As a child, I remember sitting on the floor with my three brothers one Christmas playing with a new Lego set that my older brother got from Santa. We played for hours building a spaceship, a car, a skyscraper and, of course, for me a horse. We built just about anything we could imagine. And, the best part, our creations always stayed together. They never fell down. With our father’s help, he showed us how to lay a solid foundation first before we ever started.

As a small business owner, we too must lay build a solid foundation in our business. As we covered in our Inaugural newsletter issue, after you have vetted your idea to make sure it has legs, it’s then critical that you lay the proper foundation.

In this issue, we’ll look more closely at what exactly is involved in building a solid foundation that can help your business weather the many storms that may come your way.

Step 1 – Choose The Right Legal Entity

When starting a business, or even if you have an existing business, it’s critical that you choose the type of legal structure best suits the way that you intend to do business. For example, your legal structure will affect the amount of personal liability protection that you can achieve, the records and accounts that you have to keep, the taxes that you pay, the way your business can raise money, and the way management decisions are made about the business.

Generally speaking, a company by default is a sole proprietorship or oral partnership, unless its founders opt for another structure. This type of business is not distinct from its owners, and the income is reported on personal tax returns.

You should think long and hard before operating as a sole proprietor or oral partnership, since it subjects you to unlimited personal liability. This means that if you are sued, your personal car, home, and other personal assets could be exposed to creditors, and not just the assets of the business.

So, what other choices do you have? If you want to achieve limited liability protection, the best options are generally to consider operating as a limited liability company or as a corporation. With a corporation, you can incorporate as an S-Corporation or a C-Corporation, depending upon the taxation level. S-corporations are pass through entities where there is single taxation, whereas C-corporations have double-taxation and more complex paperwork.

Whatever structure you choose, keep in mind that liability protections are not absolute. Creditors may still be able to pierce the corporate veil if you don’t follow the basic legal and accounting requirements that preserve your limited liability shield.

For example, you must make sure and keep the proper records, and file the required documentation with your Secretary of State/Business Registrar on an annual or bi-annual basis to keep the company in good standing. You must also follow the proper accounting procedures, as discussed in the next section.

Step 2 – Set Up The Proper Accounting Structure

Many small businesses close their doors for various reasons – the lack of accounting control is one of them. If you have the proper accounting procedures in place for your business, you are miles ahead of other business owners who don’t, and your business is better positioned to avoid failure than others. Let’s face facts, often times small business owners don’t have resources like large organizations do in order to fully staff accounting functions.

So, what can you do? Ideally, you should hire an outsourced CPA to assist your business. You can work with many qualified CPA’s for just $300-$400 dollars per month (depending on your business size), and they can handle everything from bill payments to maintaining your ledgers.

If you simply cannot afford to hire an external CPA to assist you, then you will need to take on the bookkeeping and accounting tasks internally. In that case, you will want to look for an accounting system that will increase your efficiency and that is relevant to your size, industry and type of business. A common accounting software program is QuickBooks. However, there are various other accounting programs on the market. You should pick the one that you are most comfortable with and that you will be most likely to use.

After you select an accounting software program, you need to pick which accounting method you will use in your business: Cash Basis v. Accrual Basis.

If you select cash basis, you will count income when you actually receive it (either as cash, credit card charges, or check) and your expenses are counted when you actually pay them. This is the most common method for small businesses, especially those that take immediate payment for a product or service.

If you select accrual basis, you will count income when a sale is made (regardless if you actually receive the money for it). Expenses will then be counted when you actually receive the good or service (instead of paying for it immediately). This method is common for larger businesses or small businesses that utilize “invoicing” and frequently deliver a product or service before being paid for it.

Setting up an accounting structure is critical to building a solid foundation for your business.

Step 3 – Establish The Proper Technology Infrastructure

Once you have setup the proper legal entity and accounting systems for your business, you also need to establish the proper technology infrastructure to support your business and your customers.

But the good news is that in today’s technological world, it doesn’t have to be time consuming or expensive to setup these systems.

For example, it is easier than ever to work from home or have a virtual office, unless you need a physical location for customers to enter. And with virtual phone systems, like Ring Central, you can answer a call while you are on the go or are out of the office.

With a virtual phone system, you no longer need to be tied to your desk. The phone system rings you at whatever number you desire. This can be your home number, cell phone, or any number. When you receive an incoming call from the virtual phone system, you are provided with a prompt to confirm whether or not you want to accept the call. This also lets you know how to answer the call.

And now with cloud computing, it is even easier to store a digital document or a digital task on a server that you can access over an Internet connection. For a small business owner, cloud computing offers tremendous advantages such as reduced costs. You pay for what you use.

You can scale your company’s file storage needs seamlessly rather than purchasing expensive hardware. Updates are automatic so there is no worry about paying for future updates. And, you can access information wherever you are rather than having to remain stationary much of the time.

So, make sure you select the proper technology to allow you to operate your business.

Step 4 – Pick The Right People To Do The Work

After setting up the right systems, you also need to find the right people to do the work.

Remember, we can’t do it all. As a small business owner, this is sometimes difficult to grasp. The word “delegation” often seems so foreign to us. Just imagine what it would be like if you delegated anything and everything that you reasonably could. You would have more free time to focus on the big picture of your business.

So, when is it time to hire someone? Do you hire employees or independent contractors? The basic rule of thumb is hire when you need help, but don’t rush to add staff, unless you absolutely need to.

Always consider using independent contractors first. The benefit to using contractors is that you can hire them without a long term commitment, like an employee would require. This gives you the flexibility to change directions without having the stress of having to let employees go, and all of the hassles that go along with that.

But always make sure that you have a written agreement that outlines the terms and conditions of your arrangement, especially your intellectual property rights. A contractor will own the copyrights to the work he produces for you unless there is a written agreement to the contrary (except for certain exceptions beyond the scope to discuss here). Great sources for finding contractors include Elance and CraigsList.

Bringing the right people onto your team is one of the most important aspects of your business. You should be slow to hire and fast to fire if things are not working out, because your company is only as good as your weakest link on the team.

For more strategies on how to grow your real estate business, contact Indianapolis Real Estate Lawyer Jynell Berkshire at Berkshire Law – A Real Estate and Business Law Firm for you!