There are many creative and fun aspects of starting your own business as an independent contractor. You can choose a name for your business! Design your own place to work! You need to start your business off on the right foot. The trickier aspects of starting a business can seem intimidating. They might even deter you from branching out on your own. We’ve compiled a list of five steps to get you started and hopefully help you overcome any fear you might have about jumping in and becoming a business owner!
1. LLC or Sole Proprietorship
You can decide between registering your business as an LLC or establishing a sole proprietorship.
LLC stands for limited liability company. By establishing an LLC for yourself, you as a business owner (referred to as a “member”) are protected from lawsuits and/or creditors. As an LLC, your business is a separate entity from you. To start an LLC, you will need to register with the state in which you work. You will need to submit filing fees and keep up with annual dues. As a member of an LLC, you will need to list “LLC” in your company’s name. As an LLC, you will have to be careful to separate your business records and financial documents from your personal accounts and records. For extra information on LLCs, see this helpful guide.
If you choose to be a sole proprietorship you won’t need to pay initial fees or registration. As a sole proprietor, however, you could be pursued by lawyers and creditors as an individual for your business practices. As a self-employed person, the costs and profits of your business as a sole proprietor would be taxed as a self-employed person. The income of your business would be considered your personal income. Sole proprietorships require slightly less commitment and are easier to establish. A sole proprietorship can be a good place to start when beginning a business, depending on your level of desired investment. As a sole proprietor, you will file your income on a Schedule C form as a part of your personal tax return. For extra information on sole proprietorships, see this page.
2. Separate personal from business
Regardless of your status as an LLC or sole proprietor, you should be sure to separate personal finances from your business accounts.
Setting up a separate account for your business has this wonderful effect of making the business come alive and seem real. It allows you to be conscious of how money is operating in your business and the effect it’s having on your [separated] personal finances. By keeping a separate credit card for business expenses, you won’t allow your finances to get murky and will relieve your own stress.
3. Educate yourself
Educate yourself on how you will pay your taxes.
Before you even begin your business, you should look into what kinds of taxes you will be responsible for at year’s end. This is a good practice whether you’re setting yourself up as a sole proprietorship or an LLC. Will you be working from home or does your business own property? What kinds of self-employment taxes [social security and Medicare, for example] will you be responsible for? Does your state require gross receipts taxes or franchise taxes on business income? Will you be employing anyone and if so, what employment taxes might you be responsible for? The more you know, the more questions you’ll have—most of which can be answered online.
4. Track finances
Track every financial fluctuation, payment, and cost.
You should track and thoroughly document every business expense. It doesn’t matter if you’re buying a desk, or an eraser—to receive a tax deduction and for your own peace of mind, you should record every financial action. You should save every invoice and receipt. Create a special folder especially for your business invoices and receipts. Each week, enter these transactions into a master document that lists both profits and expenses. You should write the dates onto every piece of financial ephemera. You will thank yourself down the line when you’re both secure in the knowledge of how much you’re spending and when you can apply for and receive tax deductions.
5. Get help
Don’t be afraid to ask for (and pay for) help.
You might consider making an appointment with an accountant to be sure you are going into the financial year with a clear-headed plan. This may seem an unnecessary cost at first, but it will help you understand aspects of your financial situation that aren’t easily googled. Talking to a financial adviser or accountant will allow you to begin this new phase of your business life with a sense of safety and responsibility and with a set of goals and plans.
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Disclaimer: The above informational materials are not intended, and should not be taken, as legal or tax advice. You should contact an attorney and accountant for advice on specific legal and tax issues.