7 Tips For Running a Side Business

As a CPA who works primarily with small businesses and start-up businesses, I have decided to put together a list of the Top Tips for Running a Side Business.

1) Incorporate. The #1 most overlooked tip by people running side businesses is that they fail to setup a business entity because they still view their business as a “little side business” that they will incorporate “when things take off.” Here is why this is the most detrimental mistake that a side business owner can make:

-Sole Proprietorships (the business structure you default to if you fail to setup a Corporation, LLC, etc) are subject to the highest audit risk out of all the business structures. The reason for this high audit risk is that all Sole Proprietorships report their business income and expenses on Schedule C (the second most highly audited form that you can attach to your tax return. By setting up an S Corporation, you become nine times less likely to be selected for a random IRS audit (audit risk decreases from 2.7% to.3%, making it very possible that you can go your entire life without ever being selected for an audit)

-Sole Proprietorships are subject to the highest tax rates. As a Sole Proprietor, you end up paying your regular income tax rate plus an additional 15.3% Self Employment Tax. This means that if you are in the 25% tax bracket, you are essentially paying 40.3% tax. S Corporations typically enjoy a lower tax rate due to payroll taxes taking the place of Self-Employment Taxes. So, if you are in the 25% tax bracket, you end up paying somewhere between 25% and 40.3% depending on the nature of your business, profit levels, etc.

-Operating a Sole Proprietorship means that your personal assets are completely exposed during your business operations. If someone sues you for a business related matter, you could end up losing your house, your savings, your retirement, and everything else you own. By setting up an S Corporation, you protect your personal assets from business related lawsuits and all you can lose are the business assets.
By failing to setup your Corporation right from the start, you lose valuable credit-building time. Banks, credit card companies, and other lenders will not lend unsecured funds to Corporations within their first two years in business. They will either lend to you and allow you to use the funds for business purposes or they will lend to the business as long as you are willing to attach a personal guarantee. If you incorporate right from the start, when you are ready to turn your side business into a full business, you may already have this two year period behind you and you can start looking for business loans and business credit cards.

2) Do not use your home address or a PO Box. There is such a stigma associated with using a residential address or a PO Box as your business address. Many consumers view the use of a home address as a sign that you are new in business and that your business is not successful. While this may be the furthest from the truth, a consumers mind will be made up once they see your address and decide not to call you, giving you no opportunity to explain why you operate your business out of your house. In order to combat this, many business owners opt to go the PO Box route. However, PO Boxes have their own stigma. Many consumers view companies that use PO Boxes as “fly-by-night” companies that may leave town at the drop of a hat and that they may never be able to get a hold of once their job is done. Some ways around this include:

-Renting a small office within the office a client, friend, associate, vendor. In addition to giving you a consumer-friendly address to use, situations like this may also open up opportunities for more referrals due to the traffic that your landlord’s business is bringing past your door each day.

-Renting office space or a mailbox within a Virtual Office such as HQ Global, Regus, or Intelligent Office. In addition to the mailbox/mailing address options, most of these Virtual Offices offer the use of Conference Rooms, Receptionist Services, and office space as your business grows

-Renting a mailbox at a UPS Store or Mailboxes Etc. While this is nothing more than a “PO Box” located at a UPS Store instead of at the Post Office, it does give you a more consumer-friendly business address

3) Don’t skimp on professional services. When you run a side business, the #1 goal is typically to keep costs as low as possible until the business takes off and starts generating some real revenue. However, know when to DIY and when not to DIY. Certain things can be done effectively using the DIY approach, while others could prove more detrimental:

-Do not try to be your own lawyer. Free legal forms that you download on the web will leave you getting exactly what you paid for and could lead to the end of your business if you are not properly protected
Do not try to be your own accountant. While bookkeeping is a task that can be taken on by most business owners (assuming they actually have the time to devote to it), when it comes to actual tax return preparation (payroll, sales tax, corporate tax returns, etc.), deadline watching, and staying current on tax law changes, you need a CPA who specializes in small business accounting and taxation

-Do not try to be your own marketing department unless you have a true gift for it. I cannot tell you how many flyers, postcards, mailings that arrive at my house and at my office that appear as if they were designed by a child (and not a child who is destined for a great career in marketing). Between typos, plain text, black & white coloring, nothing eye-catching, poor grammer, no call to action, every penny that gets spent designing, printing, and mailing these “marketing” pieces is not only wasted, but actually create a negative image for your business, doing more harm than if you simply didn’t send out the mailing.

