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If you’re thinking about starting a business, don’t take the big leap from dreamer to entrepreneur. A common mistake new entrepreneurs make is not understanding the five critical fundamentals before diving into the world of starting a business. Knowing this crucial information can be the difference between starting a thriving, successful business or crashing and burning out before your entrepreneurial plane can even take off from the runway.
Read these five essential points carefully to understand how you can prepare and pave the way to building a successful business.
1. Determine the difference between a hobby and a business
Many people believe that if you have minimal sales or don’t sell full-time, you don’t have a business, just a hobby. It’s important to understand both national and local regulations governing your sales to ensure you comply and avoid unexpected penalties and fees.
The IRS states that if you earn $400 or more after deducting your expenses (called net income), your income is NOT considered a hobby and all of your self-employment 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 business. That is, if you intend to make sales to customers, in most cases you don’t have a hobby; You actually have a business and you have to complete several steps before you can make sales.
Related: The 6 Startup Essentials for a Successful Business
2. Understand your legal obligations
To determine what you legally need to do to register your business and stay compliant, you first need to decide what type of business structure you want to have. A corporate structure defines how a company is registered and operated and what taxation options it may have.
The most common form of a new business is either a sole proprietorship or an LLC. It is important to decide what type of business you want to operate as each type has different registrations and tax implications.
Once you have determined the type of business structure you want to create, you will need to register your business. The types of registrations and permits required depend on whether you are forming a sole proprietorship or an LLC, the type of business you want to form, and your location. Find out about your county’s information on starting a business. Counties often have a dedicated resource section on their website that outlines your responsibilities and where you can obtain necessary permits.
Related: 5 common legal mistakes startups make when starting their business – and how to avoid them
3. Understand your finances
There are various fees associated with registering your business to ensure that your business is operating legally according to city, county and state requirements. These fees vary by location. Additionally, some industries require special licenses and registrations that must be renewed periodically.
4. Understand taxes
Businesses are required to collect 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 tax return at the end of the year. If you expect to owe $1,000 or more in self-employment taxes, you’ll also need to pay estimated quarterly taxes. This is a prepaid estimated amount of what you think you will owe at tax time, divided into four equal payments throughout the year.
If you sell material goods, you are obliged to collect and pay sales tax on these goods. This means you must apply for a seller permit, collect sales tax from your customers, and file/pay sales and use tax returns.
Next, plan a method for maintaining business financial records. You are required to maintain business financial records – this means tracking your sales and expenses as well as cash flow in and out of your business. This can be done by using software like Quickbooks or Xero, hiring a professional accountant or accountant, or keeping a simple spreadsheet to track your cash flow.
LLCs are also required to have business bank accounts. Personal transactions cannot be made through your business bank accounts. It’s important to keep track of all business expenses so you can include them on your tax return – this will reduce your taxable income.
Related: Five tips for small business owners this tax season
5. Operating Obligations
Developing your products, providing services and selling are important parts of your business. However, the daily operations of a business require many other elements to keep your business running and growing. Think about it and make a plan for how you will deal with important things, such as:
- marketing
- accounting
- inventory
- Shipment
- Customer service
- Scheduling
- Operating software
- Booking, scheduling and contracts
- Invoicing and Payments
Ready to start a business?
If you’ve carefully considered these important factors and are ready to get started, congratulations! The decision to start a business and the planning that goes into it deserves to be celebrated. Consider creating a formal business plan to provide structure, organize your goals, and begin planning the logistics of starting your business. Starting and growing a business is an incredible journey, and with the right planning, consistency, time and dedication, you will be well on your way to building the business of your dreams.