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Business Monday - Starting a Small Business

Posted by Nathan House, in Business 01 July 2013 · 2,186 views

Starting and running a small business is a challenging prospect. I started FoxyTronics with my minuscule personal savings and the money I made from a summer internship, so I wasn't able to hire anyone to help me with anything -- I've literally had to do everything myself. While this has made it difficult to get my business up and running, it also means that I've learned an absolutely tremendous amount.

Much of what I know today I learned through trial and error, but I also learned a lot by reading articles and blog posts written by other business owners. In the spirit of helping others get their business started, as well as to give anyone who is interested an idea of how this business got started and operates today, I'm going to try to have a blog post every Monday about business. So I guess I might as well start at the beginning:

Forming a Company

I started FoxyTronics in Virginia, which is great because Virginia is really friendly to small businesses. There are many companies out there that will form an LLC for you for a price (I've heard great things about LegalZoom, who charges $99 + the state filing fee), but if you don't mind doing the paperwork yourself, forming an LLC is actually pretty easy to do (at least in Virginia). The Virginia State Corporation Commission (SCC) has a fantastic website that makes forming and managing a company very easy.

There are several different types of entities that you can choose for your business:
  • Sole Proprietorships
  • Limited Liability Companies (LLC's)
  • C-Corporations
  • S-Corportaions
There may be more, but those are the ones I'm familiar with.

Sole Proprietorships are businesses that are run by one person, or by a person and their spouse. The business is not a separate entity from the owner, which makes it easier and cheaper to get started than the other entity types, but it also can be bad because if the business has legal or financial trouble there is no separation between the owner and business.

If an LLC is owned by a single member, then it is very similar to a Sole Proprietorship with a few key differences, the main one being that the business is separate from the owner in the eyes of the law, which can be useful for legal and financial reasons. For example, if the business were to go bankrupt, or be sued, the owners would have "limited liability," ideally meaning that the owner's assets would not be at risk.

Another advantage of an LLC is that the record keeping should be completely separate from the owner's personal records, which is a very good business practice for a plethora of reasons. I say should because many small business owners make the mistake of not isolating their business records from their personal records (I made this mistake early on, too).

The Virginia SCC website defines Corporations and LLCs on the Entity Types and Categories page:

Corporation

A corporation is an artificial person or legal entity managed by a board of directors, consisting of one or more individuals, who collectively elect officers to run the corporation’s day-to-day business activities. There are two types of corporations in Virginia, stock corporations, which are authorized to issue shares to persons who become shareholders, the owners of the corporation, and nonstock corporations, which may have members, but not owners. Stock corporations are usually formed to generate a profit for the shareholders. Nonstock corporations are usually organized for not-for-profit purposes, such as a tax-exempt, charitable organization or a property owners’ association. Generally, officers, directors, shareholders and members are not liable for the obligations of the corporation.

Limited Liability Company

A limited liability company is an unincorporated association of one or more members (the owners) who share in the profits and losses of the company’s business. It is managed in accordance with an operating agreement by one or more members (member-managed) or by one or more managers (manager-managed). A limited liability company is a separate legal entity and, generally, the members and managers are not liable for the obligations of the limited liability company.


Here are some websites that go over the differences between a Sole Proprietorship and LLC in more detail:A corporation is what a large business would register as. It's more expensive to register and maintain a corporation and the requirements are much more strict. A small business, whether comprised of of single person or several members, most likely should not be formed as a corporation.

Here are a few more really good articles about LLC's:Taxes

In addition to being less expensive and less complicated than a corporation, another huge advantage of a LLC is that it is a pass-through tax entity, which means that the business expenses and revenue are simply "passed through" to the owner of the LLC and reported on the individual's personal tax return. This greatly simplifies taxes for the business. NOLO has a good article on the subject: How LLC Members Are Taxed

I felt that a LLC was the best choice for FoxyTronics because it is inexpensive to register and renew, has lax requirements compared to a corporation, is easy to form, provides some measure of limited liability, and because taxes are simple.

Choosing a Name

One of the most important decisions to be made when starting a business is the name of the business. Coming up with a name not being used by another business is challenging, but what's even more difficult is coming up with a name not being used by another business and where the domain name is available. It's absolutely amazing how many domain names are taken. People referred to as "domainers" buy up domain names comprised of common initials, words, or phrases in huge bulk hoping that some day an individual or business will pay them an exorbitant amount of money for it; until someone does, they "park" the page, putting ads on it. Domainers compare this practice to real estate investments, but to me it seems more like blackmail.

In any case, it is very difficult to find a good business name where the domain name is available. It probably took me a good six months of consistently thinking of business names, checking if another business was using it, if it was trademarked, and if a relevant domain name was available, before I came up with FoxyTronics.

Conclusion

Hopefully that gives you an idea of what it takes to start a small business. Next time I'll talk about separation of personal and business assets, bank accounts, credit cards, book keeping, and more.

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