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| Tapping
Hidden Source of Cash to Start a Business |
You heard it said many time "to be wealthy you need to have
your own business". But having enough money to start a business
is often a big stumbling block.
In fact the lack of capital is one of the main reasons why new
businesses fail. Not having enough working capital can cripple your
marketing efforts, prevent you from hiring the best employees or
consultants, keep you short on inventory, and prevent you from being
to handle the account receivables of larger clients.
Small businesses are increasingly turning to credit cards for short
term loans. Other popular financing methods include, home equity
loans, and withdrawals from IRAs.
Credit card loans and retirement savings withdrawals, however,
can be very costly if not handled strategically. Experts advise
that you not touch your retirement savings for anything other than
retirement income. That is good advice. But, if your only available
assets are your retirement funds, the following strategy may help
you save big in taxes and penalties on early withdrawals.
Instead of raiding your IRA to finance your business - and paying
a penalty to the IRS - you can set up an Individual 401(k) plan,
and take a tax-free loan from your plan
Individual 401(k) plans with loan features first became available
in 2002, as a result of changes in the tax law. The Individual 401(k)
- also called a Solo 401k or Self-Employed 401(k) - is designed
for small business owners without any employees other than a spouse.
Individual 401(k) loans are generally quick to obtain, come with
low interest, and are repaid to the borrower's account. Loans from
a 401(k) plan are free of tax and penalty as long as the loans are
repaid.
You can transfer without dollar limit the funds from your IRAs,
401(k), 403(b), or other retirement funds into your Individual 401(k)
plan. At any time, you have the option to borrow up to the lesser
of $50,000 or 50% of the balance in your Individual 401(k) account.
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It doesn't matter if you started your business last week or several
years ago. Any single business owner, an independent contractor
with 1099 income, freelancer, sole proprietor, or in a partnership,
Limited Liability Company (LLC) or corporation, can tap into the
full benefits of the Self-Employed 401(k) plan.
In addition to the loan feature, the other key benefits of
the Individual 401(k) plan include:
- High limits on contributions: The limits for elective salary
deferrals and employer contributions enable sole proprietors in
tax year 2003 to contribute up to the lesser of 100% of aggregate
compensation or $40,000 ($42,000 if age 50 or older).
- Contributions are fully-tax deductible and are based on compensation
or earned income.
- Assets from IRAs or other retirement plans can be rolled over
and consolidated in an Individual 401(k). There is no dollar limit
on roll-overs.
You may request a free information kit on the Individual
401(k) plan here. The kit includes information on fees for the
plan, as well as information on the family of funds by Pioneer Investments,
the mutual fund company that manages the plan. |
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| Becoming a Consultant – 4 Steps to Success |
1. Prepare a personal
inventory
You should start with an inventory of your skills,
experience, and interests to decide what kind of consulting you can
do. Consider
- your educational
background,
- your work
experience, and contacts
- any other unique
skill or advantage that you may have at your disposal.
Also, think about what you like doing. To state the obvious:
liking what you’re doing is crucial to freelance work. As you will be
your own boss, no one will make you work everyday day to meet your
deadlines.
You’ll also need to be sure you have the basic skills any
independent contractor needs, no matter what the business. For
example: you will need to
-
organize an office,
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handle records and
finance,
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manage your own
time,
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promote your
services, and
-
negotiate
contracts.
Don’t be reluctant to hire experts to help with some of these
tasks. When appropriate look to barter your expertise for theirs.
Based on your skills inventory, you’ll decide on what type of
consulting you’ll do. Some of the more popular types of consulting are:
Freelance writers
Most freelance writers are driven by a shared set of personal
characteristics: a strong affinity for language, the desire to work
independently and, perhaps most importantly, a strong sense of
curiosity and interest in a wide variety of subjects. That last
characteristic is probably the most critical one for enjoying
freelance work, since assignments often require you to learn enough
about a topic to write about it as if you're an expert-or to work with
people who know a subject so well that they may have difficulty
communicating about it to an audience of laypersons. Time and project
management are also especially critical, since most freelancers need
to keep many projects running simultaneously in order to make their
business financially solvent, and since deadlines are often crucial to
success.
