Second Steps in Starting a Business

After you decide what you want to do for your business, the next steps including getting setup legally and for taxes to run your business.  The first thing you need to know here is that you absolutely must separate your personal spending from your business spending.  For accounting and tax purposes and for your business analysis, you need to know how much your business costs to run and how much money you are making to determine if you are losing money or making money.  If you are adding things like shopping for toys for your kids to your business expenses, it’s very hard to see if your business is making any money. s


In order to split your finances between personal and business, you need to create a business entity.  There are different types of business entities, but the most common are: Sole Proprietor, Limited Liability Corporation (LLC) and Corporation (S corp or C corp).  The big difference between the sole proprietor and corporations is liability and who is responsible in case something goes wrong and your business is sued.  If you are a sole proprietor and you get sued, the person suing you could include all of your personal belongings and assets in the lawsuit.  For example, you start a business selling donuts.  Someone eats one of your donuts and it gets stuck in their throat and they sue you because the donut was too hard.  In this example, his medical bills cost $75.000.  And yea, people pull that crap.  As a sole proprietor, you could be personally liable for the $75,000 and might have to sell your house, your investments and car to pay that money back.  If you have a really low risk business, maybe this isn’t a big deal and you can start as a sole proprietor, but if you are concerned about any type of lawsuit, I recommend you open an LLC.

A corporation is a type of business entity that protects your personal assets and becomes its own separate entity from your personal life.  In this case, the corporation can get sued for any reason, but the person suing can only go after whatever assets the company has.  If you run a service based company, the odds are that you don’t have a lot of assets and technically you could just say the company is bankrupt.  Then, the person suing would get nothing.  There is a higher cost for having a corporation, but the ability to shield your personal property and assets is a pretty big deal, especially if you have a house or stocks and investments.


If you decide to set up a corporation, there are three different types: LLC, S corporation and C Corporation.  An LLC is a low-maintenance legal entity that’s best for a simple business. An S corporation is a tax status created so that business owners can save money on taxes. A C corporation is a more complicated legal entity that’s best for businesses looking to keep profits in the business.  The following graphic outlines the benefits and features of each type of Corporation Entity.

In order to determine the best entity for you, you should contact a Certified Public Accountant (CPA) and explain what you are doing and they can help define the best direction for you.  If you change the entity type, you would have to changes your EIN number and other documents that could be a pain down the road.  For my businesses, I have simply gone with LLC because they are easy to setup and the taxes at the end of the year are pretty easy to complete.


Once you decide what entity you want to use for your business and you have a business name,  the next step would be to get an Employer Identification Number (EIN) from the IRS.  This is a specific number for your business that tells the IRS that you have a separate business and that the business will be responsible for filing separate taxes.  Your EIN number for your business is like your personal social security number.  It’s your business “social security” number you need to file taxes for your business.  Getting an EIN number is really fast and cheap.  Don’t pay an online service for this.  Just go to the application here:


By this point, you should have your business name, your business entity type and your EIN number with the Federal government and IRS.  You will need to register your business with three different local levels:

  • State: Register your business name and entity
  • County: Register a Fictitious Business Name
  • City: Apply for a Business License

On a state level, you need to register your corporation with the state.  Every state is different but it’s pretty simple to do a google search for your state and how to register a corporation name.  Follow the instructions and fill out a form and there is usually a small fee associated.

On a local level, you will need to have to two items: a Fictitious Business and Business License.   In order for cities and counties to make more money, most places will require you to get a fictitious business name.  This is not a fake name, but a business name that you register at your county’s recorder office.  Basically, it allows you to conduct business with your business name in your county.  Most important, major banks like Chase require you to have a Fictitious Business Name to get a bank account.

On a city level, you will want to get a business license to conduct your business in the city you’re in.  Almost every city requires businesses within their city to have a business license.  This is a pretty easy process that includes a single form and a small fee.  Most times, the fee is based on your yearly business income so, when you start out, the fees are small.


If you have all of the documentation above, you can go to a bank to get a business bank account.  This is really important because this provides a way for you to separate your personal finances and business finances.  As customers pay your business, that money goes into your business account and you or an accountant can then import all of your income and expenses into software that will breakdown everything you need to analyze your business.  After 6 months to a year of running your business, you can print a very easy report that tells you how much money you are generating, what your expenses are and then your profit or loss on the business.  With these reports, you can then tweak your spending, your marketing or find ways to increase your revenue to make more profits.



