The idea of becoming one’s own boss is very appealing to many of us. Materializing this dream requires taking actions such as conducting a market research, writing a business plan, and choosing the appropriate legal structure.
Today we will discuss a few options you have when it comes to starting a business.
Sole trader or limited company
First you have to decide whether to trade as a company or as an individual. The decision has tax, legal and financial implications.
A sole trader is a simple structure. Essentially, there is no distinction between you and your business. Some of the advantages of being a sole trader are:
- Less paperwork to do.
- You don’t need a separate business bank account.
- You keep your information private because you don’t have to put your address on any of your documents except for invoices.
The major drawback is that any business debt is your debt.
A limited company has the advantage of a limited liability which means that if your business were to go bust, your personal assets wouldn’t be taken. Your maximum loss would correspond to what you’ve put into the company. It’s also easier to sell the business because the company has its own legal entity. The downsides are that you will have more rules and regulations. For instance, you can’t just withdraw money from the business without formally recording it as a salary.
Buy a business or start a new one
Once you’ve chosen a legal structure, you’ll need to ask yourself whether you want to buy an existing business or to build one from scratch. Buying one is less risky. You have plenty of time and resource to do your homework before committing to any investment. Some of the questions to consider are:
- Does the business make revenues?
- What are the types of customers they are serving?
- Who are their suppliers and competitors?
All these questions are much harder to answer if you have to build a new business.
You also need to have a clear plan about how to improve the business. Maybe you have some skills the current owner is lacking. For instance, you are good at marketing, which will allow you to bring more customers, or you have an expertise that’s going to help you improve considerably the product. The point here is that it is easy to improve something which is already working because you have to focus on one aspect at a time.
If there are no relevant businesses out there to buy, you can acquire a franchise. You get the excitement of building a new business while being sure the concept has been validated somewhere else. You also get assistance with marketing, site selection and equipment purchasing. The disadvantage is that you have less autonomy with regards to some business decisions.
Sometimes, the urge to create something new and shape it to your liking is irresistible. This road is the hardest to take. To succeed you will need to be patient and to arm yourself with a great dose of self confidence. Your business plan will necessary be based on a set of assumptions. Also, you will have additional fundamental questions to answer, such as:
- Is the business idea viable?
- Is there a market/product fit?
Your job is to answer as many questions as you can and to systematically validate your assumptions.