Do I Need A New Business Entity?

by Kyle on July 20, 2010

A reader asks:

I am an independent freelancer and have a question about whether I need another business entity for a new line of business.

Over the last few years, I have operated two websites focused on environmental issues. Through these sites, I provide resources and tips on sustainable living and make money through advertising, affiliate sales and and e-books. I created an LLC to own and operate the websites and set up a separate checking account for the business. Recently, I decided to provide freelance writing services in addition to running my two websites. I set up another website using my personal name and have attracted a few paying customers. My question is: Can I provide freelance writing services under my existing LLC or do I need to create a new entity?

My take:

It is good to hear you have been thinking ahead and doing some proactive planning. Your situation is actually quite simple, because you have already taken the right steps of setting up an LLC and a business bank account for your other business ventures.

If you wanted to, you could set up another business entity for your freelance writing services. The benefit would be a separation of the assets and liabilities of each business. The drawbacks, though, would include the extra administrative requirements to set up and operate a separate company, setting up and maintaining a separate bank account, and additional tax reporting complexity.

I am a fan of taking the simplest approach, and the extra administrative and financial burdens are probably not necessary in your situation. I recommend that you use your existing LLC to provide writing services to your customers. You would just need to bill your customers using the LLC’s name and make it clear in any contracts and/or negotiations that you are providing services as a member of the LLC. For instance, if you are hired by XYZ to provide services, the contract would be between your LLC and XYZ, and you would sign the contact as a member of the LLC.

I hope this helps, and good luck with your new business!

Do you have a question? Send it my way using the Contact form.

Disclaimer: The information presented on this site should not be construed to be formal legal advice nor the formation of an attorney-client relationship. Please contact a legal or tax professional to discuss the specifics of your situation.

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Regular Visits by the Tax Man

by Kyle on July 15, 2010

For most individual taxpayers, tax day comes just once a year — on April 15.  But, for many businesses and self-employed taxpayers, Uncle Sam expects a check four times a year.

Who pays

Unfortunately, you are one of those poor quarterly taxpayers if you are a sole proprietor, partnership or S corporation and any of the following applies to your situation:

  • You expect to owe at least $1,000 in tax at the end of the tax year; or
  • You expect your withholding to be less than:
    1. 90% of your tax this year, or
    2. 100% of your tax last year

Huh?

Essentially, if you think you will owe over $1,000 in tax, be prepared to calculate and make estimated tax payments.

But, if your business is a C corporation, you must make estimated tax payments if you expect to owe more than $500 in tax at the end of the year.

When payments are due

Estimated tax payments are due on April 15, June 15, September 15 and January 15. If you underpay one or more installments, you get charged interest until the day you catch up.

How much to pay

Unfortunately, there isn’t an easy answer to this question. The official answer is you must calculate your expected AGI, taxable income, taxes, deductions, and credits for the year, then use Form 1040-ES to figure your estimated tax.

To simplify things, you can withhold 100% of the tax you paid last year and make payments of 1/4 of that amount each quarter, instead of trying to estimate how much your tax burden will be this year.

The Tip

I have tried to be brief, but the rules are complex. So, anyone wanting more information should download IRS Publication 505 or IRS Publication 542 for corporations from the IRS website or talk to your tax advisor.

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5 Business Lessons From My Dogs

by Kyle on July 13, 2010

My wife, Cynthia, and I have two Chihuahuas who have shared our lives for the past eight years. I never expected that two little dogs could me so much about business and living my life to the fullest, but that is exactly what they have done. These are some of the lessons I learned from watching them over the years.

1. The best time to act is now.

Dogs don’t sit around and ponder all of the possible outcomes of taking action. Instead, when they see an opportunity, they jump on it. If a piece of food hits the floor of the kitchen, our dogs waste no time pouncing on it. If it turns out to be something they don’t want, they will simply drop it after a brief investigation

We can implement this action habit into our own lives by taking advantage of favorable circumstances that present themselves. Sure, the economic news is full of stories of doom and gloom. But, don’t let that stop you if you discover a great business opportunity. Seize the circumstance by acting on it. If, after investigation, it turns out the opportunity isn’t what you expected, you can always drop it and move on. You never know if one of those situations might turn into the pure gold.

The key is to have the courage to act.

