Business Owner Basics
Is business ownership right for you?
Entrepreneurship is not right for everyone! Some folks think they will love it and after a year realize they miss the structure, security and paid time off that often comes with working for someone else.
Is your business idea keeping you up at night? Are you spending your early mornings or late nights jotting down ideas? Are your friends and loved ones sick of you going on and on about it? Do you have google docs, email drafts, or notebooks filled with problems you’re trying to solve? Are you financially secure through your own means or through that of a partner or family member that you could collect zero income for the next 12 months? If yes, then you’re probably ready to start a business.
Many people underestimate the time and energy required to make a business successful. What they don’t consider is that in the early days of a business, the owner is not just required to do the work or make the product, they are also often responsible for the marketing, accounting, financial forecasting, banking, hiring, logistics, and just about everything else.
We’ll take you on a brief overview of what it takes to start a business and the things you should be thinking about at each stage of revenue. Watch our 15-minute presentation here.
What makes you a business owner?
I’m gonna go with this simple definition: You are a business owner if you receive ANY income over $1,000 that has not been taxed. For some of our clients, that means a few well-paid speaking gigs a year, or a book deal, or a record contract with a large payout every two or three years. For others, the path to business ownership is slow. Some shift from a few consulting projects on the side of the day job to a monthly revenue amount that nudges them to quit the day job and turn the side hustle into a full-fledged business.
The biggest mistakes business owners make: Not treating the business like a business
The biggest folly here is when a person runs a successful business but doesn’t treat it like one. We see this ALL THE TIME, especially with successful creatives. We see folks with businesses or side-hustles making hundreds of thousands of dollars in revenue and still having NO CLUE what they are taking home, even if their business is profitable.
And that’s okay…we get it.
You’ve been busy building a business and you’ve been focused on growth and delighting your clients and customers and don’t have time to follow up on invoices and set up Quickbooks and everything is just kinda messy. It’s worked; you’ve held it together and seen some nasty tax bills. It’s just barely fine, but it’s not great. It’s time to stop! It’s time to admit you need help and hire someone. Yes, of course, I’m going to recommend that you hire Brooklyn FI’s outsourced accounting team because we’re really good at bookkeeping, sales tax, and tax projections, and a lot of other stuff related to owning a small business. It doesn’t have to be us, but once you hit $100-$150k in revenue annually, there MUST be SOMEONE who is not you looking at the finances of the company at least once a month. If you don’t treat the business with the respect it deserves, I promise you will be saddled with an unpleasant tax bill and likely lots of letters from the Department of Labor.
Here’s a handy chart to understand where your side hustle stands.
In Practice - What really matters
A Separate Bank Account
It’s so important to keep personal and business expenses (and income) separate. Open a separate bank account the moment you start receiving income. For most people just starting out this account can just a personal checking account they use exclusively for business. We recommend getting a business bank account if you’re ready to get a little more serious. You’ll need an EIN. We like Chase, Mercury and Relay Bank.
Opening the bank account is just the first step - you actually have to use the business account exclusively for all business income and expenses. Seriously, mixing business and personal expenses is such a headache. Here’s how to get an EIN.
Books and Records
The term “books and records” refers to the ledger that tracks the money coming in and out of your business. For most folks starting out, this is simply a spreadsheet. That’s fine for a little while but once you graduate to the “growing” phase, it’s time to start treating your side hustle with the respect it deserves. Books and records should be done in a software program like Quickbooks and should be overseen by a professional bookkeeper, at least quarterly.
Bookkeeping is a necessary expense that keeps the business on track. A few days after the close of each month, we know exactly how profitable the company is, which is extremely important for making decisions about when we need to hire, what impact a new software product will have on our bottom line, and will the owners be able to take money out of the business. Yep, here’s the part where we plug our services.
Savings for Taxes
Any freelance or business income you receive hasn’t been taxed yet. If you want a good rule of thumb - save 40% of every dollar you receive. Stash this in a separate bank account, then when it’s time to prepare the tax return, you’ll have a decent amount saved to pay the bill and HOPEFULLY be able to make an IRA contribution to REDUCE the amount of tax you owe.
Deferring Taxes
Use a SEP-IRA or Solo 401(k) to defer taxes. A SEP-IRA is easy to set up and business owners are allowed to contribute around 20% of the net income from the business. Talk to your financial planner about which type of account is best for you. There are lots of choices here and very good reasons to choose one type over another.
Choosing an Entity Type - AKA DO I NEED AN LLC?
There are many articles and videos explaining the various entity types available for business owners, and many of those videos have bad advice. But luckily, we’re here with some great advice. Watch our webinar: Which Entity Type is Best for My Business?
Many folks will tell you to set up an LLC or an S-corp. Often, those structures are unnecessary and just generate fees for the lawyer or accountant making the recommendation.
An LLC is not a type of tax structure; it’s simply a separate business entity that protects you personally from liability - it’s a LIMITED LIABILITY COMPANY. If someone sues your business, the LLC, if used properly, will protect your personal assets from creditors and litigation.
Your side hustle may not need an LLC. The debate about whether to form an S-Corporation is highly technical so make sure you’re talking to a trusted CPA or advisor who understands taxes when deciding if an S-Corporation is right for you.