In the first part of 6 Steps to starting a home business, I wrote about generating ideas, selecting your legal and taxable business structure, and creating a legal, taxable business entity. In this second part, I’ll cover the next three important steps.

Step 4: Setting up bank accounts

It’s extremely important to keep you personal and business bank accounts separate. Besides easier accounting, it helps protest your personal assets in the event of a lawsuit. Often in lawsuits, the person suing will try to “pierce the corporate veil.” What that means is that they’ll try to prove that you should be personal held liable. If they are able to get to your personal assets, then that completely defeats one of the prime reasons for setting up a Limited Liability Company (which is designed to protect your personal assets).

So how do your bank accounts affect whether or not someone can pierce the corporate veil? If you deposit the business’ money directly into your personal account or make personal purchases from your business account, then you have “co-mingled” funds. Meaning, you have blurred the line between what is personal and business. The person or company suing will claim that since you blurred the line, the business entity is invalid and you should be held personally responsible.

Do not make this mistake. You should always keep your personal funds/purchases separate from your business funds/purchases. Speak with an accountant or tax attorney more about this.

To find a good bank, I recommend starting with the bank where you do your personal banking. If you like them for your personal accounts, then you will probably like them for your business accounts as well. Make sure to review all of the fees as many business checking and savings accounts carry fees that personal accounts don’t have.

Step 5: Keeping an accurate accounting of all your income and expenses

First, understand that accurate accounting is important. For example, you don’t want to miss the opportunity to write anything off. Second, tax preparation will be much easier and faster if you have good records.

I could write several posts just on accounting for small businesses. But I’m going to just keep it picking some accounting software. Here are a few options to consider.

Quickbooks: If you know a bit about accounting and are comfortable with figuring out a somewhat unintuitive program, then Intuit’s Quickbooks is a leader in accounting software. I personally use it and don’t love it, but it works pretty well. It offers a lot of functionality, though you often have to pay for the additional functionality. Quickbooks has both a desktop (one time purchase but is outdated after one year) and online version (always up-to-date but is a monthly subscription). Also, pretty much every accountant uses Quickbooks. So you can easily send your file to your accountant for taxes or other work.

Outright: If you are looking for something that is 100% online, cheaper than Quickbooks and more intuitive to use, then Outright.com may be a great option for you. It connects to thousands of banks to download your transactions and has a pretty easy to use interface.  The cost is $9.95 per month after a free 30 day trial. Though, the lower price means that you sacrifice some functionality. But, you may consider that an advantage if you don’t love diving into accounting.

AccountEdge: This is for all you Mac users. Although Quickbooks has a Mac edition, it was first and foremost designed for PCs. AccountEdge is premium accounting software designed for small businesses who use Macs. The feature list is pretty impressive. It is desktop software and although comparably priced with Quickbooks, it is actually cheaper since getting the same functionality (such as Payroll) requires paying more to Quickbooks. I strongly recommend considering AccountEdge.

Step 6: Marketing yourself

This is my favorite step. I’m a marketer by trade.

Notice that I titled this “Marketing yourself” and not “Marketing your business.” The number one thing you are selling, especially when starting out, is you – not your product or service. Your product or service is untested and unproven. So customers are buying you, not the product. So very first, be the type of person that you personally want to do business with. Correct all of the customer service issues that drive you insane when dealing with other companies.

If your business can benefit from online marketing (which is pretty much every business), then there is a lot that you can do from free or cheap. Here’s a list of free or cheap marketing resources for small businesses. Though, I specifically recommend checking out Inbound University (not an actual university or school), which teaches online marketing for free, and Hubspot’s Internet Marketing blog. They offer tons of free information about online marketing.

No matter how you decide to market yourself, understand that you need to create a very compelling story about your brand. Being the cheapest or best isn’t good enough anymore because there is always going to be someone cheaper or better just behind you (unless you are Wal-mart). Besides, people are willing to pay a premium for a brand that they feel connected to. Just consider Apple for a moment. Apple products are more expensive than its competitors’ products and yet they are the market leaders. Why? Because people worship love Apple. Here’s a case study about building an awesome, easy to share brand story.

So build a brand that people are willing to pay more for because they feel connected to it on some emotional level. For more info on building brands, read Seth Godin.

Other considerations

These two posts are just a very basic outline on how to get you up and running. A few things not covered here that you need to consider are: what’s your business plan? where is funding going to come from? what’s your exit strategy if things going poorly? what’s your exit strategy if things going really well? what is the demand for your service (really)?

Watch for a post in the coming weeks with some specific businesses that you might want to start. Also, add your thoughts below on what you think are crucial steps in starting a home based business.

Don’t forget to follow Rabbit Funds on Twitter for more articles like this one!

Also, this article was featured in the Carnival of Personal Finance #321.

My wife woke-up one morning, about three years ago, and announced, “I’m going to start a home business.” And sure enough, she did. Since its simple inception, our swim school has been able to generate more demand than we can handle. We now have a team of coaches and multiple locations where we teach.

