Do you enjoy your job? Are you working every day in a field that you are passionate about? Or are you like me and realized that doing something you are passionate about means starting your own business? In this episode of Best in Wealth, I share a business startup checklist. I will cover many of the questions you need to consider before you start a business. If you are ready to take the next step, give this one a listen!
Outline of This Episode
- [2:04] How much do you enjoy your job?
- [4:45] Issues to consider when starting a business
- [6:27] Determine your personal cash flow issues
- [13:30] Business cash flow issues to consider
- [16:39] Legal and business formation issues
- [21:50] Tax planning considerations
- [22:26] What other issues might crop up?
- [24:09] Get the full checklist in the resources below!
What does your personal cash flow look like?
You NEED to ask yourself some questions about how starting a business could impact your personal cash flow:
- How is your personal cash flow going to change? Will you need a side hustle or a spouse's income?
- Will you need to use personal assets to start this business? Emergency fund? Savings?
- Do you have other income sources available while building your business? You do not want to pull money that was earmarked for retirement.
- Will your risk tolerance need to change in other areas? Your risk tolerance will likely need to grow with your business.
- Do you need a contingency plan? Most businesses stall, go belly up, or do not make the money you project so it is important to have backup plans in place.
- Do you have an emergency fund? You need to keep some liquidity for emergency expenses.
The bottom line is that you can not sacrifice your family for your passion. The best way to build a business is by building a large runway of cash. I worked my day job FOUR extra years while starting Fortress Planning. It was important to me to have everything in order before I quit my day job.
During that time, I took the necessary classes and got needed certifications. If I had quit my job before taking these steps, I would have been eating up my cash reserves while not building the business. My suggestion is that you make sure you are doing everything you can before you quit your day job OR plan to have a side hustle to help with income.
Lastly, if you are married, make sure your spouse has bought into the vision. It is a stressful endeavor and the support of your spouse is instrumental. If it was not for her belief in my passion I may never have started this business. If she was not all in, it would have been a tough road.
Business cash flow considerations
There are three main business issues to consider before launching your business:
1. Do you need to research the amount necessary to launch or run the business? You need to put together a capital sheet to know how much you need to start the business.
2. Will you need cash or financing to cover the costs until you become profitable? Many people take out a loan to start a business instead of saving the money needed. Starting a business in the red can be stressful and painful. If you do not have a long enough cash runway, you can go out of business before you truly have a chance to build it.
3. Do you expect income to fluctuate? If you are getting a consistent paycheck now, it is likely pretty different with a business. Can you get a line of credit to ease the business flow? The best recommendation is to have enough of a runway so that a line of credit is not necessary.
We need to answer those questions before we quit our day jobs.
Legal and business formation issues
You also have to consider what type of business you want to form:
- Sole proprietorship: With this option, business assets and liabilities are NOT separate from your personal assets. If you are sued you could lose everything—not just your business.
- Partnership: A partnership is formed with two or more partners where you have commingled personal and business assets. Your personal assets are not protected (unless it’s a limited partnership).
- C-corp: This is the most formal business structure with the strongest protection, with separate taxes, but business profits are subject to double taxation.
- S-corp: This is treated as a pass-through entity (no double taxation). It does offer protections because your business assets are separate from personal. So if your business goes bankrupt, you do not lose personal assets. One limitation is that the number of shareholders is limited to 100 or fewer. An S-corp might be the better bet from a tax standpoint.
- Limited Liability Company (LLC): Your business is a separate legal entity, it is unincorporated and shares and taxes are handled differently.
Other questions to consider from a business standpoint include:
- Do you need assistance forming that business? You can hire an attorney to help you or go straight to your state to form the business.
- Will you have employees? You will need to clearly outline employment terms, job descriptions, policies, and HR issues. Do you need to register with state agencies? Get workers compensation or other employment insurance? Should you hire an accounting firm? Will your employees have a 401k plan option?
- Will you have a business partner or partners?
- Do you need a business succession plan?
- Do you have intellectual property to protect?
Connect With Scott Wellens
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The Best In Wealth Podcast is hosted by Scott Wellens. Scott Wellens is the principal at Fortress Planning Group. Fortress Planning Group is a registered investment advisory firm regulated by the Securities Act of Wisconsin in accordance and compliance with securities laws and regulations. Fortress Planning Group does not render or offer to render personalized investment or tax advice through the Best In Wealth Podcast. The information provided is for informational purposes only and does not constitute financial, tax, investment or legal advice.