maintaining your license
The department issuing your license will provide the specifics needed to acquire it — you'll need to submit an application with information about your business and proof of your qualifications. You'll be charged for this license, so bring your checkbook. This fee is tax deductible, so be sure to record it in your accounting log.
After you receive your license or permit, read the requirements, and take special care to follow all the steps listed or your license can become invalid. Considerations include:
- Renewal dates. You'll be required to renew your license on a regular basis. Be sure to record this date on your calendar, and make sure to submit your renewal forms a few months in advance.
- Before sending off your applications, copy all forms and supporting documents, and file these with your business records. Also, keep a copy of the approved license or permit in your files.
- Understand and follow the rules for displaying your license. Most states and localities require a prominent display where customers can see the permit.
- If you change or expand your business, your current license might not apply. Check with your licensing entity to be sure you are covered.
Protecting Your Idea and Avoiding Infringement
Have you ever noticed symbols such as ®, ©, or ™, or the words “patented” or “patent No. 1234” behind a company’s name or product? These symbols indicate that the product, service, logo, or artistic creation is protected under a copyright or trademark or registered officially with the government. Companies who feel they have a special product, service, or intellectual property take this step to protect others from using the name or copying their product. The type of registration differs with each the product or service. For example, works of art or music are copyrighted while working products are patented or trademarked.
The process of acquiring these protections is run through the United States Patent and Trademark Office (USPTO), a division of the Department of Commerce. Start at their website, www.uspto.gov, to learn the basics of protecting your product and the procedures required to complete the application. This website has links including small business focused links, ways to research existing patents or copyrights, and much more. It's a great place to start if you're thinking about officially registering your product.
Acquiring a patent or registering a trademark is difficult to accomplish on your own. The forms, fees, and documentation require a long, drawn-out process, and if anything is done improperly, your application will be denied. For this reason, most people hire a patent attorney to guide them through the system. Because of the expense involved, most small businesses do not file for these protections and just hope the good business ethics of others will protect them from infringement or theft. If you feel you have invented something unique — and you can make money from it — then pursuing registration can be worth the expense. Start your research on the USPTO website, and schedule a consultation with a patent attorney or legal aid clinic to explore your options.
TIP!
Intellectual properties, which include literary, music, architecture, art, and other “original works of authorship,” are covered automatically under U.S. Copyright law. You don't have to file officially for your copyright, but it is recommended for full protection. Visit the “Copyright Refresher” link on the USPTO website for full details.
As you start your business, you must ensure your business name, product, or idea is not infringing on someone else’s existing trademark. This is typically not an issue with mini-businesses, but some companies are protective of their trademarks. If you use part or all of the name, logo, or product and the company’s lawyers feel you are infringing on their trademark, you can be hit with a “cease and desist” order, which means you must stop using this name or image in your business. If you don't cease using it, the company can sue you. Be careful if you decide to name your company, and pick something unique to your business. Visit the USPTO website and click on the link for Trademark Electronic Search System (TESS) to conduct a free search of registered trademarks. If you are planning to file for your own trademark or patent, your attorney will conduct a search as part of the application process. Research other businesses in your area because they might have a similar name or logo. Even if it's not trademarked, it's not good business etiquette to copy someone else’s name.
Do You Need to Name Your Business?
The main reason for attaching a name or logo to your business is to build brand recognition and create an image. This recognition becomes part of an overall marketing strategy. Brand recognition and image are helpful for every size of business, but the expense to develop this recognition is cost-prohibitive for small businesses. Remember that every dollar you spend cuts into your bottom line, and finding a trademark-free name, developing a logo, and registering your name can be expensive and time-consuming. You need the potential for large profits or a long-term business view to make the expense pay off.
Naming your business, though, does make it look more professional, and it's perfectly OK to give your business a name without protecting it with trademarks. Many small businesses have started out in just this way. Remember, though, that without trademark protection, anyone can steal your name, and you will have few ways to get it back. Later sections in this chapter will discuss choosing a formal structure for your business, part of which will be selecting a name for your business.
Tips for choosing a business name
Keep it simple — this is the key to choosing a good business name. Your name must tell your customers who you are and what you do. Your name needs to convey that you are professional and can be trusted to do the job well. Think about how you will use your name. Are you going to make T-shirts or hats? Then you will want a short name that will fit this space. Are you providing a specific service such as cleaning or lawn care? Then include that in your name, such as “Lee’s Lawns” or “Jane’s Kid Care.” If possible, pick something catchy that is easy-to-say and remember, and nothing offensive or cutesy. Avoid using made-up words, acronyms, or a phrase common to your area such as the team mascot’s name. For example, if your school mascot is a Viking, your name will get lost in a sea of Vikings. Check your local competition, too, so you do not choose a name similar to someone else in the marketplace, which will confuse your customers or cause them to pick your competition accidentally. Once you have chosen a name, don't alter or change it, or you will lose your brand recognition.
