If you are considering starting a business, don't make the leap from dreamer to entrepreneur. A common mistake new business owners make is not understanding the five essentials before diving into the world of starting a business. Knowing these critical pieces of information it can mean the difference between starting a thriving, successful business or crashing and burning before your entrepreneurial plane even takes off from the runway.

Read these five essentials carefully to understand how to prepare and pave the way to building a successful business.

1. Define the difference between a hobby and a business

Many believe that if you make minimal sales or don't sell full time, you don't have a business and instead have a hobby. It is important to understand the national and local regulations regarding your sales to ensure you are in compliance and to avoid unexpected fines and fees.

of IRS states that if you earn $400 or more after your expenses are taken (known as your net income) then your income is NOT considered a hobby and all of your self-employment income must be claimed on your tax return.

Additionally, most cities and counties state in their new business information that you must register your business before starting any business operations. This means that if you intend to sell to customers, in most cases, you don't have a hobby; you do, in fact, have a business, and it will require several steps to be completed before you can make any sales.

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2. Understand your legal obligations

To determine what you are legally required to do to register your business and stay compliant, you first need to decide what type of business structure you will have. A business structure determines how a business is registered and operated and what kind of tax options it may have.

The most common form of new business is either a sole proprietorship or a Ltd. It is important to decide which type of business you will be operating because each type has different registration and tax implications.

Once you have determined the type of business structure you want to start, you will need to register your business. The types of registrations and permits required vary depending on whether you are starting a sole proprietorship or an LLC, the type of business you are starting, and where you are located. Research your county's information on starting a business. Often, counties have a special resource area on their website that will describe your obligations and where you can obtain the required permits.

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3. Understand your finances

Registering your business will require various fees to ensure your business is operating legally according to city, county and state requirements. These fees vary depending on your location. Additionally, some industries require specific licenses and registrations that must be renewed regularly.

4. Understand taxes

Businesses are required to file and pay three different The types of income taxes: self-employment tax, federal income tax, and state income tax. An LLC is also required to pay an annual LLC tax. These taxes are calculated and paid when you file your tax return at the end of the year. If you expect to owe $1,000 or more in self-employment taxes, you're also required to pay estimated quarterly taxes — which is an estimated upfront amount of what you think you'll owe at tax time, divided into four equal payments throughout the year.

If you sell tangible goods, you are obligated to collect and pay sales tax on those goods. This will mean applying for a seller's permit, collecting sales tax from your customers, and filing/paying sales and use tax returns.

Next, plan a method for keeping business financial records. You are required to keep business financial records – this means tracking your sales and expenses and the flow of money in and out of your business. This can be done by using software such as Quickbooks or xero, hiring a CPA or professional accountant, or keeping a simple spreadsheet to track your cash flow.

LLCs will also be required to have business bank accounts – no personal transactions can be conducted using your business bank accounts. It's important to track all business expenses so you can include them on your tax return – this will lower your taxable income.

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5. Operational obligations

Creating your products, performing services and making sales are important parts of your business; however, operating a business on a day-to-day basis has many other elements necessary to keep your business up, running, and growing. Think carefully and make a plan about how you will handle important things like:

• marketing
• accounting
• inventory
• FREIGHT
• customer service
• pLANNING
• operating software
• booking, scheduling and contracts
• billing and payments

Ready to start a business?

Congratulations if you have carefully considered these important factors and are ready to get started! The decision to start a business and the planning involved deserve to be celebrated. Consider creating a formal business plan to provide structure, organize your goals, and begin planning the logistics of starting your business. Starting and growing a business is an incredible journey and with the right planning, consistency, time and dedication, you are well on your way to building the business of your dreams.