Do Business Well

You’ll need to decide before opening the business what form your business will take. In the United States there are four approaches available. In other countries it will be necessary to check with local resources to determine the choices offered.

Sole proprietorship. Most very small businesses use this enterprise type. It is the simplest from a tax and legal standpoint. In many cases part-time businesses using the sole proprietor approach will not even segregate their personal financial affairs from their business income and expenses. While this is not the best way to run any company, it is possible.

In general, the steps for establishing a sole proprietorship include:

• Determination of a name. If you’re not going to use your own name as the business name, you must file a “fictitious business statement.” The government requires this filing so as to put your vendors and customers on notice that you are the responsible party behind the “fictitious name.”

In most jurisdictions, this filing is accomplished by publishing certain information three times in a general circulation newspaper. If you will open your daily paper to the beginning of the want ads you will see a section titled something like “legal notices.” Most papers publish new fictitious business statements every day. However, if you don’t see any in today’s paper, it is possible your local news vendor only publishes these items once a week. A quick call will determine their policy and prices. If you decide to use your own name, it’s not necessary to file this statement. For instance, a professional firm named John Doe and Associates would not need to file. However, John’s Baby Furniture would. If you’re not certain, it’s better to file.

• Next you should open a checking account in the company name. The bank will require a copy of your fictitious business filing before they’ll open the account. It is not absolutely necessary to have a separate checking account, but it’s highly recommended.
• If you will have employees, you should apply for a federal ID number. You can use your Social Security number in a sole proprietorship, but it doesn’t cost anything to get a special number for your business.
• In most states you’ll need a sales tax number. This is the way that the state identifies you for the purposes of collecting sales taxes from you, your customers, and your vendors. You’ll need this number regardless of the type of business you’ll be running or the enterprise form you select. Your vendors will require this number in order to sell you items tax free that you intend to resell.

Generally, the state will ask for a cash deposit to ensure your payment of future sales taxes. If you only sell to other businesses who have sales tax numbers, you won’t have any tax liability, and thus—in most states—you shouldn’t have to make a deposit.

However, if you’ll be selling to consumers, end users, or others who must pay a sales tax for the products or services you provide, then you’ll certainly be asked for a deposit.

Most entrepreneurs are optimistic and somewhat proud of their enterprise. As a result, when the clerk at the sales tax office asks you to provide an estimate of your first quarter’s or year’s income, there is a tendency to give a high figure. The amount you state will be used to determine the amount of your deposit. In other words, the more optimistic you are, the more out-of-pocket expense you’ll have.

A better approach is to come up with the lowest estimate that you think will be believed. If the clerk doesn’t agree with your number and attempts to have you increase it, there’s no rule against continuing to argue your position. If the difference of opinion is great enough, you may even want to involve a supervisor. The clerk’s job is to get the largest deposit possible. Your job is to pay the smallest amount possible.

Please understand. This in no way affects your future tax liability, only your immediate cash flow. And remember, this general rule of not overestimating your income applies to all deposits you might make.

The positive aspect of the sole proprietorship as an enterprise type is that it is uncomplicated and inexpensive. The negative is that you have unlimited personal liability for the debts or other liabilities that may arise in running the business. You have less flexibility in your tax matters. In addition, you may find it more difficult to raise capital. Addressing these issues one at a time, the most important by far is the matter of unlimited personal liability.

You may or may not currently own a home, substantial savings, stocks, bonds, or other commercial paper. If you don’t now, you certainly intend to build such assets in the future. You may even intend to own a vacation home, boat, jewelry, or art. As a sole proprietor, everything you own is subject to being seized by your business creditors.

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