Hanging out your shingle, part 2

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As we stressed in the July/August issue, the most important thing you can do as a new business owner is to develop a written business plan that will guide your progress as you start your firm and map out your goals.

Anthia Cumming/iStockphoto

 ONE IS THE LONELIEST NUMBER 

One aspect of running a small business, for which entrepreneurs report being the least prepared, is the isolation and feeling of being all alone. This is an especially big change for someone who has been working in a large firm. Even if you don't think you've been particularly social or outgoing with your coworkers or managers, they've probably been sounding boards for ideas and conflict checks.

Think about all your interactions at your current position at the water cooler, before and after meetings, during training and in the hallways. As a small business owner, you probably won't have any of that.

But don't despair. You can find other small business owners with whom you can socialize, exchange referrals and get advice. Contact the local Small Business Administration office and the local chamber of commerce, and attend small-business education classes at community colleges or universities to find your "replacement colleagues." They can recommend attorneys who specialize in helping small businesses; guide you to appropriate insurance agents who understand small-business concerns; and suggest printers, payroll services, commercial leasing brokers and a myriad of other resources.

"Start with an end in mind."
- Stephen Covey

Keep an active social calendar, even if you're extremely busy starting your new firm. Schedule lunches with colleagues and friends far into the future so you'll have social and business events to anticipate when you're totally on your own. Don't lose touch with your work colleagues because they're good referral sources for your new business, and you can use their guidance. Also, prepare your friends and family for their expanded roles as your primary support network.

WHICH FORM OF BUSINESS IS BEST?

Your choice of the legal business form — determined by the options allowed by your state or local laws — will affect the manner and rate at which you're taxed. Your business' legal structure also will determine the extent to which your personal assets are at risk because of your business activities. Different forms of business provide varying taxation and asset protection advantages.

Here are some legal structure options:  

• Sole proprietorship.
• C-corporation.
• S-corporation.
• Partnership.
• LLC or LLP (Limited Liability Company or Limited Liability Partnership). 

Each of these has advantages and disadvantages, depending on your business, personal and family situations. Don't choose based on the available forms at the office supply store. A business attorney can help you decide and assist you in filing paperwork plus review your standard engagement letter, potential debt collection and so many other sticky legal matters.

Choose your attorney wisely
Since we're talking about legal counsel: Don't skimp on this investment in your firm's future. Talk with others to find an attorney who specializes in small business law. A few hundred dollars for an attorney now can save you thousands of dollars a year — every year — for years to come. 

OTHER MATTERS TO RESEARCH

Professional licensure and tax ID numbers
Investigate the type of professional licensing you'll need to conduct the service lines you've planned. If you plan to conduct investigations, and you live in the U.S., you might need to have a private investigator's license and bond, depending on the state in which you live. Some states don't require CPAs to be licensed to conduct financial investigations. Don't forget to update your CPA license to indicate you're in private practice; also research whether you need a CPA license for your firm.

Most localities require a business license and registration. If you plan on expanding your geographic footprint beyond your area, research licensure and registration requirements for every place that you wish to practice and whether reciprocity exists for your licensure at home.

You'll need a tax identification number unless you'll use your Social Security number as a sole proprietor. U.S. companies need a Federal Employer Identification Number. You may also need a state tax ID number. Apply for these numbers online.

You also may be required to register with the state department of labor, corporation commission or public regulatory commission. Your attorney can help you sort all this out. Allow sufficient time to obtain required licensures, registrations and filings before you begin working; you don't want to work without the appropriate licensures.

Malpractice and other business insurance
We highly recommend malpractice insurance even if it's not legally required. You may have limited options depending on your firm's service lines. You may need coverage for accounting malpractice, or a bond for conducting investigations; your licensure may determine the available insurance.

As a business entity, you'll need additional insurance. Find an agent who's experienced with helping small businesses and who can provide you with business liability, fire, casualty, business interruption and data loss policies, among others. Research how your home office might affect your homeowner's policy, and add appropriate riders or additional insurance.

If you have employees, you may be required to carry worker's compensation insurance. Business partners may wish to carry key employee life insurance, particularly if the death of a partner would decimate the business. If you plan on bidding for government contracts, you'll need specific types of insurance before a contract can be executed.

