When launching your own business there are many decisions to make ranging from minute details to “make-or-break” enormous ones. Will you have an office location? Will you hire an accountant or bookkeeper? Will you have red or blue ink on your business card? Will you work only on weekdays? Will you target residential or commercial customers? The list goes on and on. While some of these decisions will have a small impact on the future of your enterprise, reaching a conclusion about your business model and ownership structure is one of the biggest and most important decisions you’ll have to make.

Maybe you’ve totally got these decisions in the bag and know exactly how you’ll move forward, but for many entrepreneurs this process can seem confusing and overwhelming. Not to be misleading, these are huge decisions with many little details woven throughout, but it’s not nearly as intimidating as you might think if you just have a little background knowledge. Luckily for you that’s exactly what you’ll be armed with after reading this post.

Sole Proprietorship

As opposed to many of the other terms and options, the name here kind of explains itself. If you plan on being “where the buck stops” then this is the structure for you. As owner, boss, manager, foreman, or whatever term (or combination thereof) you’ll call yourself, you won’t have to debate decisions with anyone or worry about their standards and performance, because if you find yourself displeased with someone’s actions or performance, you’ll have the ability to dismiss them without repercussions. That sounds like an easy way to avoid conflict and it can definitely have its advantages, but on the flip side, don’t fool yourself into thinking it’s always easy to be flying solo. What happens if you’re sick or injured for an extended period? There is no one there to automatically pick up the reigns and move forward. What happens if you’re facing a major decision? While you don’t have to answer to anyone else, you also don’t have anyone else to share in the weight of responsibility. Maybe you’re really good at pouring footers and driving nails but your people skills are a bit rusty at best…as sole proprietor you’ll still have to be nice to the occasional customer-from-hell and deal with trying to convince people to select you during the bid or initial consult. In many instances, contractors simply have no need or desire to move past sole proprietorship, but do be aware that being the boss isn’t always easy; that even if you’re on vacation, you’re still technically on call and that you are responsible for making sure all the bills get paid. However, there is undoubtedly a huge sense of pride and accomplishment to say you built a business from the ground up, on your own.

Partnership

This name is also pretty indicative of what you could expect as you’d obviously be working with one or more partners. When compared to a sole proprietorship, everything about a partnership is pretty much the exact opposite, for the good and for the bad. There are a few specialty types of partnerships, but for the purpose of this article we’ll assume you’re only interested in a general partnership, which basically means you would be required to share profits, decisions, and ownership with at least one other person, which can lead to disputes and confrontations when you inevitably butt heads over a tough decision (surely contractors aren’t ever stubborn though, right?).  Many times partnerships are formed when one person has the start-up funds but doesn’t want to actually handle the day-to-day work, while the other person (or people) have the ability but not the money to begin. This might be your scenario or you might be working with a spouse, friend, or sibling in completely equal roles. It is comforting to know that there is someone else’s shoulders on which burdens can rest, but partnerships have the potential to end very badly if someone becomes upset or feels they have been cheated. For you and your partner(s) protection, spending a few extra dollars to have a legal partnership agreement detailed, defined, and drawn up by an attorney is an irreplaceable investment.  You would like to think that a handshake would be enough but, unfortunately, as with marriage, no one sets out in a partnership hoping or expecting it to end miserably, but they sometimes do and it will be to the benefit of all parties involved if you have a clearly drawn-out plan of what the responsibilities and rights are.

LLC

Don’t be intimidated by these initials, they simply stand for “limited liability corporation”. Obviously the sound of being limited on your liability seems like a win-win, but there is a little more to it than that.  The biggest advantage of operating under a LLC is that you, as a person, are protected, because you are legally viewed as a separate entity from your business, whereas in a sole proprietorship or partnership you are seen as belonging in and of each other, meaning that if your business defaults on a loan or goes bankrupt, the bank or financiers can legally assume your personal assets, essentially meaning you could lose your home to pay off your business debts. This obviously is a huge benefit should something go wrong or end up less profitable than hoped for, however, all of these extensive legal details mean exactly that: there are more extensive legal details. LLC’s are more complicated to establish and will require more formal processes as there will be more paperwork to fill out and file, plus extra precautions will have to be taken to make sure that personal details, business, and money are kept entirely separate from business ones. (That whole “being protected” thing becomes much less reliable if a bank or court can’t see where your personal money ends and the business money begins.) It is also a much more formal organization where there can be partnership or ownership interests, which can be sold. This obviously means more money available for operating costs but increases the complications when dealing with legal matters or disputes about decisions. LLC’s will provide some tax advantages, though, as you will only be responsible for paying taxes on the portion of your income as opposed to having to pay the total amount of tax on profit generated by the entire business when you are a sole proprietor.

