An awful boss; a soul-crushing schedule; a pervasive feeling that you’d rather be doing something you love: if you’ve been in the workforce for a while, you’ve likely experienced at least one of these situations. Sure, you can hope for the best when working for an employer, but there’s a great way to guarantee your own terms as an employee and set yourself up for a rewarding career experience: become your own boss.
Part of that ever-glorified American Dream is the prospect of opening your own business and sustaining your livelihood from the hours, gumption, and creativity you put into it. For sexual minorities, this can be a very rewarding experience, gaining independence from the rat race and taking charge of our own destinies based on industries, services, talents, or products we’re passionate about. There’s also the opportunity to give back to the LGBT community with our own companies and brands. But starting your own business takes more than skills and dreams—it takes planning.
Based on Seattle Gay Scene’s second exclusive interview on LGBT finances (read part one here), Ryan Velo-Simpson of U.S. Trust offers his pearls of wisdom on how to avoid common pitfalls many new business owners face, and what steps you can take to build a successful venture!
- Create Your Blueprint
“You need to ask yourself important questions before you get started,” Ryan Velo-Simpson suggests. “What is your business’ mission? Where will your money come from? What are the costs associated with starting your business? How will you be profitable?” Before getting carried away with the fun stuff like location, staff, and theme, create a business plan outlining what resources you’re going to use, what skills you have, what your financial forecast looks like, etc. Business plan documents are the treasure maps that entrepreneurs need before they set out on their adventure.
We sexual minorities are often all too aware of discriminatory practices with business. LGBT folks are disproportionately fired from their jobs and denied start-up loans simply for being queer. According to Velo-Simpson, 75% of LGBT Americans live in a state where there aren’t protections for sexual orientation and/or gender identity/expression. Luckily, Washington State has a great anti-discrimination law in place, including protections for gender expression, gender identity, and sexual orientation. This shields employees but also supports small business owners for credit and loan applications. Fortune 500 businesses and small businesses alike generally understand that discrimination is an issue—it affects their customers, their employees, and their reputation in the market—so many employers have anti-discrimination policies of their own, but this doesn’t reach the same amount of people as state or federal government, of course. Spread the breadth of protections for your employees by outlining non-discrimination policies encompassing race, ethnicity, religion, disability, sexual orientation, gender expression, gender identity, and more.
And of course, take care of your employees! Offer a competitive benefits package beyond the basic health insurance, dental coverage, vision, and retirement plan. Consider offering stock options if you have them, health spending accounts, generous maternity/paternity leave, a flexible PTO policy, work-from-home options, childcare subsidies, gym memberships, and transportation deals.
- Build a Solid Foundation
There are mountains of paperwork involved in proposing, applying for, creating, and licensing your own business. One rookie mistake can occur before you even sign the deed: not selecting the proper entity for your goals.
The most common entities are corporations, limited liability companies (LLCs), partnerships, and proprietorships. What’s the difference between all of these options? The biggest implications are tax structure, personal liability, and complexity.
Regarding taxes, anyone who starts a small business would likely default to a partnership (with a business partner) or sole proprietorship (on their own), which are the simplest. You wouldn’t file any special income taxes for a partnership or proprietorship, but you add the business’ revenues to your own personal accounts, so you’d pay income tax individually or as business partners. Limited partnerships are available as well, in which loans, property, etc. are in the name of the partnership rather than individuals. This requires a bit more credit and/or capital, but may be worth it if there are any concerns about personal liability.
LLCs are more detailed and organized. They outline who’s going to manage the business, different roles among members, how profits will be allocated, how you can transfer membership interest, how you can sell interest, etc. The LLC becomes its own entity and owns the goods that are associated with the organization. So if you created a T-shirt printing business as an LLC, all the T-shirt presses, bolts of fabric, office technology, property leases, etc. would be in the name of the company itself rather than in your name personally as a business owner.
Then we have C corporations, so named because they’re taxed under “Subchapter C” of the internal revenue code. C corporations are generally for larger entities and must pay taxes on all their corporate income. If you create a C corporation and want to pay dividends to your shareholders, you must pay taxes on those dividends. Taxes tend to be more complicated with C corporations, so if you’re just one or two people creating a business, it’s easiest to stick with partnerships, LLCs or proprietorships.
Different entities also have different liability factors. Sole proprietorships may be the simplest for tax structures, but they also have the highest liability. If your sole proprietorship fails, you’re personally liable for all debts accrued. That’s different for a limited partnership, LLC, or corporation, because a separate entity has been created, so if for some reason your business was sued and lost, the business owes, not the individual. If someone opened a one-person business—let’s say an engineering consultant, a photographer, or an independent copywriter—they don’t necessarily need liability protection, they could just be a sole proprietor and not necessarily bother with a separate entity.
