How to be an entrepreneur: achieve FI/RE by being your own boss

If you want to achieve financial independence—and be truly free from reliance on traditional employment—one of the best steps to take is to start your own business.

Starting a business is no easy feat. Most people think once you have an idea, you’re a business. More savvy pros might think it’s as simple as filing incorporation documents, but there’s much more to it than that.

To start a business, you need to identify a need for your goods or service. You need to find something that other people need that you can provide and that they’ll pay you for. This may mean conducting market analysis, refining product designs, establishing credit, or pivoting if your business starts to suffer.

Starting a business isn’t for everyone. It’s not easy and success never comes quickly. There is also added liability if something goes wrong and you don’t have a safety net in case your business suffers.  But, for those who desire true financial freedom, starting a business can be a great first step.

Table of Contents

• Why Start Your Own Business to Build Wealth?
• Options in Entrepreneurship
• How to Get Started as an Entrepreneur
• What To Do With Earnings From Your Business
• Running Your Business From the Road
• Mistakes to Avoid When Starting Your Own Business
• Are you still in the game?

Why Start Your Own Business to Build Wealth?

If you want to start building wealth in a way that makes you independent from traditional employment, starting a business of your own is one of the most tried-and-true routes to go. It’s also been said in many-a-commencement speech that there’s something noble in creating a job rather than taking one.

One of the biggest no-brainers about starting your own business is the tax benefits. There are dozens of tax deductions that are available to small business owners that aren’t available to other taxpayers. Taken together, they can save you thousands of dollars every year. That’s money that can be invested in investments such as real estate or retirement accounts, if not directly back into your business.

It would take hundreds of pages to list all of the potential tax benefits here, and most of them won’t apply to every business owner. That’s why it’s important to check with an accountant to see which ones you can take advantage of. But, if you’re more interested in the tax benefits of starting your own business, be sure to check out our section below.

In addition to the tax savings, starting a business of your own lets you set your own sail. No one will be able to tell you what to do. You’ll have the freedom to go where you want, live how you want, and work when you want. You’ll also be able to earn as much as you want—your income will be limited only by the amount of work you’re willing to put in to build your business.

People also say that entrepreneurs are people who are willing to work 80 hours per week for themselves to avoid working 40 hours per week for someone else. If this sounds like you, read on.

Options in Entrepreneurship

When most people think about starting a business, they think about traditional companies, small retail stores, restaurants, or professional services firms. They think of the companies you’d see if you drove down main street in any city or town across America.

The thing is, not all businesses look this way. There are thousands of fast-growing companies that exist nowhere and offer nothing tangible, yet they still make TONS of money and support millions of employees.

This can be, and should be a very freeing revelation for would-be business owners. It means that there are many ways that you may not have thought of to start a business and support yourself. It shows that if you want to start your own business, all you need is an idea. Some people would say it should be a big idea, but it doesn’t need to be. Your idea only needs to be as big as you want your business to be.

Some opportunities for starting a business with no money or little commitment are:

• Etsy stores
• Self-publishing books
• Drop-shipping (for digitally-minded folks)
• Professional blogging/vlogging
• Start a business with family
• Flipping homes
• Making things like quilts or furniture
• Home maintenance services like lawn care
• Virtual bookkeeping
• Tax prep
• Tech startups*
  

*The category of “startups” can include a lot of different ideas, but that’s sort of the point. There is no limit to what kind of company someone can start and still be wildly successful. And for many people with proven skills in tech, a startup can be an ideal way to create a company of their own rather than muddle through years of 40-hour-weeks on someone else’s payroll.

If you’re struggling to think of what type of business might be right for you, NicheHacks is a great resource for finding your personal business niche.

Entrepreneurship vs Side Hustles

While lots of people have skills or talents that they want to use to make extra money outside their 9-to-5 job, not everyone decides to start a business based on their abilities. Plenty of people just want the opportunity to monetize their hobby or make a little extra money in their spare time. Not everyone is built to start a business that will eventually support themselves. Some people just need to earn a little extra money in their spare time on their way to financial independence.