Corporations

There are two main types of corporations in the U.S. today, an “s-corp” and a “c-corp”. The most common type of corporation in our market is the c-corp, which provides similar benefits of an LLC in that you are shielded as a person from any judgments or rulings levied against your business. Corporations are obviously much more complicated business structures as they have shareholders and generally stocks for sale. This obviously isn’t a simple business model that would apply to “Joe’s Home Repairs” but if you’ve been in business for years and have created an impressive network of contacts and investors, you might consider moving into this business model. There are two major differences between the “s” and the “c” type corporations. First, a c-corp is usually larger, having an unlimited number of shareholders, although there are regulations on how many you can have before having to file with the SEC, the nice folks who regulate our stock exchange. In an s-corp, which is usually a smaller business, you can only have 100 shareholders and one class of stock. The second major difference is how you are viewed for taxing. Many businesses choose to be an s-corp because they can avoid the dreaded “double taxing” of a c-corp. In an s-corp you would only be taxed on the income you personally gain from the business, while shareholders also have income and losses through the business, meaning the burden of taxation is distributed among yourself and anyone else who has a stake in the business. In a c-corp however, profits are taxed when earned and then are taxed again when passed along to shareholders in the form of dividends, where shareholders cannot claim any corporate losses to offset the tax burden, as opposed to an s-corp.  Corporations do have more power and credibility as they are usually such large business entities and have such huge earning potential. Obviously these business structures are not for the faint of heart or the first-timer, but it’s also useful to be armed with a better understanding of the business world around you and to know what you could potentially grow into.

It’s difficult to grow a business if no one knows you’re in business, so spreading the word is crucial to your success. Many contractors forget that advertising is so important and simply assume that word will travel on its own. Unfortunately, it usually does travel exceptionally fast if it’s something negative. Otherwise, people are pleased with the results and it might just slip off their radar until someone specifically asks who remodeled their kitchen or built the awesome deck in the backyard. Considering this, you need to make sure that you take proactive measures to promote yourself in a positive and reliable way. In today’s society, there are endless means of reaching a customer, but some are a bit more suited to one need or another. So we will discuss a tried-and-true method that is a viable option for almost every kind of contractor or service provider.

Many things are handled in the digital world nowadays, and if you have a cell phone and a computer, you undoubtedly get email ads and text notifications from stores. While this is great for a products such as clothing or food, you probably aren’t going to send out a text telling customers that they can show that message to receive a free tub-caulking. The first consideration in any advertising situation is the audience; how best to reach the specific people you are targeting. Obviously in your line of work, you are targeting home owners, and perhaps property management companies, who are able to pay for the work (hopefully). This means it will probably be a slightly older customer you are trying to reach so an actual piece of mail is a great way to reach that demographic. Less likely to rely solely on digital media, an older customer base still reliably checks their mail and reads their newspaper, and gives them greater credibility than other forms of advertising, so a direct-mail piece is a great option to reach these folks. (And by older, we aren’t referring to 98-years-old, but 30ish and above. Old enough to own a home and be responsible about paying the bills and general upkeep).

Chances are you’ve gotten many direct-mail pieces over your lifetime promoting various services and causes. Any responsible person will check their mail and at least flip through the pieces to make sure they aren’t missing a check or, more often, a bill. This is your opportunity to grab their attention. Bright colors and bold text are essential to stand out in a sea of papers so consider a neon shade (safety yellow, anyone?) or a solid red or other striking color. Make the first words they see catch their eyes with suggestive questions or statements like “Did you know that little roof leak could land you in the hospital?” or play up the time of year with “That tax refund would look great as a new and improved patio, kitchen, etc etc…” Coupons and offers are always a great way to give customers incentive to use your services. Consider offering a discount on a specific service, a package deal for “Spring Cleaning”, or promoting that you always provide free estimates.

