The 4 Pillars of a Solid Business Foundation
This guide will give you information about the four pillars upon which every business foundation is based. Ignoring your business' foundation means you are essentially flying by the seat of your pants not knowing where you might be exposing yourself to risk.
Pillar 1 - Legal StructuresThe first part of organizing your business is choosing the entity for your business. There are different types of entities, such as corporations, limited liability companies, partnerships; or, if you are just by yourself - a sole proprietorship. Quick note, the sole proprietorship is the most risky type of structure because it is not actually a structure, it's just you, which means that your personal assets are at risk if you cause damage or default on a creditor.
There are different reasons for choosing a corporation, an LLC, or a partnership that depend on the type of governance, control, tax, and life of the business. Many people quickly choose the LLC structure because it is popular and easy to set up. However, the LLC structure requires that the members spell out their relationship between themselves, their contributed capital, how decisions are made, and importantly, how members can come and go. Often, many do-it-yourself people forego the LLC operating agreement, which means that they then rely on the language of that particular state's LLC statute for the default operating agreement.
The next part of legal structures is documenting your relationships. Many small businesses use the "handshake" method of making deals; however, this creates enormous uncertainty and puts your business at risk. Indeed, the closer a relationship you have with someone (e.g. spouse, sibling, or good friend) the MORE you need to properly document your agreements. The important agreements to have are the entity agreement, vendor agreements, client/customer agreements, and employee agreements. If you are working with particular technical or proprietary knowledge, you will also want to have confidentiality and non-disclosure agreements. Without these agreements in place, your business will be operating from a place of extreme uncertainty. Ask yourself, what happens if something goes wrong?
Pillar 2 - Insurance StructuresThere are all sorts of different types of insurance: life, auto, health, business, cyber, and so on. Most businesses look at insurance as a cost center with little return on investment. But, with guidance from trusted advisors, including an insurance agent, you can get an honest examination of the risks your business faces and how to mitigate them. Having proper insurance policies in place means you will have greater peace of mind about what decisions you can make for your business.
1. If you have business partners, how will you fund a buyout of a partner if that partner passes away? To solve this problem, the business might wish to carry a life insurance policy on each of the partners in order to provide the cash to buyout the interest.
2. If you have employees, what happens if one of them sues your business (and possibly you) for certain types of labor violations?
3. If you accept credit cards and store the customer's information, what happens if you are hacked?
These are examples of common problems a business faces in today's economy. You are working hard to build your business, why expose it to unnecessary risk?
Pillar 3 - Financial StructuresWhen I was a brand new Marine Corps Second Lieutenant, our instructors at The Basic School told us that some Marines would overdraw their bank accounts, but give the excuse "there were still checks in the book?!?" Running your business' financial operations is not so different sometimes. Often, financial decisions are made based on what the bank balance is, rather than what the business actually needs or how the future bank balance is forecasted.
The simple way to improve one's financial systems is to begin working with a financial professional, like a bookkeeper. Your bookkeeper will be invaluable for keeping your processes straight. Once all of your accounts are straightened out, you can begin doing real planning for growth. You will also be able to make strategic business decisions because you will already understand how those decisions will impact your bottom line.
Pillar 4 - Tax StructuresNo one likes to pay taxes. However, no one wants to endure the problems that accompany not paying your taxes. One of the most powerful institutions in the United States is the Internal Revenue Service (IRS). The best plan for taxes is to get ahead of the matter (which also means you need good financial systems).
To start, you should be putting aside 20-30% of all your revenue for tax payments. Getting surprised with a quarterly tax bill is a recipe for disaster! Your accountant and your bookkeeper are key players in making sure you are managing your revenue properly to account for tax payments.
Next, your business structure can greatly help you to reduce your taxes. Many people hear about "running it through the business;" however, is it proper to do so? Frankly, if you have a business and you are not putting expenses through your business, you are leaving quite a bit of money on the table.
To find out how to properly expense things through your business, you will need to sit and strategize with your business attorney, accountant, and financial professionals. Ideally, these professionals will help you to reduce your tax liability well below that 20-30% planning factor mentioned above.
Bonus Section - What If I Do Not Build This Way?Would you carry water with a bucket that has holes? Would you live in a house of cards? Do you enjoy excess amounts of stress and anxiety? If your answer to these questions is yes, then keep going. If your answer is no, then you should consider getting a team of trusted advisors on your side to work through these matters.
From my lengthy experience as a business litigator, I saw countless businesses fail or be torn apart because one of these pillars was overlooked or put aside early on in the business' life. From that experience, I observed that failing to do the proper planning at the beginning resulted in a 30 & 30 for the business later on. To solve these problems through a court, it would cost at least 30 times as much money than what it would have to properly document or systematize the business and it would take at least 30 months to solve.
Don't let that happen to you!