I had a great conversation several Saturdays ago with Logan in Louisiana. The conversation was really cool because he just turned 20 and he’s the prototypical college student, web entrepreneur, and Chargify user in middle America.
I was happy to give advice and hopefully save Logan some time and pain. When we wrapped up our conversation, we agreed that I should write this stuff down so it could, just maybe, help other young entrepreneurs and startups out there.
I hope this story will grow and evolve as I get feedback from others. Please note that this is NOT about finding customers or how to market or any of those very important things that warrant their own blog post. Instead, this post is about building the business infrastructure that can be used over and over to try ideas. You will fail more than you succeed, but at least you don’t have to keep re-creating the basic structure to do business.
I assume that an entrepreneur or startup is responding to a market need that they’ve noticed, and that reaching at least part of that market (to test their hypothesis) is do-able before they spend a ton of time and money.
I assume that any entrepreneur or startup realizes that customers are paramount and to be treated accordingly.
Finally, you should “fail fast” if the market doesn’t want what you’re offering. This one is tough, because it’s hard to know if you’re just mis-marketing. In my experience, the market at least gives some signal pretty quickly. I didn’t always listen to that signal, and when I didn’t, it was my loss.
A couple of people have said that this list is too “mechanical” – too simple. Well, here’s the problem with that: a lot of intelligent people don’t know these steps. They may have an interesting idea to pursue but they just don’t know the business steps to get up and running. Why not help them save a ton of time to create a re-usable structure?This blog post turned into a true monster, so here’s an overview of what’s in the post:
1. Find Some Partners
2. Find a CPA, maybe also an Attorney
3. Set up a Business Entity
4. Get a Tax ID
5. Get a Business Bank Account
6. Get a Merchant Account (for credit card processing)
7. Get a Payment Gateway (for credit card processing)
8. Get a Business Credit Card
9. Get a Business Line of Credit
Please note that THIS IS NOT LEGAL ADVICE, but rather, just recounting my experience. You should seek counsel, as noted below.
1. Find Some Partners
This one is not absolute, but I think it’s generally a good idea. I have a friend who’s done very well by himself and that works well for him, but I think most people will be better off with 1 or 2 partners, especially if they’re inexperienced.
I’ve always had at least 1 partner. The biggest advantage is complimentary skills and interests. It also helps in very practical ways: when one of us was sick, the other could help customers. Oh, and having partners like Ezra and Tom at Engine Yard helped us immensely in terms of connecting with our customers and knowing the technology landscape. I could never do what they do.
There’s a belief going around that 2 partners is the ideal. It’s probably true, but other combos work. We had 4 at Engine Yard. But I can understand that if you have too many and especially if no one is the leader, then you can easily have disagreements later that will hurt the company.
Logan has some partners.
2. Find a CPA, maybe also an Attorney
I know that when someone is just starting out, affording a CPA and/or attorney can be *very* difficult. I remember starting my first company when I was 19. My friend and I started Parallax.com and we had almost no money. I had an $8/hr full-time job and a credit card I could use when needed.
My friend’s dad had a friend who was an attorney, so we got advice from him cheaply, probably free in the very early days. Not a lot of time, but just enough. I don’t think we had a CPA, but in retrospect, I think a good CPA is perhaps the role you need even more at first, just someone you can bounce high-level questions off of, *and* someone who can help at least once a year to make sure you’re doing your taxes correctly.
As your businesses grow in revenue and complexity, you *will* want a good attorney. I only said “maybe” above because I think you can start something small and simple without an attorney. But as soon as you want a corporation or LLC, as soon as you have any significant revenue and employee count and potential liabilities, you should already have an attorney you can turn to.
If your businesses prosper over the years, you will make lasting relationships with these people and they will become part of the overall infrastructure that helps you in your business and personal endeavors.
You can also expect to find new professionals to help you out as your needs change. I’ve found over the years that attorneys can vary a lot, and so can CPAs. Good ones cost more, great ones cost even more, but they know their stuff and are a pleasure to work with. After some time, you’ll be working with professionals who are really good in specific niches.
3. Set up a Business Entity
A “business entity” can take many forms. Here are a few that I know. This can be very simple (a couple of hours) or relatively complex. My advice is to start simple and increase complexity/”features” as the business warrants.
* Sole Proprietorship or Partnership. I’m 99% sure that California (and probably other states) sees these as the same type of entity, just with 1 or more than 1 person involved. These are easy to set up. In fact, in California, it’s the default if you do nothing other than file a Fictitious Name Statement (see below). When I formed a 1-man company to represent myself as a Perl programmer in 2001, that’s what I did. I went to City Hall and registered myself as “PerlUSA”. And in Engine Yard’s very early days, we did not file anything officially, so we were, by default, a California partnership.
