How to Start a Cleaning Business - Part 2 - How to Set Up Your Business Legally
This is Part 2 of our series on starting a cleaning business.
Setting up your new business will be an exciting venture. Many different elements and processes go into starting a new business but without the right planning and advice, it can be devastating. You are required to abide by the legal requirements set by federal, state, and local regulations. By following this protocol, you can get your business off on the right foot and avoid future legal problems that could potentially sideline your new start up or worse, terminate it all together.
Selecting the Legal Structure for Your Cleaning Business
One of the most important decisions you will make when starting your cleaning business is deciding which type of legal structure is right for your business. The type of entity you choose will determine the amount of taxes you pay and guide you in the amount of paperwork you will have to deal with. It will also determine how much personal liability you have in the business, and can be a factor in raising money or borrowing money for your new business.
It is best to spend the time in the beginning to make sure that the entity you choose is the one most suitable for your particular circumstances. You can get advice on choosing your legal entity from the local small business administration, your accountant, and your attorney.
The different types of legal entities are:
Sole Proprietor:
This is the easiest type of business to form and is one of the most common for small businesses just getting started. You have complete control over your business and do not have to report to anyone. The drawback to a sole proprietorship is that the owner is personally liable for all financial obligations of the business. This means that if your business is sued you can be held personally responsible. Another drawback is that you are responsible for the entire sum of FICA taxes due. Normally the employer is responsible to match the employee's share, but when you are a sole proprietor, you must pay the entire 15%.
Partnership:
This type of business involves two or more people who agree to share in the profits and the losses of a business. The profits or losses are passed on to each partner and it is reported on their respective tax returns. Like a sole proprietorship, partners are responsible for the financial obligations of the business.
Corporation:
This is a legal entity in itself that is created to conduct business. The corporation is separate from the individuals that form the business and handle the responsibilities of the organization. Just like a person, the corporation can be taxed and it is also held legally responsible for its actions. A key benefit of a corporation is that the owner avoids the personal liability that occurs with a sole proprietorship or partnership form of business.
C Corporations are typically large companies and are publicly held. If a C Corporation pays out dividends, then the profits are double taxed. The C Corporation must file a return on its own behalf and pays taxes on its profits before dividends are paid to its shareholders. The shareholders must then claim the dividends as income, which are taxed again.
S Corporations elect a special tax status with the IRS and, therefore, do not face double taxation. The corporation is not treated as a separate entity; the profits are passed on to shareholders just as if the business was a partnership or sole proprietorship. The corporation itself does not pay taxes. However, there are strict requirements that an S Corporation must follow. Each stockholder of the S Corporation must be a US citizen and there is a limit to the number of stockholders an S Corporation can have. S Corporations can be appropriate for small business owners who want the legal protection of a corporation, but want the tax benefits of a partnership or a sole proprietorship.
Limited Liability Corporation:
This is a hybrid type of partnership. It allows owners to take advantage of the benefits of a corporation and a partnership form of business. Like a partnership, profits and/or losses are passed through to owners and like a corporation, owners are shielded from personal liability.
How do you know what business structure will work for your cleaning business?
There are several factors to take into consideration when determining your business structure.
- Legal liability. With a sole proprietorship or partnership you can be held personal responsible for the business, which means your personal assets can be taken if the business is sued.
- Taxes. There can be a big cost savings in choosing one type of business structure over another. C-Corporations are "double taxed". The business profits are taxed and the money that is passed on to you as the owner is taxed again.
- Management and flexibility. Do you want to have total control over the business? In a partnership or corporation there are agreements and bi-laws that you have to abide by.
- Cost of formation and administration. Sole proprietorships are the easiest type of business to set up and maintain. There are very few legal forms or tax requirements other than just general good recordkeeping. A partnership needs to have a partnership agreement drawn up ahead of time. Both corporations and limited liability corporations need to have legal documents prepared before the business begins operation.
- Future needs. Where do you anticipate the business being in 3 years or 5 years? If something happens to the owner, what happens to the business?
Your cleaning business can be successful with hard work and dedication. Choosing the appropriate business structure can make your task as a business owner much easier if you research your options before signing up your first client. Discuss the various business entity options with a professional before making your final decision.
Secretary of State and Commerce Web Sites
If you're starting a new cleaning business, you need to research the laws for setting up your business in your state. You'll find much of the information you need at these Secretary of State and Commerce web sites. Most of these sites will also provide information on how to register your business.
How to Create a Name for Your Cleaning Business
Before you open the doors of your cleaning business you not only need equipment and supplies, you need a name for your business. The name of your company will be the first thing prospective clients see - whether that is in the phone book, on your company car, in an ad, or on a website. The name symbolizes what your cleaning business represents. So it is important to spend some time on choosing a name that not only fits your cleaning business, but also presents a positive image to customers, suppliers and employees.
The easiest way to name your business it to use your own name or initials, such as Steve Smith's Cleaning. This provides a personal touch, is easy to remember, and if you have a proven track record in the business, it can attract customers. However, if your plan is to one day sell your business, you might want to consider something less personal. You can also use a combination of your initials like SS Cleaning Services.
Instead of using your name or initials, you may want to think of descriptive or suggestive wording for your business name or perhaps using your city or community name. When going this route begin by brainstorming key words or phrases that have something to do with the business: clean, cleaning, squeaky clean, house cleaning, commercial cleaning, janitorial services, etc. Write down as many words as you can think of and use a thesaurus to create more wording possibilities. Remember, the downside to using your city or community name is that if you decide to expand into other cities, people will know you're coming in from somewhere else, and they may not want to buy services from someone outside the area.