2. Trust your instincts.

It never ceases to amaze me how dogs will immediately get out of situations they don’t feel comfortable with. I was on an evening walk around the neighborhood with the dogs a few days ago when Mandy suddenly stopped in her tracks. I tugged at the leash, but she refused to budge. Instead, she stared intently up the street into the darkness. A few seconds later, the dark silhouette of an animal emerged from an alley ahead of us and crossed the street into the woods. Trusting a feeling that something was wrong, she prevented a potentially dangerous situation for both of us.

We too would be well-served by trusting our instincts more and relying less on rationalizations. If a business opportunity doesn’t feel right, you are likely picking up on an irregularity on a subconscious level. If a potential client or business partner appears to have all of the right qualifications but something feels wrong, trust your instincts and pass on the engagement. More likely than not, you will be happy that you did in the long run.

3. Enjoy the ride.

Every time I ask the dogs if they want to go for a ride, the response is always the same — sheer joy. They don’t care what the destination is. Wherever the trip takes them, they intend on simply enjoying the journey.

Too often, we become mired in focusing solely on a goal and miss out on the joys and opportunities that the journey provides. We spend much more of our time on the way to a goal rather than at the goal. Passing up the joys that the trip provides results in spending most of our time unhappy and relying on an anticipated result to fulfill us.

To make matters worse, when we achieve the goal, we usually just move on to the next target without savoring the satisfaction of that achievement. Taking time to enjoy the journey to a goal and celebrating the achievement of that goal will result in a much more fulfilling experience.

As Leo Babauta of Zen Habits regularly advocates, “Stop waiting for happiness. Happiness is right here, right now.”

4. Express your gratitude.

Dogs don’t complain about the quality of their food, that they don’t have the latest technology in dog beds or that they don’t have the right friends or contacts. Instead, they are grateful for what they have and for the people in their lives. A delightful aspect of having the dogs around is that they regularly express gratitude to us, whether it is via a wagging tail or curling up next to us on the couch.

It’s easy to feel sorry for ourselves because we don’t make as much as our neighbors or we don’t have the dream house that our peers may own. But, there are billions of individuals who would trade places with us in a heartbeat. So, take some time to think about the things you are grateful for in your own life.  Simply giving thanks for all that you have and for the people in your life will help make you a happier and more positive person.

5. Engage in pack activities.

Dogs are happiest when the whole family is involved in an activity. Our group outings to the park are the liveliest when all four of us are involved. Always wanting to be part of the action, there is rarely a time when I can walk around the house without a canine shadow following me. When I work from home, I usually do so with a dog in my lap or at my feet. The dogs understand the value of community and the power of interaction with others.

Owning a business can be an isolating and stressful experience at times. Many entrepreneurs struggle with believing that no one else shares their vision or their passion for building a business. Pack activities are essential in helping to manage the day-to-day demands and their effects on us. Uniting and connecting with other similarly-situated people provides a measure of perspective and can be extremely insightful. Find people who are ambitious, smart, hard working, full of ideas and highly passionate about their business. Hanging out with these like minds will not only have you feeling more at peace, but will also inspire you to push for more in your life and business.

So, get out there and find your own pack.

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Down But Not Out

by Kyle on July 9, 2010

“This is the lesson: never give in, never give in, never, never, never, never—in nothing, great or small, large or petty—never give in except to convictions of honour and good sense. Never yield to force; never yield to the apparently overwhelming might of the enemy.”
— Winston Churchill

Have you ever given your all to something only to have someone else come in and crush the results of all that work? Do you get frustrated because the outcomes you want aren’t coming to you as quickly as you’d like, despite the fact that you bust your butt day in and day out? Do you start to doubt yourself, your skills and talent, and your ability to succeed? YOU ARE NOT ALONE. As small business owners, we have all been there.

There are a number of ways for us as business owners to handle these types of devastating set-backs. Here are three of the most common:

  1. Do nothing and just keep absorbing the abuse;
  2. Quit;
  3. Make a change.

Option Number One – Do nothing.
If this tactic appeals to you, you probably shouldn’t be an entrepreneur. Most of us started down this road because we weren’t willing to slog along in mediocre jobs just taking indiscriminate abuse meted out by others. If we wanted to suck it up and slide along the path of apathy, we could have stayed in our corporate positions and let circumstances and other people dictate the direction of our lives.

Option Number Two – Quit.
This choice is a bit more problematic. Throughout our lives, we are reminded that you should never quit something you started. Cliches like, “quitters never win and winners never quit” (Vince Lombardi) or “success is 99% failure” (Thomas Edison) are pointed to as evidence of the viability of this notion. I think that point-of-view is far too over-broad, though.

