Building Your Own Business
One of his former students is selling genetically altered goldfish that glow in the dark. Another is developing a diaper with built-in baby wipes. For John Butler, a professor of entrepreneurship and management at the University of Texas at Austin's McCombs School of Business, such occurrences are part and parcel with living in a town bursting with start-ups. "We're in the business of wealth creation," Butler says.
Few places are as closely associated with entrepreneurial capitalism as Austin, Texas, and Silicon Valley. But the truth is that new businesses are set up everywhere--especially in tough times. Whether it's by choice or by necessity, starting a business offers multiple advantages, including providing a way to create wealth and opportunity when both seem in short supply; a chance to be the boss; and a reason to try something far beyond the bounds of cubicle culture.
"Destruction is painful, but it creates opportunity," says Jerome Engel, director of the center for entrepreneurship at the Berkeley Haas School of Business. "Now is a great time for entrepreneurs to reset their agendas for their next 10 years."
They will not be alone: The country boasted 3.8 million companies with fewer than 10 workers in 2008, according to the Bureau of Labor Statistics. And though starting a business is a common practice, many highly competent professionals manage to fumble the basics. Veterans of big companies, for example, often fail to spend enough time laying the foundations necessary for their new ventures to grow, Engel says.
First, it's important to keep in mind that even the best idea in the world doesn't make a great company; a sound business plan does. You'll want to develop a strategy that will identify what your product or service is, how you will market it to potential customers, and what it will take to keep the lights on and some money in your pocket.
It's in this stage that you'll need to decide what kind of legal entity your business will be. There are six main types: sole proprietorships, partnerships, limited liability companies, corporations, S-corporations and tax-exempt corporations. (You can change the form of your business later if you chose; for example, most businesses do not start out as corporate entities but turn into them after reaching a certain level of size and success.)
Sole proprietorships are the easiest and least expensive way to start a business, but there's one big drawback: You are personally liable for all of the debt that your business accrues, which means that creditors can come after your personal assets if your business tanks.
Sole proprietors face other liabilities as well. A chef who sells food out of his kitchen can be held personally liable if a customer slips and falls on his property. Insurance offers some protection, but you might want to consider another form of legal entity as well. Many small businesses are structured as limited liability companies to avoid the liabilities that sole proprietorships and general partnerships face.
Names are another tricky issue. If you're doing business as Mary's Donut Palace, you'll probably need to register the name with your local government. It's important to avoid misleading customers. If you're an avid scuba diver looking to give lessons, don't suggest you're a licensed instructor unless you already have credentials fully in hand.
Financing is another big hurdle. Often the biggest financial challenge new entrepreneurs face is coming up with enough working capital to stay in business for 90 days or so until revenues start coming in the door, says Alice Magos, a small-business analyst at Chicago's CCH.
"Most people don't understand that you can have a really successful business and even post a profit, but if you don't have a positive cash flow you will be out of business," she says.
Magos suggests starting out with a financial plan that conservatively estimates when you can expect to begin counting on revenues and comparing it with the amounts dates of your new venture's obligations.
If you need to get outside financing, you may be able to get grants from local organizations or small-business loans that offer attractive interest rates. But because many banks are reducing the number of loans they provide, you may be forced to ask friends or relatives to invest with you.
Also consider what Uncle Sam will expect. At the top of his list will likely be quarterly estimated tax payments. If you wait until the end of the year instead to pay what you own, the government will likely hit you with a penalty--as well as a big bill for back taxes. Those quarterly payments can be larger than you expect by the time you get done with federal, state and possibly local taxes, plus both the employer's and employees share of Social Security contributions. Most small businesses are taxed at the same rate as an individual's ordinary income tax level.
The upside: You can probably begin deducting legitimate business expenses and possibly a portion of costs associated with the use of a dedicated home office. Another nice thing about small businesses are the organizations dedicated to offering help, such as the Small Business Administration and local Chamber of Commerce.
It's also a good idea to consult with an accountant, lawyer and, possibly, insurance agent before setting up shop. Just remember that most of them are small-business people too, so will want to get paid accordingly.