I’m not saying any of this to brag, but to show that starting a home based business is much easier today than it’s ever been before. The Internet not only provides access to information, but it also gives you access to customers. The billions of searches on Google represent consumers looking for products and services.

The purpose of this post is to give you a basic overview of how to go about starting a home business.

Step 1: Generating ideas

Start by making a list of your hobbies and passions. You’ll find that business is much easier when you love what you are doing. Let me give you an example.

A neighbor of ours, Candice, tried to sell Mary Kay cosmetics and skincare. However, Candice doesn’t wear make-up or really care about make-up for that matter. Her only purpose in doing Mary Kay was to just earn extra money. The result – she failed. A few months later, Candice decided to open a business selling cake bites. The difference? She loves baking. Her husband has often complained that his spare tire around the waist is the result of always having baked goods in the house. This time, her business is going much better because she enjoys what she does. She’d make cake bites regardless of the business.

Once you’ve made a list of your hobbies, passions and interests, narrow the list down to some options where you think you can offer a unique advantage. Part of our success with swim lessons is because we are able to offer services not otherwise available in our area. There was a whole in the market and we have stepped in to fill it. So spend some time on Google and see what’s offered and not offered in your area or online.

Keep in mind that being competitive doesn’t necessarily mean offering something that no one else offers. But rather, a competitive advantage can be offering a product or service in a better way than anyone else or at a lower cost.

Step 2: Selecting your legal and taxable business type

Once you’ve decided what to do, you need to put a legal structure around your business. There are several options: sole proprietor, single member LLC, multi-member LLC, Limited Partnership,  S-Corp and C-Corp. Most home businesses are setup as LLCs. LegalZoom offers a brief comparison between LLCs and Corporations.

This is where you want to talk to a tax attorney or accountant. There are several factors that will affect the structure you choose, such as how much money you expect to make, how many people own the company, what are you planning to offer, etc. Spending a little money to set things up correctly from the beginning is worth the money.

The point is that you want to protect yourself and assets from lawsuits.

Step 3: Creating a legal, taxable business entity

There are basically three steps to creating a new legal, taxable business entity.

1. What’s in a name?
   First, you need a name. More importantly, you need a name that is available in your state. Or in other words, a name that hasn’t been registered by another entity. You can check your state’s Business Entity Search to see what is available.
2. Let the Feds know
   Second, you need to file for a Federal Employer Identification Number (FEIN or EIN). You can quickly and easily file online on the IRS’ website. You will need your FEIN before proceeding to the next step or setting up bank accounts.
3. File with your state
   Each state’s process is a little different. Though you will be required to create your Articles of Incorporation, which are the rules that govern the management of your company. There are some standard clauses, such as who are the managing members and what is your business address, but you can create business rules or articles that cover just about anything you want (as long as it’s legal). For example, if you are going into business with friends or family, then an article describing dissolution (what happens to the money and assets if your company goes under) is a very good idea.

On a side note, consider other legal requirements, such as a food handler’s permit, that you may be required to file. For example, a Sales Tax Id if you intend to resale goods. Again, this is where a good accountant or attorney can help you make sure that you are filing everything you need to.

In Part 2 of starting a home business, I will cover the next three steps, which are setting up bank accounts, keeping your accounting records, and marketing yourself.

For more money saving advice, follow Rabbit Funds on Twitter.

As you may or may not have noticed, I did not post anything during the last two weeks. Barring the birth of my second child, I had not missed a single week in the last year.

So I feel that I owe you an explanation.

Week 1: Simply put – I was in Germany working 18 hour days. Needless to say, I didn’t really have any time to blog. Now granted, I should have prepared a post or two before I left so I wouldn’t have to worry about writing anything while in Germany. Asi es la vida.

Week 2: My wife operates a small business as a swim instructor. I am the underpaid CMO, CFO, and CTO.  With summer upon us, there were/are several projects related to her business that needed to be completed. We actually hired our first contracted swim instructor, which was very exciting for us. We are also in negotiations to acquire a competitor. And seeing that her business makes a lot more money than my little blog, my efforts were better placed with her business.

I also took the time to do some soul searching as it relates to my blog. As a result, I have decided to make several changes that will hopefully provide more unique and valuable information to the blogosphere as well as allow me to better support my wife in her endeavors.

What was exciting for me during my “sabbatical” though, was to see the traffic to my site while I wasn’t blogging. As expected, I had fewer visitors but the drop wasn’t significant. In fact, I had one day that was on the high side for me. So thanks for sticking with me!

On an unrelated note, here is a list of blogs that RabbitFunds was featured on recently:

• Money Hackers Carnival #116: Back to Basics Edition hosted at YesIamCheap.com
• Carnival of Personal Finance #257: Canadian Banknote Edition hosted at CanadianFinanceBlog.com

Have a great weekend!