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Small Business Guide

June 9, 2009

I’ve been getting a lot of questions lately about starting a new business.  Given the state of he economy, it seems that many people are looking into taking charge of their own destiny.

My Side Business Guide is a wonderful resource to answer your questions from setting up your business to operating it.  Here’s a excerpt.  It’s the best $10 investment you can make in getting your business off on the right foot.

Small Business Guide

Small Business Guide

NMG Side Business Guide Excerpt

According to the U.S. Small Business Administration, there are more than 22.9 million small businesses. Many of these small businesses are started by people who also have “day jobs”– from the at-home catering business, to making a living on eBay, to getting rich as a real estate investor.

Whatever the case may be, for most people one of the key ways to building their net worth will be to start and run a side business. This NMG Guide will use the term “side business” to address the overwhelming number of people who slowly begin businesses while they are still otherwise gainfully employed with a “day job.” Of course, much of what is discussed can also be applied to those who in fact have taken the plunge and are running their side businesses full-time, á la a“small business.” Either way, whether you are starting a side business or going full time with a small business, the rules are the same. This guide will give you all the information you need on basic business types that should be considered when opening your business, or what you need to know about changing your existing business type to a new one. Many important decisions begin long before the first dollar is collected for your services or products, and months or years before you declare to the world that you’re open for business.

Perhaps no decision is as crucial in the initial planning stages than what type of business entity is
appropriate and most beneficial for your business. Choosing the appropriate type of business entity for your business has legal, operational, accounting, and tax implications. The decision should be made based on both legal and financial considerations, viewed from a long-term perspective. Over the years, we’ve gotten questions, like:

  • Should I incorporate?
  • What is an LLC?
  • How do I become an S Corporation?
  • Do I have to become anything at all to be a business owner?
  • Do I have to do anything formal to have a partnership?
  • With so many choices, what should I do?

Although, the choice will depend completely on your facts and circumstances, here are a few observations to consider: The basic C Corporation is the time-honored business entity. The LLC, or limited liability company, is the “new kid on the block” and is fast becoming the popular business type for many new businesses. The Sole Proprietorship is the easiest type for one person to start, while a regular partnership is the easiest type for two or more people to start.

N M G  Guide Overview

This NMG Guide will give you an overview of these business entities. Each chapter will give you
information on:

  • Governing Documents and Filings
  • Key Players
  • Liability Issues
  • Tax Issues
  • Types of Businesses Using That Form

In choosing your business entity, remember “simplicity” is key. You should keep your business entity as simple as possible, until and unless facts and circumstances warrant more complexity.  You may also want to conduct an annual “check-up” of your business that includes ensuring your business structure is appropriate for your operations. Although there may be tax costs involved with switching entities, there are also situations where it may make sound business sense to switch.  So, please check your business type with your tax/legal advisor on a regular basis.

DBA

No matter what business type you choose, keep in mind that you may also use a DBA as a way to give your company a new or distinct name. A DBA (also called Doing Business As or Fictitious Business Name) is often used by people to give their business a professional sounding name, even though they have not officially formalized or incorporated their business (i.e., they are operating as a sole proprietorship). For example, Linda decides to start a catering business but doesn’t have the resources to incorporate. She decides instead to file a DBA for her business, Sweet Sensation Catering, and this is the name she uses to promote her business. To most people in the public, her business name suggests that she is incorporated, even though all she has is a DBA. Gone are the days where people notice the fact that “Inc.” or “LLC” is missing from the end of her business name. DBA’s are also used by people who have, in fact, formalized their business (i.e., a corporation, partnership or limited liability company) to brand their company with a name other than their formal legal name. For example, Chandler King formed King Enterprise Inc. as a corporation for all her business activities; which include a line of gift cards, an on-line magazine and a catering company. She decided that her business name was not descriptive enough for her catering company. So she got a DBA, Kingdom Catering, to use for that side of her business. Note: In this example, the corporation, King Enterprises Inc. applies and gets the DBA.

Keep in mind, a DBA is just a name. It’s not a separate legal entity. Even though you can get a separate Employer Identification Number from the IRS for a DBA and open a business bank account, your DBA provides you with no liability protection. So, if you operate as a sole proprietorship, a DBA does not mean your business is now a corporation (or a partnership or limited liability company for that matter); even though it may sound like one to your friends, family or clients. Put another way, a DBA is a way for you to promote your business name. Finally, DBA’s are typically simple to obtain in most states. You can get the required forms from your local or county business office. Also in some places, such as in California, you must publish your new DBA in the local paper for a several weeks (i.e., a printed announcement of your company name). The costs for all of this will vary from state to state, but will generally be less than a couple hundred dollars.