Filing a Fictitious Name Statement (also known as a “DBA”, meaning “Doing Business As”) with your local city government is easy. I think this is all you have to do to start a Sole Proprietorship or Partnership in many states. If you live in a non-city/unincorporated area, I assume you can do this with your County government. This filing simply registers you (or a group of partners) under a business name. For PerlUSA, I went to San Francisco City Hall and filed the papers for something like $40. I then went to a local newspaper and paid $30 to have the listing published. I believe this is typical anywhere in America. Total cost in time & dollars: 1-2 hours, <$100. Is this a great country or what?! In one afternoon, I was legally “PerlUSA”.
— This was good enough for PerlUSA for its first 4 years. I only converted it to a corporation when it felt necessary, which was Jan 1, 2005.
* Corporation. Corporations offer a more formal business structure than sole proprietorships and partnerships. They generally offer increased legal and financial separation between the company and its owners/managers. They offer a long-established framework for selling shares to investors and for having a management structure that’s not the same as the owners/investors (though it can be the same and usually is with small corps). They also convey a sense of “establishment” to potential customers, vendors, banks, etc.
As PerlUSA grew and started getting large corporate and government clients, I noticed that they just *assumed* we were a corporation and anything else was a yellow flag to them. And the company had multiple contractors and a few employees, so it was time to be more formal and add the legal and financial advantages.
Apple and Engine Yard are “C Corporations”. Most large companies are C Corps. Income/loss stays in the corporation and the corp files its own taxes, completely separate from the shareholders, employees, etc, which have their own personal financial/tax picture. C Corps can own shares in other corps and do various things that “S Corporations” cannot. I think only C Corps can have different classes of stock with different voting rights per class, etc.
I spoke with my CPA and attorney and we decided on an “S Corporation” for PerlUSA. S Corps are generally good for a small number of owners or professionals who want to represent their services through a corporation. With S Corps, income/loss in the company flows through to the shareholders’ individual tax returns. This is generally considered advantageous.
Apple and Engine Yard are “C Corporations”. Income/loss stays in the corporation and the corporation files its own taxes. C Corps can own shares in other corps and do various things that S Corps cannot, like the different classes of stock mentioned above.
A long paragraph about shareholders, corporations, and corporate governance: A corporation is owned by people who have purchased or otherwise acquired shares in the corporation. The management and employees of the corporation are typically not the same people as the shareholders. There are, of course, many exceptions to this, especially when a corporation is very small. When I incorporated PerlUSA in 2005, I was the sole shareholder, plus I was CEO (which is both an employee of the corp and an executive officer), plus I was Chairman of the Board. Can you say “abuse of power” ? A corporation has a Board of Directors, who are charged with choosing the CEO and generally giving high-level advice and keeping an eye on the long-term direction of the company and its finances. If they think the CEO is doing a poor job, they can replace him/her. The CEO is a member of the Board and *usually* plays the role of Chairman of the Board, meaning that he guides the Board agenda. I could go on… there are examples of CEOs at public companies who formed Boards of their friends, which greatly negated the Board’s effectiveness at checking the CEO’s power. Ideally, you have a Board that trusts the CEO and helps guide the company. Ultimately, the Board and top management answer to the shareholders. And ultimately, the shareholders expect a good return on their investment, and they look to the Board and top management to deliver on that.
Note 1: S Corps can later convert to C Corps, but not vice versa.
Note 2: If you’re going to take on formal investors, they’ll want a C Corp, and probably a Delaware C Corp, because Delaware has laws that are favorable to the corporation and, I think, to shareholders. Interestingly, if they are formal investors like VCs, they will probably want to form a new corporation even if you already have one, just to be totally new & clean. I’m guessing here.
* LLC or LLP. I frankly don’t know a lot about LLCs (Limited Liability Companies) and LLPs (Limited Liability Partnerships). But Chargify is an LLC! Here’s how that happened: my co-founders in Chargify were familiar and comfortable with LLCs, and my attorney said an LLC was approximately as “good” as an S Corporation. Given my trust in my partners and my attorney and the fact that I’ve seen plenty of successful businesses as LLCs, I figured, “What the heck? Might as well try something new.”
What I do know is that our LLC does not officially have “shareholders”, because there are no shares. There *are* “ownership interests”, which a lot of people casually call “shares”. I’m sure there are legal differences and I defer to my attorney and CPA to know where those differences matter.
Logan, the student I mentioned above, formed an LLC with his friends. I was like, “Whoa, you’ve already done that? Cool!”.
