Are you thinking of ways to turn your side project or freelance business into a profitable business? Maybe you’ve been a private tutor and intend to set up a tutoring business. You love cooking and baking and want to set up a catering business or a sell homemade gourmet bakery goods.
According to the Office of National Statistics figures published in The Guardian recently, the number of self-employed business-owners has risen 10% since the beginning of the economic downturn. While the number of employees fell by 2% between 2008 and 2012, there are now 367,000 more people who are self-employed than there were in 2008. Rather than being forced into self-employment, workers became self-employed to enjoy a better work-life balance or pursue a hobby.
The pride and joy of being your own boss is truly very appealing. What could be better than doing something you’re passionate about, on your own schedule, and making a decent living while you’re at it? Becoming self-employed in your after-hours can change your family’s financial circumstances, and help you save for big purchases such as a house or car, or even pad your nest egg for retirement. But there are risks involved in starting your own business. A report commissioned by the UK Centre for Economic and Business Research revealed that self-employed people face average debts of 18.6 times their annual income, in contrast to those who work full or part time (4.1 times). Self-employed people also tend to have higher mortgage debts and credit card debt than those in full or part-time employment.
Knowing the risks is important before you set sail on your new business venture, but take a look at the following essential steps to guide you on how to start a new business, minimize risks and increase your chances of success.
Step 1: Conduct Market Research
As Sun Tzu, a Chinese military general and strategist in the 6th Century BC, said, “Know thy self, know thy enemy. A thousand battles, a thousand victories”. The key to a successful business venture is to conduct market research to provide insight into all aspects of your business, including an analysis of potential markets for your products or services (characteristics and size of target market), identification of your primary and secondary competitors, and analysis of your competitive landscape (market share and barriers to entry).
A useful tool to perform a webcheck and find out who your competitors are or who you intend to do business with is Duedil, a free database of company financials. This service enables you to search a company’s names and address free of charge. Some free company information includes basic company details, filing history, insolvency history, and current appointments reports. While some websites, research companies or government agencies charge a fee to provide detailed historical information of a company, including annual revenue and select corporate reports, Duedil makes the information publicly available for free.
Step 2: Write A Business Plan
Once you have conducted the market research, write a business plan to describe the nuts and bolts of the business and your unique selling point. A formal plan is required if you intend to secure funding from banks or venture capitalists. Ensure that your business plan contains these basic elements: an executive summary, a marketing and sales strategy plan, a description of organization and management team and financial projections of 3 to 5 years ahead. Though I personally think financial projects are completely worthless, investors simply require it to make sure you aren’t expecting a billion dollar company after 12 months of business. There are many business plan tools to help you get started, including software that has the capability to do spreadsheets, calculations, word processing, presentations, and professional formatting.
Step 3: Decide on The Type of Business
You can consider running a limited liability company as a director or one of the directors. There are several advantages of forming an LLC. With a limited liability company or corporation, the company’s finances are separate from your personal finances. In the event that the company is liquidated or litigated against, the shareholders’ responsibilities for the company’s financial liabilities are limited to the value of shares they own but haven’t paid for. Any profit left after paying corporate taxes belongs to the company and can be shared among shareholders. Trading through an LLC gives the opportunity to save income tax since you pay dividends on any profits earned rather than taking a salary, which would be taxed at a significantly higher rate.
Step 4: Registering Your Company
Registering a private company with a state’s Franchise Tax Board, or your state’s equivalent agency, is relatively easy. You can set up the company online, mail in the application or proceed through an agent, usually an attorney. All LLCs or corporations must have a company name and registered address, at least one director, at least one shareholder, shareholder and capital allocation details, and Articles of Incorporation (rules about how your company is run). You should also consider applying for an EIN, also known as an Employer Identification Number (EIN), from the IRS.
Step 5: Opening A Company Bank Account
Once you’ve registered your business, the next step is to open a company bank account to keep everything separate from your personal checking and saving accounts. Most banks will be able to provide free advice and information related to banking and financial products and services, such as a revolving line of credit or payroll account.