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June 2, 2016

How to Start a Business

Starting a business is a great step toward becoming Fiscally Free. It's OK to start small, but it is important to start.

I wanted to start a business for a long time, but I procrastinated for years because I was intimidated by the perceived complications and potential expense. My fears were unfounded.

Starting a business is easy! It is at times annoying, but still easy. Follow along as I guide you through how to start a business in Torrance, California (in Los Angeles County).

Here's the basic outline, which I couldn't find elsewhere in such detail. Scroll down for more information on each step:
  1. Select a business structure (Sole Proprietorship, LLC, Corporation, etc.)
  2. Name your business
  3. Decide who will own your business
  4. File your Fictitious Business Name (FBN) with the county
  5. Publish your FBN in a local newspaper
  6. Apply for a federal Employer Identification Number (EIN), also called a Federal Tax ID
  7. Apply for a state EIN (if necessary)
  8. Open a business bank account
  9. Apply for a business credit card
  10. Purchase your internet domain
  11. Apply for a state resale permit
  12. Apply for a city business license
  13. Profit
My city has a handy website advising entrepreneurs how to start a business, but I found it lacking. I hope you agree the four steps they list aren't quite as helpful as what I've put together here.

1. Select A Business Structure
Honestly, this is the most complicated part of starting a business. The fact that it's the first thing that needs to be done is a big barrier. Luckily, I'm going to make this very simple.
In my opinion, just about any small business should use one of two business structures--

Sole Proprietorship
Limited Liability Company (LLC)

Sole proprietorship is the simplest business structure. It is just a person (or married couple) doing business. There are no fancy tax games or anything. Best of all, there is pretty much no expense to form a sole proprietorship.

Limited liability companies are pretty similar, but they have one big advantage. As the name says, they limit your personal liability. That means, if someone sues your business, they can't go after your personal assets, like your home or savings*. This is obviously a big benefit, but it comes at a price--the state of California will charge a minimum of $800 per year in business taxes on LLCs.

There are obviously several more business structures, but they are generally more complicated than the average entrepreneur needs.

Sole proprietorship vs. LLC. How to decide?
This is the big question. Sometimes it's easy to answer, sometimes it's not, and sometimes you can do both. The main factor in deciding is understanding how much risk or liability your business will be exposing you to. If you're starting a quilting business, your risk is pretty low, so a sole proprietorship is probably a good bet. If you're planning to sell child car seats, the risks are huge, so an LLC makes sense. The third option is to do what I did and use both. Here's how:

The original plan for my business was to design and then sell automotive accessories. Anything involving cars can be risky, so an LLC seemed to make sense; however, I don't actually plan on selling anything for a while. During my initial design stages I don't need the protection an LLC offers, so there's no reason to pay the $800 annual fee. Honestly, I'm not even sure how long it will take me to develop my product, especially with this blog distracting me, so I could be wasting money paying LLC fees for years. After a lot of thought and at the suggestion of a friend, I decided to initially open a sole proprietorship to do the design and development work, but when the product is ready to ship, I will open an LLC to actually sell to customers.

Hopefully, this will help you pick a business structure, or inspire you to use both, like me.

*Liability is very complicated and I cannot possibly cover all the details in this article. Do your research and consider insurance to make sure you are protected.

2. Name Your Business
Naming your business should be easy, but it isn't. If you're like me, you want your business to have just the right name that conveys just the right message. On top of that there are a couple other considerations that must be made.
  1. Is your business name already taken? I'm guessing you want your name to be unique and original, so take some time to ensure it is. Google is your friend. A couple other resources I used are searches provided by LA County and the state of California. Also be sure you don't try to use something that's already copyrighted.
  2. Depending on your business structure, you may have to include certain information in your name. For example, an LLC must include "Limited Liability Company" or "LLC" in their business name.
  3. Think about your website. If you want an online presence, you need to think about what your website will be, and that could clearly impact your business name.
Those are the major points. There are probably additional points that could come up, so let me know in the comments if you think of any.

3. Decide Who Will Own Your Business
This may sound a little silly, but it is a real consideration. It mostly applies to married couples, but there may be some other situations where this is an issue too.
You must decide if you want one or both spouses to be listed as owners of the company. This will impact many of the forms you file in the next steps.
One reason to only list one spouse could be to avoid a potential conflict of interest for the other spouse at their current job.

4. File your Fictitious Business Name with the County
Honestly, the hard part is done. At this point you are just doing busy work.

