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Oct 01, 2018

Turning Your Hobby Into a Business

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Entrepreneur – a passionate risk-taker; hard-working and disciplined; someone with strong management and planning skills. You may even have a goal of ending up on Shark Tank. Do you find yourself with these same characteristics? Every month, thousands of entrepreneurs, like yourself, are turning their dreams and hobbies into formal businesses – should you be doing the same?
 
One of the challenges entrepreneurs often face before starting a business is knowing the right moment to officially open the doors and welcome customers in. To put it simply, individuals should technically make their businesses formal before anything is actually “sold” – doing so, however, is not something that can happen overnight.

A great place to start.
There are many different aspects to consider when starting a successful business. The first step you should take is to create a business plan – a document that is short, to the point, and has the information that lenders and investors need. Your business plan is the foundation of your business – a way to convince others that working with you and investing in or supporting your company is a smart choice. From a lender’s point of view, here is what should be included in your business plan:
  • Opportunity/Market Awareness:
    • What are you selling?
    • How are you solving a problem?
    • Who is your target market?
    • Who is your competition?
    • Why is your competition not meeting the demand?
  • Execution:
    • How are you going to turn opportunities into sales?
    • How will potential customers know about your product or service?
    • How are you going to create your product or service?
    • What are you considering success in your specific business?
  • Company:
    • Who is currently working with you?
    • Who do you need to hire, if anyone?
    • What is your legal structure?
    • Where will you be located?
    • What is your mission statement?
  • Funding Request:
    • What funding support are you requesting (amount, term, etc.)?
    • How will you use the funds?
    • How do you plan to pay back borrowed funds?
  • Financial Plan:
    • Forecast of sales - how much money do you anticipate coming back to you/your lender
    • Monthly projection for 12 months
    • Annual projection for 3-5 years
  • Executive Summary:
    • A 1-2 page overview of your whole plan, wrapping up all of the information above. Summarize what you are looking for from your financial supporter and why you feel so passionate about your business. Include any images, graphs, or data which you feel would find helpful.
A business plan is never set in stone, rather it changes as your business does. Be sure to review your business plan every year and make changes as needed. This will also be a great tool to help you determine if you are ready to take the leap in the first place – measuring your confidence and readiness level as you write your plan.

Have the right players in your corner.
Once your business plan is in place, the next step to take is to decide what type of business structure works best for you. The legal structure of your business will impact your business registration requirements, how much you pay in taxes, and your personal liability. There are several types of business structures to consider and you’ll likely want to consult with other resources like an accountant or an attorney to ensure you make the best decision. Having the right players involved in providing sound direction for your business will help set you up for success right from the start. Take a look at these business structures to give you an idea of the various options:
  • Sole Proprietor
  • Limited Liability Partnership (LLP)
    • Businesses with more than one owner who all have limited liability for business debts. This structure is typically used by professional groups like doctors or attorneys
    • Read more about this structure
  • Limited Liability Company (LLC)
  • S Corporation
    • Offers advantages of shares; protects owner’s personal assets, and income is taxed through each owner’s individual tax returns
    • Read more about this structure
  • C Corporation
Get creative.
An exciting step for entrepreneurs – choosing a name for your business and seeing it come to life. It may not be as easy as you’d think, and like everything else, there are many elements to consider when taking this step. You’ll want a name that reflects your brand and captures your personality – this will be the first thing customers see as they research your business. But before you get attached to the “perfect” name, search to make sure someone else isn’t already using it. Once you’re in the clear, remember to protect it right away. There are several different ways to register your business name based on state and federal requirements – see which option(s) is best for your business.

Put on the finishing touches.
You’re so close you can almost see the finish line! But first, you have to put on the finishing touches and make your business official with some very important final steps. To make your business a distinct legal entity, and to protect your brand, you must register your business. How and where you need to register your business depends on the structure and location of your business. For example, if you want to start a business in Minnesota, you will need to register with the Minnesota Secretary of State (SOS). Consult with an attorney on what ways you should register your business.

Right after you register your business, you should apply for an Employee Identification Number (EIN) through the IRS. This is like a social security number, but for your business, and allows you to pay state and federal taxes, hire employees, open a bank account, and apply for business licenses and permits.  Learn more about the importance of an EIN and how to apply.

The time is finally here and you’re ready to accept customers - which means sales! Perhaps you’ll decide to keep your first dollar bill as a keepsake for all of your hard work, but what about the rest? Open a business account at a financial institution to help you stay legally compliant and protected. You likely already have a personal checking account, so why can’t you just use that one? For the purpose of having a clean and accurate bookkeeping system and a clear audit trail for the IRS, it is important to keep your business funds separate from your personal. Plus, having your customers pay your business directly, rather than your personal account, adds professionalism to your business, improving your credibility and overall reputation.

If you’re one of the lucky few to appear on Shark Tank and stand in front of a panel of highly experienced business men and women - and even accept an offer from Mr. Wonderful himself – then your path to starting a business may be a little different. But for the everyday, dream-chasing entrepreneur who takes the “traditional” route, find your own Mr. Wonderful and let Firefly help make your dreams come true.

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