If you’re curious about starting your own business, there’s a lot to consider. When first starting out, it is important to take time and fully think thorough what running your own company actually entails. Testing out your idea while keeping your existing job is an ideal trial run, because it will give you time to bring in some revenue and make sure there is market demand for what you are offering. It also gives you time to network. Getting to know people in your prospective industry is valuable because you can get a good idea of what competition is like and make connections with potential future clients.
Once you’ve taken these steps and feel confident in your business idea, work through the following checklist to fully prepare to take the leap to self-employment.
1. Write a Business Plan
Writing a business plan is an important first step when starting your own business. It may seem intimidating to do so at first, but just work on one section at a time—it will be incredibly useful down the road. A business plan will help you nail down your services and explain why there is a need for what you are offering. It’s also a good opportunity to research your target audience so you know who to network with and the best way to sell your services to that group. It’s also a good idea to set goals for yourself in your business plan. Then, review and update those targets as you grow your company.
2. Decide How to Market Your Services
A marketing plan can fall under your business plan, but you’ll likely need to dive deeper to successfully sell your services. When considering how to market your business, decide how you want your personal brand to come across. How do you want to be recognized? What will you be known for?
Two key parts of marketing will be building your online presence and creating a professional website. Every well-established business—no matter how small—should have an online presence in todays’ world. Like it or not, social media is a great way to reach people and showcase your brand both visually and through content messaging. A professional website shows you’re serious about your business. It can help differentiate you from competitors and let potential clients know what you’re all about.
3. Prepare Your Finances
The last thing you want to happen when you start your company is to run out of money before you hit your stride. Even it means waiting longer that you want to launch, it is better to make sure you have enough start-up capital to keep going for at least six months without income. Initial expenses and start-up costs will vary depending on your industry but will likely include utility and Internet charges, project supplies, subscription-based fees (software, a website, apps, etc.), technology (laptop, business phone, etc.), office space or furniture, and a starting marketing budget.
4. Set a Bill Rate
With your business plan, marketing strategy, and finances in order, think about what your desired income is. Knowing your bill rate will help you figure out other important decisions such as large businesses purchases and the type of clients you will target. There are a few different ways to calculate this number, and, keep in mind, that you can always adjust it as your business grows.
5. Learn How to Pay Your Taxes
If you haven’t freelanced or worked as an independent contractor before, you’ll quickly discover that paying your taxes is very different than what you’ve experienced as a W-2 employee. Plan to pay at least 30-35% of your gross income in taxes. This includes: income tax (per your tax bracket) as well as both halves of Social Security and Medicare (FICA). This is also known as the self-employment (SE) tax.
You will also be paying estimated tax payments quarterly. Because taxes are not taken out of payment you receive from a client, paying taxes quarterly helps to eliminate paying a huge tax at the end of the year. To file your taxes, you’ll generally use form 1040-ES, Estimated Tax for Individuals to calculate and pay these taxes. This form contains blank vouchers you can use to mail in payments, or you can make payments online using the Electronic Federal Tax Payment System (EFTPS). If you are not familiar with paying taxes as an independent contractor, it is always helpful to consult a tax expert to get your questions answered—especially the first time around.
6. Choose a Business Structure
Deciding how to structure your business is a big decision that will impact tax payments and compliance adherence. Some options to consider include:
- Sole Proprietor: This is a common choice for many independents. Sole Proprietors file quarterly taxes but are taxed the same on their personal and business income. This option provides flexibility if you are still fully employed but freelancing part time.
- Limited Liability Company (LLC): Originally designed to protect owners of a business from certain business-related liabilities, the LLC structure has since become popular for independents due to its simplicity, yet strong legal protections of a corporation shielding your personal assets. Think of it as the next step above a sole proprietorship.
- S Corporation: With an S-Corp, profits and losses pass through to the shareholder’s personal tax return. This means that the business is not taxed itself; only the shareholders. However, there is an important caveat: any shareholder who works for the company must pay themselves “reasonable compensation.” Shareholders must be paid a fair market value, or the IRS may reclassify any additional corporate earnings as wages, and the S-Corp will need to pay employment tax—both the employer’s share of Social Security and Medicare taxes on all wages. Any leftover profit or loss is then passed through to the owner’s tax return via 1120 K-1 and is not subject to self-employment tax.
- C Corporation: An attractive option for the savvy independent professional, C-Corps make owners shareholders. A C-Corp has the same status that Fortune 500 businesses hold—they are corporate entities separate from their owners. In the case of an individually owned C-Corp, you are not just the owner of your company, but the majority shareholder. Because the corporation is a separate legal entity, it is an individual taxpayer in the eyes of the IRS. While this structure is one of the most complex business arrangements available, it is also the most sophisticated, making it an attractive option for independents.
7. Get Familiar with Legal Requirements
We’ve covered a few important legal requirements, but there are many others that you’ll want to be familiar with. In addition to deciding on a business structure, you’ll want to choose and register your business name, get an Employer Identification Number (EIN) from the IRS, obtain required business permits and licenses, investigate paying state and local taxes, and create a compliance plan.
8. Factor in Insurance and Benefits
When you are your own boss, that means you’re also responsible for providing your own insurance and benefits. Not only do you need to protect your business, but you also need to keep yourself healthy and happy.
Commonly, independent business owners carry general liability insurance and errors and omissions insurance—at a minimum. Depending on what client you are working with, they may require additional insurances as well. When it comes to health insurance, there are many different options for independents. Getting added to your partner’s plan might be easiest for some, or you can look into COBRA as a temporary option, or an individual, small business, or group plan for the long term. You’ll also want to consider retirement options as you plan for the future, or parental leave if you’re planning on having children.
9. Decide Where to Work
Deciding where to work can be one of the more fun parts of starting your business. If you have space for a home office, that’s a great low-cost option initially. But, there are other options as well such as joining a coworking space, renting an office, hot desking, working from ana hourly space, or getting creative and working from public spaces.
As you dig into this checklist, you’ll find that there are many other steps to take before you can start your business. It’s a lot to take on, but well worth the benefits in the end. With MBO Advantage, we can help shoulder some of that burden—assisting in setting up the right business structure and maximizing your revenue.