Tips for First-Time Business Owners

Set up the legal and tax basics correctly

Choose a business structure, register the business, get an EIN and the licenses your industry and location require. Ask an accountant or attorney before you decide.

The common structures are sole proprietorship, partnership, LLC and corporation. They differ in liability protection, taxes and paperwork. Read what an LLC is and what a sole proprietor is to compare.

Then do the practical steps:

1. Register the business name with your state or county as required.
2. Get an Employer Identification Number from the IRS. It is free.
3. Check local, state and industry licenses and permits.
4. Register for sales tax if you sell taxable goods or services.
5. Learn which tax payments are due and when.

Rules differ by state and by trade, so confirm with your state's business office or a professional.

Separate business and personal money from day one

Open a business bank account and use it for every business transaction. Mixing funds creates tax headaches and can weaken liability protection.

This single habit prevents more problems than any other. With a dedicated account, your bookkeeping is cleaner, your deductions are provable and your financing applications are easier. Funders look at business bank statements, and an account full of personal spending makes the picture unclear.

Pay yourself from the business on a schedule, rather than pulling money whenever you like. Use accounting software or a simple spreadsheet from the start. If it feels like too much, read startup bookkeeping and bookkeeping tips.

Price for profit, not just for sales

Your price must cover direct costs, overhead, taxes and a profit. Many first-time owners underprice because they forget their own time and hidden costs.

Start with the full cost of delivering one sale: materials, labor, fees, shipping, software, insurance and a share of rent and utilities. Add the taxes you will owe. Whatever remains must still be worth your effort.

In this illustrative example, a service costs $60 to deliver in materials and labor and you charge $100. That looks like $40 of profit. After overhead of $15 per job and a tax set-aside of $8, you keep $17. If you offer a 20 percent discount, you lose money on that job.

Revisit prices every quarter. A small price rise often matters more than a large sales push. See cash flow vs. profit for why a profitable sale can still strain your bank balance.

Protect your cash flow before anything else

Build a buffer of several months of fixed costs, invoice promptly and watch the gap between when you pay suppliers and when customers pay you.

Cash flow is the most common killer of young businesses. You may have orders and still be unable to pay rent. Three practices help:

• Forecast. Write down expected cash in and out for the next 13 weeks and update it weekly.
• Shorten collection time. Invoice the day work is done, ask for deposits and follow up on late payments.
• Stretch payments sensibly. Negotiate fair supplier terms without damaging relationships.

Learn the mechanics in cash flow analysis and the cash conversion cycle.

Get the right insurance and keep good records

Basic business insurance protects you from claims that could end the business. Keep contracts, receipts and tax documents organized from the start.

Most owners need at least general liability coverage, and many need property, professional liability, commercial auto or workers' compensation, depending on trade and state law. Our overview of types of business insurance explains the choices.

For records, keep a folder, digital or paper, with formation documents, licenses, insurance policies, contracts, tax filings and receipts. Learn what to hold and for how long in how long to keep business records. Calm, complete records are valuable the day you sell, hire, apply for funding or face an audit.

Know when and how to use outside funding

Use outside money for specific investments with a clear payback, not to cover ongoing losses. Know what lenders and funders typically require.

Borrowing makes sense when it buys something that earns more than it costs. In this illustrative example, a $20,000 piece of equipment that adds $1,800 of monthly profit pays itself back in about 11 months before financing costs. Borrowing $20,000 to cover payroll in a business that loses money each month only delays the problem.

Most funders want to see some history. ROI Funder considers businesses with 6+ months in operation, $20,000+ in monthly revenue and 500+ FICO. If you are earlier than that, our guides on how to get startup funding and bootstrapping are better starting points. Once you qualify, working capital and a line of credit are common first choices. Applying takes a few minutes with a soft credit pull.