4. Get a Tax ID (most business entity types)
Get a tax ID for your new entity. With the less formal business entities (especially sole proprietorship), I think your SSN *is* your business tax ID, but my memory is foggy. I *do* remember that my bank was quite helpful with this when I went to open a business checking account… they had an 800 number they called to get a tax ID if I needed one. For the more formal business entities like corps and LLCs, you will definitely need a business tax ID that’s not your SSN, because the business is legally separate from you; it will file its own taxes and produce W-2s and other tax-related documents that are completely unconnected to you personally.
5. Get a Business Bank Account
So, with PerlUSA, I went to Wells Fargo to open a checking account. My clients expected to make payments to “PerlUSA”, not Lance Walley. Incidentally, I had bounced a couple of checks earlier that year and was on a “bad list” with banks, so I couldn’t open a new account with my SSN. I will forever be grateful to the branch manager for trusting me and over-riding the system. She asked that I please not betray her trust. I never did, and PerlUSA (and later, Engine Yard) went on to bring Wells Fargo a *lot* of business! I hope she was rewarded. I stopped by a few times over the years to say ‘thanks’.
BTW, get a business savings account, too. It’s a good idea to save some percentage of your revenue right off the top, say 10%. Just a good habit to start early.
6. Get a Merchant Account
This is, unfortunately, a big mystery to a lot of people. A Merchant Account allows you, the merchant, to charge your customers’ credit cards directly, so your business name and contact phone number appear right on the consumer’s credit card statement.
This takes work, but it makes your business look real!
Merchant Accounts are kind of hard to get – on purpose. There is a lot of credit card fraud every year and that costs everyone a lot of money. Consumers/buyers have pretty generous rights about getting their money back if they think a charge is fraudulent, so banks are understandably careful about giving out Merchant Accounts.
You can get a Merchant Account from your bank, but most major banks probably won’t give you one if you’re a brand new business with no personal or prior business history. If you *do* have prior good history with that bank, especially business history, your chances increase and I would recommend that simply for convenience and for building a long-term banking relationship that will come in handy years later.
If your bank is not the right option, there are specialized entities ready to help! Your Merchant Account does not need to be at the same bank as your other accounts, and it doesn’t even need to be at a bank that you can walk into. There are banks and resellers that handle only Merchant Accounts all day long.
At times when I’ve needed a Merchant Account and was not in position to use Wells Fargo, I turned to a company called Millenium Bankcard (www.mbankcard.com). They and another, TransFS (www.transfs.com), will help you get a Merchant Account. At Chargify, we refer people to both parties and I think both are good. Personally, way back in 2000, Millenium helped me get set up for my online ringtone business, which was new and very risky from a bank’s perspective.
What’s cool about these kinds of companies is that they’ll learn about your business and do their best to get you set up. It’s *well* worth it when you’re starting out. You can later get a better deal when your company has 3 years of financials. And don’t sweat a half-percent or even a full percent.
Costs: Merchant Accounts typically have a cost structure something like this: 2.5% plus 30 cents per transaction. So if you’re charging your customer $10, the Merchant Account will get 25 cents + 30 cents = 55 cents. There are usually some other misc fees, such as a monthly minimum (I think like $20-30), maybe an application fee ($50-100), etc. The main thing is that the Merchant Account will cost you something like $30 min per month just to have it.
To the best of my knowledge, Merchant Accounts are specific to the Merchant’s country. Since I’m in the USA, I get a Merchant Account with a US bank. This allows me to charge credit cards from almost any country and the received funds will flow into my US Merchant Account. Charges are done in US Dollars and converted from Euros or Canadian Dollars or whatever the customer was using to pay if he’s not using US Dollars.
Finally, the funds flow from the Merchant Account into my regular bank account, presumably my business bank account. When you set up a Merchant Account, you’ll be asked where the funds should go (what bank account to route them to).
To be clear, your customers/buyers can be anywhere. You do not need to set up Merchant Accounts in every country. You do need to set up a Merchant Account in your country.
The companies I mentioned above can only help with US Merchant Accounts. Most Canadians, Brits, and Aussies I know have some idea of how to get a Merchant Account in their country.
7. Get a Payment Gateway
This is CLOSELY related to your Merchant Account, and sometimes it’s hard to tell them apart.
A Payment Gateway is a service that communicates with your Merchant Account. I don’t know the details, but I’ve been told that interfacing directly with a Merchant Account is quite difficult. So Payment Gateways came about to solve that problem.
You communicate with the Payment Gateway and they, in turn, communicate with your Merchant Account. The Payment Gateway actually adds a lot of value, such as secure storage of credit card info, an online credit card “terminal”, address verification services, fraud detection software, etc.
