The Four External Pillars of a Small Business
January 18, 2017 | By Kevin Vela
Starting a business is hard work. There are lots of pitfalls to navigate, and some are impossible to avoid. But it’s not as hard to get help as you may think. Every small business (and this includes startups) should have four professionals by its side to help guide the business: 1) a CPA, 2) an attorney, 3) a banker, and 4) an insurance agent.
Note that these are external pillars, as they are all professionals who exist outside of your company. But they are imperative nonetheless.
You don’t have to find these professionals overnight, and you definitely shouldn’t engage the first one just because. Interview them and ask for referrals. Invest time to do this. You’ll save time down the road. I’ve listed the four pillars in order of when your business will likely need them.
A CPA
It’s not unusual for a new client to come in and for us to end a great kick-off meeting by saying, “Okay, great, talk to a CPA and then let us know what you decide.” You see, the two primary benefits of an entity are limitation of liability and tax advantages. Limitation of liability can be pretty similar across a number of legal structures, but tax consequences are vastly different between an entity taxed as a partnership, and one taxed as a corporation. Moreover, there are some nuances of limited partnerships and S corporations that merit consideration. Thus, your first conversation should be with a CPA.
We advise hiring a CPA early on for the planning and structuring guidance, but not necessarily the bookkeeping – hire a bookkeeper for this. As your business grows, it’s not a bad idea to have both a CPA and bookkeeper (or a firm who has both resources for you). I realize that this seems like additional costs that can be avoided, but your best value to your company is likely not centered around entering numbers into Xero or Quickbooks. A bookkeeper can do this more accurately and efficiently than you can, and then your CPA can review your financial records and file your tax forms.
We have a bookkeeper who reconciles our accounts weekly and sends us monthly reports generated out of Xero. We also have an accountant who periodically advises us on tax planning questions, reviews our accounts once or twice per year, answers questions from our bookkeeper, and files our federal and state returns.
I will note that a lot of savvy CPAs who deal with small businesses on a regular basis can, and do, form entities for their clients. Usually we’re okay with this, but we have seen instances where the structure wasn’t the right one legally. If your CPA is advising you on a particular legal structure, make sure you quiz him on his background and experience in forming legal entities. Note that it’s not terribly expensive to convert an entity to another type when the company is young, so understand that choosing an entity type is not an irreversible decision.
A lawyer
Not just any lawyer, but a corporate lawyer who specializes in small businesses and/or startups. Just about all lawyers, like physicians, have specialties. Find one.
Finding the right attorney isn’t easy, but it’s not difficult either. You should interview her to make sure she’s a great fit. Discuss the fee structure up front. Ask her if the firm offers flat fee packages, and ask for an estimate on costs for the upcoming year. We’ve worked with so many startups and small businesses over the years that we can pretty accurately estimate costs for the first few years.
It’s also imperative that you know how to use your attorney. Simply put, remember that it’s much easier for your attorney to be proactive than reactive. Meet with her regularly and talk about your business’ plans.
Note that 1 & 2 are oftentimes switched, especially if you’re fortunate enough to land a CPA or lawyer who really understands small businesses.
A banker
You should not have a window relationship with your banker. Or an online one. I realize that early on you may not have much need for contact with your banker, but as your business grows you’ll need help with deposit and wire management, ordering checks, and hopefully sooner than later, a line of credit. I say sooner than later because qualifying for a line of credit with a traditional bank means that your business is in a great spot.
It may scare you at first to think about incurring debt, but just about every business I’ve seen needs capital to grow, and debt is cheaper than equity. Also, once your business is mature enough, your bank can help with treasury management, equipment or inventory financing, traditional loans, and a host of other products.
I need to be clear here. It’s not easy to qualify for bank financing early on. Your business doesn’t have the traction or credit history, and you may not be in a position to personally guaranty the loan. But as your business grows, a banker who understands your business and cash needs is a vital asset.
When you go to open up a bank account for your business, go to a handful of banks that are convenient to you and ask to speak to a business banker. Interview them and see who you like. Once you have a banker, meet with him/her at least twice per year to talk about your business.
At VW, we have a great relationship with a local bank. We remote deposit our checks and do most of our banking online, but if we need a wire pushed through, or new checks ordered, or money transferred between accounts, they are just a phone call or email away. We keep a line of credit open with our bank and use that money for growth, investment, and to manage our cash flow cycle.
An insurance agent
This is the one pillar that you probably don’t need immediately. But eventually you will.
Understanding insurance can be daunting, but once you’ve scratched the surface, you’ll feel much more comfortable. Check out this insurance primer for small businesses we wrote. You’re going to need some kind of insurance eventually; find the right partner early on.
At VW, we have general liability and property insurance (our office lease demands it), cyber liability (because we keep confidential data), malpractice insurance (most attorneys carry this), and key man insurance on the partners (this provides income to their families in the event of a catastrophic event). Our business provides professional services, and we need four kinds of insurance. Every business has its needs.
Final Thoughts
Once you have these relationships established, keep them up. I would meet with each of the above at least annually, if not twice per year, just to chat about the state of your business and forecast future needs.
In the context of a startup, it’s not uncommon to see an investor board member (instead of a founder) managing the relationship with one of the four pillars above. This is a terrible idea. As the founder/CEO/President, it is your role and responsibility to know everything that’s going on at the top. It’s fine for your directors and advisors to facilitate introductions and to help you choose these professionals, but ultimately these relationships need to be yours and no one else’s.