This is the seventh step in our complete series of Getting Started Investing. If you're a beginner who's looking to make your first investment and build wealth for the future, then read on.
Want to increase your investments, but not sure how? Start by increasing your income! A side hustle is a great way to do something you enjoy and bring in more money.
Why Are You Starting a Business
To start, let’s get into a business owner state of mind. You are a future business owner after all! What are you hoping to get out of starting a business? Why are you doing this?
Before investing, ask these questions about the possible investments:
Who is running the company (or who is managing your investment)? Choosing investments is really no different than entering into a business with someone else. You need to know the business philosophies of management before you invest in a company, just like you need to know the business philosophies of a potential partner before you go into business with them.
What are the company’s future goals? It is crucial to know where the company plans on going and the steps it is taking to get there. This information is usually available in the company’s annual report.
What are the plans to increase revenue and dividends? Now that you know where the company is trying to go in the future, you need to figure out how that’s going to benefit YOU. The management team needs to be increasing the bottom line and passing that revenue on to you and the other investors.
What kind of competition does the business face? No matter how good this company looks, NOTHING is ANYTHING until it’s compared to SOMETHING ELSE. If this company cannot outperform its competitors, it really doesn’t matter how good it looks on paper.
What is the legal environment, and are there any legal actions pending? Understand both the legal environment of the industry and any pending or potential legal issues against the company itself. You cannot accurately predict the future but you can educate yourself on what’s going on at the moment.
Is the company diversifying their product lines? In a perfect world, the company you are investing in will have diversified revenue sources and can continue successfully even if one revenue goes away. A company with heavily concentrated income will have a harder time thriving if a revenue source disappears.
What are the company’s financial ratios? DO NOT invest until you know the basic financial ratios of the company. Get a copy of the company’s annual report and compare these ratios to industry standards.
I worked harder and smarter than most people in the businesses I have been in. — Mark Cuban
Incorporating versus Becoming an LLC or S-Corp
It is generally a good idea to separate your personal and business income and expenses. To make it official, you may want to incorporate your business to help protect you in the case of bankruptcy or insolvency.
Legal protection for both yourself and your business — In most cases, incorporating will keep your personal assets safe if the business goes under. This requires a complete separation between business and personal expenses.
Tax purposes — Tax time is a nightmare for those who don't separate their finances (and for their accountants!). More than that, in case of an IRS audit, combined personal and business finances will result in a full audit of both.
Professional reputation — Many clients may feel less comfortable dealing with a hobby-type business, as opposed to a full-fledged corporation. You will look more professional if the business is a separate entity.
Business Succession — A sole proprietorship dies with its owner. But a corporation or partnership can be smoothly passed on to a new owner. If you plan on leaving your business to someone else, incorporating is the way to go.
And one big reason many people don't incorporate — It's expensive! Incorporating can be a fairly complex and expensive endeavor. To keep things simplified and cheaper, becoming an LLC may be a better option.
For more information on separating your personal and business finances and why you should incorporate, check out The Benefits of Separating Your Business and Personal Finances.
Smart Ways to Start a Business
Time to start a business! Wait…how do you do that? Let’s discuss.
From someone who knows (that would be me), here are the 7 steps to starting a business:
Write your business plan. Have a plan written down but also accept that you need to be flexible. Changing course may be the best thing you can do for your business.
Incorporate your business. This will reduce your tax burden and separate the entity from yourself should the business be sued or go bankrupt.
Create a logo. Why do you need a logo? The golden arches and the swoosh — what two companies do those logos represent? Exactly! You see a logo, you associate it with the business. Remember, your logo is the representation of your business, so make it great.
Purchase a domain name and website. It’s 2013 — get a website! And make sure it doesn’t look like Craigslist. It isn’t expensive, but it’s crucial in the 21st century.
Accounting software. Get good software to invoice and pay your company’s bills. This will make tax time so much easier.
Find an accountant. While you can probably do your own personal taxes, it is usually wise to hire someone to prepare your business taxes. Hire a good CPA to ensure nothing is accidentally left off your tax return.
Get funding. From self funding via personal savings to angel investors, you need funding. Small businesses often fail due to a lack of capital and low cash flow — don’t let yours become a statistic!
To read more about starting a business, check out The 7 Steps to Starting a Business.
Many people wish to start a business, they just aren’t sure what to do. Try monetizing what you already know! Consider if what you already know can be useful to others. If yes, teach it! Perhaps you can share what you know online. If yes, start a blog!
After you decide that your knowledge can benefit others, it’s time to get the word out. You can do this through social media, networking, and proving that you are an expert in your field. To read more about monetizing your current skills and knowledge, check out Starting a Business: Monetize What You Know.
Financing Options for Small Businesses
Big banks don’t love to finance small businesses. Thankfully, there are some great financing alternatives:
Credit unions: Credit unions are friends of small bank customers and small business owners. As a bonus, rates and terms are generally more favorable than they would be at commercial institutions.
Small Business Administration: The SBA offers several services that improve the chances of a small business owner obtaining financing.
Peer to peer lending: P2P lending is growing rapidly! Basically it consists of borrowers borrowing from individuals. Check out Lending Club or Prosper.
If being your own boss isn’t cool enough, business owners also get investing advantages that their 9-5 peers can’t get. The nine investing perks of being a small business owner are:
- The potential for unlimited income
- Greater career security than most traditional jobs
- Get more write-offs and pay less taxes
- Numerous retirement contribution options
- Greater rewards for higher risks
- The chance to do work you truly love
- Investment in your best asset — YOURSELF!
- Collect a big windfall
- A shot at early retirement
Now those are company perks! For more details on these perks to owning your own business, read 9 Investment Advantages of Building Your Own Business.
The Downside to Being the Boss
As with anything else, there is a downside to owning your own business. You don’t have the advantages of employer-sponsored health insurance and retirement plans. Let’s discuss the latter.
Self-employed entrepreneurs have several retirement options including: solo 401(k), SEP IRA, SIMPLE IRA, “Regular” IRA — Roth or traditional, and profit sharing plans.
A successful business will grow over time. Likewise, you should increase your retirement contributions as your income increases. To take the guesswork out of retirement contributions, make it automatic and evaluate every so often to see if you need to increase it.