Starting a new business can be scary. Given the year we just had, starting a new business in 2021 can feel especially so. As we rebuild as a country following a global pandemic, many people are getting back to following their passions and embarking on small business creation and ownership. Whether you are opening a brick-and-mortar shop or an online business, knowing how to optimize opportunity and minimize risk is of the utmost importance. If this is a path you are considering, take a moment to read over our list of items to consider when starting a new business in 2021.
Personal Cash Flow Considerations
Will you need to dip into your nest egg to start your business?
If this is the case, take time to think through how much of your financial reserves you are willing to use for your start-up. Also, analyze which accounts to pull from to fund your business most beneficially and efficiently.
Will there be a change in your cash flow needs because of this business?
If you think there will be a change in your cash flow demands, you will need to plan how you structure your compensation carefully. Be it salary or distributions, you must take care to ensure you are optimizing your net income.
Do you need to reevaluate your emergency fund?
Most businesses are not profitable out of the gate. It takes time to get the word out, develop relationships, and grow. Contemplating what you have in your emergency fund and making sure you have some wiggle room here will help ease anxiety and allow you to focus on building your business without as much worry.
Business Cash Flow Considerations
Do you need to research the costs to launch and sustain the business?
It’s essential to do your best in researching the cost of launching your business. You wouldn’t build a house without some type of blueprint, right? It would be best if you had a business plan that outlines what you plan to do, how much it costs, and how quickly you hope to accomplish your goals.
Do you have a back-up plan if business growth is slower than expected?
Businesses don’t always ramp as quickly as we would like, and you will need to have a Plan B to make sure you are making ends meet. Your income can fluctuate based on contracts and sales, so it is prudent to look at credit line options to keep yourself afloat, especially if your new business is your sole source of income.
Will you need financing for the bulk of your start-up costs?
When you realize how much money you will need to start your business, finding out where to get these funds can be the most challenging bump in your early days as an entrepreneur. It’s vital to explore and research the best use of available government loans or grants, possible investors including third-party investors or friends and family, traditional bank loans, or funding through responsible debt of personal assets.
Legal and Formation Considerations
Do you require guidance in creating the legal structure of your business?
If yes, consult with a legal professional with expertise in business formation to advise you on your best course here. You have several options of formation to consider:
- You can choose to be a sole proprietorship, which is the typical default and most straightforward format for the single owner since your business’s assets and liabilities are not separate from your personal.
- You can also choose to be a partnership which is the default choice for two or more owners. In this scenario, in an LP or LLP, limited partners can limit their liability. A general partnership, however, has unlimited personal liability.
- Another choice, a C-Corporation, is a formal structure giving the most robust protection to owners as it exists as a separate legal entity. Since it is considered a separate taxpayer, it is subject to taxes at both the corporate and shareholder level.
- If you were to select an S-Corporation, your business would be treated as a “pass-through” entity, dodging double taxation. There are restrictions to eligibility, including the number of shareholders and the number of stock classes allowed.
- You can also select an LLC, a limited liability company, a separate legal entity, and it is unincorporated while still possessing some corporate characteristics. An LLC can choose taxation as an S or C corporation or a disregarded entity.
Will you have employees?
If so, preventing Human Resources issues is a priority. Outline specifically the job descriptions and roles of your employees and your duties as an employer. You will also want to make sure to register with all required state agencies. Having employees at your business may also affect which retirement plan you decide to implement.
Do you need to protect intellectual property?
If you have intellectual property to protect, speak with an attorney about how to obtain the necessary patents, copyrights, or trademarks.
Will you have business partners?
If you plan on having business partners, make sure to enact the appropriate business agreements to protect yourself and your partners. These agreements or contracts would include formalizing your relationship regarding events such as death or disability and the ownership structure as a whole.
Tax Planning Considerations
Will you need assistance with preparing your business tax return?
Often business owners do not have tax expertise or the time to educate themselves thoroughly on complex tax laws. Having a professional well-versed in current business tax laws can save you money in the long run since they can help you find ways to minimize your tax burden. Research tax professionals that you feel comfortable working with locally or remotely. Ensure your fiduciary financial advisor is in communication with your business tax preparer to ensure all of your financial plan’s components are covered.
Will your new business affect your personal tax situation?
Take the time to research and understand how your selection of operations and entity can affect your exposure to self-employment tax, personal tax, and corporate tax. Remember to deduct some start-up costs such as health insurance costs, home office expenses, and other expenses, depending on the circumstances.
Will your business be required to pay and collect sales tax?
Your business may be required to pay sales tax if you sell tangible items or even some services. Find out what the requirements are and abide by these to avoid imposing penalties.
Insurance Considerations
Do you need business insurance?
Assess the need for specific insurance for your business. Consider insuring yourself against typical risks such as injuries at your business, professional liability, data breaches, and business interruption.
Should you reevaluate your life insurance coverage?
It may make sense to reevaluate your life insurance needs given your status as a new business owner. You might need to increase your coverage to provide the necessary liquidity for your heirs to maintain the business if that is your wish. Your life insurance can also be used to fund purchase obligations in buy-sell agreements. Also, if you have employees that are key to business continuity, key person insurance can help with that.
Estate planning and Succession Considerations
Will you need a review of your estate plan?
As a business owner, look over your estate plan for any needed updates to align with your succession plan, update your Powers of Attorney, and directing the management and transfer of your business interests within your will or trust.
Do you need an exit strategy or succession plan?
How will your participation in your business end one day? You may want to retire at a specific age and, well, none of us live forever, so a carefully constructed exit or succession plan is essential. Think about whether or not your business plan involves a merger or being acquired, transferred to the next generation, or sold to an investor or partner, or liquidated, among other things. As it relates to these events, you would need to see how this stage in your business will affect your retirement plan.
Making the jump of starting a new business in 2021 is not an easy one. 2020 was a year of tumult for many, both personally and economically. With that said, people still believe in the American dream and are indeed leaping in to follow their passions. With time spent considering the ins and out of business ownership and enlisting the help of knowledgeable professionals, you can have success.
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