Before You Start That New Business in January …
The Fiscal Cliff, economy, lack of job security and other factors cause many employees to question their control over the events in their lives. But the fear of business ownership can be just as daunting to someone who has never done it before. I believe that the economic forces at play in today’s business world are ripe to produce the largest number of new entrepreneurs in decades.
The Big Challenge
Chances are you’ve been thinking about being a business owners for a long period of time. You’ve probably pictured yourself being the boss, making a good living, providing jobs for other people and building something that not only supports your family lifestyle, but makes a positive contribution to your city, county and state.
Most entrepreneurs reach a point where they feel they might actually know more about the nuts and bolts of the business than their current boss does. This results in many sleepless nights and “what if’s.” “What if I fail?” “What if I lose the house?” On the other hand, “What if it actually works?”
Knowledge is only the tip of the business success iceberg. Most potential entrepreneurs know how to make things, fix things, or build things. What few have knowledge of is the most important part of any business — the money. Here are some ideas to help you combat that fear and show you how to handle those big bucks when they come rolling in.
How Do You Get Paid?
New businesses take time to generate income. For the opening days or months the majority of the money goes to suppliers and operational bills like heat and lights. When I started my first business the wife and I sat down and decided the bear minimum amount it would take to keep everything paid. We cut the cable, newspaper, dining out, and eliminated all unnecessary driving. If the food was not on sale it didn’t go in the cart. We clipped coupons, took part time jobs in the evenings. Or goal was to build a small reserve to help us over the rough spots.
Every available dime we could spare went to retire debt. If we didn’t keep our personal debt under control, we’d have no chance to establish credit with our suppliers. It was awhile before we could put some personal money in the non-business bank account.
Get a Good Attorney, Bookkeeper and/or CPA
April 15th can be a rude awakening for many new entrepreneurs. A good bookkeeper or CPA is worth their weight in gold when tax time roles around. Are business cards an office expense or advertising? Which expenses are deductible or non-deductible? Are the contracts you and the customer sign enforceable? What types of insurance and levels of coverage are you going to need? In case of an audit, the IRS really hates the comingling of personal and business funds. Tempting as it may be, if you use your personal credit cards for business, it might cost you more than the perks, mileage, or points you get from the card in the long run. Lots of businesses are started with credit cards but check with your accountant on the correct way to do it.
Should you incorporate or not? There are advantages and disadvantages of incorporation. The main reason to incorporate is to protect your personal assets from the business assets in case you are sued. Without corporate protection your home and all finances would be at risk. Under incorporation, only the business assets would be at risk to satisfy a judgment against the company. You do not have to incorporate in the state where your business is located. There are many states that have different advantages and favorable laws. Montana is a particularly popular state in which to incorporate. Check with your account as to what would work best for you.
Some Final Thoughts
The ideal situation is to start your business on a part time basis while you keep your current job. As you develop a customer base you will also know if the business is truly viable. Keep personal and business finances separate. You need a business checking account, business phone (a cell will do), if you don’t do these things the IRS could designate your business as a hobby and that would mean none of your business deductions would be allowed.
There is a ton of free advice out there prepaid with your tax dollars so take advantage of it. Groups like the Small Business Administration (SBA), SCORE, your local Small Business Development Center (SBDC), and your local chamber of commerce all have resources that will cut your learning curve way down. January is coming, will you be in business next year?