Tag: Entrepreneurship

Dear Consultant,

I have been a software developer at a large insurance company for the last four years.  I’ve had a lot of experience working with web technologies and I have an idea for a web business that I believe could make some money.  I’m getting pretty fed up with my current job, especially the long hours and the office the politics; I really like the idea of working for myself.  I just question whether or not I’d make a good entrepreneur.

This is a question that many people wrestle with at some point in their career.  There is no easy answer to your question, except one that you can answer yourself through personal experience or through close understanding of the realities of starting and running your own business.  Here are some questions that you should ask yourself that may help in your decision:

1)      Are you looking for freedom from your job or are you truly looking to create something?

in most cases entrepreneurs work long hours and are forced to work with anyone who will offer them time and resources

Many people associate freedom with starting your own business, thinking that staring your own business means that you’re able to dictate the number of hours that you work and the people that you’ll work with.  An element of that exists in some cases, but in most cases entrepreneurs work long hours and are forced to work with anyone who will offer them time and resources.  If it is simply freedom that you’re seeking, then other options exist.  Sometimes the root of freedom seeking lies in a need to reduce stress or because you’re bored with your current work.  Think about the core reason that you want to start your own business.  You mention that you’re not interested in long hours and office politics, if these issues are contributing to your decision to want to start your own business then consider addressing those issues directly.

2)      Are you trying to create value for a group of people?

Successful entrepreneurs frequently want to create something first and make money second

Ideally, the desire to become an entrepreneur should come from the desire to create value for a particular group of people.  Successful entrepreneurs frequently want to create something first and make money second.  If you have the ability to build something and create value for a group of people in a way that most other people don’t, then you may have a solid foundation for an entrepreneurial venture.  Think about your own personal skills, relationships and tendencies that make you better suited to create value for a group of people than others.  Entrepreneurship is competitive, and if you can’t say why it is that you’re best suited to start this business then I would think twice about proceeding.  Sometimes the reason that you’re better suited to do it is simply that you’re the only one who is willing to make it happen.

3)      Are you persistent in the face of adversity?

There will likely be long periods of financial and emotional hard times that you’ll need to be prepared for.

Another tough question that you should ask yourself is whether or not you have the persistence to stick with the business, even during hard times.  There will likely be long periods of financial and emotional hard times that you’ll need to be prepared for.  Close friends and family will tell you that you’re making a mistake by leaving a job, or by investing time and money into a risky business.  People who you respect will point out flaws in your plan and you’ll need to listen, adapt but persevere.  Do you have the ability to face adversity and continue without giving up?  In most new businesses, perseverance is a key element of success.

4)      How is your network of business connections?

Most successful businesses will require an open attitude that encourages collaboration with community and business partners.

Unless you have done this before, you’re going to need help.  Help with business strategy, marketing, partnerships, legal issues, technology, etc.  None of us are experts in everything and so you’ll need to start leveraging the relationships that you’ve got and creating new ones.  It is rare that you can start a business entirely by yourself in isolation; most successful businesses will require an open attitude that encourages collaboration with community and business partners.  Think about embracing networking as a pastime unto itself.  Some people dislike this sort of activity as unauthentic or a waste of time, but in the experience of many successful entrepreneurs, their network of business connections and relationships creates real value for their start-up.

There are many other questions that would be specific to your particular context, but these questions may direct your thinking about your potential fit as an entrepreneur.

Dear Consultant,

For the last eighteen months I have been doing contract architectural work for a number of clients.  I’m wondering if I should set my business up as a corporation.  Currently I do my own taxes and keep things simple, but I’ll incorporate if it makes sense to do so.

There are a number of reasons why a business should incorporate, these reasons usually relate to taxes and liability.  There is a point in the life of most profitable, growing businesses where incorporating makes sense, but for small businesses it isn’t always a great idea.  Depending on what jurisdiction you operate your business, this decision can be made more or less complicated based on your local laws.

Shareholders of corporations enjoy limited liability for the actions of the corporation.

First let’s discuss the issue of your own personal liability.  When you incorporate your business, that is switching it from a sole-proprietorship into a corporation, the business becomes a separate entity.  This separate entity can own property, take on debt, be sued and have its own rule (articles of incorporation).  If you have no partners or investors then you’d likely be the only shareholder in this company, and shareholders of corporations enjoy limited liability for the actions of the corporation.  This is frequently perceived to be advantageous because if the business goes bankrupt, you as the primary share holder may not be held financially liable for debts incurred during the operation of the business.  Similarly, if your company is sued then you may not be personally named in the lawsuit, only the corporation.  For small corporations though, where the company is transparently operated by you, you’d be asked to personally co-sign any debt and you would likely still be personally named in the case of litigation.  So the limited liability afforded to corporations is certainly not a way to completely shield you from financial or legal risk.

In almost all jurisdictions, corporations pay less in taxes than do individuals.

