Being an entrepreneur is an exciting adventure. You will have more freedom and full control over schedules, projects, and goals. However, it also means that you assume complete responsibility. Running an LLC full-time requires the consideration of various factors. One of them is the financial aspect. Entering entrepreneurship without enough financial footing can lead to many problems or, worse, failure.
So before you start and run a business, you have to ask yourself if you are financially prepared. To help you get started, here are some of the things you can do to become financially ready:
Assessing Baseline Expenses
Forming and maintaining a limited liability company (LLC) comes with expenses. Aside from the LLC fees that the state and the federal government impose, you also need to consider your bills. How much do you spend every month?
Take a look at your cost of living. Include rent, food, utilities, and other possible miscellaneous expenses. Then, think about the things that you will have to pay for once you start your business. For example, consider health and business insurance policies, income taxes, and ongoing reporting obligations.
Getting cash flow under control is hard, especially if you are in the early stages. It may take some time to drum up your business. There may also be unexpected LLC fees, from business licenses specific to your industry and activities to necessary equipment.
One of the things you can rely on for those circumstances is the money in your bank. You can use it to weather slow seasons or take care of unplanned expenses. Make sure you have saved enough money for those things before starting your business.
So how much should you save for your business venture? Well, there is no absolute answer to that. Generally, it all boils down to the decision and situation of the entrepreneur. That is why it is necessary to assess your business expenses first. Here are some questions that may help you figure this out:
- How much do you spend monthly?
- Do you have any fallback options? Do you have a partner? Or do you have a second source of income?
- What is your risk tolerance?
In most cases, having around three to six months’ worth of expenses in the bank is enough as a fallback. But if you are able to save a year’s worth, you can be freer to focus on making your business work.
Understanding Your Tax Obligation
As stated earlier, your LLC fees include your tax obligations. Generally, an LLC will not pay taxes at a corporate level. However, the owners will have to report profits and losses in their personal tax returns. The rates and requirements may vary depending on the state where you register your business.
If you hire employees, you will have to learn about withholding taxes. Some states require sales and use tax on certain products. Learning your tax reporting and payment obligations will help you avoid penalties. Additionally, familiarizing yourself with these can help you prepare your company’s budget well.
Looking at the Client Base
The main source of revenue for businesses is the customers. You have to find out if you have a potential client base. Understand your audience. Is your product or service something they will be interested in purchasing or using? Assess their purchasing power. How much are they willing to spend on products or services such as yours?
Before starting and running a business, it is important for you to conduct market research. Knowing what your target audience wants and needs can help you in attaining success. At the same time, it will help you properly determine which tools and strategies are worth it.
Having a System in Place
As time goes by, your LLC’s financial situation might become more complicated. Your expenses may change. You will also have to track invoices. If your company grows and expands, you may also need to hire more people and buy new equipment.
What you can do is to consider investing in certain systems such as invoicing software, a financial management package, or a project management solution. Research about your options and choose the ones that best fit your company’s needs.The best way to start a business is to prepare yourself beforehand for all the obligations and expenses involved. DoMyLLC can help. We offer filing services and compliance solutions as well as an Entity Management System. Contact us now to learn more.