How to Start a Business: A Checklist

Ok, so you’re ready to start-up your business — either online, home based, or (the old-fashioned way) in a brick-and-mortar building.  What do you need to do to make sure you’re operating legally?  Here is a checklist of some essential first steps:

√  Get a Business License

Contact your local government to find out what sort of license is required for the type of business you plan to open.  Most cities and counties now have websites where you can download the application forms, as well as get further information.  Don’t make the mistake of thinking that just because you have a home business you don’t need a license — most cities will require one and can impose penalties if you fail to get a license or you wait until after you’ve already been doing business for a while.  Some local governments even have arrangements with state tax authorities to check returns for home-based business income generated by unlicensed businesses.

Also, check to make sure your business complies with local zoning requirements, especially if you are operating from your home.  Finally, make sure you have the permits necessary for your particular type of business operation (e.g., food preparation, liquor sales, daycare, etc.).  Again, you can get this information from your city or county website, or by contacting your local government office or town hall.

√  File a Fictitious Business Name Statement

If your business name contains any name other than your own last name (or, for a corporation, the name in its Articles of Incorporation), you will probably need to file a “fictitious business name” statement.  The purpose of this filing is to notify the world that the entity calling itself, say “Joe’s Plumbing,” is really owned by “MegaGiant Corp.” or Sam Wurzelbacher or some other such person or entity.  This protects you by discouraging others from using your business name, and it protects your potential customers by letting them know (if they care to find out) what or who is really running your business.

You can usually register by contacting your county clerk’s office (which will also help you with an initial search to make sure nobody else is using your name).  Within 30 days of registering your fictitious name statement, you will need to publish it in a newspaper.  Then you will need to file an affidavit certifying publication with the county clerk’s office.  In Orange County, contact the Clerk Recorder at 714-834-2889, or www.oc.ca.gov/recorder/ for more info.

√  Get an Employer ID Number (EIN)

This doesn’t apply if you’re operating as a sole proprietorship (in which case you only need your social security number).  But if your business is a corporation or you have employees, you need to get a federal tax ID and will have to pay federal withholding taxes at least quarterly.  You can get a tax ID online at www.irs.gov/businesses/small/article/0,,id=102767,00.html.  Or, you can call the IRS at 800-829-4933, M-F 7:30 to 5:30.

√  Get a Sales Tax Exemption Certificate (if you will be selling a product)

A sales tax exemption certificate will let you buy inventory, supplies and materials used in your products without paying sales tax.  But it will also require you to charge sales tax to your customers.  You are then responsible for paying the sales tax to the state.  You may have to pay penalties if the state finds out you haven’t been charging tax properly or failed to pay it to the state.  Check with your state government to find out the requirements.  In Orange County, you would check with the State Board of Equalization at 714-558-4059, or www.boe.ca.gov.

√  Get Insurance

Talk to your insurance agent or broker about the types of insurance you may need for your specific business.  While most insurance is not legally required, it’s definitely something you need.  At a minimum, you should have comprehensive general liability (“CGL”) coverage.  If you own a business that makes consumer products, make sure that your CGL policy covers product liability claims — that is, claims that your product caused harm or injury to a consumer.  These types of claims can be very costly to resolve and expensive to defend.

You will also want your business to have adequate property insurance.  You may want automobile insurance that covers personal vehicles used on company business (“non-owned automobile coverage”), in addition to covering company-owned vehicles.  You might also want to consider two types of insurance that cover situations in which your business operations are disrupted:  business interruption (or “business income”) insurance and “key man” coverage.  Business interruption insurance will usually cover your fixed expenses (like taxes, utilities, rent) if the business is forced to close due to fire, flood, severe property damage  or some circumstance beyond your control.  Key Man insurance provides coverage if someone essential to the business operation (like yourself) dies or becomes incapacitated.  This is something that banks or other lenders may require.

And finally, if you have employees, don’t forget that you must have adequate worker’s compensation insurance for them! (You can get more info from your broker or at www.dir.ca.gov or 714-558-4597).

One tip when buying a liability policy: Many policies, but not all, include the cost of defense within the policy limits, along with the cost of indemnifying or covering your claim.  If you can get a policy that provides defense as a separate obligation, not subject to the policy limits, you are way better off!  That way, if you are unfortunate enough to be sued, you won’t have to see your policy limits eaten up by legal fees instead of being used to pay off the claim.

√  Get to Know a Lawyer and an Accountant

I have a whole separate post where I rant about why a small business owner should talk to a lawyer, so I won’t go into all that here.  My point is that if you want to have a successful business you will, at some point, need some professional advice.  Much better to establish those professional relationships at the outset than to look for help when you’re already in trouble.  It’s just like having a family dentist — do you want to look for a new one while holding your kid’s bloody tooth in your hand, or do you want to see the guy you’ve gotten to know and trust from routine visits in the past?  Enough said.