Real
estate consultants
Real estate consultants are independent advisors,
who can also act as real estate agents. You will need to know the ins
and outs of the real estate business, as well as understanding the
overall financial needs of your clients. You have to be good at
selling, but more important than this is understanding the needs of
your clients, and finding how to fulfill them. So it’s a good field
for people who are excellent listeners, have lots of energy, and are
comfortable giving advice in personal matters. If you not only advise
your clients, but act as broker and close deals, you will need a real
estate license from your state.
Computer consultants
Examples of computer consultants include
programmers, system administrators, and Web developers. The key to
success in computer consulting is having a skill-set that people
want. Must computer professionals are already used to working
independently, putting in long hours to get a job done. As an
independent consultant, you will need to be willing to network and
hustle to keep a constant supply of jobs coming in the door. Also, it
is critical that computer consultants communicate clearly the limits
of a job with the client: how many changes can be made to
specifications once you have started developing the product? How much
will you be responsible for debugging? How much maintenance?
Business consultants
Business consultants tend to have experience doing a job and
doing it well for some time before becoming going out on their own.
Depending on your field, you will have certifications to point to, but
in many instances your qualifications maybe more informal skills and
from on the job training. You will need to always be ready to make a case for why you’re qualified. You
will also need to be very good at marketing yourself. Networking is
crucial to this sort of work. Business consultants have to be
self-reliant and good at thinking on their feet, at understanding
someone else’s problems and needs and coming up with solutions. This
sort of creative problem-solving can be the most rewarding part of the
job.
2.
Write a Business Plan
As soon as possible after you’ve decided on your consulting
path, you should put together a business plan: write down where you
want to go and how you want to get there.
Your business plan should spell out:
- What services do
you plan to sell?
- Who do you think will buy your
services, how big your market is, how much income you expect to
make, and when?
- What resources
you’ll need to do this (money, equipment, extra help)?
- What personal
qualifications do you and anyone working for you has so that you can
meet the above challenges?
3.
Operate as a Business
Once you are ready to get started, you’ll need to decide how
to structure your business. Will you run things simply as sole
proprietorship, a partnership, or a corporation? Consult with a
business attorney or your accountant to help guide you in selecting a
structure that fits your circumstances.
Generally, if you operate as a sole proprietor and have no
employees, you can use your social security number as your Tax ID.
Corporations and firms with employees need an Employer Identification
Number (EIN) from the IRS. You may get one online from http://www.irs.gov/businesses/small/index.html
Don’t borrow from the IRS. They are the one creditor you
don’t want to have. As a self employed business you’ll be required to
pay social security tax (FICA) in addition to regular income tax. In
2003, your first $87,000 of income is subject to FICA. For 2004, that
figure jumps to $87,900.
If you are husband and wife team operating a business
together as partners, you should each report your share of the
business profits as net earnings on separate self-employment returns
(Schedule SE), even if you file a joint income tax return.
4.
Have Adequate Working Capital
Starting a consulting business can be thought as running a
marathon. Perseverance and staying power are probably the most
important resources to being successful. One key element to stay in
the game is having access to enough working capital to weather the
downturns. On this website we cover one of newest options to getting
cash - borrowing from your retirement funds thru a self-employed
401(k). Before 2002, with few exceptions, you could borrow from your
retirement funds only if you were still working for your employer.
Recent tax legislations have changed that. However, you should still
exercise care when tapping your retirement funds and consider other
types of loans first. |
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| Startup Business
Terminology |
The language associated with starting a business is
unique. Using the correct business terms helps others understand
exactly what you are trying to communicate to them.
