Some people know from an early age they were meant to own their own business. Others find themselves starting a business due to life changes (parenthood, retirement, losing a job, etc.). Others may be employed, but are wondering whether the role of business owner/entrepreneur is right for them.
There are a number of benefits to starting a business, but there are also risks that should be evaluated.
The pros of starting a business
- Being your own boss. When you start a business and are self-employed, you are your own boss and ultimately control your own destiny. This means that you have the autonomy to design your product or service according to your vision, and you have the flexibility to determine when and how you work. You can establish systems and routines that are tailored to your preferences and are most effective for you. Ultimately, building your own business allows you to pursue your goals and ideals with greater independence and control.
- Personal fulfillment. For some, personal fulfillment might be seeing a new venture grow and succeed. For others, it may be conquering the unknown and striking out on their own. However you define personal fulfillment, starting a new company might hold that promise for you.
- Financial rewards. Whether you view starting a business as an economic necessity or a way to make some additional income, you might find it generates a new source of income. Successful business owners have the opportunity to make more money for the risks they take.
- Flexible hours. Running a business of your own can be demanding and may necessitate working irregular and extended hours. Nevertheless, being your own boss can provide you with more flexibility in some instances. For instance, numerous stay-at-home parents opt to become entrepreneurs, as this enables them to create a work schedule that suits their family commitments.
- Following your passion. Entrepreneurs have the privilege of choosing the industry they want to operate in, as well as the products or services they want to offer. When individuals are passionate about their work, they often possess a stronger motivation to achieve success.
Note: Starting a business may mean purchasing an existing business. Purchasing an existing business has proven beneficial for many business owners — but this endeavor undoubtedly requires both financial and time investments. For businesses that are already profitable, these new business owners jump past the true startup phase into running a mature business.
The cons of starting a business
Starting your own business can have many benefits, but keep in mind that not all new businesses succeed.
- Financial risk. As a business owner, one of the most significant risks you face is financial loss. The expenses of starting and running a business can be substantial, including costs for materials, establishing the business, and ongoing monthly obligations. These costs can vary depending on the size and type of business. To cover these expenses, many entrepreneurs take out loans, putting them in debt from the outset while also striving to generate revenue.
- Uncertainty and stress. Business owners face the constant challenge of generating revenue, as they lack a consistent paycheck. This can result in fluctuating monthly income. Additionally, they are often responsible for overseeing or doing everything required, including administrative work that may not be enjoyable.
- Personal liability. If you fail to structure your business (for example, as an LLC) to protect your personal assets, you may end up putting them at risk. This goes beyond just losing the money you invested in the business and could include assets such as your house or car.
- Time commitment. While it may seem like you have the flexibility to take time off as a business owner, the reality is that you may find it difficult to get away. As the owner, you may find yourself working long hours, including on weekends.
As you consider whether to start a business, you should:
- Assess your strengths and weaknesses. Is self-employment right for you?
- Determine startup costs. Can you meet these on your own or would need to secure a loan or other type of financing?
- Research the marketplace. Have you evaluated the competition and considered how your particular business will succeed?
- Outline your business goals. What do you want to accomplish and what will you consider a success?
Other considerations when starting a business
Another big decision a small business owner faces is whether to own the business personally (sole proprietorship) or to form a separate, statutory business entity. If you decide to form a separate entity, there are additional decisions to be made which include selecting the entity type, formation state, entity name, tax status, and registered agent.
Choice of entity type:
Pick the statutory entity that best fits your needs. Options include:
- A limited liability company (LLC) is appropriate for almost any business. An LLC provides flexibility in management, financial rights and taxation.
- A corporation is favored by those planning an IPO, looking for venture capital, or looking to provide stock options.
- A limited liability partnership (LLP) is for professionals such as lawyers, accountants, and doctors.
- A benefit corporation is for those business owners who want to make a profit, while also serving a charitable or socially beneficial mission.
Choice of formation state:
You can form your business entity in any state but owners typically choose:
- the state where the business is located, or
- a state with a preferred governing statute.
Choice of entity name:
- Check to make sure the business name is available and, if so, reserve it.
- Make sure the name has the words or abbreviations to indicate the entity type.
- Make sure it doesn’t contain any prohibited or restricted words or phrases.
Choice of tax status:
- The entity can be a separate taxable entity, meaning it will pay income taxes on its own tax return.
- The entity can be a pass-through entity, meaning the entity doesn’t pay the taxes but its income passes through to its owner(s).
- LLCs, LPs, and LLPs can choose either separate or pass-through taxation.
- A corporation can only be a passthrough entity if it meets tax code requirements.
Choice of registered agent:
- Having a registered agent is required for corporations, nonprofits, LLCs, LPs, and LLPs
- The registered agent can be an individual, a small business owner or employee, or a professional registered agent.
- The advantages of a professional registered agent include assurance someone will always be at the statutory address when documents are served and the person receiving documents knows exactly what those documents are and what to do with them.
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