Run Your Own Corporation. Garrett Sutton
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the new venture in a businesslike manner. More specifically, the IRS and the courts will
look to the following factors:
• how you run the activity.
• your expertise in the area (and your adviser’s expertise).
• the time and effort you expend in the enterprise.
• whether there’s an expectation that the assets used in the activity will rise in value.
• your success in carrying on other similar or dissimilar activities.
• your history of income or loss in the activity.
• the amount of occasional profits (if any) that are earned.
• your financial status; and whether the activity involves elements of personal pleasure or recreation.
The classic “hobby loss” situation involves a successful business person or professional who starts something like a horse ranch or a farm. But the IRS’s long arm also can reach out to more common situations, such as business people that start what appears to be a bone fide sideline business. Before starting your business speak to your CPA to make sure it is considered a legitimate business in the eyes of the IRS. While hobbies can be a source of relaxation and satisfaction we don’t want the IRS to deem your business that you work hard in to make successful a mere hobby. And as you are starting to realize right at the start you may need the help of...
Your Professional Team
Hiring professionals to do what they do best frees you up to do what you do best. And while you may not need all of them before you set up shop, it is not a bad idea to know who you will need and want on your team before the day-to-day demands of your business overwhelm you. Remember that corporate veil? Utilizing the expertise of the right professional team will help you make certain your business is complying with local and federal requirements. As an example, they’ll help you avoid the hobby loss rules.
You want a professional team on your side who understand your business and work well with you and with each other. You want professionals who can guide you through the startup phase and who can then assist you in growing and expanding your company, deal with contracts and customers, get your message out and protect your assets. The following are some (but not all) of the experts who make up the professional team.
Banker
Banks have a host of services for businesses of all sizes. Knowing a banker (not just a teller at the counter) at your business bank is important. A good banker on your team can provide you with ideas and programs for your growth.
Establishing a relationship with a local bank can help you network in your business community. And having a previously established relationship with a banker will help when you are ready for a business loan or line of credit. Bankers can keep you up to date with other financial products that might work for your business, from merchant banking services to having the bank put together your payroll system.
Ask to meet with a vice president or a private business banker. Get to know them and keep in touch. It can’t hurt to have a banker on your side. At the start, you will open a bank checking account for your business and get checks imprinted with your company name. Banks can also provide credit cards for your business, which is a great way to start building credit for your business for the day when you start looking for loans and other forms of financing.
Insurance Agents
At the start, shop your insurance needs around. Insurance rates can vary greatly and you don’t want to overpay. Once you are comfortable with your agent, you can save yourself time and effort if you use one insurance agent for all your insurance needs. As well, discounts are available if you go through one company. Every two years or so sit down with your agent and go through your coverages. Are you paying too much? Has the value of your business or property gone up? Are you not properly covered for certain risks? Do a risk assessment review with him or her to make sure your business (and personal) needs are being met.
Attorneys
For all the lawyer jokes (and I tell a few myself), please remember that a good attorney can be a lifesaver for your business. From discussing the right entity choice and checking on name availability to handling the formation of the company and filing the required paperwork, your attorney is going to be a big help when you are starting out. You can use your attorneys to help you prepare the documents you will use when running a day-to-day business, including the contracts and agreements you’ll have with vendors and suppliers or customers. Your attorneys can assist you with proprietary information and intellectual property, protecting your ideas and filing for patents or copyrights and trademarks. If you have the misfortune of having a run-in with the government (as we’ll discuss ahead) an attorney specializing in such issues can be a very big help. As an overall strategy, for specialized advice, the attorney you choose should be well versed in the field or industry in which your business will operate.
Starting out, as with choosing an accountant, you’re going to want to ask friends and family and other business owners for recommendations and referrals, and interview attorneys to find one who will be right for you and your business. Your current banker, accountant or insurance agent, if you already have such professionals on your team, may be able to refer you to an attorney who’s right for you.
You also need to keep in mind the business license requirements for the type of business you’re starting up. (Recall our last case where Bobo and Morton weren’t properly licensed and were assessed large fees and penalties.) Almost every business you can operate requires a business license in the city in which you’ll be working. In some locations, you may also need to have a county and/or state business license. Each license requires an annual fee and some paperwork. Your attorney can help you with these requirements.
Accountants
Your accountant works with your books, with the finances of your business and your livelihood, so you definitely want to hire someone whose skills and judgment you trust. While you’re still starting up, your accountant can help you:
• set up your books and bookkeeping system.
• prepare the balance sheet and projected profit and loss statements needed for a business plan.
• advise you on quarterly tax requirements.
• help you set up financial timelines to assist with startup costs.
After startup, your accountant may continue to assist you with bookkeeping, payroll and financial management. At all times you want your accountant (and all your professional team members) to maintain matters in confidence. In the case of Bobo and Morton where the CPA’s assistant dubbed them the Hobby Loss Twins and spread word of their misadventures around town you have a serious breach of confidentiality. The assistant and his CPA firm could be sued for such behavior. I have many clients in smaller towns and rural areas who do not trust their local professionals to keep a secret. In many cases they end up using professionals in a larger metropolitan area.
With all your professionals make certain that confidences are maintained. Of course, a good professional will not have to be told this basic principle.
Your Business Name
Before incorporating you should check to see if the business name you want to use is available. There are three searches you must do.
1. Corporate Name
Whether you are forming a corporation, LLC or LP you will need to check and see if the name is available for use as an entity name. This involves visiting the website of the Secretary of State in