I know more dedicated homesteaders and holiday bakers turned entrepreneurs than I do folks who set out to open a thriving business from the get-go. But when you ask these unsuspecting professionals when that transformation happened, the answer is rarely straightforward.
So, how do you know when you’ve made the leap from amateur to professional, and what sort of business management tasks must you accomplish in order to set your new business up for success? There are some signs to watch for that will indicate your business is ready to move out of the informal economy and into the regulated one, and once you’ve determined you’re ready to take the leap, a few simple steps will get you started in the right direction.
Signs Your Business Is Ready for the Formal Economy
There are plenty of reasons to turn your informal hobby into a legitimate small business. Here are just a few examples based on scenarios I’ve come across in my work as a bookkeeper with food and farming businesses. (Some of my real-life examples of an informal food-buying economy are against the law. Just about every food product — particularly those that are processed into something, such as a pie or a jar of pickles — is regulated by a state or federal agency. But the reality is, informal food-buying relationships take place all the time.)
The egg entrepreneur. Everyone loves the egg cooler at the end of your driveway. They know the chickens and love to chat with you, but this isn’t a legal way to buy or sell fresh eggs. When your backyard chicken flock starts supplying more eggs for cash than for neighborly goodwill, it’s probably time to bring your budding business aboveboard.
The sourdough seller. You sell incredible sourdough bread to close friends for a few dollars per loaf. You love to bake. Your friends love to eat your creations, and they’re happy to help cover the cost of ingredients. You start posting on social media that you have fresh-baked bread for sale. Now, you’re selling to folks with whom you don’t have an immediate relationship. This process takes on a whole new level of risk for you and your future customers, and it’s time to start legitimizing your side business.
The farmers market merchant. You’ve been earning a bit of money selling strawberries here and there to neighbors. However, you want to start selling your farm-fresh veggies as well. This will expand your reach, meaning it’s definitely time to look into establishing a business. (The woman this example is based on approached me about setting up a booth at our local farmers market, which is a great way to meet professional advisers and begin launching your business.)
Steps to Bring Your Business Aboveboard
1. Hire a CPA. Don’t overlook the value of a certified public accountant (CPA). I can say with confidence that a good accountant will add more to your business than you pay them for their expertise. They’re integral to your success, just like any other adviser. I wouldn’t be a farmer if I didn’t have a tractor mechanic!
Long before your taxes are due in spring, start building a relationship with a CPA. If you have an excellent grasp on your business’s finances and understand your tax obligations, you may not need to meet with a CPA more than a few months before the end of your fiscal year. If you’re like most new business owners, however, you’ll want more guidance, and should aim to start building that relationship before you even register your business.
Beyond helping you file taxes, a CPA will also know about tax implications for different business entities, and will be able to prepare the financial statements required for nearly any small business loan or grant application. Many CPAs will even run payroll for you, if you plan to hire employees.
Ask other business owners in your area to recommend a CPA they’ve enjoyed working with. You can also reach out to your local chamber of commerce or a U.S. Small Business Administration (SBA) office. Both are wonderful resources.
When you meet with a prospective accountant, be prepared to answer questions about your new business, and come ready with questions to ask, such as how often they’re willing to meet with you, what their rates are, and whether they’re able to help you set up bookkeeping software.
2. Register your business. Each state has a slightly different process for registering a business. Most offer online form submission and payment. Someone from your local SBA office or chamber of commerce will be able to walk you through the necessary steps for registering in your state.
When you register, you’ll need to choose a business entity. You can choose to register in one of many ways, including as a sole proprietorship, a limited liability corporation (LLC), or a C corporation. All of these options have different implications for your business, including how you as the business owner gets paid, how you file your business and personal taxes, and who’s liable for business decisions. Your CPA will be an excellent resource through this decision-making process. Farm Commons is another helpful resource for registering your business. Farm Commons is a nonprofit that offers online resources, including free webinars and tutorials that cover legal topics specifically designed for farmers and food businesses. Its website has a handy flow chart to help you decide which entity will be the best fit for your small business.
