Recently my 14-year-old daughter decided she wanted to start a potions business with one of her friends; they figured love potions might be in demand before Valentine’s Day. So over the course of a sleepover, they set up an Instagram account, promoted it on their other social media accounts, and sat back to wait for the orders to arrive.
“How much are you charging?” I asked.
“Oh, like $5-7 per bottle.”
“And how much does each bottle cost you to make?”
“We can get the bottles for like $2 at the craft store. All different shapes!”
“What about the cost of the ingredients?”
Her sidelong glance at my spice cabinet told me she assumed those other business costs would magically be non-existent.
Most people starting a new business understand that it takes more than a kitchen to loot and an Instagram account. There’s cost analysis, proposals, marketing…but that’s not all. We’ve talked to Solo Hustle customers about the to-dos they didn’t consider—or have any idea how to handle—and compiled them here to make it easier for you.
Decide on a name and form an LLC.
Your company needs an original name, so do some basic searching first to make sure someone else hasn’t already snagged your idea. Think of the future—you may have a core group of products or services right now, but will there be other things you’d like to offer down the road? Make sure your name isn’t limiting future plans, as rebranding a company can be time-consuming and backtracking on the marketing efforts you will put into name recognition. Also, check for trademarks using the name you want for your company.
A Limited Liability Company (LLC) is an excellent idea for small business owners for a variety of reasons, but here are a few of the biggest for startups:
- It protects the personal assets of owners from creditors.
- Business income and losses are passed through to the individual members (business owners) rather than being paid at the business entity level.
- It provides more credibility to potential customers than a sole proprietorship.
To get started:
- Choose the state where you want to form your LLC. Usually, this is the state where your headquarters will be located. Each state has its own cost, taxation, and LLC laws, but choosing a state where you are not conducting business can also require additional legal hurdles. Do your research.
- Decide if you want to hire a registered agent or be your LLC’s registered agent. A registered agent must have a physical address and receive all tax forms, corporation documents from the state, and other legal paperwork.
- Draft an operating statement. Even if you are the sole member of the LLC, an operating statement further advances the legitimacy of your company and shows you respect the separation of the LLC from your personal assets.
- File the paperwork to form your LLC with the state of your choosing. There will be associated filing costs, which differ from state to state. NOTE: These fees can be tax-deductible.
Get an EIN
You provide your social security number when you file your personal taxes or fill out paperwork to receive paychecks from an employer. An Employer Identification Number (EIN) is like a social security number for companies. To determine if you need one, check these questions. If you answer yes to any of them, you need an EIN:
- Do you have employees?
- Do you operate your business as a corporation or a partnership?
- Do you file any of these tax returns: Employment, Excise, or Alcohol, Tobacco and Firearms?
- Do you withhold taxes on income, other than wages, paid to a non-resident alien?
- Do you have a Keogh plan?
- Are you involved with any of the following types of organizations?
- Trusts, except certain grantor-owned revocable trusts, IRAs, Exempt Organization Business Income Tax Returns
- Real estate mortgage investment conduits
- Non-profit organizations
- Farmers’ cooperatives
- Plan administrators
While several services will facilitate obtaining an EIN for a fee, the IRS provides a simple and FREE application process.
Obtaining professional liability insurance
Anyone who provides a service should consider professional liability insurance. You are probably most familiar with medical malpractice insurance, which doctors are required to have to protect against claims of injury or incompetence from patients. But anyone providing professional services should anticipate the possibility of being sued by a disgruntled customer, from accountants and financial advisors to attorneys to website and graphic designers.
Costs often average $500 – $1000 per employee, but that will vary based on a variety of factors:
- How common it is for your service/industry to be sued, including the level of risk and potential material or financial losses for a customer.
- The chosen liability coverage limit.
- State and location—in general, city-located businesses have higher costs.
- The number of employees. In addition to paying per employee, the larger your company, the more likely it is for someone to make a mistake.
- Years in business—startups can expect higher initial costs from insurance providers as they have unproven track records of reliability and safe operations.
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