If you’ve been bitten by the entrepreneurial bug and want to start a business, the task can be a daunting one. Understanding some of the keys to success and the missteps others have made can ease this process. Here are six financial considerations and challenges of starting a business.
Uniquely Qualified To Solve A Problem
Generally, to start a successful business, you want to be uniquely qualified to solve a problem you’ve observed. Maybe you’ve noticed there are no affordable options for a product you use all the time, maybe there’s no marketplace for a service that you use, or maybe you discovered a new process for accomplishing a task. Once you decide on what you’re solving, you need to do a market analysis of what else is already out there, how you differentiate from the other options, and why you are the person to solve this problem. If there’s no compelling reason, you are susceptible to competition edging you out.
Structuring The Business
Starting a business can expose you to unlimited liability and increased taxation. It’s critical to consult a tax advisor and business attorney to ensure that you choose the structure that best accomplishes your priorities.
Funding The Business
The phrase, “it takes money to make money” comes to mind when I think about growing a business. I’ve seen entrepreneurs take all sorts of approaches, from continuing their work at a high-paying job and using excess to cover their business expenses, to asking friends and family to invest, to seeking out business or personal loans from banks, to gaining support of angel investors or venture capital firms.
When it comes to funding your business, you need to think through your priorities. If you want to retain full control of your business and not have to answer to anyone, you may choose the path of bootstrapping or procuring loans. If your primary objective is to grow as fast as possible to eventually sell the business, you may look to investors who can provide you with the connections, capital, and advice you’re seeking, like VCs.
Finding The Right Partners Or Employees
Going it alone can be difficult. As a solo business owner with no employees, you are in charge of strategy, marketing, product, sales, legal, administrative tasks, and more. For most people, that can be exhausting.
In many instances, I’ve seen two people with complimentary skillsets become cofounders. This usually involves one person who is great taking a vision and bringing it to life and the other person effectively communicating that vision and getting others excited about it. If this idea resonates with you and you’d like to share your business with another person, it may be time to network to find that person with a complimentary skillset.
If you would prefer to be the sole founder, you may choose to bring in employees to lighten your load or help you grow. If you don’t need someone full-time, you may want to consider hiring fractional employees, or people who have specialized functions and work with multiple employers at once. You can have fractional Chief Financial Officers, general counsel, human resources, bookkeeping, marketing, and many more if you need the help but may not have the need for a full-time employee.
Offering Benefits
If you do end up hiring full-time or part-time employees, you may end up subject to rules around offering benefits, such as health insurance and retirement plans. Rules around this vary state by state, so be sure to check your state laws to ensure you’re in compliance, or risk facing penalties.
Having your own personal retirement plan also gets a little complicated when you bring on employees. As a business owner and sole employee, you have access to an array of retirement plans at fairly low maintenance costs. However, as employees get added, some of these plans become unavailable or cost-prohibitive. As employees get added, an employer may shift to a SIMPLE plan or Safe Harbor 401(k), which let you as an employer to save as much as plan limits allow on the condition that you provide a small mandatory match to employees.
Your End Goal
To effectively formulate a business plan and strategy, you want to figure out your end goal. Ultimately, this will determine many of the previously discussed factors. If you want to eventually exit your business, you need to figure out what that exit looks like. Here are some examples:
- You retire one day and the business dissolves.
- You gift your business to a friend, relative, or employee.
- Your business goes public and you sell your shares.
- Your business is acquired by another company.
- An employee eventually buys you out and takes over.
Most business owners I know would prefer to receive some compensation upon exiting. If that’s your priority, I would recommend thinking ahead about making your business marketable, identifying a buyer, and ensuring that buyer has funds to purchase your business when the time comes. If you’re not sure the buyer will have the funds, there are some ways to plan ahead for this:
- Employee Stock Ownership Plan (ESOP): this creates a market for employer to sell their ownership shares to employees without going public.
- Non-qualified deferred compensation: this can be a forced savings method that allows an employee to build funds over a number of years to purchase the business from the owner.
Conclusion
Starting a business involves a lot of moving parts, but it is critical to think through all of these considerations and challenges from the get-go to ensure long-term financial success. Identifying why you are uniquely qualified to solve a problem, what structure is right for your business, how you’d like to grow, who you’d like standing by your side, which benefits make sense to offer, and how to meet your end goal is are vital components of launching your business.
This informational and educational article does not offer or constitute, and should not be relied upon as, tax or financial advice. Your unique needs, goals and circumstances require the individualized attention of your own tax and financial professionals whose advice and services will prevail over any information provided in this article. Equitable Advisors, LLC and its associates and affiliates do not provide tax or legal advice or services. Equitable Advisors, LLC (Equitable Financial Advisors in MI and TN) and its affiliates do not endorse, approve or make any representations as to the accuracy, completeness or appropriateness of any part of any content linked to from this article.
Cicely Jones (CA Insurance Lic. #: 0K81625) offers securities through Equitable Advisors, LLC (NY, NY 212-314-4600), member FINRA, SIPC (Equitable Financial Advisors in MI & TN) and offers annuity and insurance products through Equitable Network, LLC, which conducts business in California as Equitable Network Insurance Agency of California, LLC). Financial Professionals may transact business and/or respond to inquiries only in state(s) in which they are properly qualified. Any compensation that Ms. Jones may receive for the publication of this article is earned separate from, and entirely outside of her capacities with, Equitable Advisors, LLC and Equitable Network, LLC (Equitable Network Insurance Agency of California, LLC). AGE-6531313.1 (4/24)(exp. 4/26)