Costs: Payment Gateways have costs similar to Merchant Accounts, but I think they’re usually less expensive. By that, I mean it’s common for the Payment Gateway to charge a small percentage and/or flat fee per transaction, and perhaps a minimum monthly fee. My recollection is that the Payment Gateway fees, while not zero, are much less significant than the Merchant Account fees.
Authorize.net is one of the best-known Payment Gateways, but there are many more. Braintree is another, Cybersource is another, TrustCommerce, etc, and that’s just a few in the USA. There are others for merchants in Canada, the UK, Europe, Australia, etc.
Some Payment Gateways, like Auth.net, only work with US Merchant Accounts.
Other Payment Gateways work with Merchant Accounts in other countries. For instance, Beanstream works with Merchant Accounts in Canada.
7.5 Merchant Account + Payment Gateway
I hope this is starting to make sense. Your Merchant Account and Payment Gateway work together as a pair. Generally speaking, your Merchant Account must be in your country (wherever the funds are ending up), and your Payment Gateway must work with your Merchant Account, which I think pretty much means using a Payment Gateway in your country, too.
Fortunately, almost any of these companies is happy to sell you the missing half. I look at beanstream.com and I see a note about selling me a Merchant Account in Canada. And if I go to Wells Fargo to get a Merchant Account, they will bundle Authorize.net as my Payment Gateway. See how that works? It’s almost hard to buy them separately.
Ditto with the companies I referred you to above for getting this all done in the USA, anyway. They will make all the complexity go away for a small fee.
In the end, you can expect to pay something like $50-70/mo to be able to accept credit cards.
Finally, some Payment Gateways and Merchant Accounts allow you to specify the currency in which to charge your customers. Maybe you want run one website that charges in US Dollars and another that charges in Euros. Definitely doable with the right stuff in place.
And, yes, Chargify is working to make this all possible without tearing our your hair!
8. Get a Business Credit Card
Even if you can only get a Visa or MasterCard for your business with $200 of credit, it will be useful for paying for stuff, and it will start building your business credit. People may argue with me here (ie, credit is bad), but I don’t buy it. Credit is a tool that can be used wisely.
This harks back to my comment much earlier about buidling a relationship with a bank that you can actually walk into and get to know the personnel and management.
I know that American Express became a large tool for Engine Yard and now for Chargify. Frankly, I wasn’t the person who set those up, but I think Amex may be easier than Visa/MasterCard when it comes to new, small businesses. At least that’s how they come across in advertising! I went with Visa early because it was offered/pushed on me by Wells Fargo.
I also know that if you’re really young and have no credit, then you may need a co-signer for some of these banking/credit-related steps. My dad co-signed my first credit card when I was 16, so my credit history started building early.
9. Get a Business Line of Credit
Just like #8, but bigger.
When I was building PerlUSA, we had a common cash flow problem faced by small consulting companies: we needed to pay our guys before clients paid us.
We solved this by building up cash savings and by getting an “LOC” (Line of Credit). I think it eventually got up to $50-75K and savings got up to $70K. Between the two, we were able to buffer payments between clients and consultants. Your workers and sub-contractors (and you) are much happier when you don’t have to wait for that next check so y’all can get paid!
And, btw, those resources helped finance the first year of Engine Yard, so the money plus credit really came in handy.
It took several years to reach those amounts of cash & credit, so you might as well start early. Start with a business savings account and a $200 business Visa.
I’m sure I’ll think of more in future revisions of this incredibly long story, but I’ve been writing for hours and it’s getting late and I think I’ve covered all the major things I’ve run into in 22 years of businesses.
What I told Logan in Louisiana is that, although some of these steps are difficult, the cool thing is that once they’re in place – once you have the experience – the next time will be easier.
In fact, my advice to Logan was to set up a generic company, and that’s exactly what he and his buddies had done. Do not set up MyWebProjectManagement.com, LLC. Instead, set up Web Services, LLC. Get an 800 number that rings your cell phones. Set up your bank and merchant accounts, etc. Find a CPA.
Depending on which steps you follow above, you can start with just a few days’ effort to get going, then add more, as needed. Getting all the above stuff in place will not happen in a few days – it will take at least some weeks to iron out Merchant Accounts and such, and more weeks or months if you decide on corporate formation with the help of an attorney.
You can try different business ideas and utilize the legal and financial structures you’ve put in place. Imagine how easy it will be for Logan to try his 2nd or 3rd idea! And if one really catches, then he can change the company name or form a new company for that particular business.
The point is to repeat these steps as few times as necessary! Spend some months up front, then spend years benefiting.
I hope this is helpful. I know this document is super long, but it’s useful stuff and it takes years to stumble upon it.