In Los Angeles county, you can start the FBN process online, but you can't finish it. You either need to file it in person or through the mail. Unfortunately, if you want to do it though the mail you must get the application notarized, which is additional hassle and expense. I also don't trust the Postal Service, so I think the best bet is to file in person. It is annoying, but it has to be done. I used a random work holiday to accomplish this and the next several steps.

5. Publish your FBN in a Local Newspaper
Speaking of busy work... This step seems ridiculous in our modern world, but old habits die hard, especially in the government.
Take your freshly stamped FBN statement to your local newspaper and ask them to publish it for you. Costs vary, so do some research. We got gouged by the Daily Breeze for $110, but they are doing all the follow-up with the county. I've heard some papers will publish your FBN for as little as $40, but I'm not sure they will inform the county it's been done. Make sure to verify.
After filing the FBN with the county we got lots of offers in the mail to publish it for us, so you don't even need to leave your house if you don't want to.

6. Apply for a Federal Employer Identification Number
This isn't actually necessary until you hire an employee, but it is free, easy, and makes some of the next steps easier, so it makes sense to do it now.
As I said this is very easy. Go to the IRS website and fill out the form. Your EIN will be produced instantaneously.

7. Apply for a State EIN (If Necessary)
After checking the state website, and going through a short questionnaire, I learned I do not need a state EIN at this time (the system wouldn't even let me apply). I believe this is mostly due to the fact that I have no employees.

8. Open a Business Bank Account
One of the big reasons to open a business is to get those sweet, sweet tax deductions. Open a separate bank account to make tracking those deductions easier.
The bank will probably want your FBN and federal EIN paperwork, so bring that with you.

9. Apply for a Business Credit Card
We did this at the same time we opened our bank account.
Having a business credit card lets you earn rewards while keeping the accounting separate from your personal account.

10. Purchase Your Internet Domain
This step could probably wait, but I was paranoid my desired domain would be taken, so I bought it as soon as I could. It was my first purchase with my new business debit card, since the credit card wasn't ready yet. There are many companies that will do this for you. I used Google, whom I don't really recommend because they don't offer free email hosting, which I learned after signing up.

11. Apply for a State Resale Permit
This is another step that isn't strictly necessary yet, but you might as well get it done.
A state resale permit allows you to collect sales tax. You can apply online. The application is long and annoying, but not difficult. It may take a day or two to process after you have applied.

12. Apply for a City Business License
This is the last real step! I started by going to my city's website and downloading the Business License Application. I filled it out at home and headed for city hall. After an absurdly long, yet not totally unexpected wait, the bureaucrat told us we needed another form since we were starting a home business. I was sent to a different counter where we had to fill out and sign the "Business License Supplemental Form for Home Occupations." This form says you agree to a bunch of things, but the main ones are that you cannot have customers at your home business and you can only have one business vehicle on site.
Once the supplemental form was stamped, I went back to the first desk and was allowed to submit my application. The bureaucrat retyped all my information and then requested much more money than I expected. The cost was $245, which was pro-rated. Once I paid, I was given my business license and our business was totally legit.

13. Profit
You're on your own here.
Actually, profit isn't always the goal. Sometimes a healthy loss can do wonders for your tax bill.

How long will all this take and what does it cost?
I completed step 1-12 using only a few hours over the course of a four-day weekend. Annoyingly, it does require going to government offices during normal business hours, which isn't always easy.

Here's a handy table to help explain each step.
1. Business Structure
2. Name Business
3. Select Owner
4. County FBN
County Office or Mail
$31 ($26 for one owner)
5. Publish FBN
Newspaper Office
$110 (as low as $40)
6. Federal EIN
7. State EIN
8. Bank Account
Local Bank
9. Credit Card
Home or Bank
10. Internet Domain
11. State Resale Permit
12. Business License
City Hall
$245 (pro-rated)

Total cost: $398
Total Trips Outside the House:  4 or Fewer
That's not chump change, but it isn't really that much in the big scheme of things. Also, I'm pretty sure I live in the most complicated and expensive place possible to start a business, so most people's startup effort and costs will be much lower.

Let me know if I've forgotten any steps or messed them up in the comments. I'm also curious how much harder or easier it is to start a business in other locations.

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  1. When do we get to hear your business name? Or should I just check the newspaper?

    1. The business name is Amendment Development. It doesn't make a lot of sense right now, but it will eventually. I think.