You are deciding to become (or currently are) an independent contractor. In part II, we are going to provide a checklist to help you get started. In part III we will cover forms you will need to be familiar with. Part IV goes through the basics of being in business.
First things first, I’m not a lawyer, CPA, nor a small business consultant. I’m just one guy on a team of business owners who has been out there for a little while and has walked the road ahead. So please check with a professional before making any serious decisions. This is just to help fill the gaps. Things change every day. This article was written in May of 2007, based upon our experience as business owners in Santa Cruz, California. Setting up a business may be different in your corner of the world.
Setting up Your Business
Your Checklist:
- Create a Business Plan: How will you make money?
- Pick a Legal Form of Business
- Fictitious Business Name (Optional)
- Zoning & Supplemental Permits
- Home Business Safety Check (Depends on your city)
- Business License (if your city or country requires it)
- Apply for an EIN
- Open a Seperate Bank Account
- Professional Certification
- Employees, Sales Tax & Things We Don’t Know
Create a Business Plan: How will you make money?
When someone asks you, “what do you do?” or “what type of business is it?” can you answer in 30 seconds or less? It’s called an elevator speech. Write it down. It will help you focus and you will get asked that question all the time. It is nice to have an answer.
That’s the first part of a business plan. If you get audited, one of the first things the IRS will look for is a written plan on how you will generate profit. There are many templates online and some good free courses offered by SBDC & SCORE. Some people spend years perfecting their plan, while others take 30 minutes and hand write it on a napkin. It doesn’t matter how you do it, just do it, and put it in your files.
What legal form of business is best for you? For some it is a sole proprietorship, for others it will be an S corporation or an LLC. Over the years, Peter & I have owned sole props, general partnerships, and S Corporations.
I picked a sole prop first because it was simple. I wasn’t too worried about liability (because I owned nothing and I wasn’t doing high risk services). The paperwork was relatively straight forward (I didn’t need a lawyer) and the cost was in my price range.
When Peter & I joined forces, we set up a general partnership. The GP was basically the same as the sole prop, but for multiple people. We laid down a few rules, a partnership agreement saying what happened if any of us wanted to leave, died etc… and we were off. I recommend using a lawyer for the partnership agreement and checking with a CPA.
Not long ago, we increased our exposure by taking larger projects with the higher potential for liability (if things went boom). We took on the responsibility for a team of contractors. We bought our own homes. Our legal & financial counsel agreed it was time to set up a corporation. It involved about a month of planning and paperwork, a few hours of a lawyer’s and CPA’s time and some local and state fees, which all together cost a few thousand dollars.
How do you decide? First of all .. go read my post on the business types you can choose from. It’s a bit thick but if you read slowly it will help. Then sit down with a CPA and a lawyer to discuss your particular situation.
One you have decided on your business legal structure, partnerships, corporations and LLCs will need to file the proper form with the secretary of state. Corporations will often have to file tax forms with the Franchise Tax Board. You might also want to check with the IRS on your federal tax schedule.
Fictitious Business Name (Optional)
You do not need a fictitious business name for a corporation or if you plan to operate under you own name. So a sole prop called Shane Pearlman Enterprises does not require me to submit a fictitious business name. If you do register a fictitious business name, they will give you the papers you need to open a bank account in the name of the business. You don’t own the name forever – in Santa Cruz County, where we live, it’s for 5 years, and it cost us $70. You will also be required to publish the business name in a newspaper within a set period of time, usually 30 days, which cost us $35 last time we did it.
Your country or city may also have specific restrictions and require a permits on some types of businesses. Check with your planning department to determine if a permit is required prior to the operation of your business. You should probably also quickly check with them regarding the zoning of the location you plan to have your office and make sure that there are no issues that will stand in your way. If you sell products, make sure you pick up a sellers permit. If you happen to code software like us, this was a non-issue.
Home Business Safety Check (Depends on your city)
The first time I got a business license in Santa Cruz, they required me to get a safety inspection from the fire department. I had the honor of paying $200 dollars for this, and I’m glad to know I’m safer for it. They didn’t mention it when we paid for our most recent business license 2 months ago, so I do not know if that is still in effect.
Business License (if your city or country requires it)
Depending on where you plan to run your business, go to the city or county office. If you don’t know which to go to, check out their website or give them a call. These days, many contractors run their business from home. Each city/county will have its own rules, costs and paperwork. Oddly enough, Santa Cruz County does not require a business license. If you happen to live in one of the incorporated cities in Santa Cruz County though (Santa Cruz, Scotts Valley, Capitola, Aptos…), make sure you go down to city hall and pay your $150 +/- bucks.
An Employer Identification Number (EIN) is required for a corporation, partnership and anyone hiring employees. As far as metaphors go, this is like a social security number for your business. It will get used to identify your business for everything. Sole proprietors do not need one and often use their social security number for the purposes of federal and state identification.
Open a Seperate Bank Account & Credit Card
Like the business plan, one of the main key identifiers the IRS looks for in a business owner is the seperation of their personal and business finances. You should ALWAYS keep your business money in a seperate account. If you plan to use a credit card, then open a seperate one and use it just for business. This is incredibly helpful when it comes to bookkeeping and is pretty much required by the IRS.
Many industries have organizations that police the quality of its service providers. In some cases, your industry may require a certification to even be in business. You can’t practice law, perform acupuncture or build a house in California (legally) without passing the proper state exam. This often has quite a lot to do with the significant level of liability inherent to the field. Other industries have certifications that increase the value of your business in the eyes of the customer, but are not required to be in business. Cisco Networking certifications are a great example. Some industries are not policed what so ever. When you hire a programmer, it is mostly based upon word of mouth referral, perhaps a client list, a CV, or just sheer personality.
Sales Tax, Non-Owner Employees & Things We Don’t Know
There are plenty of things that you may have to do that we have not. We don’t sell goods, we primarily use contractors and have no employees aside from Peter & myself. So if you learn something we missed or that I should update, please let me know – I’d love the input.
Resources & Links
California Small Business Services
Small Business Planner (SBA)
IRS Checklist for Starting a Business
SBDC Starting a Business
For the Local Crew: Santa Cruz