In order to protect your personal assets, it’s vital to separate your personal money, expenses, and debt from those of your business, or you may forfeit the legal protections that LLCs and corporations offer.

Failure to separate business and personal accounts can lead to, should your business be brought up for litigation, a judge finding that your LLC or corporation’s liability should be bound to you personally. This is called “piercing the corporate veil”.

Read more on piercing the corporate veil at Wikipedia.

Bank Account

The first step is to start a bank account for your business. The account can be at the same bank you do your personal banking with, but it should not be your personal account.  Also, if your personal account has a savings and checking account, do not reserve one for personal and one for business. It’s not good enough. 

Many banks will upgrade your account for free if you add a business. This can save you money in fees. So even though it’s bundled, you’ll still separate personal and business.

One important note is that your bank will likely NOT allow you to change your sole proprietorship account to an LLC. You will have to pay for getting your LLC expenses paid for out of a personal account. Once your LLC is registered on the Secretary of State’s website and you have an EIN, you’ll be able to make your business’ bank account.  In addition, if the state of your LLC and the state your bank is in are different, your bank may not allow creating a business account for it.  Just something to check.

Domain Registrar

If you have domains for personal use, like for your personal blog or website, you’ll need to create a new account at your registrar and move your personal domains to it. Hover did this for me on request. Was a piece of cake.

When setting up your account for personal and business domains, make sure you use a non-domain related email for the account.  This means if your domain is mysite.com, make sure you’re not using a @mysite.com email address on your account.  Just use a free gmail or hotmail account.  This is just good practice in case you lose control of your domain and need to get it rectified.  This is not a personal vs. business thing. It’s just a smart thing to do.

Web Host / Server Host

If you have a personal site or blog hosted on your business’ servers, it’s best to move it off to its own account.  The exception to this is if your blog is an extension of your “brand”.  Many social media personalities and famous persons fall into this exception. If you are running your email through your server, you should use a non-domain related email, just as with domain registrar section above.

Phone Number

Make a phone number for your business and use it in your contact info instead of your personal number. I use Kall8 for this. It’s only $2 a month for an 888 phone number.  You can always forward that number to your cell phone or voicemail until your business gets big, but it’s smart to have all your expenses (no matter how small) and contact info as business-centric as possible.

E-mail Host

I use Rackspace Mail for my personal and business email accounts, instead of running my own mail server. 

If you are using the same email for both business and personal, you should create one for personal that does not use your business’ domain. This may mean buying a domain just for personal use, or switching to a free email host.

The same advice for using a non-domain related email domain is applicable here, in case there is an issue with your mail host’s account, you’ll still be able to communicate with them.

Rule of Thumb

If in doubt about an expense, think of it this way.  You should have business and personal separate enough that if a company came along and wanted to purchase your business and all accounts outright, it would be easy to hand it all over without going in and changing everything.

Other

Other types of accounts you should consider separating from personal use:

• insurance
• credit cards (get you a card for your company)
• email sending systems, like SendGrid
• newsletter mail systems, like MailChimp
• payments to outsourced services (design, coding, etc)
• legal services
• marketing services (PR, Google Adwords, etc)
• payroll

There could many more, so before you whip out your personal credit or debit card to pay for something business related, think twice.

Photo courtesy dominicpics – Creative Commons BY 2.0

Next post: Using LegalZoom to set up your Delaware LLC

Part I: Why you need one, and your options

This is the first of a three-part series on how to set your startup with a Delaware LLC. I recently did this, and will guide you through the process. Let’s get started.

Sole Proprietorships are good if you are very small

When you’re first starting your business and you’re making a few bucks, you don’t have to worry too much about getting sued. For one, you may only have a few customers, you’re making them happy, and they are paying you. But as time goes on and your customer base grows, it’s realistic to expect that something will go wrong.

Perhaps you host websites for businesses and you have a few hours of downtime due to an outage or something similar outside your control. Or perhaps you infringe on a patent you didn’t know existed. Or you lose a customer’s data that they deemed vital and irreplaceable. By damaging others, even in ways you may consider insignificant, you open yourself up to the greater possibility of a lawsuit.

