May, 2004 Tax Tip
How to Succeed in Business – Basic Steps
This month’s topic is primarily a business tip, rather than a tax tip. During the just concluded filing season, I noted that several of my clients were no longer in businesses that they had begun within the past year or two. I thought about this and asked myself why the vast majority of businesses fail within their first three years? The reason is that the owners fail to observe some basic, yet critical, steps from the very outset.
Successful businesses require a great amount of advance homework and planning. Perhaps you have heard the saying that people don’t plan to fail, but they fail to plan. This is so true. Whether you seek professional advice or become self taught, you need to become an very educated in the business you are embarking upon.
Every new business needs a comprehensive business plan, regardless of whether it is used to obtain financing or merely serves a guideline or road map for the owner to follow. Such a plan will detail, among other things, the proposed business operations, location, customer market, management, potential risks and financial plan. It is amazing the number of new businesses that commence operations without any kind of written plan. This is a ticket to potential disaster. None of my clients whose businesses failed had a written business plan for even the short term.
I cannot overstate the importance of having a plan when it comes to obtaining financing. The fact is that all lenders, whether they be banks, SBA loan officers, or any other lenders, need assurance that they are investing in a sound business venture. Everyone starting out in a new business has the same destination – to make the business be successful, however the word “successful” is defined in a given situation. A business plan charts out in great detail the road to that destination.
Other very important steps in establishing a business include:
Obtaining a credit check – Good credit is perhaps as important as a good business plan for anyone seeking a loan to finance a new operation.
Choosing the proper legal structure – This is crucial from both a tax and non-tax standpoint. Seeking professional advice in this area from an attorney or tax professional is a must, both from the standpoint of choosing the entity and forming the entity with the required documents and filings! There are several legal structures in which a business can operate, including sole proprietorship, partnership, corporation (either C corporation or S corporation), and Limited Liability Company (“LLC”). For a brief discussion of each of these, please see my June, 2003 Tax Newsletter item, Tax Differences form Choice of Business Structure Revisited. Go to my website www.rontaxcpa.com and select the Tax Newsletter tab and scroll down to the article.
Getting a federal tax ID number - Only businesses with employees need to apply for a tax identification number, also called an Employer's Identification Number. This can readily be done by completing an SS-4 Form. If you can’t obtain this form, please call me at (602) 867-4199 and I will send it to you.
Obtaining required state, city, and local ID numbers and permits – This would include resale or sales tax permits for businesses that sell products, which allows business owners to buy goods tax-free and sell them to their customers at the local sales tax rate. In many jurisdictions a state employer ID number may be required..
All of the above steps are very important and need to be examined to ensure a successful business startup and operation. As always, I am here to assist you in making this possible.
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