3. Open a business bank account. Once you’ve registered your business, you can open a business bank account. It’s much easier to keep your personal and business finances separate when you have separate bank accounts. Before you head to the bank, do some research to find the best option for your business account, which may not be the same bank you use for personal finances. Banking with one institution is convenient, but there are other things to consider. For example, a small business loan or a line of credit can be an excellent option to help grow your business. A local bank or credit union is often more likely to take a risk on a new local business than is a large bank that’s more interested in your credit score.
A bank employee should be happy to sit down and talk with you before you open an account. Ask about their small business loan rates and application process. Do they work with loan programs from the SBA or the U.S. Department of Agriculture? Do they offer online banking? What’s their minimum balance for a checking or savings account? If they can’t take the time to meet with you and answer some basic questions, look elsewhere.
4. Get business insurance. Depending on the type of business you own, different types of insurance are necessary. The three most common types are general liability, vehicle, and product liability.
General liability insurance will cover your business for damages to property and physical injury. Just about every business has a need for this type of insurance. If you use your vehicle for your business, you’ll need to let your insurance company know and make any necessary changes to your policy. Product liability insurance will cover your business if someone gets sick or injured from a product you’ve sold them.
Choosing and maintaining business insurance is another situation where you’ll work closely with a professional adviser. Well-suited insurance is essential to protect your business and personal finances, so you’ll want to make sure you’re working with someone who knows the system well.
5. Invest in bookkeeping software. It’s possible to manage a small business’s finances with an Excel file, or even a ledger, but I don’t recommend it. With the help of a CPA, and possibly a bookkeeper, the insights you’ll gain from the simple reporting functions in bookkeeping software can add significant value to your business. For example, you can run an “accounts receivable aging summary” and see any out-of-date invoices that a vendor owes you, helping you better manage cash flow. The industry standard in the United States is Intuit’s QuickBooks. Intuit offers both a desktop and an online version of its software. Here are a few things to consider when deciding which option is best for your business.
- What does your CPA or bookkeeper prefer to work with? There are more opinions about bookkeeping software than there are financial professionals, so, in some cases, simply using the software that your accountant uses is appropriate.
- Do you have reliable access to high-speed internet? This isn’t always a given in rural communities. Intuit offers a desktop app for its online software that only needs to connect to the internet for periodic updates from your bank. A farmer I’ve worked with, who doesn’t have reliable service on her farm, uses the local library as a place to update her QuickBooks.
- How much can you spend? QuickBooks Desktop requires an initial investment of about $300 and needs updating every few years. QuickBooks Online offers monthly plans from about $12 per month. There are also good but simple free online options.
Just like any tool on the farm, you’ll need to learn the proper way to use bookkeeping software in order for it to be effective. It took good teachers and lots of practice for me to learn how to unload pallets efficiently with a tractor. The same goes for bookkeeping software. Your accountant will be an excellent resource to help you set up and learn whichever software you choose. Additionally, the chamber of commerce or your local SBA office will be able to offer the assistance of advisers, as well as free or inexpensive courses on bookkeeping.
6. Write a budget. Financial planning can be intimidating, but any kind of planning, even very simple, is better than none. There are entire books and courses on the subject, so I won’t dive into the nitty-gritty here. Again, your local chamber of commerce or SBA office, or your accountant, can help you with the process.
Working with an adviser to create a simple budget is time well-spent. A budget can act as a reality check about how you hope to price your products, or the amount of money you’ll need to start your business. For example, a local restaurant I worked with served pesto by the pint to takeout customers. When the owner expressed an interest in selling his pesto to a local supermarket, we decided to figure out how much it actually cost to make a pint of pesto. We calculated the cost of each ingredient, and timed how long it took one of the cooks to make a batch. From this simple information, we determined that the restaurant was actually losing money every time it sold a pint of pesto at its current price. So, we increased the price significantly, with little pushback from customers who wanted to see their favorite restaurant succeed, and started selling wholesale to grocery stores all over the community. Now, this restaurant has a booming retail business selling pesto and other sauces alongside its fresh, homemade pasta.
Resources for Small Businesses
If you’re ready to make the transition from hobby farmer to business owner, seeking out the counsel of advisers is essential. The links below can help you start that search.
Morgan Houk is a business consultant for local food and training businesses. A farmer herself, she raises orchard mason bees and grows vegetable on beautiful Bainbridge Island. You can reach her at Morgan@FishingDogConsulting.com.