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Thinking About Starting a Business? In This
Economy, Don't Quit Your Day Job Start With Good Advice First
If you've ever fantasized about quitting your job and
starting a business, you're certainly not alone. However, it's
definitely not something to do on a whim you'll need time and
good advice.
A business startup requires parallel planning in advance for
your business and personal finances. That's because business
owners even those who are acquiring ongoing businesses or
starting their own companies on the cheap quickly find their
business and personal finances are inextricably linked.
That means that before you plan the business, plan your
finances first. Here are some basic steps to consider right now:
Get some advice first.
You need not one, but two sets of financial advice when
starting a business. The first involves the viability of your
business concept. You should understand your business idea
inside and out before you launch and what your new company's
immediate and long-term cash needs will be. The second set of
advice involves your own finances and how prepared you are for
what will surely be a major lifestyle transition. Because new
business owners frequently underestimate their new business's
expenses starting out, they can find themselves funding those
business needs out-of-pocket. That means less money for
day-to-day living expenses as well as long-term planning for
retirement. That's why it's critical to consult a tax and
financial expert such as a CERTIFIED FINANCIAL PLANNER
professional at the outset.
Get rid of your debts.
With the possible exception of mortgage debt, there's very
little "good debt" in the life of a businessperson. So
while you're researching your business concept and putting
together your own financial plan, start cutting back and erasing
as much credit card and adjustable-rate debt from your personal
life as possible. The credit crisis is making it tough for any
business owner even experienced ones to borrow money at
attractive rates. You'll have the most flexibility when you owe
as little as possible.
Work on your emergency fund.
While it's wise for everyone to have 3-6 months of cash set
aside for basic living expenses in case they lose their job or
face a medical emergency, emergency funds are particularly
necessary for new business owners. Startups can be particularly
expensive, and most businesses are not profitable from day one.
Plan a more extensive emergency fund for yourself and for the
business as well.
Start thinking about your legal business structure.
Your personal financial situation and the kind of business
you're starting should determine the legal designation of your
company.
Before choosing a business structure, such as a sole
proprietorship, S or C corporation, partnership, Limited
Liability Partnership (LLP), or Limited Liability Company (LLC),
owners should reflect on their business in the context of their
overall financial life and ask themselves a series of questions:
- Is the business going to be
your primary source of personal wealth and daily cash flow?
- Is it a side business?
- Do you expect the business to
pay for your retirement?
- Do you want it to provide
other financial benefits?
- Do you want to pass it on to
family members or sell it to existing employees or outside
buyers?
The answers to these questions figure importantly into the
decision, along with other key factors such as what type of
business you're starting, its risk factors, current tax laws,
and regulations such as workman's compensation.
Plan your healthcare and other basic benefits.
Automatic benefits are the plus side of working for someone
else. When you're working for yourself, you become your own HR
department and chances are you won't be able to match your old
employer's buying power. If you support a family with these
benefits or if you have particular health concerns, you need to
price the out-of-pocket costs of such benefits before starting
your own company depending on the business and the cost of
those benefits, you might want to rethink your plans.
Price disability coverage now.
You might have short-term disability coverage as part of your
current employee benefits, but that will likely end once you
quit your job. You should price long-term disability coverage
based on your present working salary so you can qualify for the
highest possible benefit. Disability coverage is critical for
self-employed people since they're their own support system.
May 2009 This column is produced by the Financial
Planning Association, the membership organization for the
financial planning community, and is provided by Don McCarty of
Financial Decision Partners, a local member of the FPA.
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