5 financial risks of becoming your own boss

Entrepreneurship became attractive to several people, as it provides advantages such as owning a private business, not being bound by specific working hours, and the possibility for individuals to make huge profits, rather than just getting a monthly salary.

Although such advantages encourage several people to resign and start their own business, it is important for them to know the financial risks involved before they take this step.

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.  

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.

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.

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.

 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.

 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.

Craft a retirement savings roadmap

Many self-employed workers are not saving consistently 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. Which one is right for you will depend on factors such as your age, your income and how much you can afford to save.  

Source: CNBC