Engagement letter
Your strong engagement letter will legally define your contractual relationship with your clients. Your attorney should review this letter for compliance with laws in the jurisdiction(s) in which you'll practice. The AICPA's practice guide, "Engagement Letters for Litigations Services, Practice Aid 04-1," may be helpful even if you're not a CPA. 

Don't assume that clients will always pay on time and that you'll never disagree with them on fees or services. Consider these issues while you're creating your engagement letter, not when you're in the middle of a messy dispute.

The engagement letter should include policies on collections and interest or late fees, and it should establish the jurisdiction of record to adjudicate any disagreements, including whether arbitration or alternative dispute resolution will be required prior to court filings.

Conflict checks
Carefully establish a methodology for confirming that potential new clients won't create any legal conflicts of interest with your past or current clients or cases, and write policies for determining and handling potential conflicts. You can create a simple database of cases, clients and parties or use one of many software solutions.

Your office policies can have long-reaching and sometimes unexpected effects. For example, our malpractice insurance company gave us a discount because we use a case-numbering convention rather than client names in our case files and recordkeeping systems. This helps ensure that we don't accidently disclose ourseleves as the expert on a case when we're sitting in Starbucks at the courthouse with a client binder; there's no name on the outside, only a number.

Paying taxes
Create a tax calendar that lists all the deadlines for the various taxes you'll have to pay, including employment taxes such as 941 deposits, unemployment taxes and federal corporate tax payment deadlines.

If you're taxed at the individual level, such as with a sole proprietorship, be sure to include all personal tax payment dates on your calendar. Also, mark the deadlines for sales or gross receipts taxes.

Find out if you'll be liable for any taxes when you work outside your normal geographic area. For example, the Navajo Nation requires payment of sales tax for all service work performed on Nation land.

Consult your CPA for advice about taxes and to help you set up your payment schedule.

Reserving for taxes
We really should call this "over-reserving" for taxes. One of the most common mistakes small business owners make is failing to pay taxes when they're due, normally because they haven't saved enough for payment. No more employee withholding! Your first year in business may end with a hefty tax liability. We can't stress enough the need to save more than you'll think you need, especially in your first year.

Work with your CPA to set aside the full amount of tax responsibilities plus 15 percent. You may wish to open a separate tax reserve savings account.

Training and professional development
Just because you're on your own, you don't have to neglect your own professional development. Set aside money in your budget to pay for travel and training to expand your skills and earn CPE requirements for your certifications and licenses. Write a professional development plan as part of your overall business plan.

The ACFE Annual Fraud Conference is a chance to visit with colleagues and expand your horizons, in addition to getting enough CPE credits to meet your Certified Fraud Examiner requirements. Join the local chapter of the ACFE, or start a chapter if none exists in your area, to keep in touch with professionals and get additional CPE credits.

Retirement options
It may seem like you're getting ahead of yourself to plan for retirement just as you're starting a new business, but as a business owner, of course, you're responsible for your future.

Talk to your CPA or financial advisor about your options. You may want to leave in place your 401k or other plan from your employer (particularly if you're vested in a defined benefit plan as a government employee) or roll it into an individual plan. Before you take any withdrawals from your retirement plan to fund your new business, understand the tax and benefit implications.

"There is no passion to be found playing small - in settling for a life that is less than the one you are capable of living."  

- Nelson Mandela

GO FORTH AND PROSPER

Having your own firm is exciting, challenging and rewarding. You'll work longer and harder than you did as an employee, and you'll encounter many risks. However, the rewards can be greater — both personally and financially.

"You can do this."
- Melinda Guillemette, www.melindamotivates.com

Don't go it alone! Find a support network of other small-business owners and like-minded professionals, hire an attorney and CPA to advise you, and make sure you have friends and family to support you. Many small-business owners will let you pick their brains for the price of lunch. Find out what worked and what didn't.

Research every aspect of your intended business, read everything you can on small business ownership, and thoughtfully and intentionally plan every aspect of your business start-up. Once you have a business plan and are well on your way to success, don't forget to review and revise it to keep up with your growing business and shape your goals and desired outcomes for the future.

Janet M. McHard, CFE, CPA, CFFA, is founding partner of McHard Accounting Consulting LLC and an ACFE faculty member.  

Beth A. Mohr, CFE, PI, is managing partner of McHard Accounting Consulting LLC. 

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