What Issues Should I Consider When Starting A Business?

Updated: Nov 7

When a client is starting a business, it is important to ask the right questions upfront and to identify issues that are likely to arise. First-time entrepreneurs and seasoned business owners alike can benefit from preliminary discussions to spot planning opportunities, minimize complications, and get started down the right path. This checklist helps guide the conversation regarding common factors relevant to prospective business owners.

This checklist covers:

  • Personal and business cash flow issues

  • Legal and business formation issues

  • Tax issues

  • Other planning considerations


Transcript:

Hi, Todd Pouliot, mygatewaymoney.com, feel free to visit us there, and again thank you so much to our subscribers. Make sure you click that thumbs-up button, we really appreciate it. You know one of the things we talk about often is the “American dream”, and everybody has a different version of that dream one of the things that I like to help our dreams come true for financial freedom, and in this case were talking about financial freedom as a possibility of a business owner and being a business owner myself I think that having these discussions is really important for people. When starting a business is important to ask the right questions upfront and help identify issues that are likely to arise. First-time entrepreneurs and seasoned business owners alike can benefit from a preliminary discussion to spot planning opportunities, minimize complications, and get started down the right path. So we have this guide here, this checklist to help guide the conversation and we are going to cover a few main areas. We're going to cover personal and business cash flow, legal and business formation issues, tax issues, and a couple of other planning considerations. So as usual we're going to share our screen here and get you started on our checklist. So, personal cash flow issues. Will your personal cash flow needs change as a result of the new business? Consider how to structure your compensation. For example, as a salary from the business, as distributions from the business, so owner distributions to optimize your net income. And when will you need to use personal assets – will you need to use those personal assets to start the business? Consider which accounts will most efficiently fund your initial investment. And how much of your personal net worth do you feel comfortable investing in the future? Will your risk tolerance change for your investment and retirement accounts? And this is a great conversation, just to pause here and say, where is your return coming from? Is your return going to come from the stock market and investments or is it going to come from the business? And one of the things we always hear from small business owners is, “Well, I’m making much more on the small business side, I don't want to invest.” And that's a great answer, we like to hear those, those are exciting answers, but make sure you balance that and you know, not all in the business and do have some allocation to some other types of investments and that's what we want to focus on is having balance because you never know what risks your business may incur; legal risk, market risk, it could be a lot of different risks that we want to talk about with a business and that might be counterbalanced with an investment portfolio on the side. Do you need to review your emergency fund to ensure you have adequate liquidity? Do you need a contingency plan if the business does not grow as expected? And do you intend for the business to be your sole source of income? A lot of people that we work with, we always recommend having a little side hustle outside of their normal employment, and sometimes those side hustles become a great business venture that may have started out as a hobby, then become a side hustle, and then at some point could become your revenue stream or Hi, Todd Pouliot, mygatewaymoney.com, feel free to visit us there, and again thank you so much to our subscribers. Make sure you click that thumbs-up button, we really appreciate it. You know one of the things we talk about often is the “American dream”, and everybody has a different version of that dream, and one of the things that I like to help with are dreams come true for financial freedom, and in this case were talking about financial freedom as a possibility of a business owner and being a business owner myself I think that having these discussions is really important for people. When starting a business is important to ask the right questions upfront and help identify issues that are likely to arise. First-time entrepreneurs and seasoned business owners alike can benefit from a preliminary discussion to spot planning opportunities, minimize complications, and get started down the right path. So we have this guide here, this checklist to help guide the conversation and we are going to cover a few main areas. We're going to cover personal and business cash flow, legal and business formation issues, tax issues, and a couple of other planning considerations. So as usual we're going to share our screen here and get you started on our checklist. So, personal cash flow issues. Will your personal cash flow needs change as a result of the new business? Consider how to structure your compensation. For example, as a salary from the business, as distributions from the business, so owner distributions to optimize your net income. And when will you need to use personal assets – will you need to use those personal assets to start the business? Consider which accounts will most efficiently fund your initial investment. And how much of your personal net worth do you feel comfortable investing in the future? Will your risk tolerance change for your investment and retirement accounts? And this is a great conversation, just to pause here and say, where is your return coming from? Is your return going to come from the stock market and investments or is it going to come from the business? And one of the things we always hear from small business owners is, “Well, I’m making much more on the small business side, I don't want to invest.” And that's a great answer, we like to hear those, those are exciting answers, but make sure you balance that and you know, not all in the business and do have some allocation to some other types of investments and that's what we want to focus on is having balance because you never know what risks your business may incur; legal risk, market risk, it could be a lot of different risks that we want to talk about with a business and that might be counterbalanced with an investment portfolio on the side. Do you need to review your emergency fund to ensure you have adequate liquidity? Do you need a contingency plan if the business does not grow as expected? And do you intend for the business to be your sole source of income? A lot of people that we work with, we always recommend having a little side hustle outside of their normal employment, and sometimes those side hustles become a great business venture that may have started out as a hobby, then become a