4) Network. Network. Network. The hands down, single most cost-effective marketing technique is networking. In most cases it is either free or $5, $10, $15, $25 per event and it will generate more business than any $1,000 print ad or $500 mailing. By networking, you are meeting potential clients/customers and potential referral sources face-to-face while getting your company’s name out there. Many networking events run in the early morning or in the evening, so you can certainly coordinate these events around your full time job.

5) Establish a web presence. Every business out there will benefit from having a web presence. Creating a website (not a freebie, amateurish looking site, but a very clean, very informative site) is a must in today’s marketplace. Just about every business owner I know has gotten at least one client/customer who just happened to stumble upon their website while searching or browsing the web. The keys are to keep the site informative, make it easy for potential clients/customers to contact you, and offer online payments through PayPal or another well-known credit card processing company. Creating your website in blog format or linking a blog to your website is a surefire way to generate traffic and ensure that visitors return at future dates to see what you have been posting.

6) Don’t play up the fact that this is a side business. Of course, if a potential customer asks, you shouldn’t lie to them. However, if the topic never comes up, you always want to “play the part” and instill confidence in your customers that you are an expert in your field, you are going to do a great job for them, and that you will be around for a long time. Now, there are some exceptions here…there are some industries in which running a side business may actually be more attractive to some customers. For things like handyman services, electrical work, carpentry, plumbing, etc., many homeowners like to hire guys who work in their field full-time during the day and then offer their services direct to the homeowner via their side business at very low rates. For a job that a contractor may bid out a $2,500, a homeowner may be able to find a carpenter who is willing to work at a $200/day rate and finish up the job in 5-6 days, leaving them with a $1,000-$1,200 bill and a $1,300-$1,500 savings for the same (or sometimes even better) quality of work. So, if your industry is similar to this, you may actually want to play up the fact that you are operating a side business

7) Create a plan. No, I’m not talking about the clich├ęd “Business Plan,” I’m talking about a “Milestones Plan.” As a small business CPA, many people are surprised to hear that I am not a proponent of entrepreneurs creating business plans. I view business plans as the #1 barrier to starting a business and that 95% of the time, once you start your business, you end up going in a completely different direction than you had originally planned as you discover your strengths, your weaknesses, what your customers want, what the economy is dictating, etc. Far too often, I see people who want to start a business, but create the “I’ll start up as soon as I’m done writing my business plan” excuse. If you have an idea or a skill and you know how to put that skill to use or bring that idea to market, just get started and everything else will fall into place. When I refer to a “Milestones Plan,” I am talking about setting concrete milestones that will dictate your timeline over the next few years. Start off by setting the following milestones and add/adjust again a few months after your business gets off the ground:

-Set a “shut down” milestone. Determine at what point you should pull the plug on your business. This can be a financial milestone (once you invest $10,000 and don’t see any potential for profitability) or a time milestone (if after 24 months, you don’t see any potential for profitability)

-Set a “part-time” milestone. Determine at what point you will convert your full-time job into a part-time job so that your side business can turn into a part time business. This can be a financial milestone (once you hit $5,000/month in revenue, once you hit $1,000/month in profit, etc) or a customer-driven milestone (once you start getting two new customers/week, once you have 25 customers, etc.)

-Set a “full-time” milestone. Determine at what point you will quit your part-time job and start running your business full time. This milestone will be similar to your “part-time” milestone, just with the bar set at a higher level.