For these folks, having a side hustle can make a lot more sense than starting their own business—even though the two are very alike in some respects.

For other people, starting off with a side hustle can be an ideal first step on the way to starting their own business. Creating side hustles through a platform like Fiverr gives them the chance to make a little extra cash while honing their skills and becoming a little less dependent on their full-time jobs.

How to Get Started as an Entrepreneur

When you’re starting your own business, “getting started” can mean two different things: starting operations or filing incorporation documents. While both of these things are necessary for just about any business, they have very different implications and can be done at very different times, depending on what type of business you’re starting.

Technically, you get started in business when you begin operations—when you start selling goods or services and actually conducting transactions with clients. For almost all businesses, though, there comes a time where a business owner needs to protect themselves from liability that could arise from their business.

For example, you might give someone bad advice and cause them to lose money, or a customer might be harmed by a product that you sell them.

When business owners need to protect themselves, they typically do so in two different ways: by buying insurance for their business and by filing to establish their business as a formal legal entity.

Legal entities for businesses can take many forms, LLCs, LLPs, S-Corps, C-Corps, with each form having its own advantages and restrictions. Before you decide what type of entity you should use, it’s a good idea to consult with an attorney and/or accountant. Most businesses don’t need to be anything more complicated than an LLC, but it’s good to check just in case.

The basic steps for starting a business are:

1. Decide on Business Insurance

Getting business insurance is another way that business owners protect themselves from liabilities that may arise. Depending on what type of business you start, you may never need to get business insurance. But, for some types of businesses, insurance is an absolute necessity.

Some common types of business insurance are:

• General liability: This is the most common type of business insurance and helps protect you in case someone is hurt by something you do for business. For example, if you’re cutting down a tree for someone and it falls on their car, general liability insurance helps cover their auto repair bills.
• Professional liability: Professional liability insurance is really only for professionals like architects, attorneys, or accountants. However, if you’re doing consulting work and a client loses money because they follow your advice, professional liability insurance may help protect you.
• Product liability insurance: If you manufacture, distribute, or sell products in a retail capacity and a customer is harmed by something you sell, you may be held liable. Product liability insurance can help protect you from liability if you play any part in a product supply chain
• Commercial property: If you own or rent property as part of your business, and someone gets hurt on your property, you can be held liable. Commercial property insurance helps protect you from claims arising from such cases
• Commercial auto insurance: This is a big one. Most people don’t realize it, but if you’re using your personal vehicle for business and get in an accident, you may not be covered by your personal auto insurance. If you use a vehicle for anything other than commuting to your business—whether or not it’s your personal car—commercial auto insurance is a must-have.

If you think you may actually need multiple types of insurance, two or more types of coverage can usually be combined in a Business Owner’s Policy (BOP). A BOP allows you to save money by bundling packages and, in some cases, combining coverage limits for multiple types of liabilities.

2. Form a Business Entity

Part of creating a legal entity requires choosing a state where you want your company to be domiciled and then filing incorporation forms with that state. You’ll also need to draft an operating agreement for your company to outline the rights of responsibilities of shareholders (this is especially important if you have any partners).

Definitely have someone help you choose a state and file the forms on your behalf, one of these services can help. They can also help with operating agreements, contract review, and additional legal issues that may arise in the formation process or later on.

3. Get Excited About Business Taxes—No, Seriously!

When you create a separate legal entity for your business, your taxes will change. Becoming a business owner gives you the opportunity to take advantage of numerous write-offs, exceptions, and other deductions that can drastically reduce your annual tax liability.

