You already have a side hustle, which is where most businesses start—picking a product or service and seeing if it has legs. But according to the Bureau of Labor Statistics, nearly half of new startups fail within the first five years. Nobody wants to become another statistic.
Deciding whether to take your side hustle full time can be nerve-racking. But once you have decided to make the leap after researching and refining your venture and considering the various tradeoffs involved, how do you make that happen? Read on for some general tips to consider when formalizing your business plan and navigating the transition.
Pick Your Team
Just as it takes a village to raise a child, it takes a village to raise a successful business. Picking your team is a vital part of the process. Your advisors will help you navigate this journey, but remember the final decisions are yours to make.
The specific types of advisors you will need will vary depending on the nature of your business. Regardless of your industry, though, you will need tax, accounting, and legal advisors.
Tax and accounting advice helps you set up systems to track your income and expenses (including whether you do this in-house, outsource it, or utilize a hybrid approach), file the required returns and reports, run payroll, and maximize your tax efficiency.
A legal advisor helps with the formation of the business and making sure you have the required licenses and permits. Hopefully you will not need ongoing legal services after you get the business off the ground, but at least you will have a go-to resource if and when issues inevitably arise. You can use a service like LegalZoom, but those tend to be less cost-effective in the long run than an actual human who can tailor the setup to your unique situation.
Phippen Tax and Financial Services offers a full range of business services including tax, accounting, payroll, and legal. Contact us for help in setting up and managing your business!
Other types of advisors you may need include web design, marketing, information technology, and others. There is no hard-and-fast rule about where one starts and another ends. Your web designer may also be your IT or marketing advisor, but it is also fine if your social media consultant could not build a website if their life depended on it (as long as you are not depending on them for that either!).
Nobody can be the expert on all aspects of their business. Focus on what you do best and outsource the rest. You will be much happier and more productive. For example, you might be perfectly capable of filing your own tax return, but that would involve a lot of time and stress, and probably some software costs as well. Would you rather spend an afternoon trying to figure out TurboTax or helping another client on an exciting new project that generates revenue? Spend a little more money on Phippen Tax to handle your tax needs, rest easy knowing that it is handled by an expert, make more by focusing on your strengths, and actually enjoy your Tuesday afternoon.
Pick Your Name
I often tell people that picking a name is the hardest part of forming a new business. You may have already chosen a business name as part of your research and developing a business plan, but it bears repeating here. The business name is how you will set yourself apart. Once you choose the business name you can register a domain name to secure the desired URL for a future website. Do this sooner rather than later to make sure it is available. You can reserve a URL relatively inexpensively, and before you even think about what your website will look like. You can also usually reserve a business name before fully incorporating.
Having a fictitious business name—i.e., a “doing business as” alias or trade name—for your business or each separate line of your business is also possible. For instance, you might be registered as XYZ Enterprises but be known publicly as ABC Services. You would register the business as XYZ Enterprises, and register ABC Services as a trade name of XYZ.
Drill Down
Now that you have a team of advisors and a business name for your planned venture, there are several specific steps you will need to take. The specific order may vary but these are all important topics to address. Plan them all out ahead of time before you start, much like you would outline a paper before beginning the actual writing. Doing so will also help you determine the most efficient order in which to tackle the steps.
Choose a legal and tax structure and register your business.
A legal advisor is an important part of your team because there are many different legal structures available. Each has its strengths and weaknesses, and what may be ideal for one venture could be disastrous for another. There is no one-size-fits-all approach.
For example, if you are bringing in outside investors (a topic that is beyond the scope of this article), what sorts of ownership and management rights will they have? What options do you want to retain for the future? You may also need a partnership or operating agreement as part of the process.
There are also different tax structures available. Because your tax options will depend on the legal structure selected, and because there are deadlines for certain tax elections, having an advisor in your corner who is well-versed in both the tax and legal aspects is particularly helpful. We can help!
As part of the registration process, you will need to decide where to register the business and the identity of the registered agent.
Many folks think they should form their business in Delaware or Nevada because of their reputation as being “business-friendly” states. But for the overwhelmingly vast majority of small businesses, the purported advantages offered by registering your business in those states are superfluous. Besides, if you live and will be doing business elsewhere, you would need to also register there anyway. It usually makes the most sense to just register the business where you live and will be operating.
Every state requires you to designate a registered agent. This is the person that gets served with legal papers if your business is ever sued. There is no need to pay for someone else to be your registered agent. You can do this yourself.
The name and address of the registered agent are public record, as is the business address. You do not need to list your personal residence; you can use the business address for the registered agent and for the owner(s).
If privacy is a concern, consider renting a commercial mailbox that has a street address instead of using your personal residence. Many places like UPS, and even some post offices, offer this service. Of course, if you will be working out of a commercial location, you can simply use that address!
If you will have employees, even just yourself, you should also set up payroll accounts with the appropriate government agencies as part of the business registration process. This is where having a trusted advisor handling this for you is very valuable, because skipping this step initially can cause problems, or even just extra work, later down the road.
You will obtain various federal and state tax identification numbers as part of the business registration process. The most important of these are your federal employer identification number (“FEIN”) and your certificate of organization.
You will need an FEIN even if you never have employees. Think of your FEIN as a Social Security Number for your business.