First Steps In Starting a Business

So you are ready to start your first business. The first step in creating a business is to find a business you want to start.  Ideally, you should do something that you are good at and you enjoy doing. Most people will tell you that if they really love what they do, it’s not considered work.  I love building web sites and being creative and transforming someone’s online presence.  This will be the most complicated part of your journey because once you start and focus on the business, it should be something that you feel like you are good at and having fun with.


One of the easiest ways to start a company is to work in a field you were already working in if you have a job. In other words, let’s assume you’ve been painting houses and working for someone for the past five years. Over that time, you have met other people in your field (who you could hire later) and you have been learning all of the ins and outs of how to paint a house professionally. If you decide to start your own business, you can start promoting your services to family and friends and work nights and weekends on projects for yourself.  If you have learned a lot about painting and you do great work, you will get referrals to grow your business very quickly. On the flip side, if you are not good at what you do you will run into problems and people will not be happy and you could end up facing legal issues.   You absolutely must work on a basic tenet of owning a business; under promise and over deliver.  If the job is going to take 3 weeks, tell the client it will take 5 weeks.  They will be amazed if you complete the projects 2 weeks early OR it gives you time in case of an emergency.


If you decide you want to sell a product then you need to start with figuring out what your product is going to be, how much it cost to create and what other competitors are doing and how they are creating the same type of product. You need to understand what competitors are charging for a product that might be similar to yours.  Make sure you are not infringing on someone else’s idea or using a name that is already trademarked (see below).  The most important question here is “Is your product filling a need that isn’t out there or is it something people might want, but don’t need?”

If you have a product that everyone needs, it will be easier to sell.  For example, I have a friend who makes candles.  The process of making candles can be very hard as far as keeping the candle wick straight.  She invented a very simple tool to hold the candle wick vertical while pouring wax around the candle.  It was a simple invention (patent pending) that all candle makers could use.  Based on this invention, she checks off some boxes:

  1. Focusing on a targeted group of people (albeit small) that make candles
  2. Creating a product that people need
  3. Creating a business with recurring revenue because the more candles someone makes, the more of this little tool they need

Not every product needs to be invented, but by finding a niche and creating something that fills a need will go a long way to building a successful business.  On the other side, you need to look at where we are headed as a society.  Creating a cleaning product for DVDs is probably not the best use of your time or money.


Once you decide what type of business you were going to start do you need to figure out a business name and what kind of market you are targeting for your business.  This can be complicated, but you need to do some research here.  The beautiful part of today’s environment is that you have the Internet at your fingertips and you should be able to research online if anyone has a product similar to yours or even better a business name that is similar to yours.  The worst thing that can happen is that you come up with a business name and start marketing to thousands of people and then you find that there is another company with the same name.

I was a co-founder of a company that created an alcohol product where are we sold shots of alcohol in little pouches.  We called the product Pocketshots. After branding and logo design and manufacturing, we did a search on the US Patent and Trademark web site and found there was another company with the exact same name! Unreal.  We had to redo everything we had done from the name to the logo to all of the product packaging.  It was a very brutal lesson to learn and a very big waste of money for us.  It set us back about 6 months in our business.

There are a number of online resources you can use to search for names and companies and products that are trademark. The website where you can search is Here you can search for company names and product names and industries where people have a trademark for their products and services.


After you come with the business name, you need to determine who your target market is.  This is another huge part of your business plan.  My advice is to find a business that caters to a specific audience.  If you are selling jackets to a large audience, on one hand, maybe your jackets appeal to “everyone” and you have a larger market to target.  However, the more broad your market is, the more competition there is.  If you are only selling jackets to Biker Gangs, it is easier to find where those groups are via facebook groups or conventions or magazines and create marketing directed at them specifically.

Your target market will then determine how you want your business to look and how marketing materials should be designed. If you are targeting people that are very wealthy then your design and branding must be on par with exquisite types of companies who cater to the same market (like Ritz Carlton, Tiffany, etc). On the flip side if you are marketing to surfers or beach bombs then your branding should be more sports driven or “beachy”.  Again, you need to do your research and look at companies who are targeting to the same group that you are marketing to and that will help you to develop your marketing and branding strategy.