Here are just a few of the tax exemptions business owners can use to save money:

• Mileage deduction for business driving: The IRS rate for unreimbursed business driving is $0.58/mile for 2019. So if you do any driving for your business besides commuting, you can save big money by tracking and deducting your mileage. If you're investing in real estate, this would include miles spent driving to look at properties.
• Home office deduction: If you rent an office, you can deduct your rent as a business expense. If you run your business from home, you can deduct a portion or your rent equal to the amount of space in your home you use exclusively for business (ie a 2nd bedroom). You can also deduct a portion of your cell phone bill, internet, and other utilities based on how much you use them for business purposes.
• Legal & professional costs: You can deduct any legal fees, incorporated fees, insurance  costs, and other professional service fees related to your business. This includes any fees paid to accountants for consulting or tax filing preparation.
• Section 179: This is a big one that not a lot of people know about, but basically Section 179 allows business owners to deduct expenses related to buying certain types of items and expediting depreciation. I know one real estate agent who bought herself a slightly-used Porsche to use for taking clients to tour properties. She deducted the entire cost of the vehicle the year she bought it.

That said, tax treatment is radically different for different types of companies (LLC vs S-Corp vs C-Corp). For example, income for some business entities (e.g. LLCs, LLPs, sole proprietorships, S-Corps) is treated as “pass-through” income (income that went to the business but is treated as though it was yours personally).

What’s more, business income also needs to be handled certain ways in order to maintain liability protection. There are also specific rules about how business owners can compensate themselves and how these disbursements are taxed.

That’s why it’s important to confer with an accountant who understands your individual goals and circumstances. You can do a lot of things wrong in business and still be successful, but misunderstanding your tax treatment is NOT one of them.

What To Do With Earnings From Your Business

Let’s say you start your own business and it’s a massive success. Now what? You may think it’ll all be rainbows and sunshine, with endless travel and long days spent on sun-drenched beaches. And that may be the case for some exceptional entrepreneurs who score big at an early age. But that’s not how it is for most people.

More likely, if you’re able to start and grow a business that supports you financially, you’ll be faced with some tough choices of what to do with your earnings to ensure you attain (and maintain) financial independence.

Typically, small business owners have 4 main areas to invest their rewards:

1. Invest in yourself: Enrolling in courses or attending seminars can help you build new skills, develop new offerings for your business, or just improve yourself, generally.
2. Invest in your business: You may be able to grow your business by purchasing new equipment or moving into facilities that are newer, larger, or better-located—and usually eligible for tax credits and deductions!
3. Invest in the stock market: You may not want to invest in stocks of individual companies, but investing your earnings in things like low-cost index funds can help you build wealth to sustain yourself in retirement.
4. Invest in other assets: If stocks, bonds, and mutual funds aren’t your cup of tea, you might consider investing in rental properties or other forms of real estate to help grow your net worth.

When deciding how to invest your earnings, the most important thing to keep in mind is your purpose for starting a business.

Was your goal to generate extra income to pay down debt? If so, use your revenue to make advance payments against loans and get debt paid off ahead of schedule. Did you start a business to become financially independent? Maybe you want to start using your business revenue to cover living expenses, becoming less dependent on full-time employment.

No matter what you decide, it’s important to be intentional. The choices you make about spending or saving the income from your business will impact whether you achieve financial independence and when you can retire.

Entrepreneurship and Lifestyle

When most people think about the lifestyle of owning your own business, they usually imagine something far grander than reality. People think about jet-setting or luxurious living, personal assistants, and ample free time. In reality, though, it’s rare for business owners to enjoy any of these luxuries. Even for the most successful entrepreneurs, it’s typically years before founders can enjoy the fruits of their labor.

Take Jeff Bezos. He may be living large now, but he started Amazon in 1995 and had plenty of lean years before achieving massive success.

The takeaway here is that it’s rare for entrepreneurs to enjoy nice lifestyles in the early years of building their company. Starting a business takes sacrifice. That’s not to say that you can’t start a business and still enjoy your life. You just have to set reasonable expectations and learn to live within your means.

You also have to get used to a different set of problems.

