After years of careful planning, you and a friend decide to start a business. You dream of success, but you're also aware of the realities involved in such a venture. Most new businesses go broke and many partnerships turn sour.
If your venture is to prove the exception to the rule, you and your partner will need not just the requisite skills, compatibility, honesty, and a shared vision, but also a strong business foundation.
If you keep in mind the following building blocks, your new business stands a good chance of being on solid ground.
Your business could be set up as a corporation (in which you are technically shareholders) or as a legal partnership. There are advantages and disadvantages to each. Give careful consideration to which type best meets your needs.
Corporations sometimes provide limited creditor protection and certain tax advantages, but expect higher costs for bookkeeping and paperwork.
A partnership costs less to set up and administer, and could offer tax advantages, especially if you expect the business to operate at a loss for the first year or two.
2. Business plan
A well-designed business plan is essential. It keeps you and your partner focused and provides a good way to measure the success of your business.
It's also a necessity if you require financing from outside sources. A sound business plan will help convince a financial institution that you are a worthwhile risk.
How will you fund your startup costs and operating expenses for the first year? Many businesses fail because their owners didn't have enough money to see them through the initial lean years.
Will you and your partner back the business, or will you approach relatives and friends? Will you seek funding from a financial institution? If so, will it be in the form of a loan or a line of credit? Get professional advice to find out what is appropriate for you.
4. Contingency plan
Expect the unexpected. This is where life insurance* comes in.
What happens if your partner dies prematurely? Who will inherit his or her share? Will you want the surviving spouse to be your partner? What happens if there isn't a surviving spouse? If you prefer to own the entire business yourself, will you have the money to pay for your partner's interest?
Consider as well something often overlooked: long-term disability, which is more likely than premature death. Disability insurance and policies on the life of each partner will help protect your business in the event of such disasters.
Other types of insurance* you should look into include key person, fire, liability, and insurance for business interruptions and loss of physical assets.
Professional advice can be a big help in getting your business off the ground.
Up Next: Does your business fit into your retirement plans?
Many business owners, who have worked hard and invested in their businesses for continued growth, face the possibility that the sale of their business may not generate a large enough nest egg for a secure, comfortable retirement.