Legal and Accounting for Startups

Does the threat of being sued stop you from starting your own business and offering products and services?

A lady told me the other day that she wanted to start a business and she spent days reading about the legal and tax requirements for small businesses. After hours of study she did not understand any of it and she just started to cry. I understand how she feels. There are more rules than there are grains of sand on the beach. The good thing is, you do not have to know them all. That is someone else’s job.

Make money first

This may shock you, but you do not need to start with this legal and tax stuff. Instead, you first need to make money.

Yet, just a few nights ago as I was delivering a talk about how to get started selling information products, two people challenged me saying that you could get sued on day one even from offering advice. I get these comments and questions so often, I thought is was only fair to once again address them.

Everyone is at risk for lawsuits

If you want no risk of being sued, then stay at home. Litigation is certainly out of control, but it is not limited to businesses. People get sued by neighbors, drivers, shoppers in stores, etc. Anyone can sue you for any reason. So if you think that not being in business protects you, dream on. If you are afraid of being sued, you certainly should NEVER get behind the wheel of a car.

Will I lose my home?

Almost no one loses their home in a lawsuit. (exceptions are those who break the law and get jail time – think Enron). I am not an attorney, but I do know that all states have laws that allow a debtor/defendant to exempt certain personal and real property in debtor and personal injury claims. Usually if you own a business, all they can get is business profits, or perhaps the entire business. (The exception would be if you have a mansion, but that is covered below).

How do I deal with business taxes?

In terms of taxation, you generally only owe taxes on sales and profits. If you have a business that has made little or no money, you have no liability for taxes.

Common sense legal and accounting advice for business startups

For starters, again I am not a attorney nor a CPA, so I like the idea of you getting to both an accountant and attorney who deals with small business in your area. You should be able to find someone who you can meet with for a short time to get common advice without costing you money. If they want to start the clock on the first meeting, go elsewhere. I would go to other business people and ask them who they use. But do this quickly. Should only take a day to get this part done and then move on to profit.

Basically, here is what you need to do when you start to be prepared for growth.

1. Operate under a business name. Use your own name if you like. But, whatever you do, be consistent. When you start taking money for providing products and services, your legal status is “sole proprietor”. You do not have anything to do to make this happen. Just follow the steps below and report the business income on your personal taxes.
2. Open a separate bank account. I have been guilty of not doing this and causing myself headaches. Most banks offer free business accounts. You might need some legal documentation to make this happen, but ask the bank and they can help.
3. Keep records of income and expenses. Does not have to be complex, but something. I have used simple tools like Quicken, pad and paper, or MS Excel. Keep it simple.
4. Monthly “do the books” to determine how much you made and how much you spent. Your profit for the month is the difference between the two.
5. Keep 25% of your profit for possible taxes. Keep in savings account, in a box, something. This 25% is probably more that you will need for taxes, but having nothing put back for income taxes is one of the big killers of small businesses. I have seen many who suddenly realized they had a good year and owed the IRS over $80,000 and had no cash to pay for their tax bill. Save the 25% each month. You will never regret it.
6.  Act like a business. Do not mix business money with personal money.  I suggest only transferring money from the business to your personal account once per month – which is called an “owners draw”.
7. Do not sign anything except under the business name. If your business name is your name, then sign document as your name, then your title. For instance, I might sign a document as Dale Callahan, Operator of Dale Callahan. Sounds silly, but shows you are signing as a rep for the company.

These are all simple things, but by doing these from day one you will find that you will have no issues as you grow. Many of the problems small businesses get into can be tied to items above.

Two exceptions call for immediate corporate legal protection 

1. You have significant wealth. What that means may vary for you, but my general rule is anyone who has over $1million in assets excluding their home. The risk is just too great. So pay the attorney their $400 fee for legal protection, get insurance, and move on. For you this number might be $500,000. But if you are broke, do not worry about it. Attorneys do not sue broke people to get their assets. Attorneys only work to get paid, and if you are broke, you cannot pay.
2. You are in a high risk venture. If someone is likely to get hurt, protect yourself via incorporation and proper insurance. A perfect example of this kind of business is Helen Todd’s business. She teaches white water kayaking. Guaranteed someone is going to get hurt at some time. At very least some kayak is going to damage a car. So she needs, and has, legal protection from day one.

This may look like a lot of stuff, but really simple common sense. The key here is to focus on one thing first, and that is making money. Once you have income, everything else becomes clearer.

Question: What other concerns do you have about getting started? What other suggestions do you have for those starting?