Some say it doesn’t take money to make money. That might be true for generating pocket change, but it takes money to develop a business that generates a consistent, livable income. Startup costs are real, and you’ll need a good sum of money to get a business off the ground.
Once you have seed money, you’ve got to build a proper foundation. Startup costs can include investing in the right tools and software, hiring a lawyer and an accountant, obtaining surety bonds, creating a founders’ agreement, and registering your business as a legal entity. All of these tasks require time and money.
Not building a solid foundation for your business because you want to save money is like building a house directly on top of the sand; all your effort will be wasted when (not if) it crumbles.
A crumbled business can end up costing more than you would have spent building the proper foundation. To avoid the regret that comes after a preventable devastating loss, give priority to the following expenses:
Register your business as an LLC
If you want a professional presence on your invoices, checks, and other business transactions, a DBA (“doing business as”) is cheap, but a DBA doesn’t create a separate business entity. A DBA won’t protect your personal assets if your business gets sued. When all you’ve got is a DBA, you are personally responsible for everything. For example, if you get sued and are ordered to pay $40,000 in damages, it comes out of your pocket.
As an LLC, your business is registered as a separate entity, which protects your personal assets in the case of a lawsuit. You could also form a C-Corp or an S-Corp if you’re okay with the strict reporting requirements. Unlike an LLC, a C-Corp gets taxed at the corporate level and once again at the individual level. An LLC has no tax designation according to the IRS, so a single-member LLC is taxed as a sole proprietorship and a multi-member LLC is taxed as a partnership.
Pay for a legitimate registered agent
When you form an LLC, if you’re doing business in the state where you live, you can probably be your own registered agent without much inconvenience. If you’re one of many business owners who choose to establish a presence out of state, you need to hire a reliable registered agent.
The point of having a registered agent is to have a person available during normal business hours (M-F, 9am-5pm) to receive legal correspondence like complaints, summons, and subpoenas, IncFile explains. Your registered agent is also responsible for filing reports with the Secretary of State. Certain documents are required by law to be tracked and signed for in-person to prove delivery. They can’t be left in a mailbox.
You might be tempted to ask a friend to be your registered agent, thinking you won’t need to receive correspondence or file paperwork until your business grows. If your friend doesn’t understand their legal obligations, it’s a mistake that could cost you your business. You won’t always know when documents are coming ahead of time. Someone could sue your company the week after you form an LLC and you wouldn’t know until the summons arrives.
States have the power to dissolve an LLC when a registered agent can’t be reached, or if you don’t have one on file.
Your registered agent should be reliable and available. If a process server unsuccessfully attempts to serve a notice of a lawsuit to your registered agent, the court case can proceed without you. You won’t know about the lawsuit and therefore won’t be able to defend yourself, present evidence, or try to get the case dismissed. The party suing you could win a judgment against you without your knowledge.=. If they get a lien on your bank account, you could wake up to a zero balance.
Hire a lawyer to prepare startup documents
Only a lawyer knows how to word a contract, agreement, or other type of legal document. What appears to be common sense and logic might not hold up in court.
Lawyers aren’t cheap, but they have experience in the courtroom and can tell you exactly how judges interpret contracts and what kinds of contracts don’t hold up.
If it’s not your area of expertise, hire the expert
When you need something that falls outside your area of expertise, hire an expert. Skipping an important aspect of setting up your business could cost you more long-term.
Author: Oliver Curtis
Hi there. I’m Oliver. I’m just a young boy from the outskirts of… Okay, that’s a lie, I’m not a young boy anymore, although I certainly feel that way at heart.