When you work for someone else, there are always headaches. There are co-workers you don’t like, projects that are difficult or seem unnecessary, ridiculous meetings, and bothersome clients. When you’re running a business of your own, though, you still have some of these headaches, but you also have employees who want to be earning more money or working fewer hours, clients who demand more and more from you, revenue that you can’t control, and expenses that can’t be skipped. This is also your baby—as it grows and other people take the reins of aspects, they’re going to do things differently than you would and that’s hard for any parent.

If you’re going to start a business, you need to learn to adjust to these headaches and be willing to work through them as a trade-off for increased freedom and income potential.

Running Your Business From the Road

As part of right-sizing their lifestyles, growing segments of Americans are choosing to jettison many personal possessions, and sometimes even their homes. Instead, these people, many of whom run their own businesses, choose to live part- or full-time in vans or campers. They may stay occasionally with friends or family, but they live in a state of perpetual travel.

These people have chosen to live as digital nomads. They structure their businesses so that they are not confined by geographic constraints. Even though they may have employees, offices, plants, stores, and equipment, they work intentionally to set up operations that don’t require them to be present day-to-day.

This option certainly isn’t available to all prospective business owners, but it is an excellent example of picking your priorities, being mindful of the goals of starting your own business, and working from the start to structure a business that will meet your individual goals.

Mistakes to Avoid When Starting Your Own Business

Starting your own business is an exciting undertaking, but one that’s fraught with potential missteps. To give you the best chances of success, we gathered insights from business consultants and entrepreneurs to share the most common mistakes they see as well as things they wish they’d done differently when setting up their own businesses.

1. Don’t Expect to Make Money Right Away

“The biggest mistake is people think they will begin making money faster than is realistic. So, they do not keep enough savings, and they run out of money before the momentum is built. To solve this: save or borrow to have enough capital, bootstrap your way to your startup, and know it will take longer than you expect to see results.”

2. Don’t Skimp on Cost

“The biggest mistake I see people make when they start their own business is not getting professional help. They want to cut corners and not spend a lot of money, and in the process, they usually end up wasting plenty of time, effort, and money.”

3. Don’t Give In When Things Get Tough

“One of the reasons why some businesses fail to reach their full potential is because they give up midway. The world of business and entrepreneurship is not for those who are faint of heart. In order to become a successful entrepreneur, you should learn to balance all of your positive qualities. Having a quick mind, a passionate heart and a patient character are what makes an entrepreneur successful.”

4. Avoid Hiring Too Soon or Spending Too Much on Employees

“Upon hearing the term ‘business,’ many of us start thinking about a furnished office with multiple people working in it. It is just a fantasy in many scenarios. People spend much money on renting or setting a well-furnished office for their business. The next mistake they make is hiring employees too soon. Hiring is not wrong, but the company should be entirely stable to give wages. Owners hire full-time employees. However, in the initial days, their work could be done by part-time employees or even freelancers at minimal rates.”

5. Don’t Get Ahead of Yourself

“The biggest mistake I see when people are starting their own business is wanting too much too fast. They try to launch their website before it’s ready. They reach out to potential clients before they’ve even got their services finely-tuned. They put out job ads before they know exactly what positions they need filled, or even before they’ve generated enough income to cover their salaries. It’s absolutely crucial to spend time setting out a realistic set of business goals and set manageable deliverables based around these.”

6. Stay Focused & Know Your Cash Flow Expectations

“There are 2 things that fall into the “biggest mistakes” category for me.  First, not settling on a concept.  By that, I mean trying to be all things to all customers and never really saying “this is our core business” and focusing on it.”

“The second is never doing a Cash Flow Projection.  You’ll need at least 2 years of these if you’re going after any sort of bank financing, but it’s also the way you can run the business on paper before you put any money into the game.  Everything is money in and money out with a business, so you can think through what it will cost to get the doors open, what cushion you’ll need for operating expenses and finally how long until you could expect to be profitable.”

