Starting a Business

Perhaps you are considering starting your own business. Owning and operating one's own business is not for everyone. It takes a certain temperament to deal with different personalities, spontaneous decision-making, and the organization required to successfully operate a business. Starting a business is a lifestyle decision worthy of careful thought and consideration before making a costly commitment. In this article, we will explore some of the basics about starting a business and provide some other resources you can use to help you in the planning process.

Owning your own business can be the best, but riskiest, investment you can make. It has the upside potential for great financial rewards, but if it doesn't succeed, it can put you into bankruptcy. You will need to invest a great deal of time, money, and "sweat" in order to make your business work financially, and there's no guarantee that even if you do all the right things that you will be successful. Sometimes luck and timing make all the difference. For all the success stories you read about in the newspapers and business journals, there are hundreds of business failures that go unnoticed except by the families of those who tried and failed.

Okay, now that we scared off the faint of heart, let's gather 'round to see what you can do to better the odds. Some of you may already be in business but not know it. Sometimes you go into business because you like doing what you do. The personal satisfaction of doing what you enjoy is a reward of business that isn't measured in dollars. Many persons have hobbies that can actually be businesses if structured correctly. If you sell products from a hobby, consider setting it up as a business. Step number one is to be passionate about your business—the passion will drive you to succeed. If you want to make money at your business too, then you will need a plan.

There are two ways to legitimately make money in business: earn sufficient income to cover your expenses plus your "salary," or sell your business to someone else for a profit. That's it—it doesn't get any simpler. Now to the plan of how to make money in business.

To generate income you will need a product or service to sell to a customer—hopefully this is what you are passionate about. People aren't going to pay for that product or service unless they have a need for it and want to buy it. So next, you will need to identify your customers. Do your market research to determine how many customers are going to pay you and how much they're going to pay.

Will you be able to supply your customers' demand? In order to meet your customers' demand, you might need a physical plant and employees. These cost money—expenses. You will also have costs of materials you will need to produce your product or services, and possibly business taxes as well. Factor these costs into your plan. Now if there is any money left over, you can take a "salary" and reinvest the rest to grow your business. When your business grows sufficiently, you can sell it to someone else, take the money, and retire (or start another business).

Of course, it's not quite that simple, but it doesn't need to be very complicated. The key is in doing your homework well. Most businesses that fail within the first three years of operation fail because of poor planning, undercapitalization, or mismanagement. Bad homework. If you identify your market, production requirements, and costs of operation, you should be able to accurately determine how much money you will need to start and operate your business (capitalization).

Your business will need capital to get started. You can put up all the capital yourself, or you can get help from investors. You should have a good idea of how much capital you will need to stay in business. Remember though, that one of the reasons a business fails within the first three years is undercapitalization. You can borrow money at an extra cost (interest) or you can "take partners" who will invest in your business for a "share of the action." How you plan to raise capital will play an important part in choosing the business entity. You will also need a convincing business plan to get investors to agree to put their money at risk in your venture.

Determine what type of business entity will work best for you. In the United States today, there are many types of businesses recognized in each state, but they all fall into three general types: sole proprietorships, partnerships, and corporations. The different ownership entity types have different financial, liability, and tax treatments. Today there are so many variations on partnerships and corporations that the distinctions become blurred. Before committing to one form of business entity or another, discuss the tax and liability issues in your state with financial, tax, and legal advisors to help you decide which works best for you—you are the entrepreneur, so you make the decision after weighing the arguments. Rule of thumb: keep it as simple as practicable—simpler costs less.

Your business will have to file income tax returns. Which returns it files will depend upon the business entity type. You may also have to pay estimated taxes periodically during your tax year to meet IRS and state income tax rules. If you overpay your estimated taxes, you will be entitled to a refund when you file your income tax returns for that tax year. If you underpay, you will have to make up the difference and possibly pay interest and penalties for underpaying. Keep careful financial records. There are several excellent software programs available to small businesses to make bookkeeping and tax tracking simple. However, you or someone in your company needs to keep financial records contemporaneously and know some basics of accounting. When setting up your software, it would be worth the cost to consult with a tax and accounting professional and get some training on its use.

The Small Business Administration has an excellent Website with helpful guides for persons interested in starting their own business. Here you can even take a free online entrepreneur course. The site also has useful information on marketing, employees, taxes, financing, and legal topics. It's worth the time to visit this site.

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