You can also use words that describe the benefits your clients will get from using your service: spotless, spic-n-span, dust free, immaculate, etc. Take the words from your two lists and start combining them into various business names: Sparkling Waters Cleaning Company, A1 Janitorial Services, APlus Cleaning, Spic-n-Span Cleaning. As most businesses also use a tag line or motto, look through your list to see if any of your potential names suggest possibilities. For example, "Sparkling Waters Cleaning - Your floors will look like sparkling waters".
Try out different names and combinations and then judge the names by the following:
- Is it easy to pronounce?
- Is it concise? Does it explain what you do?
- Is it easy to remember?
- Is it distinct?
- Does it convey the message you want your customers to see?
- Is it pleasant to hear and repeat over and over again?
- Is it something you can stand behind?
Before you can begin using your business name, check to see if the name is already trademarked. The first place you want to check is your Secretary of State website. The site should have a business section where you can search for names to see if the name you have chosen is already being used. If there is not an online search available, you might have to go to your county courthouse to do your search. Also, you can do an Internet search at the USPTO (U.S. Patent and Trademark Office) at http://www.uspto.gov/ then, check with your local secretary of state, to see if anyone else in your state has already registered that name.
Once you have determined the name is available and can represent your business, run it by family and friends to get their reaction. It's a good idea to trademark your business name if possible, but even if you don't have any plans to trademark your name you are going to want to know if the name you have chosen infringes on anyone else's trademark. It wouldn't be very fun a few years down the road if you have been using this name and then all of a sudden an attorney contacts you and tells you that you need to change your business name because it infringes on their client's trademark.
The last place to search before deciding on a name is the internet. You want to visit a registrar site like www.godaddy.com to see if you can buy a domain name for your business. You may not have any plans to do a website right away but you will want to get your domain name right away so that you can use it when you are ready. And if you get the domain name now you can start using the personalized email address right away that matches your business name. It would look much more professional to use [email protected] rather than [email protected].
Once you have chosen your business name, you will need to register it with your state, which you should be able to do at your Secretary of State website. The business name is the flag that can wave down potential customers. Once you have decided on a name it will most likely be with you throughout the life of the business. Putting the time into researching a suitable name for your cleaning business is one way to get your business off and running in the right direction.
Registering Your Cleaning Business
Registering your cleaning business legally is very important in order to set everything up correctly at the beginning. That may ensure that you don't suffer the consequences for mistakes later. Here are some things to consider:
Running Your Cleaning Business from Your Home
If you are planning on running your business from your home you'll need to check your local zoning laws. Check with planning and zoning in your city to see if you're allowed to run your business from your home. If your home is in an area that is not zoned for home businesses, you may need to file for a variance, which in most cases are not that hard to obtain. You may need to get permission from your neighbors to run the business, and you'll need to show that your business won't disrupt the neighborhood with cars coming and going and so on. They will probably charge a fee for this – perhaps a low as $25 and as high as $200.
Special Permits
If you're going to store any flammable chemicals on your premises you may need to get a permit from your local fire department. Other permits you should check into are Air and Water Pollution Control Permits and Sign Permits.
Registering a Sole Proprietorship
If you've chosen to start your business as a sole proprietor, you'll need to register your business with your county recorder's office. They'll have you fill out a form for a fictitious name, or DBA, which stands for “doing business as”. It's also a good idea to do this so no one else can use your business name. And if you plan on opening a business checking account the bank will require this for the application. There is a small fee for doing this and they'll probably require that you publish your DBA in a local newspaper for at least 2 weeks in order for the name to be legally registered.
You don't necessarily have to register for an EIN (Employer Identification Number), because you can use your Social Security Number (SSN) instead. However if you want to protect your social security number you should consider filing for an EIN. You will also need it if you plan on hiring employees or if you've decided to start your business as a partnership or corporation.
Registering a Corporation
If you've chosen to incorporate your business you'll need to file your Certificate of Incorporation with your Department of State. If you've had an attorney set you up as a corporation they may do this for you. Or you can do a search for “Secretary of State” and then add your state name to the end of the search. Ex: Secretary of State Minnesota. The site should have a link to Business Filings or a Business Resources page where you can find information on registering your corporation with the state. You'll need to complete Form SS-4 to get your EIN number. You can go online to apply or you can register by phone or fax. All you have to do is go to www.irs.gov and do a search for EIN, which will give you all the information you need to file for your EIN number. It will probably take 1 to 2 weeks to receive your number.
Opening a Checking Account
Once you have your EIN number you should open a business checking account. If you're a sole proprietor, bring your Assumed Name document as well as your EIN number. If you're a corporation you'll need to bring your Articles of Incorporation and EIN number.
Do not to use your business account for personal expenses and vice-versa. You'll need to keep really good records of what you purchase for the business.
Paying Sales Tax
You may need to get a Sales Tax ID number from your state. Some states require that you pay sales taxes on cleaning services and some don't, so you'll need to check the requirements for your state. If you plan on selling products, you'll most likely have to charge sales tax to your customers. But again, check the requirements for your state.
You'll also need to know if you have to charge any local sales tax. Where I live, we have to charge a 6.5% sales tax on cleaning services, plus we also have to charge .5% sales tax for a local city tax. You'll also have to report any Use Tax on items you purchased that you were not charged sales tax on. So make sure you know the sales tax laws where you live.
To get all the information you need about submitting sales taxes and obtaining a Sales Tax ID; do an internet search for “Department of Revenue” and add your state to the end.
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In Part 3 you'll continue to learn how to set up your business Legally:
- Find a good accountant and insurance broker
- How to avoid tax mistakes
- Paying estimated taxes.
How to Start a Cleaning Business - Part 3 - How to Set Up Your Business Legally - Continued