7. Don’t Ignore Labor Law

“My biggest mistake during our initial growth as a company was with our first employee who worked for us for several years.  We trained her on everything having to do with running an e-commerce business, and gave her supplier and customer information without a second thought.  She had complete knowledge of confidential business practices as well as all of our advertising keyword information.  Little did we know that one day she would go out on her own and start a competing online business!  Moving forward, we always have all of our employees sign a non-compete/non-disclosure agreement to protect our business and prevent this from happening again. I would advise any new business owner to get legal advice about confidentiality and non-compete agreements before hiring anyone.”

8. Know That Your Business Isn’t Immune From Personal Life

“A very small mistake in the beginning of our business almost torpedoed it before it even got going. Our company just passed $20 million in annual revenue but it almost was sunk by a divorce 2 years ago. I have to admit when I founded my company with my two co founders four years ago crafting our Buy / Sell agreement felt like creating divorce papers on your wedding date just in case you need them later. Luckily we listened to our counsel and crafted the buy sell agreement ....because fast forward three years later one of my co founders wanted out of the business because he was getting married and having a child. Life happens and you never know what the future holds.”

9. Don’t Wait Too Long

“The biggest mistake people make when starting their own business is waiting too long to get started. The self-talk and self-doubt are real. A business is a multi-year endeavor so you need to get started so you can test your hypotheses in the real world versus playing it out in your head…Everything takes a lot longer than we think it will. I'd also focus heavily on marketing since the ability to grab attention is saturated, it also takes a long time to build trust in your brand.”

10. Know Your Worth

“Because of imposter syndrome, lack of experience, or being unaware of market averages, new business owners often drastically undercharge for their product or services. The laziest way to support your offer is to say we're the cheapest. Be more thoughtful and come up with a way to have conviction when charging what you're actually worth.”

11. Don’t Forget to Work On Your Business, Not Just In It

“One of the biggest mistakes I have seen when people start their business is not spending enough time to ensure their internal operations and procedures are in place to support the new business. They have spent so much time focusing on the product /service and marketing, but not spent enough time on how they plan on delivering to their new clients, creating workflows and ensuring their systems are duplicatable so that others can replicate it as they grow.”

12. Know Your Value Proposition

“There are so many mistakes that can doom a business, but I think oftentimes it is starting a business without fully understanding the problem they are solving. Trying to develop a product and a service and then convince people to use is a tough task. Conversely, identifying a problem then working to provide a cost-effective efficient solution will typically find more success.”

13. Don’t Think Passion Trumps Value

“The biggest mistake I've made and I see other people make is to start a business that is based on their passion. The most important thing to remember before starting a business is that it provides value to people. It has to solve a problem that people have and they are willing to pay in exchange for the solution. I started my first business based on my passion for fitness and it was struggling for many years because of the high competition. And I failed to focus on solving a problem that people had with their fitness.”

14. Go All-in

“As a seasoned entrepreneur, the biggest mistake I see people do is going in halfway. Before you start a business, you must have a plan. You have to be ready to devote all your time and effort to make sure it grows. Your focus and drive must be unwavering.”

15. Don’t Fear Failure

“The biggest mistake I see new business owners make is fearing failure. Many new entrepreneurs are so attached to this “idea” of success they have, where everything is perfect and there are no bumps in the road. What they don’t understand is that failure is actually the key ingredient to success. It’s impossible to achieve your goals without first learning the necessary lessons along the way.”

Are you still in the game?

Many people aspire to own their own businesses. Many will someday try to start their own venture; others won’t. But whether you decide to take that journey, it’s important not to make the decision lightly. There are many rewards that can come from starting your own business, but so too there are risks and responsibilities.

For those who think they’re well-suited to entrepreneurship, it’s important to consider their next steps carefully. They should think long and hard about the goals of starting their business, be mindful of what they hope to achieve. If they decide to move forward, they should move confidently toward a future of their own making.