06/09/2011 12:10 pm ET Updated Aug 09, 2011

Hiring Your First Employee: 5 Things You Need To Know

If you do everything right during the startup phase, eventually you'll need to hire additional help. Simply put, you can't go it alone forever. And the process of hiring even just one employee brings a whole new set of challenges -- recruiting, interviewing and more.

Hiring the wrong person can be disastrous for a company, but a great first employee can keep your business headed in the right direction -- and help it grow even more quickly.

So what's the best way to embark on the hiring process for the very first time? Here are five things you need to know.

1. Make sure you're financially ready.
When you're determining whether or not you can afford a new employee, you need to examine your budget and look beyond just the basic salary of a new hire. Joseph G. Hadzima Jr., a senior lecturer at MIT's Sloan School of Management, notes that each new employee will cost you in recruiting expenses, employment taxes and even potentially rental space if you're still running your business out of a home or small office. Angela Massey of Life on Purpose estimates the cost of recruiting, hiring and training a new staff member can be anywhere between $9,600 and $19,200 -- hardly chump change for a startup. So it's important to make sure your business is ready for such an expenditure.

2. Be smart about recruiting.
Chris Pacitti, a general partner at Austin Ventures in Austin, Texas, says many small-business owners initially turn to their friends and former colleagues when looking to hire a first employee. Even though you may have great chemistry with those you know well, that doesn't mean these people actually have the skills and experience necessary to take your business to the next level. Even if you have worked successfully with a person in a similar business environment, your new business venture exists in a new time and space where old, familiar practices may not work. When recruiting potential employees, "trusting your gut" isn't enough. Statistics reveal that almost 40 percent of all resumes and job applications are based on completely false or, at the very least, over-inflated information. When you're recruiting outside your circle of trusted friends and former colleagues, do appropriate background checks to make sure everything you're being told is accurate. If you're hiring a reputable firm to do your background checks, you also must tell the candidate in writing to be in accordance with federal law.

3. Write a clear job description.
Job descriptions and contracts aren't only important for legal protection -- they also help give you an idea of exactly who you're seeking so you don't waste time in the recruiting and interviewing process. A solid job description should detail both the duties of the position as well as characteristics of the person who would be best able to perform them. These details will then help you develop interview questions. Make sure you include descriptors to help you determine how a potential new hire will fit in with your company's culture and any future team members you may need to hire. A great employee will be one who meshes well with your company's personality, standards and long-term vision. Many business publications offer free job-description templates that can be customized to suit hiring needs across industries.

4. Identify what type of employee you want to hire.
Before you start the interview process, you need to set a specific salary and determine the new employee's classification. Federal law is very clear about the terms of paying and classifying new employees. Make sure you're familiar with details such as the current minimum wage and what benefits you're required to provide. First answer important questions: Do you want to hire a full-time or part-time employee? Do you want an independent contractor, common-law employee, statutory employee or statutory non-employee? Do you know what these different classifications mean? Misclassification of your employees can lead to fines of up to 1.5 percent of the wages, plus taxes, and criminal charges can come into play. The IRS website provides detailed descriptions of each classification.

5. Check references diligently.
References aren't just for show. Before you even consider making a formal job offer (or even suggest a second interview), you need to ask for and actually call at least three references. Ideally, two references should be professional and one should be personal. Personal references are critical because they help establish true credibility and personal character. Sometimes just asking the right questions will elicit surprising responses that show irrefutably the candidate is either totally right or totally wrong for the position. Ask professional references questions that specifically relate to the candidate's ability to perform the tasks for the job. Personal references should be asked how long they have known the candidate and their opinions of the person's character and work ethic.

The original version of this article appeared on AOL Small Business on 6/9/11.