What to know about the financial risks of becoming your own boss

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Amid the “Great Resignation,” many people continue to relish the idea of being their own boss. While autonomy and flexibility can be alluring, there are also important financial considerations.

This is especially important advice given that new business applications remain historically strong, albeit down 2.5% in June from the prior month, according to U.S. Census Bureau data adjusted for seasonal variation. Applications for new businesses hit a record 5.4 million in 2021, and despite recent headwinds, the number of applications through June remains well ahead of the comparable six months in 2018, 2019, and 2020, Census Bureau data show.

Here are five things to contemplate before hanging out your shingle.

The economics and business expenses 

While setting out on your own can be rewarding money-wise, it can also be a financially risky move. Consider whether you can afford to give up a regular paycheck and if you can stomach the uncertainty. “You have to be comfortable not getting that paycheck,” said Michael H. Karu, a partner with CPA firm Levine Jacobs & Co. in Livingston, N.J.

Depending on the business, you may or may not have a lot of start-up costs and ongoing expenses. Some of these costs could include office space, equipment, software, hardware, phone service, an invoicing system, subscriptions, professional services, and travel. You’ll need to be sure you have the cash flow to cover your expected expenses.

Pick a team of advisors 

You’ll want to assemble a team of professionals including a certified public accountant, an investment advisor, insurance specialists, and an attorney who can review contracts and offer advice on other business-related matters.

You may have to spend some money, but professional advice can be invaluable, said Rob Cordasco, a certified public accountant and founder of Cordasco & Company, a CPA firm in Savannah, Georgia.

Getting it right from the beginning will be especially important if the business takes off since you don’t want to find yourself unprepared from a legal, insurance, or tax perspective. “Some missteps can be unforgiving or hard to undo,” Cordasco said.

Determine your structure

How you set up shop depends largely on factors such as your anticipated income, your expenses, and the desired liability protection, Karu said. You’ll also want to consider whether you plan to hire employees and whether you want everything to flow through your personal return, he said.

You may not need to register the company if you plan to conduct business as yourself, using your legal name, according to the Small Business Administration. But weigh the pros and cons because you could miss out on personal liability protection as well as legal and tax benefits by not registering, the SBA states.

Investigate insurance options 

There are many different types of insurance you may need as a business owner, some of which will be business-dependent. Coverages could include health, life, disability, business liability and malpractice insurance.

To get a sense of what you’ll need, determine what coverages you are losing by leaving your salaried job, said Erin Ardleigh, founder and president of Dynama Insurance, a New York-based independent brokerage providing life, disability, health and long-term care insurance.

Many employers provide some level of disability insurance, for example, which is something some people don’t think about when they go into business for themselves. This can be a costly mistake considering data from the CDC that indicates one in four adults in the U.S. has some type of disability. “Something is always better than nothing,” Ardleigh said.

It’s also important for owners starting a business to consider what insurance, if any, they are required to have by state law, she said.

For health insurance, consider your options under a spouse’s policy, if available, or COBRA, said Stacy Edgar, co-founder and CEO of Venteur, which helps start-ups with health insurance. Then compare the options on www.healthcare.gov, the government’s marketplace for individual health care plans. From that site you can also determine whether a state-based exchange is available to you. Do a cost comparison of the plans and get other important details such as deductible information and which plans cover your current medical professionals, she said. “There’s a lot of choice,” Edgar said.

As you build your insurance stack, you may find yourself working with more than one insurance broker, especially if you need personal and business coverage since these protections require different expertise. It also pays to shop around. “Do not buy the first thing you are shown,” Ardleigh said.

Craft a retirement savings roadmap

Many self-employed workers are not saving consistently for retirement, according to a recent report from the Transamerica Center for Retirement Studies. Thirty-four percent only occasionally save, while 20 percent say they never set money aside for retirement. This can have negative consequences for their ability to retire comfortably, if at all.

To save for retirement, business owners can choose from several tax-advantaged options. These include a Roth or traditional individual retirement account, a SEP IRA or a solo 401(k). Which one is right for you will depend on factors such as your age, your income and how much you can afford to save. Make sure you understand the contribution limits as well as the pros and cons of each type of plan.

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Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns.

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