If your business is a sole proprietorship and your business is sued, the judge can go beyond the assets of the business and a judgment can extend into your personal income and savings. You could lose every penny you have, and perhaps even future earnings. A judgment that your business funds can’t cover could even mean having to sell your car or home. The reason a sole proprietorship is so weak in terms of protecting your assets is that a sole proprietorship, by its name, indicates that you are the sole owner. That includes sole owner of the liability and debt. In addition, whether your sole proprietorship’s bank account is intertwined with your personal account or not is irrelevant. The business is all you and that’s all the judge will see. In a sole proprietorship there is no legal distinction between the owner and the business.

Enter corporations and LLCs

Once you move into the realms of corporations and LLCs, the business transforms into its own entity in the eyes of the law. It is separated from you, and is taxed appropriately. There is a work-around coming ahead, so don’t let the tax thing scare ya.

Both corporations and LLCs protect their investors/shareholders/members from liability should the company become a target of litigation.

Corporations

Read more on Corporations at Wikipedia.

C-Corp

A C corporation has the advantage of having multiple levels of stock: preferred, common, etc.  There is no limit on the number of members who can join the company as shareholders. Profits made by the C-Corp are taxed separately from dividends paid to shareholders.  Therefore, the corporation is taxed on profits, then the dividends are paid to shareholders, who then pay capital gains taxes on the dividends. This is referred to by some as double-taxation.

C Corporations are typically a better fit than LLCs for startups seeking investors such as venture capitalists and angels, due to the flexible share types. You could always convert to a corporation from an LLC if needed.

S-Corp

In contrast to a C-Corp, an S corporation is not subject to income tax. The shareholders pay tax on their share of the profits. This is similar to an LLC from a tax point of view.

S Corporations can only have up to 100 members and one class of stock.

LLC (Limited Liability Company)

A Limited Liability Company, or LLC, is a special type of business that can have one or many members with voting privileges in the company. There is no limit on the number of members, and depending on the state the LLC was formed, members could be individuals, corporations, and partnerships.  Each member is granted either a percentage of the company or a share of the total business units. I’ll discuss business units in part three of this series. An LLC has the advantage of pass-thru taxation. It can be taxed like a corporation, partnership, or even as a sole proprietorship, where the taxes are paid easily on the single owner’s personal tax form. The method is declared on form SS-4 when applying for an EIN (Employer Identification Number) from the IRS (and if you wish your LLC to be taxed like a corporation, file form 8832). More on this also in part three.

LLCs also have it easy compared to corporations as far as the paperwork and maintenance of the business. Read more on LLCs at Wikipedia.

Why Delaware?

Delaware LLCs (as more and more states do nowadays) allow for single-person membership.  In addition, under the business-favorable Delaware LLC law, LLCs do not have to have annual member meetings. And the paperwork needed to maintain the business is minimal.

Some states such as California have steep annual fees to maintain an LLC. The Delaware LLC franchise fee is only $250 per year.

To maintain a Delaware presence, should you live in some other part of the country, you will need a registered agent. Fees for this can range from around $100 per year to close to $300 per year depending on the agent you use. The agency I’m with costs $159/year.  For this you get an agent who will contact you should any paperwork come from the Delaware government or in the event your business is sued. They are your business’ representative in Delaware.

Also, Delaware has no sales tax or intangible personal property tax.  Delaware also allows the owners and managers of an LLC to remain anonymous.

Whether you decide to go Corporation (C or S) or LLC, you’ll find that Delaware is a favorable choice for either.

Legal disclaimer: I’m not your lawyer and I’m not your mom, and you shouldn’t believe everything you read on the internet. Make sure you do your own research.  And eat your vegetables.

In the next post, I’ll go over the first step in protecting your personal assets – separating all your personal accounts from your business. It’s vital to do it and do it right, or you may forfeit the legal protections that LLCs and corporations offer.

Next post: Separate your Business and Personal Accounts

I use three methods:

Pay by the Month

This is an example of a SaaS payment model. Customers may use your product daily, but they pay on a monthly basis. Customers may get unlimited use of your service, or it could be metered in some way (5 faxes per day, for instance).

