How should I legally structure my company?
Choosing the right legal structure, or business entity is an important part of starting your business. On a federal level, your business legal structure determines your tax burden. On a state level, it can impact your liability. For example, an LLC (Limited Liability Company) structure can protect your personal assets in the event of a lawsuit.
A sole proprietorship is the simplest business structure. It is one person responsible for all business profits and debts. It is the easiest entity to set up and also dissolve. A partnership is owned by two or more people. There are general partnerships, where the business is shared equally, and limited partnerships, where one person has control of the operations.
A limited liability company (LLC) shields owners, partners, or shareholders from personal liability for business debts unless they acted in a negligent manner that resulted in injury to others.
Finally, a corporation is separate from its owners. It can sue, be sued, or own and sell property or shares of stock in the company. There are different types. This includes C, S, and B corporations, as well as closed and nonprofit corporations.
Sole proprietors, partnership owners, and S corporation owners all categorize their business as personal income. C corporation income is classified as business income. You can see how the structure you choose can significantly impact your taxes, as well as liability and control. Speak to your tax and legal advisors for specifics regarding your personal situation and to learn which legal structure might be best for you.
How much money will it take to start my business?
The first step is to calculate your startup costs so you have an idea of how much funding you need. It will also help you to estimate profits. Begin by identifying all of your startup expenses. Below is a list of some common startup costs.
- Licenses and permits
- Professional services (lawyer, accountant, etc.)
- Market research
- Office space or a building
- Equipment and supplies
- Software & other subscriptions
- Employee salaries
- Website/advertising/marketing/promotional materials
The startup costs for different businesses can vary greatly. For example, the cost of starting a single-person at-home business will be dramatically lower than starting a brick-and-mortar business with 20 employees and a large inventory. You are estimating the costs of many of these things. Add up all of the potential expenses to get the full picture. Categorize the costs into one-time expenses and ongoing expenses, such as rent, salaries, and utilities. You will want at least one year of monthly expenses to get you started, but more is recommended, as it may take time to turn a profit. You may also face some expenses that were not anticipated.
What are the biggest challenges I will face when starting a business?
Knowing the challenges that you may face in advance can help you better prepare for those challenges. Here are four common challenges in starting a business.
- A shortage of capital and cash flow. Failure to adequately plan for expenses and the lack of income can be disastrous for new business owners. If you don’t have enough capital set aside, you can quickly run out of cash. Be sure to adequately plan and set aside enough funds to cover all of your needs while you develop your business as we mentioned above. Keep in mind that most businesses don’t make any profit in their first year of business.
- Lack of demand. Advanced market research will help you better understand the market for your product or service. It will also give you a look at the competition and how you will compare. You need to be sure there is a demand for whatever product or service you provide before you start your business.
- Financial management. Poor financial planning is one of the main reasons new businesses fail. If your costs outpace your revenue, you are setting yourself up for failure. You need to keep a close handle on your finances at all times. Again, be sure to have enough startup capital to keep you afloat as you get your business off the ground.
- Hiring good employees. The people you hire can often mean the success or failure of your business. Take your time to hire the right people for your team. You want people who are highly experienced in your line of business, will work as hard as you, and who share similar values. Most importantly, take the time to understand their strengths and weaknesses before you hire them.
A review of our most common business startup questions answered
Starting a new business can be an exciting and rewarding experience. It is essential that you seek the advice of professionals when it comes to structuring your business entity. You will also need to be sure you have enough capital to cover all of your expenses as your business gets started and through the first year. Do your market research and carefully calculate your costs. Finally, take a serious look at the challenges all new businesses face. Benchmark Federal Credit Union provides business accounts, commercial lending services, and small business loans for small businesses. We’re here to help you grow your business dream into a reality.
Once you get your business going, be sure to read our “3 Tips to Increase Your Business Presence Online.”