Building a Lasting Business: Success Takes Planning

During the pandemic, millions of Americans decided to launch small businesses. However, millions of businesses close every year. In fact, the Bureau of Labor Statistics reports that 20% of small businesses will fail in their first year, and only 50% will survive through year five.

In 2023, inflation, borrowing woes and other challenges took their toll. For those who have chosen - or are planning - to launch a full-time small business or a “side hustle” to augment their income or create the foundation for future success, don’t let bad planning challenge your chances at success.

Whether you’re going solo or planning to launch with a partner, protect you and your fledgling company…

• Get your papers in order. If you’re launching with partners, consider how things could go wrong. Business partners, even those including friends or family, can see issues arise that test more than your relationship. They could challenge the business itself. A shareholder or operating agreement defines roles and responsibilities, profit distribution, ownership shares, even how or to whom shares can be distributed if one partner exits the business. Think of this “business prenup” as preventative planning.

• Put structure behind your enterprise. What structure should your company have, especially if you’ll be engaging employees, vendors or sub-contractors? Sole proprietors find this as a way to limit personal exposure when selling products, or taking salary, tax deductions and other benefits. Among the options. An LLC can offer both liability protection and flexibility in ownership and rights. An S-Corporation is generally suitable for those providing services, as opposed to goods, with flexibility and tax benefits for salary, profits and dividends. If the company anticipates growth requiring capital, investors or ownership shares, a C-Corporation might be the right option.

• Special considerations for not-for-profit or cause-related enterprises. Some organizations fall between the pursuit of profit and serving a social benefit. These may qualify as a low-profit, limited liability company (L3C). This designation by the Internal Revenue Serviced simplifies investments in socially beneficial, for-profit ventures. It allows them to pursue a public good, while seeking a profit - and paying taxes.

• Consider conflicts of interest. Whether your new business is a side hustle launched while still employed, or something you’ll leave an employer, will your current employer see a conflict, especially if you plan to practice in the same or a related field. Review any non-compete agreements currently in place. A conversation with your employer could ensure you’re not violating any non-competes - or help assuage any concerns.

The forms and documents required by state agencies and the IRS to launch a business can be as easy to complete as hitting “enter” on a website. However, if done incorrectly, legal, financial and corporate planning behind your business formation may have serious ramifications. Bringing on your attorney, accountant and business advisor early may help defy the odds and ensure long-term success.

Director at Tripp Scott, Tanya L. Bower focuses her practice on corporate and entrepreneurial business and tax matters, including estate planning, asset protection and wealth preservation.

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