Avoid future headaches by focusing on three critical areas when starting your business.
Starting a business is more than just checking boxes – it is knowing what boxes to check. Unfortunately, mistakes in the beginning stages of business creation can cause countless headaches in the future. Here are a few of the basic, yet critical steps that will ensure an ideal foundation for potential growth.
Select a corporate structure
Choosing the correct structure for a business is an important first step, as each option has distinct benefits and restrictions.
An LLC receives legal protection from lawsuits, similar to a corporation, and is one of the more popular business structures. It also excels at protecting owners from liability. Additionally, this business structure is not required to pay corporate taxes.
An S-Corporation operates like a partnership, but with greater legal protection. However, this business structure carries a larger price tag to maintain compliance with legal and accounting standards. Also, an S-Corporation must have fewer than 100 shareholders.
A partnership is when two more more people operate a business as co-owners. They are easy and inexpensive to establish. However, there is unlimited liability, meaning individuals are responsible for the company’s debts.
A new business with only one owner is a sole proprietorship. Taxes for this structure are included on the personal income tax return. The disadvantage to the sole proprietorship is that the owner is personally liable for losses and lawsuits.
Taking the time to thoroughly review the benefits and drawbacks of each option will help you select the structure that best fits your business. Speaking with trusted advisors or lawyers during the process can help you make the ideal selection.
Create a business plan
A solid business plan will continuously guide a new business on a path to success. Not only will it map out the future of the company, it will also provide the organizational structure of the entity and direction on how to execute plans. A business plan should demonstrate how the company intends to be profitable. It is the blueprint for the organization's success, and it should outline many important facets like growth strategies, data-based ideas, target markets and competitors, opportunities and threats and future cash flow projections. A thorough business plan is a vital tool in acquiring capital, as investors need an understanding of the company, its aspirations and how it plans to succeed.
Bring in capital
Most new business owners will eventually look for ways to obtain additional funds. One popular method is through venture capital opportunities. These investors are frequently on the market for promising opportunities, but they typically want a model that is new and innovative in the industry. One option for small businesses is to pursue a Small Business Administration-backed loan, as these are easy to obtain, have long repayment periods and offer low interest rates. Small Business Administration-backed loans do require a lengthy lead time, so they may not be the best option if the business needs immediate funding.
Launching a new business venture is a challenge that requires immense time and effort, as there is much to consider. Starting simple with the correct structure, then building a comprehensive business plan and selecting an appropriate funding option are reliable ways to head down the entrepreneurial path.