This model is lucrative when businesses are your customers, since they tend to review products they pay monthly subscriptions for on a quarterly or yearly basis. Many times your business customers won’t be using the product at all, but will still be paying about $15 to $100 a month (or more). Conversely, individuals are more likely to use what they are paying for more often and you’ll get a lot more turnover, especially when your subscription fee is less than $10. Individual customers tend to be fickle.

Pay per Use

Your service may not warrant a pay-by-the-month charge. Perhaps you offer a one-time on-demand service or something that will be used irregularly. Charging a fee is a good way to go. In many cases you don’t even need to have the user create an account.

It may be the case that your service is process intensive or uses an API that you have limited use of. Offering this as an unlimited service on a monthly payment basis could put you out of business.

Hybrid

Some customers may not need your service every day even every month, and just need to use your product briefly. You may choose to offer both methods, offering a limited use for a slightly premium price.

Conclusion

However you decide to go, I recommend running some numbers beforehand before committing, because the switching cost could be painful.

Next post: from BlackBerry to Android

But just going on Adwords, putting together a text ad or two, selecting a few keywords and sitting back is not going to work.  Adwords is a complex system to get results from.  And once you’ve tuned it to get good results, you have to keep tuning your keywords, bids, and ads to keep them performing.  Adwords in itself could be a part or full-time job for companies with many products (an therefore multiple ads and keyword sets to manage).

A good article to get an excellent handle on this is in the book The Web Startup Success Guide.  In the chapter “Money: Raise, Manage, Make”, the author (Bob Walsh) interviews Dave Collins, Founder of Software Promotions, which focuses on the “arcane arts” of AdWords, search engine optimization, and web analytics for small software companies.  The point that sums it up:

I’d say the single most important fact, if you like, or point that should be behind every decision is that the whole AdWords system is set up for Google. It’s a very obvious and very simplistic statement, that every aspect of the system is set up and geared heavily toward Google and their priorities.
There’s an obvious overlap of priorities, and, for some matters, what’s good for Google is good for you. But there are also a lot of times when you could be spending money on, for instance, keywords that aren’t really relevant. Google is happy, and you are not.

So the key thing is, go with your eyes open, and understand that the system is not set up to be your friend, to be on your side at all.

Doesn’t that make you feel better?

Getting Started

So when you jump in to Adwords, one of the first things you’ll be doing is brainstorming keywords that match your product or service.  The keywords you choose should have a decent chance of someone searching for them.  If not, Google will warn you that search volume for your keywords are low.  Here are some excellent third party services that help you find good keywords in your industry:

• Wordtracker.com
• Keyworddiscovery.com

Each of these are a bit spendy but in the long run will help you make a lot more money with better ads.

For phrases you are using as keywords, like “gold-plated belt buckle” I recommend setting phrases as “phrase match”.  This will find them in any combination, and is less expensive than the default “broad match”.  Set this by clicking the keywords in the keyword interface:

Cost per Click

For each keyword or phrase you’ll have to come up with how much to spend per click.  This is the dance you will dance with Google and Google always leads.  You are bidding against other advertisers for those same keywords.  Google will try to point you in the right direction and tell you when you’re bidding too low, and will recommend a bid price to get “first page” placement, but it’s still hard to know if you’re paying too much.  I’m sure there are books on this.  People get paid to do this bidding for a living, you know.

There is also the content network where your ads can show if you choose.  This is not search results.  Your ads will show up in the Adsense widget on publisher’s sites.  I recommend creating another campaign just for the content network and setting those per-click amounts lower, since they will provide good traffic but of lower quality.

Crafting Ads

Good Adwords ads tend to have a few things in common.  They tend to capitalize the first letter of each word (“Voted #1 In Customer Satisfaction”) (Google recommends it too), the price is listed for the service advertised (“only $19.95”), and the ads attempt to get your attention.

Making good ads involves a bit of trial and error.  The nice thing is that with Adwords reporting, you’ll be able to discern which of your ads are under-performing.

Landing Pages

Landing pages are where the customer will go once they click the ad and hit your site.  The most common advice is to not send users to your home page.  Make a set of special web pages that each target a special selling point that your ad is selling them on.  Make the landing page match the words and tone of the ad.  One approach that you’ve probably seen is where the landing page matches your search exactly.  This is done by passing through keywords in the URL.  Then on the landing page you can dynamically generate a title.

