As I have formalized my business organization, I learned a few things I am going to share here--sort of a corollary to my popular post on What I've Learned about Unemployment in Massachusetts.

But First Things First

Until you are seriously committed to starting a business, you don't need to do anything more than find clients with work to do and make sure you get the work done on time. Thinking about tax issues and forming a corporation or LLC...even doing a business plan, spreadsheet, etc.--these are all distracting time-wasters that get in the way of generating that first bit of revenue. As a sole proprietor, working out of your home or a coffeehouse, the first step in forming a business is to get a client.

When you contract with your first client, rather than worry about whether you have formed an LLC yet or obtained a DBA certificate from the Town Clerk...just make sure you have a signed proposal that states the work you will do, how much you will be paid, and which includes a limitation on your liability such as:

CLAIMS. All claims for defective or incomplete Services must be made in writing fully setting forth the nature of the alleged defect or damage, within thirty (30) days from the date of the invoice. CLIENT’s failure to so notify PROVIDER shall constitute acceptance of the Services. PROVIDER’s liability is limited to the total cost of services invoiced.

Then, do the work. Do it well. Repeat.

When I started Dave Atkins Media a year ago, this was the rule I set for myself because I knew that as someone with legal training and curiosity about everything...I would quickly get lost in the fascinating details of things that mostly don't matter. For accounting, bookkeeping, and taxes--use excel. Use a single worksheet of date, revenue, expense, description to start. Don't run out and buy Quickbooks yet.

I also used Freshbooks--an online invoicing and time tracking system--to record my hours and expenses--then, each week, I would generate a report which gave me earnings - expenses = the amount I reported as freelance income for unemployment claims.

Ready for Prime Time
I reached a point where I decided to go "all in." It would be nice if that point had been precipitated by a steady stream of cash flows and the growing realization that my business was taking off--but it didn't work like that. I just decided that I needed to get out of my house and separate the business from my personal finances. I decided that whatever I built, it was going to be much bigger than just some temporary hourly contract work thing that I did until the next job came along. I think, for me it coalesced around the finding of an office space in the center of town with the opportunity to post a sign.

Choose the Form of Business
The Commonwealth of Massachusetts has some guidance online: Forming a Business, Step by Step. It's a good starting point, but it is easy to get lost in the details.

I chose an S-corporation as my business form. I started to write about why here, but then I found a blog in California that covers it pretty well. His decisions are influenced by the particulars of California law, but the Federal tax issues are the most significant to consider.

To form an S-Corporation:

Note: Your tax year will be January-December for all things. No Fiscal Year treatment for S-Corporations in Massachusetts.

Go to the Secretary of State's Corporate database search and make sure the name of your company is not already taken. More info here.

Obtain a Federal Employer Identification Number (FEIN). You will fill out an online form and get an ID number immediately.

Use the online filing system at the Secretary of State's website to create your Articles of Incorporation. Some key "hints":

• specify 275,000 shares of undesignated stock. That is the maximum amount. If you want to change this later...$100 fee to file and $100/100K additional shares authorized.
• specify 1/1/2010 as the effective date of organization. Do NOT make the mistake of forming a corporation in November or December if you can postpone to January. This will save you $456 in minimum corporate excise tax you would otherwise pay in March 2010 for the first partial year.
• One person can serve as President, Secretary, Treasurer and Director. It looks silly, but if you are a sole incorporator, this is what you do.
• Submit the form and pay with your credit card.

There are two forms you must file with the IRS to elect S-corporation status. Go to the IRS website to download the forms in instructions for:

• Form 2553 Election by a Small Business Corporation
• Entity Classification Election ("check the box form")

The paperwork is far from over, but you are now a corporation. You will need to draft and file additional documents including your bylaws and minutes from an initial meeting (with yourself!). I'll blog about that separately...but it is critical that you follow the rules and keep up with the formalities/requirements.