As for taxes, in almost all jurisdictions, corporations pay less in taxes than do individuals.  So if your business is currently setup as a sole-proprietorship or if you’re simply operating the business under your name, then you’ll be taxed at your own personal tax rate.  If you are making significant profits and don’t have much in the way of expenses to offset your income, then there could be tax advantages to incorporating.  This is definitely a decision that would be taken in the context of advice from a tax accountant.

Incorporating introduces some overhead and complexity that may not be necessary.

By virtue of the fact that you’d need to engage with a tax accountant brings me to my next point.  If you are currently doing your own taxes, and you’re not billing significant income through your business, then incorporating introduces some overhead and complexity that may not be necessary.  If you choose to incorporate, you’ll need to pay for the incorporation process – the cost of which varies depending on where you live, but it is frequently a non-trivial amount of money.  Each year when submitting taxes, it would be advisable to hire an accountant to complete your annual tax forms.  While not always complicated if you have a simple tax claim, corporate taxes are different from what you’d be used to and there is room for error.

This is a complex question that certainly depends on the specifics of your situation, but there are pros and cons to creating a corporation for your small business.

Dear Consultant,

We’re starting a business that aims to sell a new product that my partner and I developed.  The product is novel and we believe that it can make a significant amount of money if we can get it into the hands of the right retailers.  We already have working prototypes and some retailers willing to work with us, we also have enough funds to do at least one or two manufacturing runs.  We have been told that we should start big, and to do that we need external funding to develop the inventory needed to push our product into retail channels.  Is this a good approach, or should we try to fund this ourselves and not tie ourselves down with debt or giving up partial ownership of the company?

You’re in the enviable position of having a viable product and it sounds like you have some good leads with retail partners.  Getting funding for the manufacturing of orders already agreed to shouldn’t be such a difficult thing.  Some banks would likely be willing to work with you and depending on the nature of your product there are other alternative funding sources such as venture capital funding.  However, you’re also in the position to possibly fund your growth organically from your own operations.  Let’s look at these options.

1)      Take out a loan.

Take on debt to finance your manufacturing.  The least complicated way to fund your manufacturing is to take out a loan to pay for your operations.  You’ll pay interest on this loan for the duration of the time it takes you to pay it back, and the amount of interest that you pay will depend on how risky your lender thinks that you are.  You can get cheaper loans if you have some assets like a building that you can use to secure your loan.  Secured debt can sometimes offer significantly better interest rates than unsecured loans where you offer no collateral to back the money that you’ve borrowed in case you are unable to pay the loan back to the lender.  Likely candidates of lenders may be some more risk tolerant banks, or a banker who has worked with you in the past with whom you have a good relationship.  You could also borrow from friends and family if that option were open and made sense to you.

2)      Give up equity.

You can offer equity in your company to an investor in return for the money.  That is, you can make them partial owners, affording them rights to part of all of your future profits and the ability to have input into decisions about how the business is operated.  Typically venture capital funding works like this, they want a large portion of the ownership of the company in return for money for you to grow your business.  In many cases this makes a lot of sense, but you will relinquish some control of your business.  There may in the option to negotiate the terms of funding agreements like these where the funder may not have decision making rights and will only share in future profits.  Equity ownership partnerships can be made with anyone, not only with traditional venture capital firms.  Family members and neighbours could also be given partial ownership in return for funding.  It is usually advisable to incorporate in situations like these.

3)      Bootstrapping.

If you already have a prototype and enough funding for some manufacturing as well as at least one or two retail partners to sell your product then you may have the ability to remain lean and fund your next round of manufacturing after your first round sells through your retailer.  That is, make profit from the sales of your first round of manufacturing and reinvest all of those profits into the manufacturing of the next round of products.  The term bootstrapping refers to the proverbial “pulling yourself up by your own bootstraps,” or doing it yourself.  The advantage of this is that you maintain complete ownership of your company and you’re not saddled with loan payments.  A disadvantage of this is that you may have to turn down large orders that you aren’t able to fill because you won’t have enough cash from your last sale.  This type of organic growth can be great, but it can also slow down the growth of your organization.  In the case of competitive industries, this could be particularly problematic as your competitors may be able to fulfill large orders that you’re not able to do given your limited funding.

The best decision in your case will depend on the opportunities that come up from retailers and from lenders or funders.  It goes without saying that growing organically is the best route until such time that demand from retail partners outstrips your ability to fund manufacturing.  At that point you’ll want to re-evaluate that strategy.

Dear Consultant,

I work at a non-profit organization that works with an at-risk community of teenagers.  Over the last four years we’ve been helping our clients sell artwork through an online store to raise money for a number of our initiatives.  Recently, one of our funding agencies has told us that they would be willing to offer us funding if we decide to turn the online art sales into a “social enterprise.”  What exactly does that mean?  Isn’t that what we’ve already been doing?

A social enterprise is a business initiative that derives most of its funding from the sales of products or services and where the business operates with the intent to create social value, not just profit.

