Sunday, December 19, 2010

Mom worried about son's startup business

Margo writes:
My 23 year old son has been running a small computer consulting business out of my home for the past two years. He’s recently decided he needs a store front and has rented office space (at a good rate) with a grand opening scheduled for January 3rd. He doesn't have a business plan, a seller's permit, hasn't checked into sales tax laws, doesn't have a business checking account and pays his one employee with cash. I am not sure if his business is an LLC. When I ask him about these items he says don’t worry mom I’ve got it covered or it doesn’t apply to me. I'm so stressed out about this I’m not sleeping. How critical is it to have these items in place by January 3rd? The accountant at my place of employment says he probably has a year before the IRS catches up with him.

First this is exciting. Most new businesses are started by young people in their mid-20’s to mid-30’s. Also, starting a business during an economic downturn can be cost effective. Your son is getting a good deal on rent and most likely other items he needs to open his store.

Your question does however remind me of a Zen proverb:
In the beginner's mind there are many possibilities. In the expert's mind there are few.
It is illegal for your son to provide services that are subject to sales tax without having a sales tax permit. Computer services are a taxable service. The cost for a sales tax permit is $25 in Wisconsin and he can apply online.

It is also illegal to pay an employee or independent contractor without completing the proper tax filings. Your son needs to pay payroll taxes and workers compensation, etc if his worker is truly an employee. If his worker is an independent contractor he needs to issue a 1099 at the end of the year. He should make an appointment with an expert to discuss these items.

A business plan is helpful, but not critical or a business breaker.

His company doesn't need to be an LLC; he can operate as a sole proprietor which doesn't require any registration. If he decides to become an LLC at a later date he can do so.

Without a business checking account he may have difficulty depositing checks written out to his business name into his personal account OR people may be uneasy about writing a check to him personally at his business store front for business services. Plus if he doesn't keep his business transactions separate from his personal transactions right from the beginning, he's asking for a huge headache/mess at the end of the year when he needs to prepare his taxes.

I asked one of my tax preparing colleagues if she has seen small businesses that were not set up properly in the beginning and what the repercussions were. Yes, she's seen this before and these companies end up paying more in the end when it all catches up to them. Like four times as much because of penalties, errors, accounting fees, interest, etc.

So my advice:
You need to encourage your son to sit down with an expert NOW to discuss the above items. He should strive to run his new store as professionally as possible; his reputation is at stake as well as his pocket book. He can get free online and in-person business counseling, mentoring, training and advice at SCORE a nonprofit association made up of over 13,000 volunteer mentors dedicated to educating entrepreneurs.  He can find an office in his area here.

One more thing, I recommend that you don't co-sign any rental agreements or business loans.

2 comments:

  1. All good advice. Since it's Christmas time, perhaps Margo can check out the local B & N and see if there is a book on starting a business in Wisconsin. Two years ago I helped to start a small business in Virginia, and found such a book that was practically a check list. It was very helpful and would have fit in my stocking...

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  2. Webb,
    You are correct there is such a book and thanks for mentioning it. My tax colleague also indicated seeing a book at B & N on starting a business in Wisconsin, but since I didn’t have the exact title and author I didn’t include it. Good advice.

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