Why own your own business?
Lots of people work jobs that pay just enough to get them back on Monday morning. That means you’re working on someone else’s business, helping them increase income and increasing their net worth instead of your own.
On the contrary, owning your own business is the most direct way to control your financial future. Whether you’re a business owner or a real estate investor, being self-employed and focusing on financial goals that are personal to you and your family provides several advantages. This article is a short course on how to do just that.
Do you have a business in your future?
Look at your own financial situation. Are you satisfied with it? Does it give you the freedom to control your own time and financial choices? What are your talents and strengths? If you have a desire to be more in control of your financial future, chances are you have the attributes to own your own business.
Many small business owners start out part time. That is, they keep their ‘day jobs’ and start running their own business on the side, on their own time. That could be having an eBay® business, just like 1.5 million others. Or you could be investing in real estate. You could be providing a local service to your neighbors and community. Either way, you have plenty of resources, from the federal and state departments of commerce, to the national and local chambers of commerce, to the Small Business Administration.
What is the score?
Your community probably has access to a local chapter of SCORE – the Service Corps of Retired Executives. This is a volunteer-based service initiative of the Small Business Administration. Retired business executives who still want to volunteer join together to serve as mentors and consultants to new business owners starting out in their local community. They conduct monthly seminars for new business, review and make suggestions for business plans, and often help open doors using contacts and resources you may not know about.
Where do you start?
The start-up phase of any business can seem daunting at first, but exciting. Pick a name for your business and check your secretary of state’s website to see if that name is available. Obtain a business license in your city or county under that name and follow local requirements, such as filing a fictitious business name statement in the local legal newspaper.
You’ll need a business plan, one that helps you focus and get financing. Although many companies downplay the importance of a dynamic business plan, those who are willing to put in the time and attention it requires often see long-term success. Many of my clients over the years have come to see the wisdom in updating their business plans and financial arrangements to make their business as attractive as possible to potential business lenders.
What is the best form of business entity?
The vast majority of business owners operate as ‘Sole Owners’, meaning that they do not choose to form a corporation or an LLC, but instead operate solely in their own name. That is certainly the least expensive way to start a business. It requires little in the way of capital. It only has the most minimal legal requirements. However, while inexpensive, it is also potentially the most financially unstable due to the fact that if you and your business are legally the same, any liability arising from the business can result in complete financial devastation for you. as all of your personal assets are 100% at risk and can potentially be taken from you.
It makes much more sense to use a company to start with. Having your own company provides a separate identity, meaning you are not the company and the company is not you. Plus, a company gives you a better way to control your taxes. There are approximately 4 times the number of tax deductions available to a business than are available to a sole proprietor. Plus, you can do a lot more for yourself financially in retirement planning through a business than on your own as a sole proprietor.
Clearly there is a national trend today towards the formation and registration of more Limited Liability Companies (‘LLC’) than corporations. This is mainly due to the fact that corporations require much more paperwork and have much less flexibility than LLCs. Using a corporation is still a viable option for many. It is perpetual in nature and can be an effective and inexpensive way of doing business for many. Many business owners use corporations, and if you plan to take your company public to sell shares on a stock exchange, you’ll want to use a corporation instead of an LLC.
However, there is no denying that the number of LLCs formed each year now exceeds the number of corporations formed nationally. With an LLC, the Operating Agreement drawn up by a competent attorney will be a key element in running your business. It will establish who is responsible for management, profit and loss sharing, additional capital contributions to the business, the nature of investments and business holdings, and much more.
However, you can’t ignore the wisdom of having a solid business plan. You should establish a clear mission statement and set of goals, as well as a description of how you and your company will achieve those goals. You need to establish a financial picture, including what you need in terms of financing so that your loan application to a small business loan source is credible and can be funded. It would make sense to attend live training events that show you step by step exactly how to prepare a dynamic business plan and how to create a small business loan application that a lender will find credible enough to finance.
Bottom line: You and not your current employer are responsible for your financial future. Your employer sees you as a means to an end: their own and not yours. The lifestyle you enjoy, the money to pay your bills and shop, and how you spend your time at work and time away from work may be in your control, but you need to take action. The tax laws favor small business owners and you should be one of them.