What I like to do is make landing pages, and then make sure they are searchable.  So make sure there you can get to your landing pages by clicking links from your homepage.  That’s how the search engines will find them.  Then your landing pages can be found by people searching for keywords on your landing pages.  If they can find you that way, it saves you advertising money.

Call to Action

Once a user hits a landing page and reads all about your wonderful service, give them a direct path to buy.  You need a “call to action” on your landing pages. Place a big signup button, “buy now” button or signup form on the landing page which leads them to the next step.  Don’t leave ‘em hangin’.

Isn’t There an Easier Way?

Yes! There are now services like Trada which will manage your search advertising campaigns for you, not just on Google, but Yahoo and Bing also.  Trada leverages a huge pool of search optimizers (humans) that come up with a wide variety of keywords and then they create your ads, manage keywords, and monitor performance.

The video above is an interview with Trada CEO Niel Robertson on This Week in Startups.  Look at that great hair.

Trada claims averages of 25 optimizers, 6200 keywords, and over 100 ads per campaign.  Here’s a short intro video:

Next post: interview with Ryan Sit of PicClick

When you’re running your own startup and trying to make your product better, it’s tempting to take everything your users say and build it into your product.  After all the users are the ones closest to it, right?  A user makes a suggestion and you’re more likely than not to add it in.

Doing things this way is part of calming our ego.  When a complete stranger who is kind enough to use your site gives you a helping hand, it’s hard to say no, right?  They want to know that you care.  Well caring is not the same as always saying yes.  Sure, your kids may want candy for breakfast or want to stay up until midnight, but you don’t let them.   It’s not part of the vision you have for their health and well-being.

Let me make a distinction.  A user is a prospect, a site visitor, a person who uses your site (perhaps as a freemium structure) but is not a paying customer.

Customers help drive company direction, whereas users provide valuable input.

If you always listen to users and follow their advice:

• everything will be free and therefore make no money
• your products will be built by committee (of everyone)
• your vision will not matter

So should you do everything customer suggest?

Nope.  It’s your business.

Quote from Henry Ford:

If I’d asked my customers what they wanted, they’d have said a faster horse.

So even when your customers suggest or even demand something, you need to think about how it fits into the vision you have for your startup. If it doesn’t fit, you must reject it.  Now there may be an astounding insight that comes up that shakes up your vision and changes it.  That’s a good thing.  But don’t go backwards, only forwards.

Won’t a user become a customer?

Yes, but getting your customers satisfied means that once the user does convert to a customer, their experience will be so much better than when they were a user.  But don’t make the user’s version suck.  Just make it not as great as the customer’s version.  If your users do not convert to customers, then the product wasn’t for them in the fist place.

Do you have evidence to back this up?

Luckily. Here’s a good, short post on BlueMango’s experience with the launch of their ScreenSteps Live product.

But my business model only has users.  It doesn’t have customers in it.

That is why you fail.  Listen to this podcast and make your hard efforts worthwhile, and not just a hobby:

37 Signals podcast: “Making people pay and targeting nonconsumption”

Next post: ad solutions for publishers/content sites

Google Apps

You probably have a personal Gmail account, and using Google mail for your business isn’t that different, but instead of an @gmail.com address, you can use your own domain.  This professional (premium) version of Gmail is part of the Google Apps suite of services.  This version of Gmail is called Premier Edition.  If you’re expecting supercheap, it’s not.  It’s twice as much as Rackspace Mail, but along with that you’ll get a 25GB mailbox, 1GB Google Docs storage, 10GB storage + 500 MB shared on Google Sites, and a nice integration into Google Talk (you’ll get notified of mail even when you’re not logged in to mail).  It’s really a suite more than just mail service.  The pricing, to be exact, is $50 per user account per year (billed annually).  Compared to Rackspace mail at $2 per month per mailbox, Google’s suite comes out to ~$4.17 per month.  Either way it’s not likely to break your startup’s budget.

To me, the extra $2 is worth it for Google Docs and Calendar.  For working on teams, having a central repository for your super secret startup’s super secret documents is great for sharing and collaboration.  And it will save you from having to spend so much on a copy of Office for everyone.  Then again, you could have everyone download OpenOffice, but working on docs in the Google Docs site saves you from editing and uploading and then having to edit and upload again later, and you and a co-worker can be in the same spreadsheet at the same time.  Extreme Excel anyone?

