You’ve just decided that it’s a go! You’re going into business and you have the idea chosen. What are the next steps? There are several important decisions to be made which will have a big impact on your business for years to come.
What are you going to name your business? It might seem like an afterthought but it shouldn’t be. My book publishing company I named “Bob Adams, Inc.” caving into my ego and ignoring the advice of others to choose a snappier name. The end result? Years later I did a disruptive and expensive name change, renaming the company “Adams Media Corporation.”
How can you come up with a great name? First decide how functional you want your name to be. Is your name also going to reinforce the positioning of your business? For example, I called my summertime painting business “College Painters” to emphasize that we were cheap and also to explain why: we were college students just trying to make a little money to pay tuition.
Another consideration with the name is whether or not it violates someone else’s trademark. So, do a name check in advance and make sure you don’t have a conflict. If you want to make extra sure there is no conflict, invest the money in an intellectual property attorney and have him or her search for conflicts and render an opinion.
Another key decision is what legal form is your business entity to take. While there are many variants, your basic choices are sole proprietorship, partnership, LLC or Corporation. A sole proprietorship means that you really do not have a business entity, that you are doing business as yourself. You still might use a fictitious name (for example College Painters was a fictitious name but if I called the business Bob Adams, Painter that would not be fictitious). The fictitious name you are supposed to register with your state government, but to be honest I never bothered for any of my sole proprietorships and no one ever cared.
A basic partnership means that you are in business in with someone else, but you are each still doing business as yourselves. The business is not a legal entity. So, for example the sales income is you and your partner’s income, and the business expenses are also your personal expenses.
A corporation on the other hand is a totally separate legal entity. A corporation has assets and liabilities distinct from that of the owners. And the income of the corporation is generally taxed separately from that of the owners.
However, in the US you can elect with the IRS to be a “S” corporation which means that the owners of the business are directly taxed for the earnings of the corporation. What is the advantage of an “S” corporation. With a traditional corporation, the business earnings are first taxed at the corporate level. Then, when and if you distribute the earnings to the owners, the owners are also taxed on any distribution. Hence with a traditional corporation you face double taxation. On the other hand, “S” corporations have some restrictions not faced by traditional corporations, such as limits on the number of investors.
An LLC or limited liability company has some similarities to an “S” corporation in that it is an independent entity, but you are taxed personally on the earnings of an LLC, avoiding the double taxation of a traditional corporation. There are some subtle distinctions between an LLC and an “S” corporation, so if you are trying to decide between the two, I would recommend you consult with an attorney. In fact, I would recommend that you carefully read up on the different choices for the legal form of your business, but then also get an opinion from an experienced business attorney.
The next key business decision is where are you going to locate your business? In general I am a big believer in saving money and if at all possible running the business out of your home or apartment. I have run all kinds of businesses out of my homes and apartments. Once I had 8 people working out of my 1-bedroom apartment and semi-trailers backing up to the kitchen window to load up cartons of my books for distribution.
I know a lot of people say “it’s not professional” to work out of your home. But I hate that phrase and you should too! Sometimes it’s a lot better to save money and leasing commercial space can cost a lot. It’s not just the amount of rent but also the fact that you are locked into a fixed term lease. Furthermore, there are all the “hidden” costs such as property taxes, higher insurance levels, utilities and more. In many localities, it is not legal to work out of your home especially if you have employees. But you know what? If every illegal home business was shut down in this country, we would plunge into a depression. Many large businesses started at home, from Ford motor company to Apple computer.
Some decisions about your business are worthy of a lot of careful thought and these are three of them: the name of your business, the legal form of your business and the initial location of your business. I have learned how important these decisions are the hard way: by making a quick decision on them which later proved to be a mistake. You don’t have to make a mistake: think them through carefully, get input from others, make an intelligent decision, and be on your way to business success!