If you're asking how to become an entrepreneur, know that you have to start by creating a business plan, calculating startup costs, and deciding how to incorporate your business.
One of your biggest decisions, though, is deciding which business structure is right for you. That starts with a business plan.
Creating a Business Plan
What is a business plan? It's the roadmap for how your business will run and grow under a defined structure. It's vital if you want to attract investors and get funding and convince people your business will succeed.
Most business plans can be classified as traditional plans, which go into detail and can be dozens of pages. Other businesses will create lean startup plans, which can be as short as a page.
A traditional business plan goes into detail with an executive summary, company description, market analysis, organization, marketing and sales, funding requests, and financial projections. A lean startup plan presents the key elements only.
Determining Startup Costs
When calculating how much to start a business, you'll calculate what you need to raise funds and attract investors, as well as how long it might take before you see a profit. The Small Business Administration (SBA) offers a calculator that can help you estimate startup costs.
Your costs will depend on a variety of factors, including whether your business is brick-and-mortar, online, or a combination of the two. Each of these has different types of startup expenses.
These can be one-time, like the purchase of equipment, or recurring costs, like rent and utilities. Once you've added up your expenses to determine how much capital you need, write up a formal report of startup costs. You'll use this report when raising capital and speaking to investors and lenders, and they will use it to compare expected costs to projected revenue and determine the potential for your business to profit.
Types of Business Structures
You can start a business and become an entrepreneur without setting up a structure. If you do this, you'll have a sole proprietorship. That means there is nothing legally separating your business from you as the owner.
Although this has advantages in that it's the simplest way to operate, it also means that if you have business debt or your business is sued, your personal assets could be taken to cover the business debts. Beyond that, if you have a business partner, you'd default to a partnership, where two or more people share ownership.
Many businesses choose to form a corporation. If you form a corporation (a.k.a. "incorporate"), your personal assets can't be taken to cover debts. The two types of corporations are the S corporation and the C corporation. The most popular for small businesses is the S-corp, which offers passthrough taxes. In this scenario, your business pays no taxes, and you pay taxes on your personal income tax return. A C corporation, conversely, is an independent legal entity owned by shareholders, who are not legally liable for any business debts.
Still another popular option is to form a limited liability company, or an LLC, which can be taxed in a variety of ways. With flexible tax options and protection of your assets, the LLC is a hybrid structure that provides the limited liability of a corporation and the tax efficiencies and flexibility of a partnership.
How to Incorporate Your Business
You can incorporate a business or LLC on your own by filing the required paperwork with your state's Secretary of State. Since incorporating a business is complex, however, many owners don't have the time or energy to go through the process themselves. Instead, they enlist the help of an attorney or services known as business creation services or business formation services.
In each state, a registered agent is legally required and will serve as the point of contact between your business and the government. A business creation service can file the necessary paperwork to incorporate with the Secretary of State and serve as your registered agent, with a physical address in your state. It's where you will receive legal notices and other important mailings. These services can save you time and give you the space and energy to focus on the big picture instead of the technicalities.
To learn more about Krogh & Decker, LLP business formation services, click here or get in touch today!