This is an important step because changing your logo and your color scheme and your marketing overall after you have already launched your business is very difficult and expensive.  Keep in mind that your marketing is not as important when you have a service-based business, but if you are marketing a product and have to redo all of your packaging marketing materials, it could set you back quite a long time.


Creating a business plan can take quite a long time. I have created two or three for businesses and they can be helpful, but there are many factors that go into a business. At the end of the day, if you were starting a small business, creating a business plan can take quite a long time.  The main things that a business plan allows you to are things you can do in a word document and spreadsheet:

  • Who are your competitors?
  • What do they charge for their services?  Pretend to be a customer and call them and get their marketing materials and prices
  • What do they charge for their products?
  • What your cost to provide your service?
  • What is your cost to manufacture your product?
  • What other outside costs are involved?
    • Office?
    • Staff?
    • Utilities?
  • What are your start up costs?
    • DO you need an office or warehouse or can you start out of your garage first?
    • How much do you need for marketing? Web site?  Business Cards?
  • How much money do you need to generate to break even?
  • How much do you need to generate to quit your job?

In this phase there is a phrase you should become aware of. It’s called “paralysis by analysis”. What this means is some people analyze and research so much that they do not start their business. There is a point where you have to take the leap of faith for your business to start.  For example, when I wanted to start this blog, I researched other people starting financial advice blogs.  For the most part, the things I am writing here are common themes across most financial advice blogs.  However, I didn’t really find a STEP BY STEP guide to understanding how someone can understand the basics of becoming financially free.  Most of the blogs post concepts and ideas and article resources.  However, there were enough blogs out there to be pretty daunting.  Why would someone read this?  Am I going to get through to anyone? Is this a waste of time (something I desperately need to build my own wealth).

I decided to take a leap of faith and put my time and resources into this because I like writing and maybe one person will get something out of this and go on their own journey to become wealthy.  Back to my point.  If you can answer the questions above about your business, and you still find that it’s worth it to move forward, then it’s time to open your doors.

What’s Better? A Service Business or Product Business?

Assuming you have a job right now and you want to generate another stream of income, you might be looking to start a side business.  The first question you will want to ask yourself is “should I start a service-based business or should I sell a product?”  While both can be lucrative, there are major differences to both approaches.

Service Based Businesses

This is the cheapest service to start.  If you have a skill like accounting, marketing or consulting, you can easily start a side business and work nights or weekends for extra income.  The key here is to come up with a service that requires a monthly fee so you can bring on clients and compound those clients with new clients and generate a steady flow of income that is consistent.  This is key because you will know exactly how much consistent revenue you can generate each month to put into different passive income investments.

My web site design business normally just includes me creating web sites for other people.  They are typically one-off projects that start and end.  Once a web site is up, most people don’t change their sites very often.  So, how did I turn that business into something that could generate monthly income?  I added three services:

  1. Web site hosting
  2. Web site maintenance
  3. Web site marketing

Every single web site has to be hosted on a computer somewhere and the service requires that the computer host be connected to the internet 24/7.  When someone types in the web site name, a signal goes to the hosting computer and tells it to show the web site to that person.  Well, if the hosting computer goes down, guess what?  The site goes down. I outsource the hosting service and purchase servers from companies who have 24/7 tech support and who have servers all over the United States and where the computers are connected 24/7.  I then resell that service to my clients.  A typical server will cost me $85-$100/month.  My clients pay between $30-$40/month and I can get about 40 clients on one server.  So, 40 clients x $40/month is $1600/month and my cost is approximately $100/month.  As long as the server is running, I have passive cashflow from that one server of $1500/month.  Is this completely passive?  No.  Every once in a while a server might not work for a period of time or we have a web site that gets hacked in which case we restore a backup and make updates and monitor it so it doesn’t have issues.  While it’s not completely passive, I would estimate about 5-7 hours a week for over 300 sites.

