Last week, Latinos for Trump founder Marco Gutierrez told MSNBC's Joy Ann Reid that "[m]y culture is a very dominant culture, and it's imposing — and it's causing problems. If you don't do something about it, you're going to have taco trucks on every corner."
His statement took the internet by storm with many contemplating what a future with taco trucks on every corner might look like (the consensus on social media: delicious). Memes popped up all over, and The Washington Post even took a look at the economic impact of such a phenomenon.
Politics aside, small businesses, like taco trucks, do have a significant impact on our communities and in our cities. According to the Small Business Administration (SBA), 28 million small businesses in America account for 54% of all U.S. sales. Those same small businesses provide 55% of all jobs and have provided 66% of all net new jobs since the 1970s. And food trucks notwithstanding, the small business occupies 30-50% of all commercial space in the country, an estimated 20-34 billion square feet.
While the headlines might be filled with disappointing economic metrics, the opposite is true when it comes to small businesses. The SBA reports that the number of small businesses in the United States has increased 49% since 1982 and, since 1990, even as big business eliminated 4 million jobs, small businesses have added 8 million new jobs.
Sound promising? If you've been contemplating starting your own small business, and you're ready to get started - even in a taco truck - here's what you need to do:
1. Check name availability. Choosing a name can be fun - but it can also be challenging. You want a name that not only reflects your products or services but is memorable and will resonate with consumers. And with millions of businesses already operating in the U.S., you also want a name that isn't being used by someone else. Changing names after the fact - especially once you've received a letter from a lawyer telling you that you can't use a name - can be costly, confusing for your customers and embarrassing. So choose a name first - before you incorporate and before you order those business cards. Since trademark law is the purview of the feds, you can check whether the name is trademarked with the United States Patent and Trademark Office with a quick search. But don't stop there. Kelley Keller, an intellectual property lawyer, advises that you should conduct "a comprehensive Internet search to see if anyone is doing business under your name on the web, but didn't file a trademark application" (there are firms who will do this for you for a fee). You should also check that domain names and social media URLs are available so you can stake your ground online (remember, however, that ownership of a domain is not the same as ownership of a trademark). Finally, don't forget to check your state and local business registrations, typically found on your state's corporate or Department of State website, as well as your local government's clerk office, to make sure that no one has staked a claim using your desired name or a confusingly similar name.
2. Consider incorporation. You can certainly manage your business as a sole proprietor, but depending on your type of business, that might not be advisable. As a sole proprietor, you can be personally liable for debts and obligations of the business. That means that personal assets – like your house – can be treated, for liability purposes, as business assets. With that in mind, small businesses are increasingly incorporating or organizing as a limited liability company (LLC). As with choosing a name, this is something that you want to do early in the game since one of the keys to liability protection is to establish a clear division between business and personal assets from the start.
3. Choose your entity. Choosing your entity - meaning your form of business - early is important. Your choice of entity can affect the number and identity of shareholders and partners, equity structure, control and management, as well what kind of funding you might be eligible to receive. It can also affect future costs, including tax compliance: the more complicated your structure, the more likely you are to need help figuring out and filing tax returns and annual reports.
I know it can be tempting to hop on the internet and choose the most popular entity structure that you can find. But give it some real attention (even better: consult with an attorney). That's because entity choice is state specific. You incorporate or organize at the state level and the laws of the individual state matter: not all entity choices are respected or treated the same in every state. Getting it right in the beginning is crucial. While it’s true that you can typically switch your form of entity later, there may be tax and other consequences, including more fees, as a result.
For more on choosing your entity, check out this article.
4. Get an Employer Identification Number (EIN). For most businesses (not including sole proprietors and single member LLCs), you will need an Employer Identification Number (EIN) – think of it like your Social Security Number for your business. This is the number that you’re going to use to open your bank account and file your tax returns. It’s important once you get the number, you use it: keeping your business and personal finances separate is not only helpful at tax time, but it is a key part of maintaining that liability protection that you want. You need a new EIN when you start a business or if you change the form of your business, such as converting from a partnership to a corporation. It’s easy to apply for an EIN, and it’s free if you get it through the Internal Revenue Service (IRS).
5. Register for state and local taxes. Most states - and many municipalities - require that you register your business with the taxing or corporate authorities (in some cases, it's both). Typically, this is so taxing authorities know what kinds of taxes you might be subject to, including payroll taxes and sales taxes. Don't be overly ambitious: while you might have aspirations of setting up taco trucks across America some day, the tax authorities are more concerned with your plans for the short term. You don't want to be stuck filling out zero returns because you represented that you might be subject to certain kinds of taxes (like cigarette or alcohol excise taxes) or apportioning taxes and filing more returns based on future projections. Be honest but be reasonable about your plans. You can always amend your registration if your situation changes.