So why don’t I use Google Apps? Because I’m a loner, a rebel.  I’m a one-man show, ya dig? I don’t need no team.

But wait, there’s more…

DNAmail

I’m adding DNAmail due to their wide range of services.  So before you plunk down money for Google Apps, you could save 21 cents a month and get real humans to help you move your mail.  Let’s go down the list of what DNAmail offers:

Google Apps: DNAmail is an authorized reseller, so there’s no funny business.  But if you sign up for Google Apps through DNAmail, they’ll offer free 24/7 support to help you get set up and migrate your mail for you.

Hosted Exchange & Sharepoint: Exchange hosting pricing ranges from $2.95 a month for a personal account with no frills and web access to $12.95/per month for unlimited mail (you know for those managers who have massive mailboxes because they’re afraid of getting sued or fired if they can’t find that spreadsheet you made them 4 years ago).  The middle price point is $8.95 a month, and for that you get a 3GB mailbox.  For both the $8.95 and $12.95 option you’ll get free Microsoft Outlook, MAPI, POP and IMAP access, and 50MB free Sharepoint storage.  To increase your Sharepoint space, see additional pricing here, which ranges from $9.95/per month for 1GB up to $79.95/month for 5GB.

Oh yeah, and “DNAmail, DNAmail, everybody loves DNAmail” to quote Jason Calacanis.  Since DNAmail sponsors This Week in Startups, I gotta send ‘em some love.

Next post: listen to your customers, not your users

These days setting up an email server is pretty easy. But just because it’s easy doesn’t mean you should do it.

editor’s note: officially, I write “e-mail”, but it looks better as “email”

Why NOT to host your own email:

• if it’s hosted on your web server, you risk DOS attack if you get flooded with mail
• over time it becomes a pain to manage (software updates, security concerns)
• if you are hosting IMAP, you have to back up a LOT of data over time since it keeps all your mail on server
• if your web server’s IP address is in a “bad neighborhood”, your email will get bounced back a lot, forcing you to send through a different mail host anyway (called a smart host)

The Do-It-Yourselfer

If you decide you must host it on your own server, the easiest way to do it is with Qmail, a sendmail replacement.  QmailRocks is the best tutorial from start to finish – including installation of web-based mail interface, antivirus scanning with Clam Antivirus, and SpamAssassin.  Once you go down this road, however, it’s all on you.

The Easy Life

For those who would rather spend their time building their business instead of babysitting an email server, I have a few solutions, depending on your cash and your organization.

For today, and continuing to tomorrow, I’ll go over some hosted email providers, what they offer, and some pricing.

Rackspace Mail

After hosting my own mail on my server for about 4 years I dumped it and went to Rackspace mail.  At $2 per mailbox per month, I have IMAP service (POP is an option), 10GB of space, and attachments up to 50MB.  My email is backed up every night, and if needed I can restore it myself from the control panel.

I currently have 6 mailboxes (since I run different businesses), but have unlimited aliases.

They do the anti-spam and antivirus stuff for me.

I can check mail from my mail client (Thunderbird) and BlackBerry, and they offer a web-based interface that’s nice, but I don’t use it.

For those needing hosted Exchange, they do that also, but your mailbox will be limited to 2GB.  Exchange is $10 per mailbox per month.  Unless you know you need Exchange, you’re not going to need it.

If you don’t know the difference between POP and IMAP, IMAP is a protocol for handling mail that keeps all mail on the server and downloads it to your email client when you check your mail, but keeps a copy on the server and marks whether you’ve read it or not.  So if you check mail on your main box and then go to your laptop and check mail, you won’t see the messages you just read as “new” messages.  The same goes for sent mail.  It keeps the sent mail synced for you, too.  With POP, on the other hand, your mail is downloaded to your mail client and then removed from the server (although you can keep a copy there), but mail clients will not be able to sync POP like it can IMAP.