Social Enterprise can mean a variety of things depending on the situation.  Many people in the for-profit sector view social enterprise in terms of corporate social responsibility initiatives, including philanthropy and community engagement projects.  Others in the non-profit sector think about social enterprise simply as earning money from people by selling products or services.  But a fairly all-encompassing definition of social enterprise can be succinctly stated: a social enterprise is a business initiative that derives most of its funding from the sales of products or services and where the business operates with the intent to create social value, not just profit.

To be clear, a social enterprise can be a for-profit organization but it doesn’t necessarily need to be.  Many non-profits seek to make money from the good work that they do, to diversify their sources of revenue away from donations and grants.  There is a growing group of non-profit organizations who recognize that some or all of their operations can be sold to some kind of target market in a way that is competitive with other businesses.  Generating revenue in this way offers a degree of financial self-sufficiency that many non-profits are not used to.  Similarly, businesses in the for-profit sector frequently create value for their customers, which is why their customers purchase their products and services.  The difference between a social enterprise and a regular business is that a social enterprise also creates social value.

Creating social value refers to helping groups that are marginalized, underprivileged or don’t have a strong voice for self-advocacy

So what is social value?  Creating social value really comes down to explicitly trying to helping people in need.  Sure a tax accountant helps her clients who are in need of having their tax returns filed, but that is not what we’re talking about here. Creating social value refers to helping groups that are marginalized, underprivileged or don’t have a strong voice for self-advocacy.  This includes environmental issues, as many environmental issues are an antecedent for social problems including drought, disease and natural disasters.

Here is a quick way to visualize how social enterprises fit into the traditional sectors that we usually think about.

Social Value and Monetizability

A social enterprise is frequently competing with both the non-profit and government sectors, as well as the for-profit sector

A key thing to think about in this diagram is that the sectors overlap.  A social enterprise is frequently competing with non-profit and government organizations that are trying to create social value for the public good, but because a social enterprise is also trying to make money from their products or services, they are often competing directly with other for-profit businesses.  Monetizability refers to the likelihood of an organization to make money from a product or service, so highly monetizable products or services are frequently already highly sought after by the for-profit sector.

In your case, selling art online would be a social enterprise if you’re able to cover your costs and if you’re creating social value for your teenage clients.  If after careful consideration of all of the expenses related to your art sales, including hours of effort of salaried workers, the revenue is higher than your expenses or if you have a plan to increase your revenue before taking too much of a loss, then you’re successfully operating a social enterprise.  This is an entrepreneurial pursuit that involves someone championing the social enterprise as though they are an entrepreneur.

Dear Consultant,

For the last several years, my wife and I have been helping a youths in our neighbourhood sell their artwork through local business-owner’s stores and through an online portal.  We’re established enough now that we’re looking at creating a formal business out of this.  We see the opportunity to make money for ourselves while at the same time helping the young artists in our city.  What are the advantages of registering as a non-profit versus a for-profit organization?  We’re obviously not in this just for the profit, but we’d like to earn some money to cover our expenses and maybe even pay ourselves a bit too!

Contrary to what many entrepreneurs think, starting a non-profit does not necessarily mean that you’ll forego a salary and do hard work only out of the goodness of your heart.  Non-profits can be operated as a business, earning money to cover their expenses from the sale of their products or services just like a for-profit organization.  That means that you can not only cover your expenses, but you can also pay yourself a salary as you see fit.

Non-profits aren’t charged as much taxes as for-profits, but are expected to provide some type of product or service of a charitable, scientific, religious or public safety nature.

The key difference between a non-profit and a for-profit organization is that non-profits aren’t charged as much taxes as for-profits, but are expected to provide some type of product or service of a charitable, scientific, religious or public safety nature.  Also, non-profits are supposed to stick with activities related to their basic purpose; if they deviate or “pivot” away from their core tasks, they may be required to pay tax on their income after expenses are subtracted, just like a for-profit business.

One common misconception is that as a non-profit organization, you cannot “make a profit.”

One common misconception is that as a non-profit organization, you cannot “make a profit.” That is, you can’t earn too much money above and beyond your expenses.  This isn’t really true, you can make net income, but you can’t simply put that money into your pocket.  That profit needs to be reinvested into the organization.  So the profit can go towards more marketing, or hiring a new employee, etc.

The other thing to think about is whether you’d like to receive donations as well as earning money from your product or service.  If that is the case, you may want to become a Nonprofit Corporation.  In many jurisdictions, Nonprofit Corporations can issue tax receipts to donors allowing them to get tax benefits for the money that they give you.  Incorporating is a different organizational form from simply registering a business as non-profit or as 501(c).  In the USA, these are known as “Nonprofit Corporations” and in Canada these are known as “Registered Charities.” 

… at the end of the day, registering as a non-profit may be a valuable way for you maintain the trust of your stakeholders.

Registering your business as a non-profit often makes people more apt to help you out.  If they believe that you’re in it for the profit, then you may lose some social capital with those who question your motives.  You’ve said that you’re not strictly in it for the profit, and you’re dependant on the trust of local businesses and neighbourhood youths for the products that you sell, so at the end of the day, registering as a non-profit may be a valuable way for you maintain the trust of your stakeholders.