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 U.S.—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, but 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, says Robert Siuty, senior financial consultant at TD Ameritrade. It should address several fundamental questions: “What’s the overall strategy going to be for the business? What are your broader goals? What are your cash liquidity needs?” Siuty says.
“A big reason a lot of businesses fail is there’s no plan in place, or it’s put together on the fly,” Siuty says. “You need to spell out how you want your business to grow.”
Once you devise your business plan, “periodically go back and tweak it,” Siuty says. “Your goal is to grow, but with that growth comes additional expenses, and you want to account for that,” he says.
The plan “is the foundation of your business,” according to the U.S. Small Business Administration (SBA). “It’s a roadmap for how to structure, run and grow your new business. You’ll use it to convince people that working with you—or investing in your company—is a smart choice.”
Research, research, research, Siuty sums up. “Talk to ‘centers of influence,’” he adds, such as accountants, advisors, and others who may have expertise or a sense of consumer trends or market direction.
When starting a business, “Ask yourself: is this a good idea?” Siuty says. “Is there a need for my product or service in the marketplace, or a void that I can fill? And do I have an established client base?”
By conducting comprehensive market research, you gain insight into potential customers and similar businesses already operating in your area—information that can help you develop a competitive advantage, according to the SBA.
The administration 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 S corp. The legal structure you choose will affect your business registration requirements, how much you pay in taxes, and your personal liability, the SBA says. (According to the National Association of Small Business, about 42% of small businesses are S corps; LLCs are the next largest category, at 23%.)
If you’re starting a new business, your tax situation can vary depending on your business structure and other factors. An S corporation, 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.
This is a good area to seek outside expertise, Siuty says. Having an attorney in place “makes a ton of sense,” he says. The same goes for enlisting an accountant who can offer guidance on “what kind of tax deductions make sense, what can be written off, and what can’t.”
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, Siuty says.
Also, exhaustively assess expenses of every possible variety: regular overhead costs, “known” and “unknown” variables, and more, Siuty says. Building a sufficient reserve fund for slow business periods is also a good idea.
In other words, think about what could go wrong and how you would deal with it. “How much is your reserve, and is that enough to meet your cash flow needs?” Siuty asks. “You want to devise a plan that covers unforeseen issues and unknown variables. You need to have a fallback.”
The size of a reserve fund depends on the business, but in general, “the more capital the better,” Siuty says. “You want to make sure you have enough for when things get a little light.”
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 arrangements, Siuty says. A surviving spouse or children may not be interested in running the business.
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.
A “small” business, as defined by the Small Business Administration, is independent and has fewer than 500 employees. In the U.S., there are roughly 30.2 million small businesses, about 80% of which have no employees. Small businesses comprise about 99.7% of all firms with paid employees, according to the SBA.
Small businesses created 8.4 million net new jobs from 2000 to 2017, compared to 4.4 million jobs created by “large” businesses.
Still, not everyone makes it. About 80% of small businesses started in 2016 survived until 2017, according to the administration. About half of establishments survived five years or longer; about one-third survive 10 years or longer.
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