This probably seems a bit intimidating to someone who has never done a formal advertisement, but another perk to using a direct-mail option is that you’ll have help from whomever you select for the service. Most newspapers offer a direct-mail option which is a great way to be a bright-and-early reminder of their need for a reliable contractor. Using this option, and depending on the local paper in your area, you can generally select the day of the week you’d like to be included in the paper as well as a specific area or zip code for delivery. Generally you will pay more to be in a weekend edition, particularly the Sunday paper, than a weekday press, but there are pros and cons to each. Work with the advertising consultant at the paper to determine what options are available to you and would best suit your needs. Many places will offer bulk discounts for inserting a higher number of mailers and/or having a larger number printed up. Even if you only plan to distribute a few thousand, it might be worthwhile to have more printed initially to achieve a lower “per-item” cost, and then you could run them a few additional times in the paper at a later date, or keep them to personally hand out at bids or with potential clients. There are many private services that also offer direct-mail, which would generally be delivered in the actual mail. A quick internet search will help you identify many of these or if you already get direct mail pieces, look at the fine print for information about the publisher and how to contact them. Keep in mind that most places will have a minimum requirement, either in dollars spent or in total number of pieces printed or distributed, so don’t think that you can only send out 50 at a time.

As a good advertising consultant will tell you, frequency and repetition are essential for print-advertising success. While this probably seems like a sales tactic, it truly is better to budget your money to send a smaller number of ads, several times than thousands of ads, one time. It’s just like studying for a test, the more often you see something, the more of a presence it builds in your brain. Plus, even if your piece gets thrown away or overlooked the first time, the more chances you present to be seen, the greater your odds of, well, being seen. You also create a kind of rapport with people when you’re persistent. How many of us have declined a product or service the first time but when the same salesman keeps asking, you eventually feel more inclined to listen because they obviously have something to say that they feel is worth working at to get you to listen. People start to think “This is the third time I’ve gotten this. I wonder what it is.”

Many people forget how essential advertising is to their success and cut it first when the budget gets lean. It is somewhat of a catch-22 situation when funds are limited but you can’t increase those funds without people wanting your services, and they can’t want your services if they don’t know they are available so plan wisely to accommodate for advertising and promotion.

Deciding to start your own business isn’t a decision to be taken lightly or one that you decide upon like adding items to a grocery list (hopefully!). So it stands to reason that if you are ready to move forward with a business venture you’ve given a great deal of thought to the specific risks and benefits of ownership. Obviously one of the biggest details to deal with whether starting a business or operating one after 20-years is always money. If you’ll be building from the ground up, financing is of the utmost importance as the decisions you make can ultimately be a huge factor in whether you are successful or not, plus giving you a more solid-foundation to grow upon. Maybe you’ve just received a generous inheritance from Great-Aunt Hester and money will be no issue for you, but for the other 98% of entrepreneurs, it’s a huge source of anxiety. Let’s look at the ups and downs of the most viable options, which will help make it clear what will be the best decision for you and your business.

Personal Funds

This is perhaps the easiest source of money to deal with but the hardest to secure. If you’ve known for years that owning a business is your life-long goal then hopefully you’ve had the insight and ability to save towards its creation. This would obviously lend a huge helping hand towards the financial ability to start a business. If, however, you’ve only recently made this decision, you might not have a huge chunk of change lying around, or it might already be designated for a dream home or a college fund. If you’ll be starting slowly, as a weekend handyman, you can probably get by on your own money, even if it’s a little at a time, but if you plan to work exclusively at your trade then the cost of tools, vehicles, advertising materials, employees, insurance, and possibly an office can easily deplete even a pretty “padded” savings account.

