February 23, 2010
Business planning for a new online business can be tricky. Often, the businesses struggle along, unsuccessfully, for a period of time–so it’s important in the beginning to keep the operation lean.
However, while Internet businesses often start off slow, they can (thankfully) explode with revenues and profits, which means that suddenly the web-based entrepreneur has all sorts of good problems and puzzles to solve.
And of course, there’s also a dark side to web-based businesses that produce windfall profits. Just as they can quickly ramp-up in revenue, cash flows and profitability, they can just as easily implode.
The unique financial characteristics of Internet business, therefore, suggest several business planning gambits:
Internet Business Planning Tip #1: Use a Limited Liability Company
Often in online businesses, you want to protect yourself as much as possible from unnecessary legal risks. The Internet, of course, can be a dangerous place to do business. Not everyone with whom you transact business is someone you’d feel comfortable taking home to meet the family.
Operating as a regular, traditional corporation represents one simple way to reduce your legal liability. However, a corporation automatically requires fairly complex accounting (including the requirement to do formal payroll.) Furthermore, a corporation means you’ll be doing separate federal and state corporate income tax returns, which are expensive and complicated.
As an alternative to a corporation, therefore, consider using a limited liability company. A limited liability company should provide your online business with the same legal protection as a corporation. But a limited liability company, if it’s owned by a single person, won’t require a separate corporate income tax return. Instead the LLC’s income and deductions will get reported on the owner’s regular tax return.
In summary, using an LLC rather than a corporation means you keep things nice and cheap in the beginning–when cash flows may be pretty lean.
Internet Business Planning Tip #2: Elect for Corporate Tax Status If Profits Ramp Up
A quick tip: Tax laws allow you to elect to have your LLC treated as a corporation later on down the road. And you may want to do this if your online business takes off.
An LLC taxed as an S corporation can save you scads of Social Security and Medicare taxes. And an LLC treated for tax purposes as a C corporation (your other option) can, in some unique situations, save you substantial taxes, too.
Internet Business Planning Tip #3: Setup and Use a Real Accounting System
One big advantage of an Internet business is this: Typically the accounting is pretty easy.
Accounting for an online business is easy, by the way, for a couple of reasons: First, someone else (like PayPal or the affiliated company you’re marketing for) often does much of the accounting work for you, collecting and processing the individual transactions.
A second reason that accounting for an online business is easy is this: Typically your financial data is available at someone else’s website (perhaps even your bank) for down-loading directly into your accounting system.
Because accounting for an Internet business is or should be easy, therefore, you really ought to go to the very modest effort of getting something like QuickBooks up and running to do your bookkeeping. (Probably, you won’t even have to enter much of the data yourself… some website will do the lion’s share of the work.)
With a good set of books, you’ll be able to better manage your business. And with a good set of books, you’ll definitely save on your taxes by capturing more of your legitimate business deductions.
Internet Business Planning Tip #4: Scenario Plan for Windfalls
One final business planning tip should be considered when you’re talking about an online business. And here it is… You should have a plan for what to do if you’re lucky enough to enjoy a big financial windfall. In other words, you ought to think ahead about how you’ll deal with any large financial windfall that your online business produces.
A really good way to deal with a portion of any windfall, by the way, is to sock away a bunch of money into a pension plan. In other words, if you find yourself with a $100,000 or a $1,000,000 surprise, see if there isn’t a way to stash a goodly portion of this amount into a pension.
Any accountant or financial planner can give you specific details on the options available in your situation, but know from the start that you can rather easily store away tens of thousands of dollars a year into pension options like SEP-IRAs, Simple-IRAs, 401(k) plans and even a few other options as well. (If you’re married and you can get your spouse on the payroll, you can stash away as much as $100,000 a year, tax free, with little headache or hassle.)
Here’s the rationale for this suggestion: The one common feature of Internet business success is that the success typically isn’t very long-lived. And you’ll never be sorry if you salt away a bunch of money from your blow-out years in the online business.
Seattle tax accountant and writer Stephen L. Nelson edits a business plan templates web site and an online business web site, Nelson holds an MBA in finance from the University of Washington and an MS in taxation from Golden Gate University.