Bottom Line: Any type of business can use a DBA, but it’s most commonly used by sole proprietors. It’s like the poor man’s method to having a business, without the costs of incorporating.

Employer Identification Number

Every business will need an Employer Identification Number (EIN) from the IRS. This number i used for a variety of things, including, needing this number to open a bank account for your business. You can get an EIN by filing Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. The IRS also has an online tool that will allow you to complete this form and receive the EIN in a matter of minutes. Visit
http://www.irs.gov.

This NMG Guide will go over the basics of various business forms. Keep in mind, a sole proprietor may use his or her social security number instead of an EIN, but many sole proprietors prefer to get an EIN to represent their business activities. The bank will typically require that all other business types use an EIN when setting up a business account. Also, regardless of what
business form you choose, you may need an EIN if you will have employees, because you will then be required to make tax deposits, and file employment tax returns and reports.

Bottom Line: The EIN is easy to obtain and makes sense for anyone with a business to get one.

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2 Comments leave one →
  1. June 9, 2009 6:52 am

    Hi Shannon,
    I am starting a small internet business and I want to involve a few people initially to contribute their talents with the thought of (possible) future success paying off their efforts eventually by way of sharing a percentage of ad revenues. I am contemplating different possible ways of doing this and wondered if there are any examples of this kind of arrangement/agreement that have worked in the past? I want to have a very clear and well thought out agreement, but I am not actually employing them in the sense of paying wages for services – it’s more like a barter. Would it be legal to give them a percentage of advertising revenue in exchange for services and if I did this could I create an ‘out’ after a period of time in case the agreement wasn’t working out? Are there any precedents for this kind of arrangement? I’d be very appreciative to hear your thoughts and ideas about this. Thanks! -Portia

  2. June 9, 2009 5:39 pm

    Hi Portia –

    Great question. First, I want to wish you much success in starting your Internet business. Given the state of this economy, it’s great to see people taking control of their own destiny! I know you will do well.

    Yes, it is absolutely legal to do what you suggest and you are extremely smart and savvy to know that this MUST be documented BEFORE you actually start using their services. As a starting point, this arrangement/agreement would be a mix of an Advertising Sharing Agreement (or Ad Revenue Sharing Agreement) and Services Agreement. But I wouldn’t get caught up in the “name” of the contract.

    Instead, you need a contract that spells out in plain English all the terms that you have described. Clauses and language that you will particularly need to focus on include:

    Independent Contractor Clause – Spell out that you aren’t employing them. That they will be considered as independent contractors/service providers. This means they will be responsible for all of their own taxes, insurance, benefits, etc.

    Term – How long do you want the agreement to last? 1 yr? 2 yrs? Make sure this is very clear. Also, devise an “out” that lets you terminate the agreement for “cause” (i.e., they aren’t performing well, haven’t provided services to you in 60 days, etc) and for “without cause” (meaning just because you feel like it) by you giving them the proper written notice (10 business days, 30 business days, etc) that you are ending the contract. Finally, if you owe them money at the time you are ending the contract, make sure to provide that they will be paid these amounts within a reasonable time frame (30 days) after ending the contract.

    Ad Sharing Revenue – Detail how much they will share in the advertising revenue. Include the timing of when you will make this calculation of their share of the revenue (i.e., weekly, monthly, quarterly) and how soon after that you will actually pay them (i.e., immediately, 7 business days, etc). It’s key here that you come up with a system that gives you the time to do the proper accounting/bookkeeping. Finally, you might want to consider adding in a minimum payout requirement – basically you won’t pay them money until this share reaches an aggregate amount of $50 or $100. This will help you to avoid having to cut checks for $2.50 each week!

    Ownership – Make it clear that you are the owner of all of the content (i.e. intenet business/website).

    Services – Provide a real clear description of what they are providing in exchange for a share of the advertisement revenue.

    Standard Clauses – Include the standard clauses such as: Confidentiality, Indemnity, Arbitration.

    ****
    I also highly recommend that you set up an LLC (limited liability company) for your internet business and that you then have the agreement be between your LLC and the service provider (or his/her company)

    Of course, we would love to help you and we offer very reasonable flat rate packages to help set up your business and draft/review your agreements!

    Good luck!

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