While every business opportunity is different, here are eight considerations to keep in mind.
- Entity Formation. Whether you form a Pennsylvania LLC or a Delaware corporation depends a lot on your end goals. LLCs work well when your goal is primarily just to run your own business. On the other hand, a corporation is ideal for higher growth companies that may take on investors at various points in the growth cycle. LLCs are the right answer for most people, whether for a rental property, a coffee shop, or a consulting company.
- Funding. Typical sources include your own savings, taking on outside investors, and a loan from the Small Business Administration (SBA). Using your own savings (or credit cards or a HELOC) means that you have the most control over how the funds are used, but also increase your risk (because no one else’s money is at stake). Taking on investors can help spread the risk to other parties, though the investors usually want a voice for important company decisions. SBA loans are available for certain types of businesses and allow you to retain control of the business while not putting all of your own money at risk. However, SBA loans require a personal guarantee from the borrower, again increasing your risk.
- Insurance. Obtaining commercial general liability insurance can be a great way to decrease your financial risk, though it comes at a monthly cost. An experienced and qualified insurance broker can provide recommendations for the types and limits of coverage.
- Commercial Contracts. Drafting and negotiating your company’s key legal contracts can be confusing and complicated endeavor. Having a form agreement for your customers and employees can be a good way to make sure all of the pieces are in place to protect your business/assets. If your employees handle confidential information or create any technology or inventions, a "Proprietary Information and Invention Assignment Agreement” will help ensure confidentiality and that your business owns their work product. Customer agreements are a way to set out the terms of the engagement and limit your own liability in the process. Many of these provisions are complex (i.e., indemnification and limitations of liability) and greatly benefit from being drafted by an attorney. Starting out, however, you may be forced to use the counterparty’s form of agreement, in which case it is even more important to have an attorney review its provisions. Finally, you may need space to operate your business, which requires signing a commercial lease. Typically, landlords have the bulk of the negotiating power, so picking your battles is key to getting the deal done.
- Franchising. Opening a franchise can be an easy way to hit the ground running with help from an established brand. However, franchise agreements (like commercial leases) can be some of the most one-sided agreements you will see (and not in your favor!). Further, most franchise agreements require a personal guarantee that limits your ability to get out before the end of the term. Opening a franchise is a big commitment and should be evaluated carefully.
- Accounting and Taxes. Talking with a qualified CPA before you need them is critical to keeping your books straight and preparing for tax season. CPAs can assist with financial management, tax planning and provide strategic advice.
- Budget. Simple financial modeling can help create guidelines for running your business. Consider one-time costs (e.g., trademark filing) as well as recurring monthly expenses (e.g., rent/utilities, labor). Consider how long it will take you to start receiving revenue and keep this in mind when evaluating funding sources and how much you can pay yourself.
- Testing the Waters. Before quitting your job and pursuing your dream, dipping your toe in the “self-employed” water may be a safer way to test the market. Many people keep their day job and start an LLC for the side hustle they pursue on nights and weekends.
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