Starting a small business is a stressful affair. There are a lot of hurdles and challenges, especially the first year or two. At Dowd Law we have been helping businesses for over 20 years, so we know a little bit about starting a small business. Read on to learn some basic information necessary for starting a small business.
Choosing an Entity: Corporations vs. LLCs
Corporations and LLCs make up the vast majority of legal entities that are established every year. The businesses operated under these entities range from one person contractors to enormous manufacturing industries employing thousands of people. The corporate and LLC laws apply equally regardless of the size of the business. So, which one is right for you?
A limited liability company, or LLC for short, originated as a hybrid between a corporation and a partnership. Over the years the LLC laws have been modified to provide the LLC with ultimate flexibility. A limited liability company can be taxed the same way as a corporation, which means it can be taxed as a C corporation or a S corporation. Additionally, it can be taxed as a sole proprietorship or partnership, depending on the number of owners.
Owners of an LLC are referred to as members. Members of limited liability companies are typically protected from the activities, debts and contracts of the company. Just like shareholders in a corporation. An LLC can be managed by its members or by managers.
Corporations, just like LLC’s, are created under state law. However, corporations have been around far longer than LLC’s. And the law related to corporations has been much more consistent over the decades, while the law related to LLC’s has undergone continuous change. Corporations are owned by shareholders, managed by directors, and operated by officers.
Both corporations and LLC’s protect their owners from the liabilities, debts and contracts of the business. In most cases it is going to come down to how the business is going to be taxed. If you are absolutely going to be taxed as a C corporation or a S corporation, then set up a corporation. If you are unsure, are likely to change tax status, or are involved in a passive activity, then set up a limited liability company.
Keep It Simple
Starting a business is a big endeavor. Entrepreneurs often want to fill every need and have a tendency to spread themselves too thin. Taking on too much can rob a start-up business owner of precious time and money. A new business owner should start off simple. Don’t try to be everything to everyone. Perfect the main purpose of the business. Once everything is settled and has a steady rhythm, expansion begins.
The most important part of starting a new business is the business plan. And, one of the most important parts of the business plan is the financial costs and projections. No matter how much planning is done ahead of time, unexpected costs pop up and take entrepreneurs by surprise. Sit down and calculate as many expenses as possible: rent, marketing, labor, supplies, etc. A thoroughly thought-out business plan helps an entrepreneur critically think of all aspects of the business, including the costs and expenses. Both fixed and variable. Whatever that number is double it, triple it, even quadruple it, to estimate the expenses for the first year. One of the top reasons for a start-up failing is a lack of adequate funding. An entrepreneur caught off guard with too little money is in trouble. On the other hand, one with money left in the budget is ahead on the next year of operations.
Find a Balancing Between Enthusiasm & Knowledge
Enthusiasm is absolutely necessary when starting a new business. New businesses sap the energy out of their owners. It’s not a job, it’s a lifestyle. Think of the business as a new child. It takes a lot of energy and money, but the pay-off is worth it. However, good parents do not enter parenthood entirely blind.
At a risk of too many analogies, think of starting a business like navigating a river. Enthusiasm is the motor on the boat, propelling everything forward. Knowledge is the rudder helping the business find its way. Many entrepreneurs start a small business based on enthusiasm alone. They have a passion for a product or service and they think about the obvious costs and expenses, but they don’t actually have a plan. As a result, they spend their saving and retirement to keep the “dream” alive.
Before you start your own business, write your business plan. Writing your business plan will force you to research your business, the market and the industry. There is information everywhere. Research can be formal and informal. There are many government resources, such as SBA, SCORE, Sunbiz.org, etc., that are available for free. Need specific answers related to the industry you want to go into, then reach out to others that are in the industry you want to go into. The business plan doesn’t need to be 30 or 40 pages, that can take the enthusiasm out the sails. But, a basic business plan, 5-10 pages, that addresses the essential elements of the startup, can go a long way to making your business successful without taking all of the wind out of your sails.