When starting a business it is often difficult to get other people and businesses to take you seriously. Customers may be hesitant to buy from you. Suppliers may even be hesitant to sell to you and they certainly won’t line up to give you credit. Speaking of credit, a new business often has a better chance of finding gold at the end of a rainbow than they have of getting a loan or a line of credit at a bank. Even getting a business checking account is harder than it used to be. With that in mind I’ve collected some information to help you with starting a business that the public, suppliers, creditors, and even the government perceives as legitimate.
It turns out that convincing the government that you are for real is pretty easy, and convincing them helps to convince others, so we’ll start there. It may be surprising that the government is the easiest target but it shouldn’t be. It is in their best interest for your endeavor to be a business. They will get to collect revenue off of the work you do or the products you sell, so they want to make the process of you becoming a business as easy as possible. To convince the government you’re a business you just have to tell them you’re a business. Well, often you have to pay them some money too, but really that’s about it. But you have to tell them in a way they’ll understand. What they will want to know first is what kind of business you are. If you are going to be a corporation, limited liability company, or partnership, there are legal forms you file with the government, pay some fees, and poof, you’re a real business. (There are all sorts of long term consequences to this decision, so I strongly recommend hiring an attorney to help you make the decision and file the paperwork.) If you don’t want to be one of the more formal types of businesses you can elect to be a ‘sole proprietor.’ This is actually the simplest and most common structure used to start a business according to the Small Business Association. Becoming a sole proprietor happens differently in different states. Some are as simple as saying “I’m a sole proprietor” and hanging up a sign, or the modern day equivalent, which is usually making and publishing a web site. In other states you may need to pay a small fee and register with some governmental agency. This registration may be required to open a business bank account. When you are registering you should go ahead and get an employer identification number (EIN), especially if you think you might someday have employees. It’s an additional ‘signal’ that you’re legit. You can get an EIN on line at IRS.Gov, specifically here.
Next, let’s convince the banks that you’re in business. They’re still probably not lending you any money but having a business bank account separate from your personal one makes record keeping easier, and those long checks are pretty cool, especially if you get them in a book, three to a page. You can sit at home with the book open in front of you, wearing a translucent green visor and just soak in the ‘in business’ feeling. OK, when you go in to the bank ask them to talk to a business bank representative. That person will tell you what they offer and how much it will cost you. You will need a deposit to open the account. A check or transfer from your personal account is fine. If he or she looks at you funny (which they won’t) just say you’re taking an equity position in the new venture. That’ll teach ’em. They will ask you your business name, and will most likely want proof that it’s legit. This is where you show them the papers you paid the attorney (out of your personal account — damn!) for. The business name will go on the account. You will be the one signing the checks (with your own name). At this time they may ask you for a TIN, or taxpayer identification number. If you formed a company you’ll have one. If you got an EIN you’ll be able to use that. If you don’t have either of those things then you can just use your social security number. They may want to see your card, but no one has ever asked me. After that you should be set up. Handle this account with care. This is the beginning of establishing business credit.
Now, on to suppliers. Regardless of what business you’re in there will be things your business must purchase. Cleaning supplies, web hosting, products for resale, packing peanuts, transcontinental business class flights, something. Some of the things you may wish to buy may not be for sale to the general public. You may be entitled to different pricing if you’re a business. Often businesses receive credit terms for things they purchase. Things that you’re going to buy and then sell later at retail will be sold to you tax exempt. Let’s take each issue in turn.
To acquire things that are not available to the general public the company selling to you must agree that you ‘should’ have access to them. For instance, in some states it is illegal for most people to buy dynamite, but if you’re a building demolitions company you would be allowed to buy it. Often there is a license or certification process that goes along with this kind of product. If that is the case, seek out the licensing agency, complete the requirements and you’re in. Bonus, it makes you look more official. Sometimes there’s not an ‘official’ gatekeeper or policy, but some people just aren’t allowed access. For instance, there is no law saying you can’t own lock picking tools in most states. As a matter of fact you can buy them from many sources online. However, if you were to attempt to purchase them from a legitimate locksmith supplier it is unlikely they would sell to you unless they could independently verify that you were a locksmith. In the past, having an ad in the local telephone book was considered proof in that industry, but with the rise of internet advertising and the demise of the phone book you might have to prove you’re a locksmith some other way. Joining a trade association often serves as ‘proof’ in these situations, and is often a good idea as well. I’ve even had to answer questions that supposedly only a locksmith would know, kind of like a secret handshake.