If you do elect to use personal monies, keep in mind the need for cash flow and emergencies. While you are just beginning, chances are it might be a while before you have a steady source of income as you are trying to build up business and it takes a while for payments to be received, so make sure that you don’t totally deplete your day-to-day money, particularly if you also have to live off of it. It’s no fun to use every dime you have to keep a business afloat while the lights have been turned off at home or you can’t afford to send your child on a school field-trip. In case you haven’t already learned this in your personal life, owning your own business will be a great introduction into the reality that things will always go wrong, break, blow-up, or fall-thru at the most inopportune time. This is simply a fact of living and can’t be avoided, but it can be prepared for, so resist the urge to spend all of your cash up-front and make sure to leave some stashed for an “emergency fund.” Maybe you’ll be uninsured for a while and end up needing stitches, maybe your only nail gun falls off a roof, or maybe you get a little excited and dig through someone’s buried cables, the scenarios are endless but you can guarantee there will be unexpected and un-planned expenses so do yourself a favor and have a little cash to cover it.

Under the personal funds umbrella there is also the option to borrow from a private source, such as a parent, sibling, friend, or business partner. This is a great option to secure cash without the hassle of a bank and legal stipulations however it can be extremely risky to the health of the relationship. You’ve probably always heard that “money does funny things to people” and while you might have bummed lunch money from your brother or buddy a time or two, this would be more than a $10 loan. Carefully consider the ramifications of this situation if for some reason you cannot repay the money, or at least in the time or amounts expected. What would this do to your relationship? Would the insult to your pride be worse since it’s a personal acquaintance? How would that person handle the situation? Also, make sure you consider how secure their source of funding is or how trustworthy that person is in general. While many people use this option and it certainly can be a useful tool, just make sure you have carefully considered and thought through this before making any decisions you might come to regret.  If you do decide to borrow from a personal source, draft a contract with an attorney or have an agreement notarized to make the terms you’ve decided upon legally binding and secure.

Business Credit Card

According to the commercials on TV, a business credit card is a guaranteed way to have business success and peace of mind, or at least that’s what they portray. While a business credit card can be very helpful it might also be the easiest way to get in over your head if you aren’t careful. As opposed to pulling money out of your bank account, which will continue to deplete and you’ll see the difference, it’s much easier to swipe a piece of plastic over and over throughout the course of a month, not realizing how much you are adding up to be due at once. Now if you are the type of person who uses a card and pays it off every month, then you could truly benefit from a business card, particularly if you shop for a rewards program. Depending on your needs, you could be earning towards a new vehicle, airline tickets, or simply cash back every time you buy a box of nails, which is a great way to maximize the benefit of a credit card. What the credit card companies are hoping, though, and the trap that so many fall into, is that you’ll be lured in by the promise of rewards and purchasing-power but then overextend yourself and be forced to pay in installments, which are penalized with extremely high interest rates. A credit card is a great tool to have on hand in an emergency situation where you can’t easily access cash or to give yourself a “cash advance” until the checks come in at the end of the month, but do proceed with caution as the interest rates are staggeringly high, sometimes 3xs the amount a traditional loan would charge. If you have problems managing your money or limiting spending, use extreme caution before taking this route.

Business Loan

Depending on the size of your business and the scope of start-up costs, this is a great option for someone looking to making the leap to fully self-employed. If you’ll need to purchase several thousand dollars of equipment, materials, or space, this is probably your best bet, although it will require a formal process to satisfy loan requirements. Most banks will want to see a business plan and documents to support your claims of why you deserve the money and how you plan to use it, so you’ll have to do more advance planning and paperwork. You will also have to be willing to answer a lot of questions about your financial standings and provide details about the things you owe and own. This isn’t always a very fun process, particularly if your financial snapshot is a little less than rosy or you’re recovering from a rough patch. Keep this in mind if you can afford to wait a few months to, say, improve your credit score or pay off outstanding debts, if you’re concerned about your ability to qualify for a loan. A bank loan is easier to manage though as you’ll have a specific amount due at a specific time for a specific duration, which makes budgeting easier for someone who struggles to do so. It is also a secured loan and insured by the bank, meaning that the funds can’t simply “disappear” as opposed to if you are borrowing from a personal acquaintance.

