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Action Steps

Start Here: Protect You and Your Family

A special note from the founder of Start on Purpose.

We love the upside of business ownership. Prospering companies boost family incomes, create new jobs and have the potential to solve some of the world’s most challenging problems.

No matter how big or small your business purpose, we want you to succeed with the least amount of financial risk to you and your family. Owning a business can become a family’s largest personal asset—worth thousands or millions of dollars. Or, it can become a devastating personal liability that decimates a family’s credit for years to come.

Explore Start on Purpose for guidance on how you can maximize your financial upside as a business owner while minimizing needless risk at every turn. You can do it!

Susan Schreter

What to Know and Do Next:

  • Endeavor to make money.

    If your dream is to one day start a business, your goal is not big enough! After all, it doesn’t take much to start a business-a company name, a business license, perhaps business cards and a website. The administrative action steps might take just one or two days. Now what?

    Once you decide you want to start a business, determine how much you want to make as a business owner. Be specific. Set a number.

    If your goal is to just “make money,” then you probably won’t make much money. You can do better! Achieving goals starts with setting goals.

    How much money do you want to make each year in salary? How much do you want your business to be worth in five or 10 years? Write down your objectives.

    Extra Empowerment: Start on Purpose recommends that founders who put more than $10,000 into a new business, should endeavor to create a business that one day can be worth no less than four times total invested cash in order to compensate founders for investment risk. For example, if you invest $15,000, develop strategies to steadily turn your equity stake into $60,000 or more at the time of company sale. This is what it means to build a business in a purposeful way.
  • Limit your personal financial risk.

    No business founder should ever invest “everything” in a business. This is especially true for first-time entrepreneurs who are over the age of 40 and have more personal assets at stake.

    The best way to avoid “over-investing” in a new business venture is to determine how much you can afford to invest in a new business without jeopardizing your family’s lifestyle or existing retirement assets.

    Set your investment ceiling before you start your business. Discuss this number with your spouse. When business founders set an investment ceiling, they are more likely to seek out other ways to finance their companies before they run out of cash.
  • Always track what you have at risk.

    There are several reasons why you should track every cash investment or expense paid on behalf of your business. You will need this information for financial statement preparation as well as to calculate your profit or loss in your business at the time of business sale.

    An equally important reason why you should always know how much you have at risk in your business is to make sure that you don’t feel pressured to exceed your investment ceiling. It’s common for struggling business owners to stop counting how much they have invested in their companies because they “really don’t want to know the number” anymore. Their reasons for investing more become less purposeful.

    Every new infusion of cash should advance your company’s ability to serve more customers with products or services that they are willing to buy. If the investment of cash is merely to pay old bills, pause and explore more rewarding strategies that are worth your time and cash.
  • Learn about liability-limiting business entities.

    Most new businesses are organized as sole-proprietorships because it’s inexpensive and easy to administer. The problem with organizing a new business as a sole proprietorship is business owners personally assume all liabilities and bills that the business can’t pay

    Take time to learn the fine points of corporations and Limited Liability Companies to reduce your personal financial exposure to unexpected business problems and debts.
  • Pay taxes first.

    There are times when businesses are tight on cash and owners have to decide which bills will be paid, first, second and third. As businesses grow, these critical decisions may be delegated to accounts payable managers who may not make payment decisions in the best interest of the business owner. Too often, vendors who complain the loudest to accounts payable staff get paid first.

    While businesses can incur business tax obligations, officers and owners may be personally liable for unpaid federal, state and payroll taxes. The interest and penalties associated with not filing returns or paying taxes can be steep, with some states more punitive than others.

    When your company is in a cash crunch, carefully consider paying bills that may represent personal liabilities first:

    Taxes (sometimes interest and penalties may be lowered through negotiation with tax authorities)
    • Employee salaries and commissions
    • Bank, credit card or lease obligations that are backed by a personal guarantee.

  • Use your title.

    Who’s responsible for an unpaid business invoice? You or your business entity? Ideally, you want it to be a professional obligation, not a personal obligation.

    Vendors and collection agents like to claim that all small business bills are the owner’s bills. If you have organized your business as a Limited Liability Company, a corporation, or other type of business entity, make sure there is no confusion regarding the responsibility for bill payment. Add your company title and company name to all documents that require your signature such as contracts, leases and business letters. This signifies that you are signing in your official capacity as an officer or employee of the corporation, not as an individual.

    If a vendor sends an invoice to you personally rather than your company entity, kick the invoice back to the vendor for correction. Teach your staff members to do this too.
  • Get business general liability insurance.

    There are over 35 million U.S. businesses that operate out of a home or apartment. Most standard homeowner’s insurance limits coverage for business-related losses, such as theft of business equipment.

    While you may not want to think about the unthinkable, consider purchasing a ow-cost small business general liability insurance policy. Research and compare rates according to your company needs. As your business grows, you can adjust policy coverage.

    Extra Empowerment for sole proprietors.

    Owners of businesses that are organized as sole proprietorships personally assume the financial responsibility for unpaid business debts and liabilities associated with their company’s products, services or operations. While a general liability insurance policy won’t help sole proprietors pay off unpaid bank loans, it can minimize some of the liabilities associated with product liability complaints, trips or falls at a home-based business.
  • Understand personal guarantees.

    A personal guarantee is a binding legal obligation to pay long overdue business obligations with personal assets. Some personal guarantees are negotiable (agreements with landlords and suppliers), others not (most Small Business Administration-backed loans and all small business credit cards). It’s best for business owners to try to avoid credit relationships that involve a personal guarantee.

    Anytime you sign a personal guarantee, add the amount of the guarantee (loan amount, credit line amount, total equipment lease obligation, multi-year office or retail space lease amount, etc.) to the amount you have already invested in your business. This new amount is the total amount you now have at stake in your business. Always know this number!
  • Ask your ecosystem.
    Going out on your own should never mean going it alone. As you set goals and face tricky challenges in business, identify a group of professionals and other business owners who have been-there-done-that experience. Meet with them regularly. Ask them questions related to their experience and expertise.

    As your company advances and faces new challenges, expand your ecosystem to include professionals who already have traveled to where you want to go. Ask them about their mistakes and what they would do differently if they had the opportunity. Learn from them.

    Asking questions is not a sign of weakness, but leadership strength. In one way or another, business mistakes take time and cash to correct. The fewer mistakes you make, the more cash your company will have on hand to get more customers, which in turn will deliver even more cash back to your company’s bank account. That’s entrepreneurial success.

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