The certificate of organization will go by various names depending on your state and the legal structure involved. Think of your certificate of organization (by whatever name) as a birth certificate for your business; it is literally proof that your business exists.
Be sure to fulfill all licensing and permit requirements that apply. You might need a professional license to practice your craft, a city business license and/or certificate of occupancy for your primary business location, and a sales tax license to collect sales tax and purchase wholesale items tax-free.
After you register your business, or as part of the licensing process, you might also need various forms of insurance—professional, premises, or general liability; workers compensation, etc. Do not skip this step either. Your advisor can help you determine what types of insurance are helpful and/or necessary.
Banking
Once you have your FEIN and certificate of organization, you will be able to set up bank accounts for your business. Having separate accounts in the name of your business is a vital step for both legal and tax/accounting purposes.
Why do this? The whole point of registering your business is to separate you the person from you the business. From a legal standpoint, you do not want your personal assets to be at stake if you get sued. If you use your personal accounts and co-mingle funds, then you blur that line. From a tax and accounting standpoint, it is simply easier to track your business income and expenses when they are separate from your personal activity. Plus, in the event of an audit, your business deductions are more easily disallowed when mixed in with personal activity.
You can transfer money from your business account to your personal account (after all, the whole point of a business is to make money!), and vice versa, but your business income and expenses should go through only business accounts, and your personal income and expenses should go through only personal accounts.
You will definitely need a checking account, and will likely need one or more (high-yield!) savings accounts. Unless you have a very high volume of transactions for which you need special services, do not pay a fee for these accounts. There are plenty of banks and credit unions that offer fee-free banking.
You can certainly have your business accounts at the same place as your personal accounts but that is not necessary. Any convenience by co-locating your personal and business accounts is probably overstated given the availability of ACH transfers and mobile deposits.
Besides your basic bank accounts, you will likely want a business credit card. This is a great opportunity to get a rewards credit card with a good sign-up bonus! If you cannot get a credit card in your business name, then you can use a personal credit card as long as it is used solely for business. Again, do not co-mingle funds.
Finally, your banking considerations (and your accounting software) should consider what payment methods will be available to your clients or customers.
Consider whether your bank will allow you to accept Zelle payments, if you plan to have this as a payment option for your customers or clients. Some banks are compatible with Zelle for personal accounts but not for business accounts, so be careful.
If you plan to accept credit card payments, what mechanism will you use? For example, you can do this directly in Quickbooks, use a third-party platform like Square or Shopify (or Toast for restaurants), or work directly with your bank. There are different fees and costs involved with each so be sure to weigh your options.
Marketing
If the extent of your marketing is to print business cards, you can probably handle this yourself using a site such as VistaPrint. But if you are taking your side hustle full time, you want someone who can help you attract new clients or customers by assisting you in developing your marketing strategy and infrastructure.
This might include (1) designing a website—including selecting a suitable and cost-efficient hosting platform—where clients can see your available services and reach out to you, (2) setting up an e-mail list for you to communicate with folks regularly, and (3) putting you in touch with someone who has expertise in leveraging social media. (Do not expect one person to be an expert at web design, information technology, marketing, and social media.)
Internal and external communication
You also need to consider how you will communicate internally and with customers, vendors, and others. Questions to consider include:
What e-mail address(es) will you use? What platform will host your e-mail server?
Will you use a separate phone number? Will this be publicly available? Consider whether to add a separate line to an existing cell phone account, or whether you want to use a “dummy” number for calling and texting that is linked to your existing phone.
Will you need a fax line? Although communication by fax is becoming obsolete, there are still some industries where it might be helpful. Keep in mind that many services offer the ability to send and receive faxes without using an actual fax machine.
Will your customers need to e-sign documents? If so, what platform will you use? Consider whether additional software is really necessary. (More on that below.) If you already subscribe to Adobe Acrobat Pro, for instance, you probably do not need a DocuSign account.
Will you need to exchange confidential information? What encryption method(s) will you use to safeguard that information? Even if you do not exchange confidential information with outside parties, what internal controls (such as multi-factor authentication) will you use to protect yourself?
What sorts of workflow processes will you implement? What tools would be useful to help you be more productive? Are they worth the price? (We are big fans of Asana!)
Information technology
Besides the information technology considerations mentioned above, what additional physical technology do you need? What software do you need to support that physical technology?
Evaluate your technology considerations together rather than piecemeal. For example, you might be able to meet your cloud storage needs with a Microsoft 365 subscription that simultaneously fulfills other requirements. (And while Microsoft 365 has business plans, the “personal” plans might be enough, and can work great for a small team!) On the other hand, if your existing word processing and spreadsheet capabilities are sufficient, then a stand-alone, low-cost service like DropBox might work. There are many options available!
If you think you do not need some sort of cloud storage—even if that just means regular backups to DropBox—you are wrong. What happens if your laptop gets lost, stolen, or damaged? (A good mental exercise is to imagine the worst-case scenarios, and then think through how you would respond. Write down your plan, and rest easy knowing you are prepared!)
Go Forth!
While transitioning from side hustle to full-time entrepreneurship is a daunting task, it is less daunting if done properly. Remember to be flexible in your approach because you will need to adjust as you move forward. Let us help you navigate this path! The extra effort on the front end will set you up for success both initially and beyond.
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