If an objective is worthwhile, I urge you to stay on course, even though you may have to endure a significant amount of pain. But, if you start down a path and find that the result at the end of the road is either 1) not what you thought it was or 2) not obtainable, then it’s time to re-evaluate whether you should continue with the endeavor. In The Dip, Seth Godin, proposes that Americans have been brainwashed by Vince Lombardi. “Winners quit all the time,” says Godin. “They just quit the right stuff at the right time.” The million-dollar question, though, is when to walk away from something. The key is to step back, gain some perspective on the situation, and try to objectively determine whether you should continue.

Option Number Three – Make a change.
If you’re unwilling to keep your mouth shut and are convinced the goal is worth pursuing, it’s time to do things differently. Einstein is credited with defining insanity as “doing the same thing over and over again and expecting different results.” If you keep running into roadblocks in your business, maybe it is time to stop the insanity and make a change. The only way to produce different results with the same set of circumstances is to do things differently than before.

Instead of reacting to circumstances, take a step back and assess what you need to change to obtain a different result. Be proactive by taking the first step and being the person who gets the ball rolling towards change. Successful small business owners embrace change and make it happen. Change usually starts with disruptive innovation, so you must also be willing to break a few paradigms to create any real transformation.

So, my question for you is:

If you are not happy with what you’ve got, what changes are you willing to make to get something different?

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Is the Juice Worth the Squeeze?

by Kyle on July 6, 2010

Starting a business, expanding an established company or even pursuing a single customer costs your business time and money. So, agile business founders, whose companies are based on speed an efficiency, must constantly view every move their businesses make through the lens of return on investment.

With each opportunity, you, as the agile business leader, should assess the investment costs and risks in light of the forecasted revenue. The agile business methodology is based on taking a disciplined approach to determining when to spend money and time, but that doesn’t mean that you can afford not to spend them. It just means that you should properly evaluate whether the costs could be worth the potential rewards, and then go after those opportunities where the numbers look like they will work out in your favor.

In my agile business, we continually remind each other of the following mantra:

“Is the juice worth the squeeze?”

Or, in other words, will this business/new line of business/customer be worth the time, money, effort and risk it will take to pursue? If not, we move on, looking for those opportunities that will.

Try this mantra for a couple of days, and let me know how it works for you.

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Your Own Independence Day

by Kyle on July 4, 2010

Today is Independence Day in the United States. As most people in the country band together to celebrate the 234th birthday of our country at local parades, barbecues, softball games and other community events, I think it is an opportune time to reflect on the notion of independence in our lives in general.

Two definitions proposed by Meriam-Webster for the word independence are:

  1. A state of not being controlled by others; and
  2. Not requiring or relying on something else.

I don’t agree with those definitions, though. Personally, independence is about much more than the amount of control other people can exert over me, and it certainly is not about going through life alone.

Independence, in my opinion, is about aligning one’s life and one’s actions with the values you hold sacred. In order to to accomplish that feat, I believe we can’t do it alone and must lean on others for wisdom, advice, counseling and support.

On July 4, 1776, the 56 Founding Fathers signed the Declaration of Independence because they believed in something bigger and chose to take action in alignment with their values, regardless of the consequences. Many of those men gave up their possessions, their families and ultimately their lives for a cause they steadfastly believed in. The Founding Fathers and the patriots who supported the cause lived the very essence of independence – taking action in pursuing cherished values.

What is your definition of independence?

For me:

  • Independence is exploring and pursuing the things in life that interest me and eliminating those that are negative, draining or irrelevant.
  • It’s about living deliberately.
  • It’s about forging my own path instead of walking on one forced upon me by society.
  • It’s about acting instead of reacting.
  • But, most importantly, independence about living true to my values and designing my life around those values.

I celebrate Independence Day every morning when I wake up grateful that I have the flexibility to pursue those things that fulfill and interest me and have a positive impact on other people’s lives.

As a creative entrepreneur, whether you are in the United States or not, take some time to celebrate your own personal Independence Day today.

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Take Action!

by Kyle on June 29, 2010

We all know that results are derived from action, but, too often we get stuck in inaction — the quagmire of doubt and perfectionism and distractions and planning that stops us from moving forward. I am no proponent of taking off in a buzz of unguided activity, but the sad truth is that no plan will ever be perfect. If you wait until your plan is bullet proof, you will never get anything of real significance accomplished. The best way to get unstuck is to stop worrying about being perfect and to just get going.