Special pricing is usually a matter of buying in quantity. Sometimes that is making a large purchase, or sometimes it’s making a small purchase, and making sure that the company you’re buying from knows that you intend to make regular, ongoing purchases. The discount you’re receiving is for bulk, or sometimes, for doing the work of selling the product to the retail customer. The easiest way to get this is to just buy a lot all at once. The next best way is to become a regular customer. After you’ve been ordering for a while, inquire about discounted pricing. As with all negotiations, your results will vary by industry standards, whom you’re working with, and your negotiation skills.
Business credit is typically granted as business relationship are developed between your business and your supplier. You will almost certainly start out on a cash payment basis. Over time as you order and pay good will is developed. My suggestion for developing business credit is to do it early. The process I use is to fill out an application for credit with whatever company and then place a couple orders for cash while they’re processing it. Once they’ve received a few hundred dollars from me in business it’s easier for them to grant me a small credit line. I then charge something and pay it off right away. The purposes for this kind of credit, at this stage of your company’s development are to (1) build more credit, and (2) to facilitate your business’s operations. You’re not trying to generate interest free inventory loans at this stage. You’re just trying to establish that you’re a legitimate company and make doing business easier.
The last issue is avoiding paying sales tax on something you’re going to resell. If you’re going to sell products, and you don’t live in one of the five remaining states without a sales tax, you’re going to also collect sales tax and pass it on to the government. In most states if you’re going to be collecting that tax on retail sales, you don’t need to pay it on the wholesale amount you pay for whatever it is you’re reselling. The process I’ve been through in three states requires you to get a Sales Tax ID number. Remember 1200 words ago when we were dealing with the government? You should have gotten a sales tax ID number then. Sorry. So, get that number using your state’s process to do so, then give that number to whomever you’re buying whatever from. Now, this is important. It will be tempting to not pay sales tax on things that you are just going to use in your home and/or your business. DON’T DO THIS. It is a crime, and governmental types get more bent out of shape over this than they do for little things like arson, murder, or bigamy. Only kidding, but if you want to bring the governmental hammer down on your business just mess with their revenue stream. So, get the number and use it properly. With great power comes great responsibility.
Finally, everyone thinks you’re legit but your customers. How do you signal to them that you’re the real deal and not some random fly by night quasi-organized scam artist? Well, first, all this stuff you’ve already done helps. For example, when you sell something that people are accustomed to paying sales tax on and you don’t charge it that will send up a red flag. But you’ve covered that. If you have a retail location you can hang your business license. If you have a website, make sure that it’s professional and error free. This means that if you have a product or service offering you need a policies page. All the cool (i.e. real) companies have them. Local businesses have local numbers. Sure, this is easy to fake and lots of fake businesses have local numbers too. And sure, everyone can call everywhere now so what good is a local number. A local number is a signal. People consciously and subconsciously process signals like this to make decisions. Take credit cards. All of them. Online and off. It’s a hassle. The credit card company takes part of your money. Suck it up. Your bank can help with processing, or you can just use Square or something similar. From day one, manage your online reputation. That’s right, I’m giving you permission to Google yourself regularly, even daily if necessary. You will have bad things come up on the internet. Deal with them, then move on.
As soon as you can, join the Chamber of Commerce. Seriously, join the chamber. After you’ve been in business a year, register with the Better Business Bureau. Do things that you see other businesses in your industry and area doing. When you have the funds, engage in local marketing such as sponsoring a baseball team or whatever. Legitimate businesses invest in the communities that support them.
That’s about it. Well, not really. There are tons of things, but that’s all you’re getting today. This list should be good enough to get you started. If you need specific consultation, feel free to reach out to me. I’d love to help.
That was a fun read, Dr. Nelson. Very informative.