Questions & Guidance with Jacob Milder,
Certified Financial Planner with Oak Street Investments
Throughout my first Business Bootcamp program, participants had a lot of questions about the finances surrounding their new businesses.
How should I set up the legal enterprise?
What kind of expenses can I anticipate?
Do you have a spreadsheet that will outline my financial outlook?
So I enlisted the help of Jacob Milder, Certified Financial Planner with Oak Street Investments, to give you the rundown of how to set up your business for financial success. Here are 7 of the most common financial questions to consider when starting a business.
(1) I’m ready to start my business, what are the first steps?
Congratulations on starting your business and for asking the right questions right out of the gate! Once you have a name for your new business, head over to your Secretary of States’ (SOS) website for the state in which you’re looking to register your business. For Colorado, visit https://www.sos.state.co.us/biz/FileDoc.do
You’ll need to first do a name availability search to see if the name you want is available, then fill out the necessary forms for the corporate structure you’ve selected (see below). Also note that you’ll need to list someone as available to receive legal documents on your behalf, a registered agent. Frequently that’s you, but you may want to consider hiring someone because whomever you choose will have their information public on the secretary’s website. Generally hiring a registered agent costs around $40 per year.
If you plan on earning money, opening a credit card or bank account, or just about anything else having to do with money, you’ll want to setup an EIN, or Employer Identification Number, with the treasury. Also sometimes referred to as a TIN, Taxpayer Identification Number, an EIN can be obtained from the IRS website in under 10 minutes.
As part of the registration with the Secretary of State, you’ll need to determine what kind of corporate structure you want, which will in turn determine which forms need to be completed. While the forms are fairly straightforward and can be completed without professional help, you can get extra guidance from an attorney, an online service such as Legal Zoom or Rocket Lawyer, or even by calling the Secretary of State’s office. (In my experience they’ve been very responsive and helpful, even though they are careful not to veer into the legal advice lane, and it’s a real cost-saver to go this route.)
(2) How do I know which Corporate Structure is right for my business?
Deciding on the corporate structure is an extremely important decision. While corporate structures can be changed down the road, doing so can be costly and, depending upon the nature of the change, can take substantial time. The most common types of corporate entities for a service-based business are a Limited Liability Company (LLC) or an S-Corporation.
Both of these structures are considered pass-through entities, meaning that income and losses pass through to the member(LLC)/Shareholder(S-Corp)’s own 1040 (tax return) rather than being taxed at the corporate level like a C-Corporation. If you select an LLC, you then decide to be taxed as a disregarded entity just as a sole proprietorship, or elect to be taxed as an S-Corp. (And yes, you can be an LLC electing S-Corp Taxation.)
When deciding between an LLC and an S-Corp, there are a number of differences between the two but consideration should be given to the following:
- number of owners/shareholders/members
- residency status (generally nonresident aliens are not permitted as owners of an S-Corp)
- number of classes of stock
- simplicity and cost of setup
- control over income and self employment taxes
(3) Okay, that’s great, but I’m still confused! How do I know which structure is right for my business?
Every business is unique so the factors that are most important to you and your business will determine which direction to go. If you’re looking for simplicity and the lowest cost, setting up an LLC and obtaining a taxpayer ID number/EIN can be done in under 1 hour with under $100.
While the costs may be a bit higher and the process a bit longer, setting up an S-Corp may be right for you if you think you’ll benefit from the structure required when you incorporate and the ease of transferring ownership shares down the road. Most accountants (CPAs), certified financial planners (CFPs) or business attorneys should be able to help guide you in your decision.
Regardless of the direction you choose, I recommend spending time completing your operating agreement. This document is akin to a more official version of your business plan, and you can use a lot of the information from your business plan to create it. Once again you have the choice to do it yourself, use a free template from Dr. Google, get a bit more guidance with one of the legal websites above, or go full-service with an attorney. (Here's one link to create a free operating agreement for your LLC.) While there are a few states that require this document, most do not. That said, it’s a good idea to have one.
(4) How much will it cost to get started in business?
