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Capital, Confidence and Concept
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Conventional wisdom says that starting your new business is risky, although these days “risk” is a relative term.
It turns out that working for someone else is risky, too – as so many people have discovered in the past 18 months. Evidently, joining a union for the perceived promise of stability doesn’t remove that risk, and neither does working for the government.
In the presence of the risks of entrepreneurism, there are, however, two things you need to bring to the table in some combination when you make the leap to start your own business: Capital and Confidence. The need for these two elements exists in a constantly evolving, symbiotic dance because the amount of either that is available at any given moment varies. In a general sense, the less capital you have, the more cajones you need to survive.
Nevertheless, many small business epitaphs have been written by entrepreneurs who had an abundance of both, but who lacked a solid, well-thought-out concept of what they were actually doing. In other words, a bad business idea – or a good business idea executed poorly – has the power to trump everything else when it comes to achieving ultimate success.
The concept of concept is multi-faceted. You can have a general idea of something that might make a successful business model and still have absolutely no idea how to actually make it work. Which is why it makes sense to test your assumptions, build a good support system, increase your business skills and knowledge, and continually adjust your plan as you move forward. That is a powerful reason why business coaching makes so much sense for first-time entrepreneurs and new business owners.
Of these three elements – Capital, Confidence and Concept – the risks of entrepreneurism are only alleviated by improving your concept. Contrary to the assumptions of many first-time entrepreneurs, having what is perceived as “sufficient” capital doesn’t remove the risks at all – it only defines the amount of risk. And, confidence – although absolutely essential to any entrepreneur – can actually increase your risk if it isn’t appropriately balanced by the other two pieces.
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Should you change your corporate status?
Posted by: | CommentsWay back in December 1997, Inc. Magazine published an article that discussed the circumstances under which a business may want to consider switching its corporate status. Among the conditions it discussed were the following:
- The company needs capital. If you’re simply contemplating raising your credit line or bringing in some informal investors, you can probably stay with whatever structure you’ve got. But if you’re aiming for venture capital or a public stock offering, you’ll need C- corporation status.
- You’re exploring incentive compensation. A deferred-compensation arrangement will likely mesh with whatever corporate structure you’ve got. But setting up a stock option plan will be much easier if you switch to C status. The exception: you can use an S structure if the number of employees covered–plus the number of previous shareholders–doesn’t exceed the new 75-owner limit for S corporations.
- The company is profitable and no longer capital hungry, and you’re looking to boost your personal income. One quick solution might be to switch from C- to S-corporation status, thus eliminating the double tax on all dividends paid out to shareholders. But don’t go this route if you’re also contemplating an IPO: you won’t be able to revoke your decision for five years.
- You’ve got great prospects, but the company is still losing money like crazy. Corporate losses, and the tax benefits they can provide, may be more valuable if you switch to a C corporation. That’s because, in many cases, S-corporation owners can claim corporate losses only on their personal tax returns up to the amount of their total investment. With C corporations, most losses can be claimed (or carried forward into later tax years) at the corporate tax level.
- You’re thinking about adding fringe benefits but are looking for ways to control their costs. It’s time to get your accountant to do a cost-benefit analysis. Many fringe benefits for owners turn out to be cheaper with C-corporation status. But don’t switch before figuring out whether the cost of double taxation would wipe out any benefits you’d receive from a switch.
- You’re diversifying the company into a new business line. Wait! Although switching to an LLC structure is often too costly to make sense for an established business, you might be able to achieve real benefits by organizing your new venture from day one as a limited-liability company.
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