Memo – Thinking Of Starting Your Own Company Instead Of Returning To A Job? Here’s My Best Advice

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In the current employment environment created by the Coronavirus, many people have been asking me about starting their own business.  They have come to the realization that relying on even a well established business for continued employment is no longer a guarantee.  Being able to have control over your future income stream is becoming more appealing.  Following is the advice I give to those people looking to strike out on their own: 

1. Do you have a skill that is readily marketable and potential clients to serve?
   1. If not, 
      1. You are not ready to start your own business. 
      2. There are many predators holding themselves out as New Business “Consultants” and Mentors. They quite often say they are experts and coaches. 
         1. Ask for a detailed resume and how long they have been an “expert.” 
         2. Be careful of anyone or any organization holding themselves out this way. These expensive consultants charge high prices and promise you a turn-key business when you are done with their “courses” but usually with no money back guarantee. If they don’t offer a full refund in case their training does not work, then walk away quickly.
            1. There are countless YouTube commercials, and email scams from people promising to help you start your “Multi Million Dollar” business on Amazon, Etc. Be extra wary of lofty promises, and ask yourself, “If they are so successful, why would they need $49.99 from me”? 
         3. Do your homework before paying anything. If you are considering one of these, ask for at least ten references of recent successful students and contact all of them before signing anything or paying any money.
      3. If thinking of a completely new industry than one you have experience in, consider taking a job in that industry and gain serious experience, and then starting something on your own in the future. 
         1. You need years of experience working for someone else in order to successfully start your own business. 
            1. Pizzeria example – A client of mine retired early from Wall Street and came to my office to discuss fulfilling his dream of owning a pizzeria. He had never worked in that industry before. 
               1. I advised him to go and work in a pizzeria for at least two years and then decide. 
            2. Apply this advice to your situation if you also don’t have any experience in an industry you want to work in. 
         2.  MLM multi-level marketing schemes. 
            1. Multilevel marketing (MLM) is a strategy some direct sales companies use to encourage existing distributors to recruit new distributors who are paid a percentage of their recruits’ sales. The recruits are the distributor’s “downline.” Distributors also make money through direct sales of products to customers.
               1. There are some legitimate MLM companies.
                  1. Research heavily online and with the Better Business Bureau before investing anything.
               2. Get at least ten other recruit references from the person trying to sell you on an MLM. Rigorously interview them about their experience, and ask for documentation of financial success. 
                  1. If at least ten references aren’t provided immediately, walk away. This is most likely a scam. 
               3. In most MLM schemes, there are a few people at the top of the “pyramid” making millions of dollars, and thousands at the base of the pyramid losing money.
               4. Be wary if too much importance is placed on your recruiting people beneath you, your “downline”,  in order to make a profit.
               5. Be wary if an MLM company wants you to make a significant purchase of “products.” There are hundreds of thousands of garages filled with products that unsuspected people have purchased and were unable to sell. 
               6. Research the products being offered. Are they essential? Are they unique or are they available in similar forms at local stores and online.
                  1. MLM offerings are usually more expensive than their competition.
                  2. If the products are not unique, and more expensive than the competition, I think your decision to invest is made for you. 
2. The most successful new entrepreneurs are the ones who leave a long term career and then strike out on their own providing the same products or services.
   1. Do you have a non-compete agreement with your current employer?
      1. Be sure to have an attorney review it before doing anything.
3. Develop a business plan for your new venture.  Many businesses fail because they neglect to plan out their income and expenses (Cash Flow) over the initial years.
   1. Be thoughtful as to when your income will come in.  Just having clients and doing work does not necessarily mean money in your pocket right away.
      1. Many businesses have a 30 or 60 day payment policy.
      2. Consider the effects of late paying clients on your cash flow projections.  
      3. Consider the possibility of bad debts and how this could affect your ability to continue.
         1. Having your sales contract or engagement letter reviewed by an attorney is an important factor in being able to collect from difficult client situations.
   2. Plan for unexpected expenses.  In business there will always be expenses that pop up which you did not consider.  You need to have enough cash reserves built up so you can overcome unforeseen obstacles, such as a quarantine lockdown!
4. Don’t rush to form an LLC unless your potential clients require it.
   1. You don’t need to form an LLC to begin doing business. 
   2. Why go through the expense of forming an LLC or Corporation, when you can more cheaply file for a DBA? 
      1. Then if you find you can be profitable, that might be the time to form a company
   3. Legalzoom and other online companies don’t always do all the necessary filings on the federal and state levels, so do you own research.
5. An LLC or Corporation does not protect you from personal liability, so be careful!
   1. Many people believe that once they have formed an LLC or Corporation they cannot be personally sued.
      1. This is untrue. If you personally do an act, you could be personally responsible.
   2. Get business insurance before starting your business.
      1. This is the best way to protect yourself from liability.
6. Set up an accounting system from the beginning.
   1. Maintain a separate business account.
      1. Do not commingle business income and expenses in a personal account.
7. Do you have to register your business? 
   1. It is possible that your state, county and even township have requirements that you register your business before you are legally able to transact business.
   2. Do you live in a townhouse or condominium community?
      1. Check your bylaws for restrictions on running a business out of your unit.
   3. Your state may require you to have a license, in addition to simply registering your business, for the type of work you intend to perform.
8. Home Office Deductions are often missed. 
   1. If you are working from home, be sure to accumulate your expenses at your residence, whether owned or rented, so we can calculate a home office deduction for you at tax time.
9. When executing contracts or engagement letters to perform services, get the counsel of a good commercial attorney.
   1. Make sure to include wording about when payment is due to you and
   2. That if collection action is needed, the loser in court pays the other’s court costs and attorney fees.
   3. Don’t download contracts or other forms off the internet. 
10. Be very hesitant to use retirement plan and pension funds to start a new venture
    1. Early withdrawal of retirement plan and pension funds most likely will be taxable AND subject to a 10% penalty if you are under 59 ½. So the total amount of money you have to invest can easily be cut in half once you consider these tax implications.
11. Most Important! Consult with a CPA on all the accounting and tax ramifications of your new endeavour.
    1. Keeping a CPA on retainer for ongoing tax, accounting and business guidance is essential. 

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Remember,

“If We Aren’t Working For You, Then You Aren’t Working At Your Best”

Chris Whalen, CPA
(732) 673-0510
81 Oak Hill Road
Red Bank, NJ 07701
www.chriswhalencpa.com

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