Do the legal paperwork and open a bank account FIRST!

This may seem counter-intuitive, but if you are thinking about starting a business, you should form the business, on paper, first, before you do anything else.? Whether it is a Sole Proprietorship, a Partnership, a Limited Liability Corporation (LLC) or another type of corporation, the date you file the legal paperwork is considered “day one” in the life of your business, in most cases.?? Why is this important?? Most other businesses, including banks and other financial institutions, do not consider you to be a “legitimate”, “established” business until your business has been “open” for over a year.? Even scarier, the US Small Business Association (SBA) does not consider you to be a “real business” until you have been open for over two years.? Having an established business bank account (no, you cannot repurpose your old personal checking account) is another milestone that is considered important by the government and by other businesses.? I have talked to many entrepreneurs that started a business and then tried to go and get financing, or other assistance for that business, and ran into a brick wall because they did not prepare ahead of time.

Let’s look at this from a different angle.? Planning, opening and establishing a business from scratch takes significant effort and time.? Many entrepreneurs will also tell you that it ALWAYS takes more time than you initially think.? You will make mistakes that you will need to recover from.? Things will change that you will have to adapt to.? If you spend a year and a half “getting things started” and then decide to incorporate, you are also restarting your businesses time clock on the day you file the legal paperwork.? There are many web sites and local firms that will file your incorporation or other paperwork for a reasonable flat fee.? Your bank will be more than happy to open a new business checking account.? So, spend a few hundred bucks, file the paperwork, make a minimum deposit into a new business checking account, and start the time clock in your favor while you finish planning and establishing your business.

Here are a few more things to consider.

·?????? If the bank account requires monthly fees, then you will have to keep money in the account to cover those fees, or if you start with a higher balance, then there may be no fees at all.

·?????? Talk to a lawyer and a Certified Public Accountant (CPA) about the plans for your new business.? Most do initial consultations for free.? They will help you decide which type of business you should create, based on your vision, tax laws and their expertise.? It is a good idea to get a professional opinion that will keep you from making costly and time-consuming mistakes, before you get started.? You will also then know which tax laws apply to you so you can plan for that as well.

·?????? If you do incorporate or form a business the “wrong” way, it can be changed later but it is best to avoid that.

·?????? Keep it simple and call it something like “Bob’s Company” or “YourLastNameCo”.? If your plans or your vision for the business changes, then it is not going be a problem when you get up and running.? Your business may become “Bob’s Company” doing business as “Bob’s Pet Shop” at a later date, so you do not have to complicate matters when you start out.? If six months in you decide to become a florist instead of a pet shop, then the change will be easy.

·?????? Most businesses run their financials within a fiscal year (accounting time period) that starts in January and ends in December.? This will make your life easier because the calendar and most other businesses run the same way.? The easiest possible thing to do is to start your business in January, but that is not essential.? If you do not start your business in January, then that is another reason to talk to a CPA so that you know what your options are.

·?????? It is VERY important that you keep everything for your business financially separate from your personal life.? Let’s say, for example, you are wanting to start a clothing brand.? If you are going to buy a sewing machine, some fabric and supplies to start working on your designs, then transfer the money you are going to spend into your business account (this is called a contribution), and make all of your business-related purchases with your business checking account and debit card. ?When our family started our first business, we used our personal accounts and our business accounts interchangeably.? This made our bookkeeper insane (or you will become insane if you are the bookkeeper) and tax preparations for our first year were a major nightmare that also continued into year two.? Remembering what you did and for what reason, last April, is not easy.? If you keep your personal and your business financials separate from day one, then all of the complexity that we had to deal with is something that you will never encounter.

·?????? Keep written records, get a bookkeeping app, use your bank’s app, or a spreadsheet.? It doesn’t matter how you do it, it is just good business practice that you record the financial details of your business accurately from day one.? Your life will be so much easier if you establish good habits from the start of your business.

·?????? Finally, if you follow these steps, at the end of your first year, your tax returns will likely show you putting money into the business, with little to no income or profits.? In most cases, the money that you initially put into your business will be considered a loss and that is often a deduction, a tax credit or a refund that you can use towards the business in year two.

This article is intended to be informational for new entrepreneurs and is not to be considered legal, financial, or investment advice.? Do not try to attempt this on your own without help.? Talk to the appropriate legal and financial professionals for assistance to ensure you are not making any costly mistakes that might also get you into legal trouble.

Author's note: We are all rewarded for our activity on LinkedIn. Please like, share, repost, and comment. I am always open to talking about business.