Need Exchange? I’ll have a cheaper Exchange option tomorrow.  But if you need Exchange, you’re probably not cheap anyway, amirite?

to be continued tomorrow…

Next post: email for your startup, part 2

Today’s angels and VCs are holding on to their money.  It’s not good enough that your startup gets tons of traffic.  Traffic does not equal money.  If you don’t have a product or service that people are willing to pay for (either sponsors or users), then you don’t have a service worth building.  It might be a service that makes you happy to offer, but you won’t get funding.

So why am I talking about creating a story to get funding?  It’s a good test to discover that what you’re doing is worth your time.  If you can’t honestly come up with one solid idea that will create long-term revenue, then why are you working so hard?  You need to sit down in a quiet place and figure out that one sure-fire revenue method.  And a revenue estimate that should make it worth your time.  Otherwise, why are you taking time away from your spouse, children, and other family members?

You need to start making money on day one.  If you start making money within the first day or week that you launch, isn’t that better than working for months and then making nothing?

Forget ads.  Ads will not make you rich.  Ads are not worth the time.  Some sites like TechCrunch make a lot of money from ads, but they also have many servers, office space, IT staff, article contributors, and other people they have to pay.  If your revenue model is “get traffic, then run ads”, you need to come up with something better.

Be the VC

Take off the rose-colored glasses (honestly does anyone in the 21st century wear these?) and pitch the business idea to yourself.  Or even better, your spouse.  If they aren’t excited about it, then they don’t buy it.  And neither should you.  So figure out a better way to make money with your startup, or dump it.  Life is too short.

Outliers

You may be thinking, “what about Twitter?” Sure they just rolled out a business model and have $150 million in funding so far.  But the investors are expecting a return on that investment.  Probably a 4-6x return.  And no one can cash out shares until that $150 million is paid back to the investors.  Twitter, Facebook and many other “successful” startups like this are statistical outliers. 

Playing the lottery is not a business model.

Next post: serving your business email, part 1

We bought that SSL certificate from VeriSign for $495 per year.  That was 2003.

Nowadays, you can get an SSL certificate for around $50.  With the explosion of SSL providers and resellers, there are bargains everywhere.  Last year I purchased a certificate from RapidSSL for $49.  You can find the same certificate at wide range of prices from different resellers, from $15 to $79.

Does it work? Yes. It’s an SSL certificate that supports Strong 128/256 bit encryption, which is industry standard SSL.

And compared to the pain I went through with VeriSign back in the day (faxing documents, letterhead, etc) it’s a savings of time, too.  With RapidSSL there’s a pretty fast verification process and you’re done.

“But I found this other certificate that’s cheaper.” Great, buy it.  Like I said, there are many providers and each has many resellers.  But if you’re looking to save $5 by going to Stinky Ralph’s Discount SSL Certs, I don’t know about that.  Use your good judgment.

Next post: my BlackBerry

The niche is fickle, yet willing to spend time and money to advance the things they care about.  If the niche you’re targeting is Garbage Pail Kids card collectors, a famous person’s tweet may create a burst of traffic, but once everyone has seen it, that traffic tsunami will pass quickly.  The reason is that most people will get a chuckle from your site and then move on.  The niche traffic stays.  But if your site is not niche but appeals to a broad audience, your small server city will stay flooded after the traffic tsunami.  They will stay and tell more of their friends and it will get worse (or better, depending on your view).

A Real-World Example

Pollux, a tool for tagging your music (when the original source left tags off or mislabeled) was definitely buzzworthy as a free download that solved a widespread problem.  Created by two college students, Chetan Surpur and Shashwat Kandadai, as a side project, and using an application that is free for non-profit use, they set up their site, allowed users to download it for free, and got completely stomped when featured on Lifehacker.

They were featured in an interview on net@night in October 2009.  The interview portrays the story of their plight.  The guys had used GenPUID, which was free for non-profit use, but their program was so widely downloaded, the GenPUID servers were getting hammered far beyond common non-profit use. In order to offset with a commercial license based on their downloads it would have cost them roughly $20-30,000 by then.  This was the site at the time of the interview:

Pollux has since relaunched with a business model.  They still offer a free download (that will tag 20 songs). But to purchase, it’s a subscription for $10/year for unlimited tagging.

Epilogue

Niche markets are perfect for building a business slowly and organically (by word-of-mouth, not mass marketing).  That slow growth allows you to add servers and employees when needed.

Next post: Interview with KnowEm