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Let's start with the good news. You've no doubt heard the statistics: that 9
out of 10 new businesses fail. Well, it turns out that census data show that
about 65% of new businesses were still in operation after 4 years. As we dig a
little bit deeper, though, the news is more sobering for solo entrepreneurs:
Successful businesses tended to be employer firms rather than solo enterprises.
And several studies don't even take into account sole proprietorships. A look at
the factors contributing to success or failure in these studies, though, can
still offer valuable lessons to those determined to succeed.
Here are a few do's and don'ts:
1.
Do your homework before opening your new business. The most common reason for
failure cited in recent studies was "outside business conditions" having to do
with increased costs (such as rent and insurance)and new competition. You should
study the existing and potential competition and factor in increases in fixed
costs as you determine whether you have the capital you need to get started. If
you're already in business, you can still do this research and incorporate the
results into your planning. Go to the library and read up the specific costs and
hazards associated with your industry. Get training or work in a successful
business that is already doing what you plan to do so you can see from the
inside how common problems are resolved and success is achieved.
2.
Do eliminate or reduce existing debt as much as possible and clean up your
credit reports before you open your doors for business. A 1998 study showed that
difficulties obtaining financing and excessive debt were the second leading
cause of business failures. Businesses started with at least $50,000 in capital
had the best chance of success. This doesn't have to be your own personal
capital, of course; but if you don't have it, you need to be in a position to
borrow it, and that's difficult to do if you already have high levels of debt
when you get started. Before applying for funding, be sure to get your credit
reports, which you can do easily and cheaply at MyFico.com. The site has
terrific tools you can use to get errors corrected. If your credit is poor,
there are services, such as those offered through Eventis that will help you
repair it (see our website).
3.
Don't start a business as a sole proprietor or general partnership. You
absolutely must put into place a separate legal entity, such as a corporation or
limited liability company (LLC)to operate your business. If you're already in
business as a sole proprietor or mom-and-pop partnership, you must do this
immediately! The risks involved in starting a business, especially for
independent entrepreneurs, are high enough without multiplying them further by
putting all your personal assets, including your automobiles and your personal
residence, at risk. Some experts have argued that this way of doing
business--which most opt for because it's "easier"--is so dangerous that it
should be outlawed! This is true from a tax standpoint as well as an asset
protection one. There are many advantages that the government gives to
businesses that are properly structured which are simply not available to you if
you insist on operating as a sole proprietor. Just don't do it!
The right structure for your business would involve one or more entities--such
as an LLC managed by a corporation. If you are a serious entrepreneur planning
to build long-term wealth, a comprehensive home study course on business
entities will save you thousands of dollars in fees, taxes and unnecessary
losses. The resources on our website will help you choose the right entities for
you and show you how you can get them set up quickly, easily, and inexpensively.
4.
Don't incur significant expenses without first putting your business entity in
place. Start-up expenses, expenditures made before the date you are officially
in business, in excess of $5,000 cannot be deducted in full in the year in which
they were incurred; instead they have to be deducted over 180 months (15 years).
By contrast, expenses incurred by an existing business can be amortized or taken
all in a single year (within certain limits) under Section 179 of the tax code.
5.
Do be sure to check with your local and county governments to find out their
requirements for doing business. You may have to register, obtain a permit,
and/or pay a business tax, and there are stiff penalties that apply if you fail
to comply with these requirements.
6.
Don't incur high fixed costs, such as rent, if you can avoid it in the early
years of your business. Starting a business from home was cited as a positive
factor in business success, because of this limitation on fixed costs. Obviously
if you have a restaurant or gym, or something of that sort which requires a
separate commercial space, you will have no choice in the matter. But if you do
have a choice, create a dedicated work space in your home.
7.
Do obtain one of excellent business tax guides we recommend on our resources
page (http://www.wealthstrategies202.com/taxes.htm). The studies of business
failures cited tax problems as one of the major causal factors. Unless you're a
sole proprietor, the tax guides commonly available are addressed to individuals
and don't help much with business taxes. (And if I've not convinced you not be a
sole proprietor yet, one look at all the tax deductions available to a properly
structured business operating as a corporation or LLC will!)
Follow these simple rules, and you will dramatically increase the likelihood
that your business will be one of those still around in five years.
Copyright 2006 Azur Pacific Associates
Germaine A. Hoston, Ph.D., President of Azur Pacific Associates, a consulting
and translation firm, has operated successful consulting businesses in the US
and France. Get a free special report when you subscribe to her free eNewsletter
for Small Business Entrepreneurs at:
http://www.wealthstrategies202.com
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