Legal and Accounting Tips New Business Owners Wished They Knew Sooner
From choosing a name to designing a logo, building a website and landing your first client, starting a new business can be exhilarating. Yet, entrepreneurs also have to deal with the less exciting aspects of a startup, such as contracts and taxes.
At a virtual 2021 Global Entrepreneurship Week session, Chris Brown, founder, Pixel Law, and Meghan Hovee, founder, Hovee CPA, joined moderator Lauren Conaway, founder and CEO of InnovateHER, to discuss legal and accounting best practices that can help freelancers, entrepreneurs and small business owners get off to the right start.
Here are four key takeaways to consider:
1. Build a strong foundation for your business
During the session, a budding entrepreneur asked Chris for advice on how to start a package delivery business. Chris suggested these steps, which pertain to most founders:
● Register your business structure as a corporation or limited liability company (LLC)
● Purchase insurance
● Develop articles of incorporation (for corporations) or organization (for LLCs)
● Draft bylaws (for corporations) or an operating agreement (for LLCs)
● Get an employer identification number
● Set up a business bank account
Business owners should also plan on filing annual reports to stay in good standing with the state. This compliance measure is required for corporations and LLCs in Kansas and only for corporations in Missouri.
“Don’t ignore the legal and accounting stuff,” Chris says. “Talk to a professional even if it’s just an hourlong planning session. Tackling this up front will make your life easier.”
Meghan agrees, adding that business owners should put regular blocks of time on their calendars to check in on their finances rather than waiting until the end of the year to figure out their tax implications.
“Accounting and taxes are often neglected, and that can hurt your business,” she says. “You’ll thank yourself for prioritizing these important aspects of your business. You’re not alone if you don’t have a basic knowledge of taxes. Don’t let fear or insecurity keep you frozen.”
The KCSourceLink Resource Navigator is a useful tool that helps entrepreneurs find over 240 Kansas City-area organizations that can assist with legal, tax and other business services.
More expert tips below …
2. Protect yourself and your business
One of the best ways to safeguard yourself as an entrepreneur is to set up your business as an LLC. Chris says this business structure is the most common. You can change your business organization from an LLC to a corporation if you need to down the road.
“There are far more advantages than disadvantages to becoming a limited liability corporation,” Chris says. “An LLC is a shield for you as an individual.”
Some of the benefits of an LLC include protection from personal liability for business decisions or actions, less recordkeeping compared to a corporation and few restrictions on profit sharing. In Missouri, you can register your business as an LLC online with the secretary of state’s office. Kansas residents can use the state’s virtual business filing center and Business One Stop to navigate the LLC process.
“There is no tax implication for becoming an LLC,” Meghan says. “If you operated last year as a sole proprietor walking dogs and then you become an LLC this year, nothing changes for you for tax purposes.”
Insurance offers another layer of protection. Chris and Meghan suggest talking with an insurance broker who can assess your risk, determine the right types of policies for your business and shop for the best rates. Chris recommends Brush Creek Partners in Kansas City, Missouri, and Tru Insurance Solutions in Overland Park, Kansas, but there are many more local companies; do your research and weigh your options before you make a decision.
Contracts are a must for savvy business owners. These legally binding agreements define and govern the rights and duties between your business and those you work for or with.
“Written agreements, or even email exchanges, are better than oral agreements,” Chris says. “Draft something up and sign it, that’s better than nothing. Contracts are awesome in business for helping you avoid or resolve disputes.”
Chris says at some point every entrepreneur should put money toward contracts either by hiring a lawyer to write them or buying a template. Chris offers a free guide to contracts for freelancers, entrepreneurs and small business owners on his website. He also sells attorney-drafted, fully-editable contract templates and is the co-founder of Contract Canvas, a company that supports creative professionals in creating and e-signing client agreements.
3. Optimize your business operations
Challenges can abound for new business owners, so it makes sense to simplify legal and accounting whenever possible. For example, Meghan said it’s beneficial for businesses that include more than one person to determine early on who will be responsible for tracking income and expenses.
“Be on top of every receipt for expenses,” Meghan says. “You don’t want to lose out on any deductions.”
For married couples starting a business, Chris and Megan say legal and accounting is usually easier to manage if one spouse is the sole owner of the business and the other spouse serves as an employee or contractor.
Choosing a reputable bank that understands the needs of business owners will also make day-to-day operations less of a hassle. For instance, Lauren says she enjoys the online business tools offered at CommunityAmerica Credit Union in Lenexa, Kansas. Another example is Chase Bank, which has a minority business division.
Chris and Meghan also recommend keeping your personal and business funds separated either in different accounts or in different buckets under the same account.
“Co-mingling funds puts you at risk of losing your protections under an LLC,” Chris says.
During the GEWKC session, Lauren conducted a poll in which 3 in 5 participants said they don’t use an accounting platform. While using a spreadsheet to keep track of your finances isn’t necessarily a bad thing, Meghan, who uses QuickBooks Online, says accounting software is worth looking into. She points out free or low-cost, user-friendly solutions, such as Wave and Xero, that can accommodate the needs of everyone from a freelancer writer to a restaurant owner.
“A lot of times people make the change from spreadsheets to accounting software too late, and they wish they had been producing financial statements from software sooner,” Meghan says.
4. Seek out specialized help
Chris emphasized the importance of working with an attorney who has experience in the specific area of law for which you need help. For example, when an attendee at the GEWKC session asked about intellectual property protections, Chris said a patent is the most expensive, complicated type of protection (compared to copyrights, trademarks and trade secrets) and business owners should work with a patent-specific lawyer to navigate the process. Other law specialties of interest to entrepreneurs include contracts, employment and labor, bankruptcy, taxes, real estate and mergers and acquisitions.
Local accelerators such as the University of Missouri – Kansas City’s Entrepreneurship Scholars program can help with legal concerns as well as law firms like Husch Blackwell in Kansas City, Missouri, which offers pro bono legal services to nonprofits.
“A good lawyer can save you a lot of money and a lot of headaches,” Chris says.