The final consideration with entity selection is complexity. Licenses and permits are required no matter if you’re a sole proprietor or an entity, but there are also fees for legal administration and filing, so corporations, LLCs, and partnerships are often more expensive than proprietorships. No matter which entity you choose, all entities in Washington must file with the state and complete annual reporting.
- Establish Sturdy Supports
Starting your own business can be expensive, but don’t let that stop you. As long as you have a solid business plan in place and decent credit for initial funding, you can give it a good shot. But this is a common area where new businesses fail: not planning for short-term and long-term financial success.
In the short-term, be wise about your initial investment. A business owner often puts their entire net worth and credit score on the line when opening a business, which is a high risk. When they ask for loans from their bank, the business owner will have to guarantee the loan, and if they can’t pay it back they may have to file for bankruptcy.
Consider a diversified approach so the weight of your organization doesn’t rely on just one pillar. Use part of your own savings, apply for bank loans, and look into investors who may be interested in your business plan. You shouldn’t count on gifts from family, friends, or GoFundMe campaigns (sorry not sorry, Kim Davis), but don’t be quick to turn them down if you get the offer.
In the long-term, be open to all possibilities for the future of your business. It might be ideal to build your business up and leave it to your family as a legacy, or sell it for a high profit, but it’s important to be practical as well.
U.S. Trust conducts a survey every year called Insights on Wealth and Worth. The 2015 survey interviewed business owners and two thirds of them—including robust businesses and high-wealth individuals—didn’t have any plans for exiting their business. This means that if the business owner suffered an unexpected accident or illness which prevented them from working, or (heaven forbid) they passed away without leaving a succession plan, the future of the business is left out of the business owner’s hands. Succession planning is a crucial step, with the right management team in place or informed family members who can carry it out and make decisions.
There are several options for the business owner when it comes to exiting the business. The most common is to sell to another business. It’s not always easy to find a buyer but Seattle has a very active community with investors, business buyers, sellers, etc. The second most common option is to give or sell the business to a family member, usually upon retirement. Though it’s rare and requires a large employee base, you also have the option to sell your business to your employees. This option has excellent tax implications and is a wonderful opportunity for employees to get a piece of the pie they’ve worked so hard to bake.
But keep this in mind: transferring your business to others is sometimes easier said than done. Sometimes family members don’t necessarily want to inherit a business or don’t have the same skills as the original owner (“But, Dad, I don’t want to run the family auto shop. I’m going to be a dancer!”), and sometimes workforces aren’t equipped to manage a business that’s succeeded to the employees. It’s important to communicate ahead of time to ensure the plan is less risky.
There’s one more option: liquidating your business. Liquidation is like selling to someone else, but instead of selling your entire business, you’re just selling the material assets. The buyer won’t operate the business in your stead; they will just purchase the resources for their existing business or start a new business with those assets. Liquidation may be the most you can hope for if your business wasn’t successful. Capital gains taxes and depreciation recapture still apply for liquidation, so be thoughtful about this option since it may or may not make you more money than an outright sale.
Unless you’re transferring your business to a spouse, there are tax implications for business succession, too. Business ownerships are considered investments, so selling a business means you are subject to capital gains taxes. When you own a business, you get individual tax write-offs because the business has its own exemptions and deductions. Being self-employed provides you with more potential write-offs, but also more potential taxes.
- Enlist Help
Tax professionals are incredibly important to advise small business owners, and a good one will save you more money than they cost. “As a wealth strategist, this is where my value is to my clients,” Velo-Simpson says. “If you’re going to start or sell your own business, we can help you find more tax-efficient ways to reduce or defer the tax burdens.”
A lot of wealth can be made and a lot of freedom comes from being a small business owner. Set yourself up for the best chance of success by meeting with a financial counselor like the ones at U.S. Trust.
It’s very, very possible to make your own business a reality! Take the above considerations to heart and think about consulting a professional so you can increase your chances of success. Also take advantage of some wonderful resources that are available to you. Check out the Washington State Department of Revenue for information on how to start a business in Washington. There’s also a Seattle chapter of the Small Business Administration (SBA.GOV), a federal organization that helps educate small business owners and connects them with loan funding. They offer specialized support through programming and have an LGBT Outreach Program, too. Lastly, check out the National Gay and Lesbian Chamber of Commerce (NGLCC), described as the largest non-profit organization to advocate for LGBT businesses.
Got questions for our finance expert Ryan Velo-Simpson? Comment below or email me, your go-between, at email@example.com.