When I started the business, I was charging $20/month for hosting and have since doubled this rate.  In addition, I added a new service called hosting + 1 hour of changes to web sites per month.  This means we will make text changes (like new staff or adding new projects to a site) and we will manage their web site every month.  This service includes hosting and costs $75/month.  You would be surprised at how many people sign up for this service and do not make changes to their site.  I would estimate about 70% never make changes to their sites.  So, the added benefit to the clients and on demand changes added another 80% to the monthly fees and requires little to no work.

If you are starting a service business (like accounting), you can get 2-3 clients per month and possibly generate an extra $500/month just by doing company’s accounting.  For other services like marketing, you can charge more and bring on less clients.  The beauty of service-based businesses is that your overhead is next to nothing and you are simply spending more time to do it.  When you put all of that extra money into passive income investments, you can start replacing your income from your job and business.

What you need to get started:

  • Company name
  • Company bank account
  • Basic web site for marketing
  • Accounting software (like Quickbooks online) to track your income and expenses


The following are pros and cons of a service business:


  • Easy to start
  • Easy to scale
  • No overhead needed (just a home office)


  • Time intensive – you will need to find the extra time to do the work
  • Value of the company is low since the value is solely based on you.  You could sell the client list to another company but it would be low value
  • If something happens to you, the revenue could go to zero (unless you have passive services like above

Product Based Businesses

This one is a little more complicated because you need more overhead to start. Your first question would be whether or not you have a product that everyone “needs” vs. what everyone “wants.”  There are quite a few options when it comes to selling products.  Are you selling a product that is unique?  Are you targeting a specific market?  If you are selling a product, my suggestion is to find a product that ONLY appeals to a specific audience.  What does that mean?  If you are selling ladders or jewelry, there are already hundreds of companies that sell generic items like that.  It will be very hard to compete.  However, if you are selling leather jackets for bikers or comfy mats for yoga studios, it’s easier to find groups that you can market to and you can charge more for your product.

For example, if there is a huge yoga institution and your company becomes the “preferred comfy mats product for the Yoga Institution,” people will go to you for their yoga mats.  There are hundreds of Yoga groups on Facebook you can target as well as other magazines, conventions and marketing methods you can use to target that group.  The more targeted your group, the easier it is to find those people to sell to.

What You Need to Start a Product-Based Business

You need to come up with:

  • A brand for your company (you will want a professional logo)
  • Determine who your target market is going to be
  • What’s your background story?  More people will buy your product if they can buy into an interesting story
  • An E-commerce web site to sell your product online
  • How are you going to produce your product?
  • How are you going to store inventory?
  • How are you going to ship and fulfill orders?


The following are pros and cons of a service business:


  • If the product in its category is heavily needed, there will be higher demand
  • The value of a product that creates a brand can be extremely valuable
  • A subscription based model can create recurring revenue
  • It’s easier to market to a large audience of people in your target market (vs. Business to Business where there is a much smaller client base)


  • There is much higher start up costs required
  • Ongoing costs include: shipping, inventory, staff and more
  • Creating a brand that sticks with consumers can take a lot of investment capital

Tax Advantages of Owning a Business

One of the biggest reasons to start a business is due to the number to tax advantages you receive as a business owner.  When you have a job, your taxes are taken out of your check immediately and, at the end of the year, you have to scramble to try and get some of that money back in your returns.  Businesses take their gross income and then deduct all expenses and then you pay taxes on the profit afterwards.   The key phrase here is “deduct all expenses” BEFORE you pay taxes.  Your expenses in a business can include items that you would normally pay for after your W-2 earnings such as gas for your car, cell phone, meals or housing expenses.


When you work for a company, that company gives you a W-2 worksheet that deducts upwards of 30% of your income from your check along with Social security and other expenses.  The following is an example of someone in California making $100,000 per year and the typical deductions.

In this example, someone making $100,000/year only takes home $70,000 after taxes are taken out ($5800/month).  Now, out of that $70,000, this person needs to pay for all of their personal expenses:

  • Home – mortgage or rent ($2000/month)
  • Car expenses – $500/month
  • Cell Phone – $150/month
  • Internet – $75/month
  • Travel – $300/month
  • Food – $1000/month
  • Child care: $500/month
  • Shopping: $500/month
  • Total: $5025

This leaves about $800 left over.  When you own a business, the government allows you to write off expenses for business after the income and THEN you pay taxes on your profit left over.  So, in the example above, you are losing $30,000 immediately.  That money is gone and goes right to the government.  You’re left with 70% of what you earned and then you have to pay your expenses after that.  How does this scenario work if you have a business.

