New Business Basics: Cover Your A$$
As your business gets off the ground, you’ll need to put some time and thought into the processes and procedures of its daily operation. It’s not glamorous but these processes are the internal organs of your business and absolutely vital to its survival. In the long run, they will save you time and likely a lot of money and ensure business longevity and better chances for its success.
Maintain Good Records From The Beginning:
Four score and about twelve years ago, a handful of small-ish companies, Enron, Tyco and WorldCom, completely imploded for a variety of mismanaged corporate accounting reasons. Experts delved into understanding “how this could happen?” at such gigantic, seemingly well-run corporations and discovered the shocking absence of high level record keeping systems. Such discoveries, among other things, ultimately resulted in the passing of the Sarbanes-Oxley Act which now obligates public companies to regularly provide financial information and certify its accuracy.
While your business isn’t likely to be filing paperwork with the SEC, the lessons learned are good ones: good business models include record keeping systems. But what exactly does that mean for your business?
A good place to start is with the forms, or general information templates, that you’ll use for your business. When you meet with a client or customer, how will you retain information about your prospective or existing relationship? Will they fill out application? Will you require that they sign a contract? Will they receive a proposal? What happens if they give you a deposit for services?
This kind of intake at the outset of your working relationship is important for a variety of reasons. It identifies the major obligations of each of the parties (e.g. “You will pay me X and I will give you Y”) and helps you keep a record of who you’re working with and what exactly you’ll be doing. I’m avoiding the use of legal terms here (they scare the creative types and I’m trying to be inclusive) but this essentially forms your basic contract.
What kind of forms do you need? First, a way to obtain basic client information (name/address/email/etc.). Next, consider an engagement letter or come communication that sets forth your understanding of what you will be doing for your client. You might have them acknowledge the engagement letter with a signature, or response email, or something in writing (for the love of all that is holy, please do it in writing!) that confirms to you and perhaps a judge one day their agreement. Again, depending on the type of business you’re starting, you can tailor this document to be more complex and inclusive.
Third, consider the types of documents you will use to collect payment. Are you issuing invoices or sending a receipt? How will you handle taking deposits? A good rule of thumb is to ask yourself, “If a year from now, I had to prove that I did or didn’t take John’s deposit (or that John knew I would do Y work for X money) here’s what I could show…”
When you identify what forms you want to use, you can find good samples to borrow from all over the internet. You don’t need a lawyer to draw up documents or contract for you. Although, I will warn you that depending on the caliber of the relationship or scope of work you might want to consider hiring a lawyer to draft some for you (see “Hire the professionals when necessary” below).
Consider Tax Ramifications:
I won’t pretend that I know a whole lot about taxes. But I do know that you should consider the tax benefits/burdens of different business structures. You’ve undoubtedly heard about partnerships, sole proprietorships, and corporations but do you know which structure will be the best for you?
Your business structure will impact how you file your return, what income is taxed and what expenses you can write off. It will even establish your potential liabilities in the event you or your business is sued. This is an area where a conversation with an accountant would be wise. They can advise you on what would be the best fit for your business and help you through the steps of establishing that structure.
In addition to selecting the best structure for your business, you should learn what business expenses are acceptable tax write offs under that structure. Then, keep excellent records and files for receipts and go to town; within reason, of course. The first few years of business ownership don’t always have many benefits so tax write offs can help soften the blow a little bit.
Hire The Professionals Where Necessary:
You can often save yourself a lot time, money and the gloating of naysayers if you spend some money while setting up your business. But knowing what to spend it on is half the trick, right?
Hiring key professionals to assist in setting up and later running your business is usually money well spent. A smart entrepreneur sticks to what he or she knows best and hires professionals, like lawyers and accountants, to help where they are weak. You don’t need hundreds of hours of representation, just some basic cover-your-ass-type structures and systems like those discussed earlier.
Of course, you also don’t actually need the lawyers or accountants to do any of this work for you. Unless you specifically need their authorization on a document or representation in court, for the most part you can do-it-yourself. I’m not saying that that is always the best idea, just that you could consider doing some things on your own.
You could draft your own forms and contracts and even set up your own corporation or file your own taxes. The problem is that many new business owners get so focused on doing only what they are good at (e.g. being a photographer or restaurant owner or consultant) that they forget the business side of running a business! Often this is realized when it’s too late: a letter from the IRS or service of a lawsuit. Running a business requires you to be a jack-of-all trades and if you were savvy at the legal or accounting stuff well, you’d probably be a lawyer or an accountant. So unless you’re actually going to do the work and get these systems into place, stick to what you are good at and hire the professionals to do the rest.
By establishing good practices early on in your business, you set it up for longevity and protect it from liability. Employ good record keeping systems, understand the tax consequences of your activities, and hire key professionals and you’ll have a solid basic foundation from which to work.
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