Here are some
definitions of familiar (and not-so-familiar) business terms:
1099 - A Form 1099
must be filed to report payments totaling more than $600 or more
made to any individual for rents or services performed in the course
of a calendar year. If this form is not filed, you may be subject to
penalties from the IRS. 1099 Workers are not employees and are
responsible for reporting their own income.
Corporation – A legal form of operation under which the business
is recognized as a separate legal entity guided by a group of
officers known as the board of directors. Corporations are owned by
stockholders who invest capital into the corporation. Stockholders
are not personally responsible for the debts of the corporation
(unless they have personally guaranteed them), thus reducing their
liability to the limit of their investment. Chartered or registered
in the state in which it resides, a Corporation can acquire and sell
property, lend money, sue, be sued, and can survive the death of its
owners.
C Corporation – A Conventional Corporation, the C Corporation is
the most common form of a corporation.
Contractor – Also known as "Independent Contractor." Contractors
are responsible only for the work they do. Contractors are generally
specialists hired to do a specific job. Payments made to contractors
are reported to the IRS on Form 1099 and are responsible for
reporting their own income taxes. But be careful! The IRS has very
specific rules determining the difference between a contractor and
an employee. If the IRS feels an individual should have been treated
as an employee, you will be liable for payroll taxes that should
have been withheld and paid, plus any interest and penalties. To be
a contractor, the person has to operating a business of his or her
own.
Contract employee - An employee who is hired for a specific purpose
defined under the terms of a contract. The term is sometimes used to
describe Independent Contractors whose earnings are reported on Form
1099. However, use of the term in this manner is technically
incorrect, since an independent contractor cannot be an employee. DBA – "Doing Business As." Also known as
"Fictitious Name." Any name other than your own under
which you do business. For example, if your name is John Smith and
the name of your business is "Paper Cutters," you would register
your business as John Smith, doing business as "Paper Cutters." You'll need to contact the Clerk's office of the City
or County where you want to start a business to find out their
specific procedures and fees for filing a DBA or business
certificate, and getting a business license.
EIN – "Employer Identification Number."
Also known as "Employer Tax Identification Number." The number
issued by the IRS by which the employer is identified. Employers may
apply for an EIN by filing IRS Form SS-4. Check out
the IRS’s web site on small business/self-employed for guidance on when you need an employer I.D. to do business as a
sole proprietor and when you can just use your Social Security number instead.
Entrepreneur - A somewhat vague term typically used to describe
anyone who goes into business for themselves or who develops a new
idea for a business venture.
Free agent - The term "free agent" was developed to refer to
independent workers who are hired for specific, typically
short-term, professional jobs. The term is somewhat vague, as it has
been used by independent contractors, consultants, and almost anyone
else who has their income reported on Form 1099.
Freelance – Freelance workers are independent contractors who
perform work-for-hire. The term is most often applied to writers and
other providers of specific professional services. Interestingly
enough, the original "Freelancers" were knights who were available
to be hired to fight in battles for feudal lords, hence the term
"Free Lance."
LLC – "Limited
Liability Company." A business form allowed in many – but not all –
states. Operates like a traditional business partnership,
distributing income and income tax to the partners which they report
on their individual income tax returns. The LLC structure protects
partners from personal liability for the business's debts.
Partnership – an
agreement between two or more individuals who are in business
together. There are several types of partnerships.
Schedule C – the IRS form used
for filing business income & expenses as an adjunct to form 1040.
Self employed – anyone
who is in business for him or herself. A self-employed person is
responsible for filing their own quarterly taxes and other tax
responsibilities.
Sole proprietor –
a business with only one owner.
Subchapter S or S
Corporation – A form of corporation that pays out all income
proportionately to their shareholders, who then claim the income on
their personal income tax returns.
Temporary worker –
an employee hired on a temporary basis, typically for a specific
purpose. Temporary workers are often hired to replace absent
employees or for seasonal work, such as extra retail workers hired
during the holiday shopping season. Temp workers can be hired as
employees or independent contractors.
W2 – The
form used by employers to report wages and earnings of an employee
to the IRS. |
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