Many banks offer programs specifically for small-businesses and start-ups, understanding there is a special set of needs and challenges. There are also grants and federal programs that offer assistance to entrepreneurs with financing, counseling, and management. Research options that might be available to you on a local, state, and federal level. These would be great supplements in addition to any bank financing you might have or need.

Line of Credit

If you are already established in business but might have a huge purchase to make, are looking to expand, or have hit a rough patch, a line of credit is a good option for a little extra cash. Similar to a credit card in that you can “charge” what you need, it usually has a lower interest rate and might not be as enticing to “over-indulge” with. The major drawback with a line of credit is that banks generally will only extend these to lower risk businesses or individuals, meaning those with solid credit scores, an established payment history, or who have been in business long enough for the bank to assume they are secure. If you have an established history with a bank or a banker personally, they might be able to help you secure a line of credit even if you do have a few dings on the credit report. Once you have a line of credit, they also provide a sense of security for unexpected and emergency expenses as you might not have the thousands of dollars on hand needed to replace a costly piece of machinery, but would be able to purchase it through the line of credit and pay it off either in lump sum or at the monthly installment date.

Okay, so it’s fun to think about quitting your day job and starting a new business.  And I remember how good it felt that day I went to my boss and put in my two weeks notice – there’s nothing quite like it.  But, can I be brutally honest?  The truth is that you need to be very smart about how and when to make this transition.  Do it the wrong way or prematurely and you could be setting yourself up for a world of hurt.

To put it simply, if you just drop your job cold-turkey and have no savings to live off of while your new business gets its footing then you are almost certainly doomed to fail, and you could eventually be reduced to begging your old boss to hire you back.  I know that’s not what a lot of you want to hear, but it’s the cold, hard truth.  You absolutely must have some money put aside for life expenses, because new businesses don’t typically spit off lots of cash flow right from the beginning.  There are considerable startup costs that will eat up most of your profits in the early phases.  Tools are expensive.  Trucks are expensive.  Marketing is expensive.  Getting new projects when nobody trusts you yet is expensive.

There’s no hard and fast number because everybody’s financial situation is going to be different, but in general it would probably be a good idea to have enough money set aside to live off of for at least six months before you quit your day job.  So, let’s say you require $3,000 per month to pay all your bills and meet all your obligations.  That would mean that you really ought to have at least $18,000 set aside before quitting your job.  12 months worth would be even safer, if possible.  The more the better.

I’m sure some of you will read that last paragraph and think that I’m crazy, but take it from somebody who has been there – your profits will be minimal in the early stages, no matter how good things are going!  The startup costs and investments will pretty much devour most of your profit and cash flow.  And keep in mind that if you want to grow as a business then you will need to re-invest a healthy chunk of your profits back into more marketing, more equipment, more people, etc.  If you start taking out too much cash for yourself right from the get-go then you will starve your business to death!  It needs money to grow and prosper.  That’s why it’s so crucial to have backup savings to live off of. Give your business a fighting chance!  The idea is that after six months or a year things will be really rolling and you can then afford to start taking a healthy salary for yourself that will meet your personal financial obligations.

Perhaps you’re thinking that either (A) you’ll go insane if you have to stay at your job full-time for another 6-12 months or (B) you’ll never be able to save up that kind of backup cash before starting the business.  I hear you.  It’s understandable.  In this situation I would try to find some kind of half-measure to make it work.  Do you have the kind of job where you can slowly wean yourself off as your business takes off?  Cut back from 40 to 35 hours, then down to 30 hours a few months later, then down to 20 hours a few months after that, all the while building your business in your spare time.  That way you’re not totally cutting ties with that weekly paycheck until you’re absolutely sure that the business is going to make it.  I’m not going to lie – it will be hard to keep your day job and launch a contracting or service business at the same time, but this is usually the smartest way to go if you don’t have 6-12 months of living expenses set aside.  The alternative, however, is not a pretty picture.  Cut the job off too soon and you could very easily sabotage your new business and your personal finances.  Suck it up, punch that clock for just a little bit longer, and you will be doing yourself and your business a huge favor in the long run.