Are you feeling stuck in your current job and looking for a change? Starting a new business could be your dream come true. But what might begin as an idealistic vision can turn into a costly reality check. If entrepreneurship is your goal, there are certain things you need to know.
Choose the best legal form
You must choose a form of legal entity for your business. The most basic form is the sole proprietorship, where business income is taxed on your personal tax return. However, this form does not provide you protection against legal claims on your personal assets.
If you want legal separation between your business and personal assets, the corporate form might be better. Losses and claims are usually limited to the assets of the corporation. The downside is that income is taxed twice, once at the corporate level, and again when income is distributed to you as shareholder dividends. This is why many newly formed corporations are structured as S corporations. S corporations provide liability protection, but income is taxed on the shareholders' individual tax returns, avoiding the double taxation a regular corporation faces.
You might also consider operating as a limited liability company, which also protects against liability and avoids double taxation. Which is better, the S corporation or the LLC? The answer depends on the number of partners involved and the level of flexibility you desire.
Maintain good records
Whichever legal entity you choose, you will need accurate, detailed accounting records. Here's a tip: Open a new bank account and use it exclusively for business transactions. Then religiously track every check and deposit. Sloppy bookkeeping in the start-up phase will come back to haunt you at tax time.
Raise sufficient capital
Of course, starting a new business will remain only a dream without sufficient capital. Raising capital is normally the single biggest obstacle for a new company. Where will your start-up funds come from? Savings and investments are the best sources. Using retirement funds to start a business is often tempting, but you might pay a hefty tax and penalty for early distribution. And if the business fails, you will be left without a retirement nest egg to boot.
Bank financing is always an option, but you might consider borrowing from family members or offering shares in your business to keep your bank debt load as small as possible.
Count on advisors
With your business entity determined, and all necessary capital in place, you will still need one more thing: a support team. Key players should include an attorney, an accountant, and an insurance professional. Teammates could also be people within your industry network or even a seasoned mentor well acquainted with your line of business.
It has been said that every journey begins with a single step. If you're thinking of starting a new business, may we suggest that your first step be a call to our office. We know business and can help you get off to an informed start.