The trait that separates successful entrepreneurs from floundering entrepreneurs is a daily commitment to fulfilling the benchmarks they set for themselves and their companies. Every day you must be willing to step out of your comfort zone and take care of what you know needs to be done. For some people this daily commitment means picking up the phone and making calls to prospective or current customers, no matter what. For others, it means sourcing suppliers for new products, drafting new copy for a website re-design, implementing changes in fulfillment procedures, or a myriad of other fundamentally important action items.

Planning isn’t action. Yes, you absolutely need to plan so you are clear about what you want to accomplish and the general direction you will take. Just do it quickly and get to the actual action as soon as possible. It is only through action that you will ever accomplish anything of significance.

Here’s my suggested plan for success:

  • Prepare an action plan or plans;
  • Start implementing your action plan or plans;
  • Make course corrections along the way.

Be forewarned – you will face obstacles; you will learn some hard lessons and the journey will not always be pretty. But, this process of discovery is invaluable to your success. You will learn what works and what doesn’t, and these are insights you would have never uncovered by staying put.

Take action on one of your business plans today. Only action will get you where you want to go. So, take the first step – stop thinking and start doing.

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As a Freelancer, Do I Need a Written Contract?

by Kyle on June 28, 2010

Let me make this easy – Yes!

When starting out as a freelancer or independent professional, you may not need a lot of legal help in the beginning. But, one thing you absolutely need is a good service contract. I say this because the service contract is critical to protecting the most important aspect of your business – the relationship with your clients.

Let’s Go Back to the Beginning.

Business revolves around agreements between people and organizations. A contract makes these reciprocal promises legally enforceable. Without contract law, freelancers would find themselves providing services and merely hoping to get paid for them.

That sounds ridiculous, doesn’t it? Well, the unfortunate fact is that this is exactly what many freelancers do each and every day when they provide services without a written contract. “We don’t need to put that in a contract; they said they would just do it for us.” “They’re great guys – if the widget doesn’t work right the first time, they will work with us.” “I’ve worked with them for years, and there’s never been a problem.” These are all excuses I have heard for why a contract wasn’t written for an agreement. Another common theme behind all of these situations was that the freelancer in question was not paid. In fact, a recent study (PDF) by the Freelancers Union found that 40% of freelancers polled went unpaid when employers refused to pay them fully for work performed.

Why Some Deals Don’t Work Out.

People usually get along while the deal is being put together. But all too often, something goes wrong along the way. My (admittedly simplistic) model for why business deals fall apart consists of two elements:

1. The parties’ expectations were not adequately detailed in the beginning; or
2. One party does not live up to its obligations.

In many cases, the second element relates back to a failure to properly define everyone’s expectations at the outset (element #1). You, as the freelancer, may deliver everything you thought was included in the agreement, but the client may have expected more or may have anticipated something else.

Clarifying Expectations.

As you can see, the real value in creating a written contract is in clarifying what everyone expects out of the deal. You shouldn’t feel untrusting or slimy about asking a client to sign a contract for services, because it is good for all involved. A contract shines a light on the parties’ presumptions about what their obligations will be and what they will get out of the deal.

Anyone who is serious about living up to his or her obligations will happily agree to a written contract. Moreover, presenting yourself as a freelancer or independent professional who asks clients to sign a contract before actual work begins demonstrates your professionalism and allows you to separate the serious clients from those you should be wary of.

I believe that most people are not out to take advantage of others. There are definitely situations in which one party either cannot or decides not to live up to its obligations. But, the majority of business deal collapses boil down to a failure to define everyone’s expectations in the beginning. Either way, a contract protects you by setting the expectations or by providing a method of addressing a breach of the agreement.

Does it Matter?

If the deal matters to you, create a written contract. If the relationship with your client matters, create a written contract. If neither of these apply, create a written contract anyway.

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Get Lean

by Kyle on June 28, 2010

“You’re a lean, mean, fighting machine!”
-Bill Murray as John Winger in Stripes

What comes to mind when I mention that your business should be running “lean?” If you are a management consultant “lean” would mean:

A generic set of management strategies used to change the culture of organizations to bring about dramatic improvements to key metrics.

*Yawn* For me, the word “lean” in a business context means:

Not spending a penny more than you have to create value for your customer.

Easy, right? Well, it is a sad fact that most businesses don’t stay focused on remaining lean. The boom days of years past saw an explosion of small businesses pop up all over the landscape. These businesses grew up in an environment where money was easy to come by and customers were abundant. There was plenty of money to go around, so overhead was taken on without a second thought.

