If you’re considering starting a small business, here are a few key points to keep in mind.
Starting a business begins with a well-researched business plan
Each type of business structure has its own rules and potential tax implications
Operational logistics include financials, marketing, and HR considerations, including setting up a retirement plan
Small businesses are the little engines—numbering over 30 million in the United States—collectively powering a trillion dollar impact for the nation’s economy. For decades, starting a business has been a goal of entrepreneurs, tinkerers, and countless others who’ve had it with the corporate rat race and are ready to hang up their own shingle and be their own boss.
Looking for tips on how to start a small business? Starting your own business may sound like a cool idea at first blush, but there are multiple considerations and steps you must navigate along the way before you transform that idea into a viable, profit-producing reality. Even a strong economy is no guarantee of success if you haven’t done your homework.
Here are a few key points if you’re starting your own business. But remember: The following list includes general considerations, and each industry, geography, and business type has its own unique set of things to keep in mind.
Your business plan should be your first step, and it should address such fundamental questions as:
Asking those questions and more represent the start of a business plan, not the finish. A big reason new companies fail is there’s no plan in place at all or founders believe they can put one together on the fly.
A business plan details how that business should grow over time, and entrepreneurs should revisit the plan regularly to note costs and revised expectations.
According to the U.S. Small Business Administration (SBA), a business plan isn’t just for internal use. Bankers and investors will want to see a well-developed business plan to better understand your products and services and how you plan to make their potential investment grow.
Where does business planning really begin? Research, research, research. And then go to trusted experts to vet your ideas and structure the business itself.
For a start, these experts may include professional business and financial advisors, and others who may have specific knowledge of your industry and expertise in consumer trends or market direction around it.
And don’t forget the tough questions. As you proceed, always be asking whether there is truly a need for your product or service in the marketplace or a void that you can fill. Confirming a potential client base is important too. That’s the point of pursuing specific expertise, data, and advice.
The SBA added that by conducting comprehensive market research, you’ll gain insight into potential customers and similar businesses already operating in your area—information that will hopefully help you develop a competitive advantage in your territory and beyond.
The agency recommends studying several additional details and questions when starting a business, including:
Common small-business structures include sole proprietorship, partnership, limited liability company (LLC), corporation (C corp.), and Subchapter S corporation (S corp.). The legal structure you choose will affect your business registration requirements, how much you pay in taxes, and your personal liability, according to the SBA.
If you’re starting a new business, your personal and business tax situation can vary depending on your business structure and other factors. An S corp., for example, is designed to avoid a double-taxation drawback of regular C corps. S corps also allow profits, and some losses, to be passed through directly to owners’ personal income without being subject to corporate tax rates.
Even if your business idea seems simple, the financial and legal structure that’s right for your operation can vary widely. Consider working with legal and financial experts in selecting a business structure that’s right for you and the organization you’re trying to build.
If you choose to leave corporate life to start a small business, prepare to say goodbye to certain things—for better or worse—including a relatively predictable income stream. Irregular cash flow is among the biggest potential pitfalls small business owners or the self-employed must navigate.
Also, make exhaustive assessment of every possible expense that will be a part of your new job. That includes regular overhead costs, “known” and “unknown” variables, and more. And creating a sufficient reserve fund for slow business periods is also a good idea, not to mention considering building a personal emergency fund for yourself if you don’t have one in place already.
Essentially, a reserve fund exists to meet cash flow needs over an extended period, and it’s appropriate to start thinking about that in the business-planning stage. There is no magic number, but most experts would say the more capital you can reserve, the better.
Life has a beginning, middle, and end. So do business ventures.
Whether you set up your business to be led by an individual owner or proprietor, a partnership, or some other structure, you should have an answer for a basic question: Who takes over if I’m no longer here?
For partnerships, “buy-sell” agreements, which allow the remaining owners of a business to acquire the interest of a partner who retires or dies, are common. Other business structures have their own succession-planning structures.
Keep in mind that a surviving spouse or children may not be interested in running the business. Plan for that too.
There are several retirement plan options for small businesses, including plans designed for businesses without employees.
A solo 401(k), also known as an individual 401(k), is for self-employed individuals without full-time employees. This plan allows you to contribute as both the employer and the employee, enabling you to boost retirement savings with higher contribution limits.
Other options include Simplified Employee Pension (SEP) IRAs and Savings Incentive Match Plan for Employees (SIMPLE) IRAs. SEPs and SIMPLEs can be relatively straightforward to set up, but each has its own set of rules, administrative requirements, and potential tax benefits.
The latest figures from the SBA show that small business operators are far from alone. They comprise 99.9% of all U.S. firms, with 81% having no other employees beyond a founder.
They do have a big impact. The SBA reported small businesses created 12.7 million net new jobs between 1995-2020 and 65.1% of net new job creation since 2000.
Still, not everyone makes it. Between 1994-2019, the SBA added that an average of 67.6% survived at least two years while the 15-year survival rate was 25.7%.
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