Likely double whatever you think (wink). Joking aside, you can spend as little as $100 or less registering your LLC with the Secretary of State. Using an online service such as Legal Zoom or Rocket Lawyer will add a bit of expense ($50+/mo) but also walk you step-by-step through the forms required for your state. An attorney will prepare your documentation for $500+. Setting up an S-Corp requires quite a bit more documentation so expect to pay at least $1,500 for filing fees and assistance.
From there, as a startup, your largest expense may be on the technology required to launch, manage and grow your business. Given your decision to start a business, you’re probably already familiar with a number of the tools you’ll need to get started, but researching and identifying the exact costs of these tools prior to launch can save you time and money in the long run.
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Regardless of your industry, here's a list of common expenses:
- WEBSITE (domain, web-hosting, platform, or design fees). We use GoDaddy for domain purchases and the websites themselves are surprisingly inexpensive to build these days using a do-it-yourself platform (ie. Weebly, Wix, Wordpress (what’s up with the “w”s) or Squarespace). CLICK HERE TO READ WHY WE, AT REL IMPACT, CHOSE SQUARESPACE Consider, too, the kind of functionality you’ll be needing: Do you want an online store? Chat rooms? Ability to accept payments? Each of these can affect what you pay for your monthly hosting, security and site build.
- RENT Where will you work? Do you need an office space or will you work out of your house? Do you need a storefront downtown or will a co-working space you use 10 hours per week be more effective? While you can set up a computer, printer, phone and home office for less than $1,000, you may also consider having a virtual office. Google Virtual Office and you’ll find there are lots of spaces around town happy to take your money and let you use their address and collect/forward your mail; some will even take your phone calls. Expect to pay at least $125 per month or more for mail forwarding, rights to use the offices, telephone answering, etc. If you want your own private office, obviously there’s a lot of variability depending on the size, but expect to pay a minimum of $750/mo, and substantially more in nicer areas and nicer buildings, for more space. If you have a friend with an office, consider asking them if you could work out of there for a few hours a week while you’re getting set up.
- Most people need help when you’re starting a business. Whether it’s outsourcing research, SEO, website development, writing or something else, it’s a good idea to budget for some assistance. Personally, I used Upwork.com to find experts to help with web development and a couple of complex excel files. Pretty much anything you need help with, you can find it on Upwork or Fiverr. (No, I didn’t get any compensation for that commercial).
(5) How do I pay myself?
While it’s outside the scope of this Q&G to discuss how your business will actually make money, let’s assume the business is earning money and it’s now sitting in your business bank account. If you’re an S-Corp, you will be taking a regular salary up to what is considered “reasonable” for someone doing your job and will reflect withholdings of social security, medicare, federal and state taxes where applicable. You can withdraw additional amounts without these withholdings in the form of a draw or distribution. As such, figuring out what is “reasonable” is therefore very important for tax-planning. With the Tax Cuts and Jobs Act of 2017 (TCJA), it’s recently become even more important to work with a professional to determine what’s “reasonable”. As a member/owner of an LLC, money can be transferred directly from your business account to a personal account. Which type of taxation method you’ve selected for your LLC will determine the tax consequences.
(6) Which software should I use for accounting?
The gold standard for accounting software, based on longevity and their premium pricing, is Quickbooks. Newcomers Xero and Wave are also worth taking a look at. Each one is slightly different and has a different user experience, but they all do roughly the same thing. I use Quickbooks Online for my business (about $30/mo). You can link a business credit card and bank accounts to the software and it will help you track and categorize your business spending, but these are not great for personal finance.
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(7) So how do I track my personal finances?
Tracking your spending and income is one of the most important things you can do to manage your personal finances. And when managing a business is added into the equation, it’s even more important to track spending. The two pieces of software I recommend are Quicken (no longer owned by Intuit), and Mint.com. Both do a great job but if you don’t want the ads, it pays to go with Quicken.
Jake Milder is a Certified Financial Planner™ and managing member of Oak Street Investments. He has spent 15 years in financial services working with hundreds of financial advisors and their clients to help them build stronger relationships and better portfolios.You can learn more here.