So You Want to Open a Business? Here are 5 Steps to Get You Started.
In today’s high-tech society, many people have decided to start their own primary or secondary businesses to take advantage of the opportunities afforded by the web or to enter into a second career. Before you set out to begin a new business venture, there are numerous issues, both legal and practical, that you should carefully consider before you take the big step to becoming an entrepreneur.
1 Make Sure It's Right for You
Consider whether owning a small business is really right for you. We all hear about the 20-year-old billionaires who have been able to take a great idea, mix in some luck, hard work, and good fortune and arrive on the cover of Forbes magazine. However, for each success story, there are millions of small business owners who are exhausted from being overworked, are underpaid, and live with tremendous stress each day as they wonder whether they can make it. An entrepreneur needs to have the time, skills, and resources (financial and otherwise) to devote to their business. If the autonomy of owning your own business and the lifestyle choice is right for you, read on.
2 Create a Business Plan
Before starting a business, you need a plan that addresses the many issues that will arise, such as how you will finance the start-up costs, what the expected revenues and expenses are, in which markets you should operate, what you expect your profits to be, and any staffing needs, to name just a few. A good Business Plan is like a blueprint that you will use and revise periodically as the business environment changes, and may sometimes, after careful reflection, result in a sound decision not to open the business. It will be crucial if you are seeking financing for the business, but it’s also important for business owners who don’t need financing because it will help them determine if they have enough money to support the business and whether their investment will be wise. A good Business Plan usually has three parts:
- A description of the purpose and operating functions of the business
- A financial section that presents projected balance sheets, income statements and cash flow projections
- A summary section that contains data supporting the first two sections such as maps of retail stores, target market areas and includes histories and resumes of the business owners.
Since the first year in which a business is opened can hardly be considered a normal year due to start-up costs and initial decisions, the Business Plan should project out three to five years in the future to give the business owner and the reader of the Business Plan a sense of what the business will look like after that time frame. This forward projection is done by showing the outlook of the first year and its unique start-up costs, a two or three year picture showing the effect of the plan as the business matures, and a broad view of the future of the business and how it expects to adapt and adjust as it grows to maturity.
3 Determine Your Legal Structure:
Business entities can be simple or complex. Which structure you undertake will depend in part upon what your business operations will entail, the markets in which you operate, and the inherent risk in the business you have chosen. The simplest form of business is the sole proprietorship for a single owner or a general partnership for a business with more than one owner. In either case, there is no state or federal filing that needs to be made to create a sole proprietorship or general partnership. You simply open your doors and begin business operations. However, both the sole proprietorship and partnership structures have one big drawback – the business owners remain personally liable for all debts and claims of the business. In order to insulate your personal assets from the liabilities associated with the business, consideration should be given to a legal structure that limits the personal liability of the business owners.
Entities that offer limited liability include the corporation, limited liability company, and limited liability partnership. All of these entities require filings to be made with the state in which you choose to form the entity, and all have annual filing fees. The limited liability company (LLC) is a favorite choice of many new small businesses as a result of its simplified structure and the ease upon which it can be formed. Many businesses that expect to grow large or to operate in certain industries may instead choose the tried and trusted corporate structure, which provides familiarity and a large body of law regarding any legal issues that may arise in the future. Corporations are the most complex entity as there are statutory requirements including that the stockholders (owners) meet each year to elect directors who are responsible for the global management of the company, who also must meet annually to elect officers of the company (President, Treasurer, etc.) who run the day to day affairs of the corporation.
A large part of entity selection includes analyzing the most beneficial approach for income taxation on the profits of your new small business. Certain business structures, such as the sole proprietorship and single member limited liability company, don’t even require you to file a separate income tax return for the business. The business information is reported on a separate schedule of your personal income tax return. All other entity types require the preparation of a separate tax return for the business, whose profits may or may not be directly reported on your personal income tax return. Consideration must also be given to other types of taxes and regulatory oversight that may arise, such as payroll taxes if you have employees, sales taxes, property taxes, and licensing and permit requirements. This is where seeking professional advice is critical. If you are not familiar with the nuances of entity selection and the various types of taxation and regulatory oversight that may occur as you begin your new business operations, trouble may soon follow. There are many brilliant entrepreneurs out there who are able to devise a business strategy, product, or service who fail in those endeavors because they don’t know when to seek out proper advice about issues that they are not familiar with. The most successful business owners are those who surround themselves with professionals and others who can provide them with the advice and expertise they need in the areas that the owners are not knowledgeable about, or not aware of. This allows the entrepreneur to focus on their business rather than trying to learn the intricacies of the legal, accounting, and regulatory issues that accountants and attorneys can guide them through.
5 Record Keeping:
Before starting a business you will need to develop a methodology to properly develop, track, and preserve the business activity through records. Business records are more than simply financial records. Processes need to be in place to assure that you have the information required to review and monitor your business activity, as well as conduct the necessary reporting that may be required to various government agencies. These may include financial transaction records, personnel records, contracts, state and government filings, and client or customer information.
So before you open that new business, carefully consider if it’s right for you, and then plan out your strategy by writing a Business Plan, considering the proper entity structure, analyzing the taxation issues, developing record keeping procedures, and seeking out advice when needed. Proper planning will provide you with some peace of mind and assist you in the success of your new business venture.