side hustle, and then at some point could become your revenue stream or your income source and you're reducing that risk of relying on somebody else employing you and possibly again changes in the atmosphere of the economy, much like what we're going through now and that may allow you to have much more freedom and ultimately financial planning to me is about financial freedom. I don't like to use the word retirement, I think it is a poor word, I like the word financial freedom, and that is when you can expect to leave your job and be able to be self-sufficient with financial freedom. Business cash flow issues. Do you need to research the amount necessary to launch or run the business? This is a lot of the areas where I see people not doing enough of their own due diligence. Consider the initial cost to start the business, tax and legal fees at formation, and the expected overhead cost. Which ones are fixed and which ones are variable? You know for us we need to look at those fixed expenses such as rent, phone, internet, all those things and what is variable. You know for us we have licensing and things that we have to constantly keep up. So make sure you do your due diligence and get your business plan together. Will you need cash or financing to cover costs until you become profitable? Most businesses are not profitable immediately. That's kind of why we do like to see the tier up from the hobby to the side hustle and then into a full-time business so you can make sure those things work out for you. So look at the availability of traditional bank loans, government loans or grants, strategies for raising capital from family and friends, or other third-party investors – venture capitalists possibly, and funding with your own personal assets or debt. Cash flow is the key to any small business. Cash flow is the blood that pumps through the veins. Do you expect income to fluctuate based on sales or consulting agreements as opposed to predictable revenue? Consider opening a line of credit to cover your cash flow interruptions and short-term needs – it’s a good way to get – again worry about that cash flow and keep that blood in a business going. Legal and business formation issues. One of the things I really recommend is finding a really good attorney to work with. I’ve got somebody here in my office that I go to and just asked questions all the time. As a sole proprietorship, it’s the default and simplest structure for a single owner. Business assets and liabilities are not separate from personal. That is the easiest thing, is the sole proprietorships, and when you're deciding on that legal structure, that's a basic one. A partnership, it’s a pass-through entity and is the default and simple structure for two or more owners. You have general partners, and it has unlimited personal liability, but in a limited partnership, or LLP, limited partners can limit their liability, so again that’s another avenue to look at. A C corporation, now I’m going to talk about C and S here. We want to make sure that we understand the differences between those two, and what the taxation of those structures means too. Again, the 2017 Tax Cuts and Jobs Act is going to sunset in 2025, and at any time we can have changes in business taxation. So, a C corporation, it's a separate legal entity, it is the most formal structure, and often the strongest protection for owners. As a separate taxpayer, business profits are subject to double taxation at the corporate and shareholder levels. And that's what we talked about understanding, “Am I C Corp or an S Corp, what type of tax am I going to pay?” So besides having a very good lawyer on your team, it's also great to have a good CPA as we have in our office, on our team to help us make decisions for people. An S corp, is a corporation, so again it is a corporation, that elects to be treated as a pass-through entity which means there's no double taxation, eligibility restrictions apply and include limits regarding stock classes, there is only one stock class, and the identity of the number of shareholders, so again, under a hundred with family aggregation that’s in there but that's the taxation is the big difference that we want to look at between the two and the complications of setting up a C Corp vs. an S Corp. And also what we see commonly, a limited liability corporation. It’s a separate legal entity that shares corporate characteristics which means it has limited liability, so that’s a limited liability corporation, but it’s unincorporated as an LLC and can elect to be taxed as a corporation as an S or a C Corp partnership or disregarded entity. So, those are some of the common things you want to look for on how to set up the business. So, we did business planning, now we’re looking at how to structure the business. And do you need to create an organized system to track transactions and other business activity? Boy, I really want to work well, and for me, I work with our CPA here to do those trackings, so I’m trying to give you a little personal insight into what we do here. So, consider appropriate methods to establish and maintain proper bookkeeping and record-keeping practices. Separate business credit and checking accounts, receipt management, and accounting software. So, one of the things that I do, again just giving you a personal insight, is I don't want to do all the bookkeeping myself, I like having a separate person looking at things just to make sure things are on track if there are any questions we ask those questions I get brought to me we can go through that. So, make sure that those things are being done properly. Do you need assistance choosing where to form a business? Consider whether there are reasons to look beyond your home state. So, state-specific tax advantages and licensing advantages, so make sure you understand those as well. Every state operates differently so, I’m incorporated as an LLC here in the state of Ohio and I can do business elsewhere, but I'm paying income taxes because I am located in Ohio. I could be located in let’s say Florida, where I would have no state income tax, however, I have to be cognizant of the licensing requirements for the state of Florida, and if I was choosing to do business with clients here in Ohio. Now, I have clients all over the United States, so it’s not as big of an issue but, we definitely want to make sure we look at State issues state-by-state. Will the business have employees? Consider the following here, clearly outline employment terms and job descriptions. Your duties as an employer and policies to prevent HR issues. So, I have subcontractors that are 1099 and also W2, so I have to be careful in outlining those job descriptions for people that just do some work for me, and I very clearly defined those roles and goals on what those people need to be doing. And, you may need to register with state agencies, and workers' compensation, I have to make sure that's all taken care of. Insurance, and unemployment insurance are big issues make sure you cover your employees. Continuing on with legal Information. Having employees may impact which retirement plan you should implement. Again, we