6. Get local approvals. You might get the impression from Food Network's The Great Food Truck Race that setting up a taco truck is as easy as pulling up to the curb. But when it comes to taco trucks - and small businesses in general - local rules apply. It's not enough to register your business for tax reasons - there may be other non-tax approvals that you need. Some local authorities require you to obtain a general business license before you open your doors and you may have to renew annually. You may also need individual permits and licenses depending on your trade or business: in addition to the kinds of business-specific approvals you might expect, like permission to prepare and sell food or operate a daycare, you may also need location-specific approvals for say, sidewalk sales or home-based businesses in residential neighborhoods. Some local governments also require safety inspections and annual fees (in Philadelphia, for example, you have to pay an annual fee if you have a fire alarm at your place of business). Do your homework in advance so that you don't get slapped with a fee for noncompliance - or worse, shut down.
7. Secure financing. Financing your business when you're a startup can be challenging whether you're a taco truck or Facebook. You not only need to know how you're going to turn on the lights in the beginning but how you will keep them on during those first few challenging years. This is where planning matters - and where that entity choice becomes important. Your options for raising capital can be limited depending on your choice of entity, and your ability to borrow can be affected by how credit-worthy you and your partners may be. Determine a strategy and a backup strategy early on in the process and hammer out any details about control, capital contributions, and debt loads before you open your doors. Making sure that your business partners or lenders are on the same page from the start can help avoid financial and legal blunders later. For more on debt and equity, click here.
8. Open a bank account. Keeping business and personal assets separate is important. It's a good idea to open a separate bank account for your business using the name of the business and the EIN of the business (see #4) and not your own Social Security Number. This does two things: one, it helps establish a clear division of assets for purposes of liability and two, it makes tax time much easier. Figuring out which expenses are personal and which expenses are for business isn't impossible with one account, but it's not advisable. Keeping those accounts separate is clean and makes tax reporting and tax compliance (not to mention, a tax audit) much easier. And if you're planning on paying employees, get two accounts: having one account earmarked exclusively for payroll taxes makes it less likely that you'll dip into money that isn't yours (for more on payroll taxes, click here).
9. Buy equipment and supplies. You know you need equipment and supplies to start a business but when is the right time to buy? Typically, you want to buy business equipment and supplies once you've incorporated and opened that bank account - that helps you easily track expenses for business purposes (remember, equipment and supplies are deductible if ordinary and necessary for your business). Additionally, you want to avoid buying certain assets personally - like real property - and then transferring those assets into your business if you can: that may result in negative tax treatment, such as double transfer tax. And don't forget that contributions of assets to a business, such as a partnership, can carry tax consequences: it may be less expensive and less complicated to simply acquire those assets in the name of the business to start. When you do start buying, take advantage of tax opportunities like the Section 179 deduction - with the deduction, you can purchase business equipment worth up to $500,000 and write off the full amount for federal income tax purposes rather that having to depreciate the equipment over time. If you do have assets to depreciate, the 50% bonus depreciation rules have also been extended through 2019.
10. Make sure you understand employer/employee rules. When you're starting out on a shoestring, it can be easy to confuse the independent contractor/employee rules. It feels like employees should be those who are with you for the long haul or who are full-time. This isn't true. Employees can be full time or part time, seasonal or year round, temporary or permanent. So what distinguishes an employee from an independent contractor? Here’s what the Internal Revenue Service (IRS) says "The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done." (Click here a longer list of specific factors to consider.)
You want to get the employer/employee relationship right in the beginning. If you classify an employee as an independent contractor, you may be held liable for employment taxes and you may be required to retroactively apply benefits. In some instances, you can also face legal action. Figure it out early not only to avoid those penalties but also to set expectations with your workers about work schedule, payroll, and the like (a good way to do this is to have an employee handbook).
One more note: when you're applying for your EIN, you'll have to answer questions about your future plans - like employees. Be honest but be realistic. Your payroll tax responsibility, including frequency, is dependent on your actual circumstances and not your grand plans. If you anticipate only hiring one worker in the first year, say so, even if your dream is to hire 100. Similarly, if you don't anticipate hiring any employees in the first year, say so: if you indicate that you're an employer, you'll be required to file employment returns (including payroll and unemployment tax returns) even if you don't have any tax liability. Setting expectations with the taxing authorities is just as important as setting expectations with your staff.
11. Promote your business. Whether you're painting your name on a truck, launching a new website or putting a sign in front of a brick and mortar shop, promoting your business is important but it can feel like an extravagance (trust me, it's not). Here's the good news: you generally can deduct reasonable advertising expenses that are directly related to your business activities. Don't be afraid to think out of the box: those ads you might place in the church directory are just as deductible as having your business name on the shirts of your local youth baseball team. You can deduct the cost of ads in traditional media (think newspapers and radio) as well as online media. Business cards and leave-behinds like pamphlets and magnets are also deductible. The IRS even allows you to deduct the cost of goodwill advertising, or positive "brand building" for your business so long as it's reasonable, as well as ordinary and necessary.
For more small business tips, check out my Small Business Startup And Survival Guide.
