What to know about the financial risks of becoming your own boss

Amid the “Great Resignation,” many people continue to relish the idea
of being their own boss. While autonomy and flexibility can be
alluring, there are also important financial considerations.

This is especially important advice given that new business
applications remain historically strong, albeit down 2.5% in June from
the prior month, according to U.S. Census Bureau data adjusted for
seasonal variation. Applications for new businesses hit a record 5.4
million in 2021, and despite recent headwinds, the number of
applications through June remains well ahead of the comparable six
months in 2018, 2019, and 2020, Census Bureau data show.

Here are five things to contemplate before hanging out your shingle.

The economics and business expenses

While setting out on your own can be rewarding money-wise, it can also
be a financially risky move. Consider whether you can afford to give
up a regular paycheck and if you can stomach the uncertainty. “You
have to be comfortable not getting that paycheck,” said Michael H.
Karu, a partner with CPA firm Levine Jacobs & Co. in Livingston, N.J.

Depending on the business, you may or may not have a lot of start-up
costs and ongoing expenses. Some of these costs could include office
space, equipment, software, hardware, phone service, an invoicing
system, subscriptions, professional services, and travel. You’ll need
to be sure you have the cash flow to cover your expected expenses.

Pick a team of advisors

You’ll want to assemble a team of professionals including a certified
public accountant, an investment advisor, insurance specialists, and
an attorney who can review contracts and offer advice on other
business-related matters.

You may have to spend some money, but professional advice can be
invaluable, said Rob Cordasco, a certified public accountant and
founder of Cordasco & Company, a CPA firm in Savannah, Georgia.

Getting it right from the beginning will be especially important if
the business takes off since you don’t want to find yourself
unprepared from a legal, insurance, or tax perspective. “Some missteps
can be unforgiving or hard to undo,” Cordasco said.

Determine your structure

How you set up shop depends largely on factors such as your
anticipated income, your expenses, and the desired liability
protection, Karu said. You’ll also want to consider whether you plan
to hire employees and whether you want everything to flow through your
personal return, he said.

You may not need to register the company if you plan to conduct
business as yourself, using your legal name, according to the Small
Business Administration. But weigh the pros and cons because you could
miss out on personal liability protection as well as legal and tax
benefits by not registering, the SBA states.

Investigate insurance options

There are many different types of insurance you may need as a business
owner, some of which will be business-dependent. Coverages could
include health, life, disability, business liability, and malpractice
insurance.

To get a sense of what you’ll need, determine what coverages you are
losing by leaving your salaried job, said Erin Ardleigh, founder, and
president of Dynama Insurance, a New York-based independent brokerage
providing life, disability, health, and long-term care insurance.

Many employers provide some level of disability insurance, for
example, which is something some people don’t think about when they go
into business for themselves. This can be a costly mistake considering
data from the CDC that indicates one in four adults in the U.S. has
some type of disability. “Something is always better than nothing,”
Ardleigh said.

It’s also important for owners starting a business to consider what
insurance if any, they are required to have by state law, she said.

For health insurance, consider your options under a spouse’s policy,
if available, or COBRA said Stacy Edgar, co-founder, and CEO of
Venture, which helps start-ups with health insurance. Then compare the
options on www.healthcare.gov, the government’s marketplace for
individual health care plans. From that site, you can also determine
whether a state-based exchange is available to you. Do a cost
comparison of the plans and get other important details such as
deductible information and which plans to cover your current medical
professionals, she said. “There’s a lot of choices,” Edgar said.

As you build your insurance stack, you may find yourself working with
more than one insurance broker, especially if you need personal and
business coverage since these protections require different expertise.
It also pays to shop around. “Do not buy the first thing you are
shown,” Ardleigh said.

Craft a retirement savings roadmap

Many self-employed workers are not saving consistently for retirement,
according to a recent report from the Transamerica Center for
Retirement Studies. Thirty-four percent only occasionally save, while
20 percent say they never set money aside for retirement. This can
have negative consequences for their ability to retire comfortably, if
at all.

To save for retirement, business owners can choose from several
tax-advantaged options. These include a Roth or traditional individual
retirement account, a SEP IRA, or a solo 401(k). Which one is right
for you will depend on factors such as your age, your income, and how
much you can afford to save. Make sure you understand the contribution
limits as well as the pros and cons of each type of plan.

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