Writing a Business Plan
When you first decided to go out on your own, you had a plan in your head and maybe even something written down on paper. If you used this plan to find work or analyze your business, then you've already developed your first business plan. Anything that guided you or helped you make decisions counts as a plan. Of course, as your business grows, you need something a little more official. If you're looking for partners or investors, you will need a formal business plan for presentations. A business plan can include anything you think is important to your business, including references, projections, and great ideas you have for the future. See Appendix A for a business plan outline recommended by the U.S. Small Business Administration. Most business plans require documentation and descriptions relating to these areas:
- An executive summary highlighting your experience and the business’ history
- A description of the business, product, or service
- A marketing plan
- A business management plan
- Financial projections and past financial records
- Supporting documentation
Writing a business plan helps you flesh out what you want to accomplish with your business and identify any issues you will face for expansion. It will help you point out potential problems and discover opportunities for making more money. Your business plan will also help you develop and express your personal business philosophy and long-term goals. This will be your road map to the future, and it will change with time, so expect to make alterations as you go along. Visit the SBA website for more information or check the Score website at www.score.org and click on the “Templates and Tools” link. This link will take you to a thorough explanation of each element of a proper business plan and walk you through putting your own plan together.
Structuring Your Business
The next step is to develop a real business structure. Up until now, you have been operating as a “sole proprietorship.” You are the owner and only employee, and any taxes or liability protections are grouped with your personal life. For instance, you file one income tax form, and any liability coverage you have is covered under a personal insurance policy, such as homeowner’s insurance.
It doesn't take a formal legal document to be a sole proprietor — it's the de facto structure for most independent contractors or self-employed workers. This type of operating system works for many people and needs no adjustments. You easily can work as an independent contractor for the rest of your career. However, without a formal business structure in place, you are personally liable for anything that goes wrong because of your business. If your product or service is faulty, if your service causes injury, or if your bills go unpaid, you can be sued for damages. If your business doesn't have enough money or assets to satisfy the lawsuit, you can be forced to use your personal money or assets to pay the bill. As mentioned earlier, proper insurance policies will cover you in many of these instances, but establishing a full separation between you and your business is the only way to protect yourself completely.
This separation comes in the form of incorporating your business or forming a legally recognized business. Once this structure is in place, all monies will go through the corporation, and the business will issue you a paycheck. As with other topics discussed in this chapter, incorporating costs money, is complex, and requires assistance from an attorney. The costs are worthwhile, as you not only will protect your personal assets but also gain some tax advantages and make it easier to transfer ownership later on. The kind of business structure you select depends on what type of business you are in, the level of liability you might face, and your long-term goals for the company. The most common structures include:
Partnership
A partnership is formed when two or more persons join together to run a business. Each person contributes money, property, labor, or skill and expects to share in the profits and losses of the business. A partnership must file an annual information return to report the income, deductions, gains, losses, etc., from its operations, but it does not pay income tax. Instead, it “passes through” any profits or losses to its partners. Each partner includes his or her share of the partnership’s income or loss on his or her tax return. When forming a partnership it is recommended to draw up a legal document clearly spelling out each partner’s responsibilities, contributions, and share of profits.
Corporation
A corporation is a collection of prospective shareholders who exchange money, property, or both, for the corporation’s capital stock. A corporation takes the same deductions as a sole proprietorship to figure its taxable income. A corporation conducts business, realizes net income or loss, pays taxes, and distributes profits to shareholders. In general, an elected board of directors runs each corporation — for this reason owners must give up some control of the management of their business.
Subchapter S Corporation
Subchapter S corporations (or S corporations) are corporations that elect to pass corporate income, losses, deductions, and credit through to their shareholders for federal tax purposes. This type of corporation is limited to having no more than 100 shareholders and allows shareholders to avoid double taxation on the corporate income. Subchapter S corporations do have restrictions including: domestic-only memberships, may not include other partnerships, and have only one class of stock. Small companies frequently choose this type of incorporation because of the tax advantages.
Limited Liability Company (LLC)
This is the most flexible and popular business structure for a small business. Similar to a corporation, owners have limited personal liability for the debts and actions of the LLC. Other features of LLCs are similar to a partnership, including management flexibility and the benefit of pass-through taxation. Ownership can be one person, an unlimited number of people, other corporations, or foreign entities. Both federal and state agencies set requirements for accepted LLCs so be sure to check if your business is allowed. An LLC business entity must file a corporation, partnership, or sole proprietorship tax return.
There are many more details, restrictions, and qualifications with each of these mentioned business structures. Visit the SBA website for more details or find a book at your local library to learn more. Make sure the research you do on these forms is current as laws change frequently regarding issues related to corporations and partnerships.
Taking on a Partner
Partnering with someone can offer both advantages and disadvantages, and you must weigh these carefully before you enter into a legally binding partnership with someone. The advantages include gaining another person to share the workload and expenses, adding someone with more experience or complementary skills, an expanded network of potential customers, and someone to share the stress of running a business. The biggest disadvantages of taking on a partner are giving up control of your company and dividing the profits. With a partner, you will have to make compromises and joint decisions. Be careful of giving up too much control, and make sure your partnership is clearly spelled out in a legal document, such as a partnership agreement described in the previous section.
You must get along well with the person or people you choose as a partner. You don't, however, have to be best buddies and hang out on the weekends. Many business partners rarely socialize outside of the office setting. As long as you can communicate effectively, find solutions to disagreements, and work together toward building the business, your partnership will do well.
As a teen, you might be tempted to go into business with your friends, and this can work out some of the time. With this arrangement, though, the old adage of “never mix friends and money” holds true. You might love to hang out with the person, but day-after-day might drive you crazy eventually. Your friend might be great with people but awful at handling money. If things go wrong with the business relationship, you also could lose this person as a friend. Choose someone with your same outlook toward the business, but also look for a partner who can add a skill or attribute you do not have. Your partner doesn't have to live in the same town as you, either — teaming up with someone in another market can help you expand your sales area into an additional market.