Last week I spoke with a client who was excited to tell me he had left his job and started his own consulting company. I was happy for him, and as his advisor, was curious to learn more about it.
Here’s a snippet of our conversation:
Client: I’ve already got business lined up and I’m planning to hire an employee.
Me: That’s fantastic—will this person be W-2 or 1099?
Client: W-2, I guess… We agreed to have a salary because we will be working long hours every week.
Me: More than 40?
Me: Are you familiar with the Fair Labor Standards Act?
Clients: The what?
(I went on to explain that I’m not a labor-law attorney, but that he should read up on this topic.)
Me: Have you considered creating an employee benefits manual?
Client: I don’t think we really need that; it’s just us two.
Me: How about liability insurance?
Client: Do I need it?
Me: Are you bonded?
Client: What’s that?
Me: Do you want to have a retirement plan, like a 401(k)?
Client: Absolutely; we agreed it was a “must,” and I want to have a matching plan for contributions.
Me: Are you familiar with the different kinds of retirement plans and the calculations for employee and employer contributions?
Client: They’re all the same, aren’t they?
Me:(trying to politely restrain myself) No!
Client: Well, it’s okay; I think we are going to be partners, so none of this will matter.
Me: Actually, it matters a lot. Have you discussed creating a partnership agreement? Because if there’s a fifty-fifty ownership split… who gets the deciding vote?
Client: That’s a good question.
Me: Have you considered different types of business structures? C-corporation, LLC, S-corporation? Have you talked to anyone about these options?
Client: We just want to start a business, make a bunch of money, and then sell it and retire—we don’t want to do all of this. It doesn’t matter that much, does it? We have customers who are ready to buy, and we just want to get started, not pay lawyers a bunch of money.
Me: Actually, it matters a lot. One of the biggest mistakes entrepreneurs make is failing to plan.
Another way to put it: Failing to plan is planning to fail.
If you want to succeed (and who doesn’t?), design the business before it’s opened—what does it look like, who has which responsibilities, and how do we value the company? This all needs to be done before the doors open and the website goes live.
The primary problem most new business owners face is a lack of familiarity with the process—they don’t know exactly what it takes to start, own, and run a business.
Thankfully, my client was interested in listening and open to advice. And he had overcome another major issue in business—knowing who to trust.
Knowing who to listen to and how to get everything implemented takes a lot of work—and it’s work that doesn’t have anything to do with the primary function of the business itself, which can be challenging for many entrepreneurs. In fact, many businesses fail because the founder wants to work in but not on the business.
The good news is that there are people who can help. Check with your local chamber of commerce, research on Google, and read, read, read.
You’ll also need legal counsel, bookkeeping and tax help, and a financial advisor. A good financial advisor is like a personal business coach. Their job is to help you position your business’s financial plan and your personal financial plan for success.
If your financial professional doesn’t know how to help, look for a new one who can. It’s not personal—it’s business, and it’s too important to cut corners.