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- Tim Stobierski
- Oct 20, 2022
Things to Consider When Starting a Business
Over the past two years, Americans have had more time to think about what they’re truly passionate about career-wise — and for many of us, that means branching out on our own. According to the 2022 Northwestern Mutual Great Realization survey, 78 percent of those currently employed are interested in some type of career change in the next two years — and 24 percent of those are interested in starting a new business.
Of people surveyed who plan to make a career change in the next two years say they want to start a new business.
While the appeal is easy to understand, leaving a job to start your own business or enter the freelance life can be a difficult transition. That’s why it’s important to do everything you can to set yourself up for success. When you know the right financial steps to take first, you can better prepare for the unique challenges of starting a business.
9 things to do before starting a business
Here are nine important things to do before starting your own business.
1. Know yourself
Just as you should aim to understand the market and industry that you want to break into before you quit your job and pursue entrepreneurship or solopreneurship, it’s also incredibly important that you understand yourself.
Why do you want to start your own business? What goals (personal or financial) are you trying to accomplish? What does success look like to you? What does failure look like to you? How much risk are you willing to stomach as you work to get your business off the ground?
The answers to these questions will be different for everyone. By answering them honestly, you can put in place a plan that works for you and your family.
2. Know the law
Before launching anything, it’s a good idea to understand the laws and regulations that are going to apply to your business. Do you need a particular license or permit? If you plan to open a physical space, could zoning rules complicate your plans? Laws and regulations can vary by state and even by city or town, so don’t be afraid to turn to city hall, your local chamber of commerce or an attorney for guidance.
Additionally, which business structure is right for your business? While many small businesses are sole proprietorships, there are other options — LLC, S corporation, partnership, etc. — which can offer a number of legal and tax benefits.
3. Build an emergency fund
While everyone should have an emergency fund, they are especially important for entrepreneurs. One survey found that up to 82 percent of business failures are due to cash flow problems — namely, not having cash when it’s needed.
Many businesses follow a cycle where demand is higher at certain times and lower at others. For example, a landscaper will naturally see more jobs in the summer than in the winter, and a boutique shop may sell more merchandise around the holidays. Having a healthy stockpile of cash can help you through the ebbs and flows and prevent the kinds of cash flow problems that could destroy your business.
How much should you aim for? While six months’ worth of expenses is what’s typically recommended, freelancers and other self-employed individuals may want to sock away even more — for example, nine months' worth of expenses — although this will depend on your financial situation. If you are married with a second source of income, for example, you can likely get by with less set aside; if your business is the primary source of income for your family, though, you may need more of a cash cushion to rely on.
4. Pay off your debt
While this isn’t a requirement to starting a business, it can be a good idea, because reducing the amount of debt that you owe can have a number of benefits for your business.
For example, if you plan on relying on a business loan or other kind of financing to get your business off the ground, reducing personal liabilities can make you more attractive to lenders, which increases your likelihood of receiving funding and receiving lower interest rates. Additionally, the fewer bills and obligations you have, the easier it will be to ride out the tough times without having to tap your savings.
5. Get your business’s finances set up
How well you manage your business finances will be critical to success. That means knowing how much money is coming in, how much money is going out, where it is coming from and where it is going to. It can be hard to do that if your personal finances and business finances are commingled.
Set yourself up for success early on by opening a separate business checking account. Use it to receive payments and to pay for any business expenses and overhead. Not only will this will help you understand exactly how your business is doing, but having a separate record of your business transactions will also make it easier come tax time.
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6. Get the right insurance
Once you’re self-employed, you’ll no longer be able to count on an employer for your insurance needs (unless, of course, you are married and on a spouse’s plan). From health, vision and dental coverage to life insurance, it’s important to have a plan for how you’re going to pay for these additional expenses. Depending on the type of business you’re starting, you also may need specific types of insurance that help protect your business.
7. Research self-employed retirement options
Once you’re self-employed, you’ll also no longer have access to an employer-sponsored retirement plan like a pension or 401(k). You are your own employer.
But that doesn’t mean you don’t have options. Generally speaking, entrepreneurs and the self-employed can choose between a number of different kinds of retirement accounts, including:
- Traditional or Roth IRA
- SEP IRA
- SIMPLE IRA
- Solo 401(k)
Each of these types of accounts have their own requirements, limits and benefits, so it’s important to do your research and understand which is best for you and your business.
One additional note: You’ll have to contribute additional self-employment taxes (Social Security and Medicare) when you’re self-employed, a total of 15.3 percent of net earnings for 2022.
8. Have a contingency plan
While there are steps that you can take to increase your chances of success, the simple fact is you can't predict the future. That’s why all entrepreneurs need to be able to answer this question: If this doesn’t work, at what point am I willing to cut my losses? Without an answer, it’s far too easy to fall into a habit of chasing your losses.
9. Consider working with a financial advisor
You’re likely going to need a tax advisor to help you navigate the intricacies of paying taxes as a self-employed person. But have you considered a financial advisor? Financial advisors can look at your whole financial situation and help you create a financial plan to help you reach the goals that you outline in it. If your financial plan includes starting a business, a financial advisor can help guide you on the path to making it a reality — including many of the steps above.