Owning a Business
Business ownership can be both risky…and rewarding
Owning a business is no small task, and like all investments it does involve a certain level of risk. Whether you start a new business or buy an existing one, owning your own business offers a chance at more freedom and greater financial rewards.
The first step in starting a business is to do thorough research. Understanding your options and knowing the steps you need to take to get your business up and running and set you on a path to success.
Options for business ownership
When it comes to starting a business, there are several options available—all of which have advantages, disadvantages, and some degree of risk:
- Building a business from the ground up
A successful start-up business can be very rewarding, but without a history to gauge the likelihood of success, it also involves a higher degree of risk. Your first step would be to create a strong business plan, which is something banks or investors will want to see if you need financing.
- Buying an existing business
The obvious advantage of this option is that there is a proven track record of success, but there are some pitfalls you should try to avoid:
- You may not possess or be able to acquire the expertise and services of the existing owners.
- It may be difficult to evaluate the quality of the information provided to you by the existing owners, especially without the help of a professional.
- You may be taking on a significant amount of debt when acquiring a business.
- Buying a franchise
When you buy a franchise, you also buy a proven concept, marketing support, business expertise, name recognition, and assistance with site location. However, you also give up some things:
- You will not be entitled to all of your business profits.
- You may be limited in your decision-making process, and will not have the final say in some decisions.
Choosing an entity for your business
Three separate categories of business entity structures exist:
Is a viable option to consider when two or more people are the owners of a business.
Provides the greatest shield from individual liability and is the easiest type of entity to use to raise capital and to transfer, but is also generally subject to federal income tax.
- Limited Liability Company (LLC)
Provides limited liability for owners, with more flexibility in the structuring and governance than a corporation.
Each category has advantages, disadvantages, and special rules, so be sure to research your options, and consider working with a professional, to help you choose the best option for your business.
Options for funding your business
Aside from using your own funds or borrowing from friends and family, there are numerous routes available for funding your business:
- Bank loans—Usually require that you provide collateral, such as your home, to secure the loan
- Angel investors—Private investors who contribute money in exchange for ownership interest
- Venture capital—Venture capitalists typically take an equity stake in your company, and most expect to receive preferred equity securities in exchange for their investment
- Selling stock—This can take the form of an initial public offering (IPO) or private placement (selling shares of stock to a select group of equity investors). Both require compliance with federal and state securities laws
- Factoring—Securing a loan against your accounts receivable
- Economic development programs—Many government loan programs are available to small businesses, including the U.S. Small Business Administration
- Customer/supplier financing—Your business bills for part of the services or products that it supplies up front, and the rest of the fees are paid as the products or services are delivered
After all of the hard work you will put into starting your business, it is important to make sure it’s properly protected, and that everything you’ve worked so hard for won’t suddenly disappear.
No matter how careful you are in running your business, accidents and unexpected events happen. You will have to plan for the unforeseen if you want your business to thrive. One way to do this is through insurance, which can protect you in the event of:
- Physical destruction
- The death or disability of a key employee
Plan for the succession of your business
Business continuation planning, usually called a “buy-sell” agreement, is simply the development and implementation of a plan of succession. It answers the question: Who will take over my business if I should die prematurely, become disabled, or simply decide to retire?
A properly structured buy-sell agreement will:
- Predetermine who will receive your business
- Set the purchase price and terms of payment
- Establish the value of your business for federal tax purposes
- Specify how the transfer will be funded
- Provide the cash needed to pay taxes, debts, and other estate settlement costs
It will save you, your company, and your heirs thousands of dollars—and hours—by eliminating the potential costs, delays, and frustration of IRS contests and litigation.
It is never too early to think about planning for the orderly and affordable continuation of your business. And the sooner you start, the more affordable it will be.
Next, you can move on to information that can help if you are widowed or divorced.