The 5 Most Important Financial Decisions Entrepreneurs Face

Business owners are responsible for a number of tough decisions, from the fine tuning of an initial business plan to ultimately choosing whether or not to sell the business once it’s successful. Some of the most substantial decisions they’ll need to make over the course of their ownership are financial, which will dictate the cash flow and profitability of the company over time.

Financial decisions should not be taken lightly, and should be made only after extensive research and careful consideration. Here are five of the most important financial decisions you’ll have to face as you start your own business.

1. How are you going to structure your business?

This may seem like a straightforward question—after all, there are only a handful of options available to business owners in the United States (sole proprietorship, partnership, incorporation, limited liability company). But different business structures have different tax advantages and disadvantages, and different ways of handling liabilities. For example, a limited liability company (LLC) generally has an easier time raising capital than a sole proprietorship and is easier to sell if the business takes off. However, it requires many more formalities and more paperwork, as well as carrying greater tax complexities. Your structuring decision will significantly impact your company’s bottom line.

Once you decide on a structure, you’ll need to file all the necessary paperwork for your business in the state in which you’ll be doing business (choosing the right state for your business is also an important factor to consider). Once the formalities are complete, there may be some tax implications you’ll have to take into consideration immediately—even if it takes some time for your business to get up and running. At this point, you’ll be able to get your tax ID and start registering with tax authorities.

2. How are you going to get startup capital?

Every business needs some amount of startup capital to get things off the ground. How you choose to raise that capital is an extremely significant financial decision for your company. It will determine the speed and volume of the capital you can gather, as well as a path forward for any remaining capital you’ll need over the course of business development. It may also require you to allow other people to be involved in day-to-day business decisions as part owners of the company.

First, you can try to raise the capital yourself, by investing your personal finances and collecting investments from friends and relatives. You can also supplement this by perusing federal, state and local governmental grants and loans. There are many available, and they can be found using directories and resources like sba.gov.

Second, you can pursue private angel investors, who will be able to provide your business with both ample volumes of startup capital and some guidance on how to run a business effectively; most angel investors are previous entrepreneurs or serial investors. However, some investment deals require investors to be influencers or decision makers in the trajectory of your business, which may rob you of some of your independence as an entrepreneur.

Third, you can elect to pursue crowdfunding, a relatively new strategy that uses platforms like Kickstarter and GoFundMe to collect microdonations from a large pool of users, essentially giving you wide access to capital without the constraints of private investors.

Finally, you can pursue a private equity loan from a bank or open a line of credit to use to get the business started. However, most substantial business loans require assets to use as collateral. Read More