Do it online, or go to a pro? For something so important to your new business, this is one instance where cheaper is not necessarily better.
Are you thinking about starting your own small business and wondering how to get it going? Are you asking yourself, “Should I engage a professional to help me with this process or can I do it on my own by researching everything on the Internet and using online organizations to form whatever entity under which I will operate?”
This article outlines the formation process and offers advice to help you decide whether to go the self-help route or engage a professional. We at Raines & Fischer LLP are big fans of using professionals to do this kind of work to ensure that your business gets off on solid footing. We understand, however, that budget constraints may force some people to do all of their own work or look for bargain-basement help, and we offer advice on potential pitfalls that may be encountered by the unwary.
Here is a summary of the process of forming your own business, including the issues you will confront, the kinds of professionals you should hire, and the pitfalls you want to avoid.
- Selecting the form of your organization — Many start-up business entrepreneurs come to us and ask us how they should operate. They hear the terms “LLC,” “S” corporation, “sole proprietor,” “PLLC,” “LLP”, and “C” corporation and ask us to explain the differences. Each form has its advantages and disadvantages. Some are more expensive to form than others, while some, though cheaper to form, end up costing more in the long run because their operational and accounting costs are greater down the road. The obvious and subtle differences between each form of organization are best explained in detail once we understand a little bit about your business idea, your goals, and the number of people in your organization. In that conversation, we can define the most advantageous parameters for your specific start-up.
- What sort of professional should I retain? — We believe that you will get the best results if you retain a professional to help you with this process. You need an expert to ensure that you are clear on how to make proper tax elections, file all required forms, meet state publication requirements, and maintain awareness of deadlines and registration requirements. With an online service, you may get your entity formed and may get a tax identification number, and some boilerplate minutes, but nobody is advising you as to what tax elections to file and what is expected to be reported to the various authorities – and missteps can be costly. If you decide to use an attorney to form your organization, it is imperative that he or she has familiarity with state as well as federal tax issues and requirements. Ask if you will be receiving all of the paperwork filled out in a corporate kit. If the attorney does not include all of the initial tax registrations, minutes, certificates, and corporate seal in his or her price, then go elsewhere. Of course, the smartest investment is to retain a combination firm that provides both legal formation and tax services such as Raines & Fischer LLP, where both attorneys and CPAs are on staff.
- Establish a banking relationship with a bank that caters to small businesses — The hardest thing for a new business to find is a full-service bank that wants your five-figure bank balances, will give you a $100,000 line of credit, and will eventually fund your expansion with a five-year-term loan. At Raines & Fischer LLP, you can benefit from our relationship with JP Morgan Chase where we can introduce you to those types of bankers.
- Find a website designer who can build you a creative site — In today’s world you cannot thrive without a strong Internet presence. All new businesses need a website that shows sophistication and creativity. If you are not highly visible you become invisible. You simply will get no traction. We can refer you to several web and marketing advisory firms.
- Make sure your business is well capitalized — Four out of five new businesses in the USA fail in the first five years of operation, and most of these fail due to undercapitalization. Before you take the quantum leap into business, prepare a budget and cash flow projection to see what your worst-case capital needs might be. Then prepare to spend 10% more. That is your basic survival test. Without that kind of capital, you risk going out of business just as you are starting to take off.
- If you have a great idea and inadequate money, look for investors — While friends and family are often the best sources of capital for start-up businesses, there are also a limited number of venture capitalists out there who will fund an idea or concept if the business plan is good enough. Your CPA or attorney should be able to help your write a business plan to attract such investors.
- Select an advisor who specializes in small businesses — Often times we run across a start-up entity that has engaged a large law or accounting firm to help them form a business and provide initial bookkeeping services — and the results have not been good. The large law firms tend to “paper the entity to death” with Byzantine shareholder or operating agreements between two partners operating out of a garage, when a much simpler agreement — at a much lower cost — would suffice. We also see a plethora of Delaware corporations formed, as if the organization were a Fortune 500 company, when a simple New York or New Jersey entity would have sufficed. On the accounting side, we see situations where the entrepreneurs have hired a mid-sized or Big-Four firm to do bookkeeping work because somebody’s wealthy uncle had a relationship with the firm. From the point of view of both expense and service, a large-firm approach can be like taking a hammer to kill the proverbial fly. You will get more personal service, tailored to the needs of your specific business ideas when you choose the right smaller firm — a firm that wants your new business to succeed as much as you do.
At Raines & Fischer LLP, we champion the entrepreneur and want to work with exciting, cutting-edge start-up businesses that have fresh ideas. We specialize in this type of work. We leave oversized, publicly held companies to the Big Four and second-tier firms. What we deliver is the same high-quality work that a major firm would provide, at costs that are reasonable and manageable for the start-up client. And with Raines & Fischer, you work with a partner as well as a high-quality staff person, not only at the initial meeting, but throughout the duration of your engagement with us.
Alan Raines has a Bachelor of Science in Business Administration, magna cum laude, from Boston University, a Master of Business Administration in Taxation from New York University, and a Juris Doctor from Fordham University.
Alan is a member of the New York State Society of Certified Public Accountants and the American Institute of Certified Public Accountants. He is also an active member of his community serving as an officer and director of various not-for-profit organizations.
Alan P. Raines, CPA, MBA, JD
Managing Partner, Raines & Fischer, LLP