Your business generates $100,000 a year in revenue.  You pay $25,000 in expenses and marketing to run your business (assuming you are a web designer and you do all of the work).  So that leaves $75,000 left over.  Then, you use your phone for work, you pay for the car out of the company revenue as well as childcare and travel and food for clients.   You can’t write off everything to the business, but let’s run some numbers:

  • $75,000 left over after marketing costs for the business and outsourcing = $6250/month
  • Travel (for work): $500/month
  • Car paid for by company: $500/month
  • Cell phone paid for by company: $150/month
  • Meals paid for by company: $500/month (not all food can be written off)
  • Child care: $500/month
  • Shopping (you need outfits to meet clients): $300/month
  • Total: $2450/month
  • Balance: $3800/month

So, after you deduct all of your work related expenses, you are really only making $3800/month.  If you multiply that by 12, you are making $45,600 taxable income to the government.  In addition, you are able to deduct part of our house expenses where you work so let’s say 10% of house = $200 month tax write off from that expense and it lowers your yearly income to $43,200/year.  In this example, you would probably drop to a lower tax bracket than the person making $100,000 year, but at 30% tax rate, you would owe the government $12,960/year.

So, your company generated $100,000 per year.  Many expenses were paid by the company, your tax rate has been cut by more than half and the best part?

Why Start a Business?

The United States of America has been a world leader for decades because, from the beginning, it has encouraged free enterprise and entrepreneurship.  This encouragement has led to thousands of technological breakthroughs and has allowed people to be more successful than they ever could be in their wildest dreams.  By creating programs to encourage business owners, the United States provides opportunities that you might not get in other countries around the world.


Today, you have a great job.  Today, you are being paid well and life is easy.  If you are following some of the guidelines in this blog, you are saving money for retirement, you have an emergency fund and maybe you are able to travel and spend time with your family.  If you are satisfied with your life, maybe you don’t need to read this blog or start a business.  However, if you are interested in a challenge and you are ready to get out of our comfort zone to really get to the next level in your financial life, this is what you need to read.  A job can come and go.  You have no control if a company keeps you or fires you. You have no control over the direction of the company and the decisions that are made at the top.  Unless you are in upper management, you are simply a cog that makes the wheel go round.  You are replaceable at any time and you are expendable if the company starts to go through a rough patch.  The only control you will ever have in your life of your financial situation is if you own a business.   Technically, your family finances is a business and you control how much you spend, what you invest in and how you monitor your personal finances.  This is different.

A business allows you to do the following:

  • Create another source of income (you don’t even have to quit your job)
  • Create something of value that you could sell at a later time
  • Create a stream of income that allows you to write off expenses from the business income so you don’t have to pay after tax money
  • Control your own schedule to work on your own hours without having to report to someone else
  • Control your own destiny by making business decisions that could infinitely grow your income


This is one of the biggest advantages.  If you are happy with your job, you can still start a business on the side.  This depends on a few factors, but really, life comes down to what you’re good at and what skills you have to offer if you want to start a service-based business on the side (like social media marketing, consulting, accounting, etc).  If you want to start a product-based business, what products can you sell, who is the market you’re selling to and how expensive will it be to manufacture your products.



It is true that businesses fail.  If a person doesn’t understand the basics of business, then their odds of success start to drop very quickly.  That’s a fact.  If you are selling a product that costs $10 to make and you are selling it for $13, there is not a lot of money left for expenses like staff, office, utilities and marketing.  In my experience, people who start businesses always have an initial blast of energy to get started.   They get their business cards and web sites set up and start talking to people about how they own their own business and they get really excited about the “IDEA” of owning a business.  The hard part comes next.  Is there business dealing in something that’s desirable?  Is their product worth the cost or is it even hip enough or useful enough to be sold?  Is their service something people want and how good are they at that service?  Is their restaurant location in a desirable location?  There are many reasons why businesses fail, but success or failure comes down to the owner and how confident they are in their product or service and how quickly they can adapt to market conditions.