Fast-forward to 2008, and many of these businesses found themselves in serious trouble in a hurry. Customers disappeared and small business credit became virtually extinct. The overhead costs that were easily paid before soon became crushing burdens.

Most small businesses that fail don’t go out in a blaze of glory. Instead, they simply die on the vine from a cash flow shortage. Every business runs into hard times and periods of cash flow diminution. It is the lean, focused businesses that continue to survive and even thrive in those times.

Getting Lean
Business owners should look at mid-year as an opportunity for a “tune-up.” They need to examine every area of expense, cut the fat and rein in costs that are unnecessarily high. Don’t go into your accounts with a financial sledgehammer and smash every cost. Instead, take the time to conduct a detailed analysis of the return on investment you receive for every dollar spent. Then, pick up the scalpel and do some financial surgery.

The smart companies will look at their financial records for 2010 and ask, “How can we make sure we operate in a lean and effective manner and cut costs where it makes sense to cut without impairing our competitiveness?” Those companies will finish the year lean, healthier, and competitive. The other companies, well, they won’t be around for much longer in this economic environment.

The Tip
Take a look at your financial records and closely scrutinize every recurring expense. How is each dollar of those expenses contributing to creating value for your customers? The idea is to make every element of your business the best it can be, without sacrificing effectiveness.

Take the time to do this now and soon your business will be a “lean, mean, fighting machine.”

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Where Are You Now?

by Kyle on June 27, 2010

We’ve all heard the cliché, “those who fail to plan should plan to fail,” but in the crush of daily activities, business planning tends to take a back seat. But, mid-year is a great time to dust off the business plan and re-evaluate your company’s strategic direction for the rest of the year in light of this year’s performance so far.

The Business Plan
Many new entrepreneurs and those who advise them set the business plan on a pedestal as if it is the answer to all entrepreneurial questions relating to a business idea. But, there are also those on the other end of the spectrum who think business plans are a complete waste of time.

I tend to emerge somewhere in the middle. I know many entrepreneurs who never wrote a formal business plan for their businesses but went on to make a lot of money. But, all of those successful entrepreneurs understood the importance of business planning. While a formal, MBA-approved business plan itself may not always be absolutely necessary for success, effective business planning always is.

Your business plan is just a map. The actual path you take may look very different from the original plan, but the plan will make you think about the details and how they fit together in your business.

It is intuitively obvious, but, in order to eventually arrive where you want to go with your business, you need to know two things: 1) Where you are now, and 2) Where you want to go.

Where Are You Now?

The three general areas you should consider in determining your current position are finances, marketing and operations.

Finances
Prepare and examine your “Big Three” financial documents:

  • The balance sheet shows all of your business assets, liabilities and equity and provides a summary of how your business is doing financially at a particular time;
  • The income statement lets you see at a glace whether or not your business is profitable by itemizing your revenue and expenses;
  • The cash flow statement shows the net increase or decrease in your cash flow over a period of time and will show you where the money went.

As you review your financial documents, what issues become apparent? Are there leaks in your financial infrastructure that should be addressed? Do you have enough cash and credit to maintain operations into the foreseeable future?

Marketing
Your business should have marketing plan in place to address:

  • Who is your target customer group?
  • What is your positioning in the market or unique selling proposition?
  • Where will you approach your target customers?
  • When will you approach your target customers?
  • How will you approach them and how much in sales do you expect to achieve?

Have you answered each of these questions? How is your business executing in these areas? If you need some assistance, a great resource for small businesses to use in implementing a realistic marketing plan is The Duct Tape Marketing System by Jon Jantsch.

Operations
Operations are where the rubber meets the road. Without efficient and effective operating procedures, your business will waste time, money and effort. Sam Carpenter, in his book Work the System states that every business should have three types of operational documents:

  • The Strategic objective defines the primary goal of your business and how your business is structurally organized to achieve that goal.
  • Operating principles are the fundamental guidelines for decision-making within the organization.
  • Working procedures are documented and systemized methods for addressing daily or periodic business processes.

What operational documentation do you have in place? Do you have strategic, operational and tactical documentation for your business? What processes are not working as smoothly as they should, and how can those processes be modified to produce regular and frictionless results?

The Tip
Over the past six months, your business has likely changed in ways you don’t recognize. Take the time now to analyze your financial, marketing and operations plans to determine where your business is now.

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