have a flowchart, “should I set up a traditional 401K for my business?” Not every business should have a 401(k), but it’s a great benefit that a lot of people are looking for. Obviously, we can look at SIMPLEs and SEPs and different types of retirement plans. And cash balance plans and you name it. There's a litany of different retirement plans if you are a solo entrepreneur or you have employees. Will you have business partners? Implement appropriate business agreements and formalize the relationship and ownership structure and make sure you understand the triggering events that may occur; death, disability, divorce, disaster, or a disagreement on how those will be handled up front. I would hate to get into business with somebody, we could be great friends, great business partners and that person becomes deceased, but I may not have a relationship with the spouse that is now a widow. So, I need to be cognizant of those issues if I chose to have a business partner. And then a great issue is a succession plan. If you have business partners, a buy-sell agreement can set a course for a smooth transition, so, if you do lose one partner, how do you compensate the widow? And those can be funded in many many different ways it could be a sinking fund that it can be funded by, a life insurance policy – many different avenues to make sure that that buy-sell agreement is funded properly. And if you're planning on bringing your children into the business, include tax-efficient ownership transfer strategies in your annual gifting plan to your estate plan. So, make sure you understand how to transition down to the next generation. Do you have intellectual property to protect? Consult an attorney regarding trademarks, copyrights, and patents. Somebody that lives here locally does that for a living on an international basis. Just a wonderful person I get to talk to about these types of trademarks, copyright, and patents on intellectual property, great discussions. Now the ones that I like to talk about it are the tax planning issues. We talked a little bit about that C and S and how we tax – those taxes going to the small businesses. Understand how your choices of the entity and your operations will affect your exposure to personal tax, self-employment tax, and/or corporate tax. Again that's that discussion about how we're going to compensate, through a salary or owner distributions to whoever the owner is. You may be able to deduct certain start-up costs; home office expenses, health insurance costs, and other business expenses depending on your circumstances. Again this is tax planning, don't wait until the end of the year after everything's done and look back and then you made all the mistakes. Figure this out beforehand, and plan ahead. You may need to begin making quarterly estimated tax payments to avoid underpayment penalties. Again, tax planning, so once your preparations are done and then you look at the next year, what are your expected gross receipts going to be, what’s the expected profitability going to be, and again that's business planning 101, we want to make sure that's good. Will you need assistance in reviewing your business tax return? Boy, this is a great one, yes or no? Let's look at those things and talk about them. Will the business have to collect and pay sales tax through business sales, physical products, or even certain services it may be required to pay sales tax and collect those taxes. Make sure they are being paid on time as well. Do you need help determining if you'll be eligible for a qualified business income deduction, sometimes just QBI is how it's referred to, so QBI deduction. We also have a good flow chart here, “Am I eligible for a QBI deduction?” So, look up that flow chart. And then the other issues do you need business insurance? I know I do, it's mandated in my business. Consider insuring against common risks, business Interruption, injuries of the business, professional liability, and data breaches. Will your business need a license to permit, I know I do. Make sure you get them where they are required. So, city, county, state, or federal licenses. The small business administration can provide additional guidance for you. And health insurance coverage, I know this is a big issue, a lot of us – a lot of people ask us like, “Hey I want to leave my job, I want to start this business, but I have to cover my family” Consider what provider and coverage will best suit your needs and your employee needs if you have employees. Do you need to reevaluate your life insurance? Probably a good time to sit down with a financial planner like us at Gateway Financial and look at this. You may need to increase your coverage in order to provide liquidity for your estate and enable your heirs to maintain the business. And if you have a buy-sell, remember we're circling back to what we talked about before, life insurance can be used to fund that purchase obligation. And if you have key employees, key person life insurance can help ensure business continuity in the event of a death. That's one that is underutilized, that key person Insurance. Do you need to review your estate plan? Make sure your succession planning and directing the management transfer of the business is your will and/or trust, whichever one you have, and update your power of attorney. Will your business be minority-owned, woman-owned, veteran-owned, or LGBT-owned? Consider if your business is eligible for different certifications, tax benefits, grants, loans, and business opportunities that might be available. And, do you need to outline your exit strategy? Consider whether your ultimate plan involves a merger, being acquired, transfer to the next generation, sale to a partner investor, employee stock option plan, or the ESOP — stock ownership plan, excuse me, or liquidation. How are you planning on exiting the business is also a big critical question to ask. We all love running our businesses but a lot of people don't know how to get out of that business. So, I hope this was a really good checklist for you to say, “Hey, I need to think about some things before I do what I want to do.” Not that it's going to stop you, but if you lay a good foundation, a good framework for your business when you start, it will save you so many headaches later on, years down the road when you're looking at buy-sell agreements or partnering with someone else or possibly selling off the business to somebody else. Also, your compensation, how you're going to structure the business for taxation, so many big questions and big decisions to make make sure you get a good team behind you that understands – that's going to sit on your side of the table and say, “Here's my opinion of what I think you should do.” And have not just one person, have a team of people around that say, “this is why you should do it” not just the answer that you're looking for but why to that answer. So again, please subscribe – we love our subscribers. Hit the thumbs up it helps with the YouTube algorithm and we'll keep bringing great content like this have a great day and be well.

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