Personal Finance Essentials

The Good News and Bad News About Entrepreneurship

The Dream Is Real. So Is the Risk.

What You Need to Know Before You Leap

EntrepreneurGoodNewsBadNews

Frustrated job seekers often fantasize about starting their own business. The opportunity to be your own boss, succeeding or failing by your own talents, is a powerful draw. But the truth is that few people are actually meant to be entrepreneurs. At least one-third of new businesses do not survive past two years, and 56% don’t make it past four years, according to the Small Business Administration. These are not numbers designed to discourage you — they’re numbers designed to prepare you.

The Good News About Entrepreneurship

There are lots of benefits to being self-employed. Among them:

1

Flexibility and freedom. You get to set your own schedule.

You decide when, where and how you work, and even who to accept as employees and customers. All this can help you achieve a better work-life balance.
2

Pursuing your passion.

Being self-employed means you get to choose your field. Don’t like some duties? You get to delegate them so you can focus on doing what you love. Self-employed people like to brag about their job satisfaction compared to those who work for others.
3

Control over business decisions.

You’re the boss, so you get to make all the decisions. That autonomy can be empowering and lead to a more fulfilling career.
4

Unlimited earning potential.

Unlike a job where compensation is usually limited, building your own company gives you the opportunity to make as much money as you want. The harder you work and the luckier you are (by being in the right place at the right time with the right solution and the awareness and willingness to capitalize on the moment), the greater your financial reward.
5

Tax benefits.

Self-employed people incur lots of expenses –including a home office, travel costs, business-related purchases and so on. You get to reduce the amount you pay in federal and state income taxes because of the business expenses you incur.
6

Increased retirement savings.

The law lets self-employed people contribute far more to their retirement savings accounts than people who work for others. This not only further reduces your annual income taxes, it also dramatically increases the amount of wealth you’ll have in the future, compared to employed people.

The Bad News About Entrepreneurship

But there are lots of downsides to being self-employed, too. These include:

1

Frightful financials.

People with office jobs need to give no thought to how their desk, chair, phone and photocopier got there. Hospital personnel merely use their facility’s tools and equipment with no notion of the cost or effort in procuring them. But that’s not true for self-employed people. As the business owner, everything is entirely up to you. If you don’t make it happen, it doesn’t happen. This leads to a frightening financial experience for all new business start-ups, including:

a. Immediate and ongoing business expenses. You start spending money the day you start your business, long before you start generating any income. You’ll need money to get started, but where will it come from?

b. Income instability. Unlike a job that provides a consistent income, your life as a newly self-employed person is filled with financial uncertainty. It could be months before you land a client or make a sale, and a couple more months before you get paid for the work you’ve done. How will you pay your bills in the meantime? (There aren’t many people who can handle the stress of not knowing how much income they might earn or when it might start. Even if you can handle the uncertainty or variability, that doesn’t mean your spouse or kids can.)

c. No employee benefits. Employers give their workers generous benefits. But you get none of those. If you get sick and can’t work, not only are you not earning money that day, you must pay your own medical bills. And you can forget about vacations, because you won’t be able to afford to take 14 days off without earning an income.
2

The owner is also the janitor.

Operating your own business means you must handle everything. That has two downsides:

a.You must be an expert in everything. You’re starting a business because you’re passionate about something – and you’re probably an SME, a subject-matter expert in that field. But it’s not enough that self-employed graphic designers know all about Photoshop; they must also know all about:

• Legal and compliance
  1. How to structure your business (sole proprietorship, C‑Corp, S‑Corp, LLC, etc.)
  2. Understanding contracts and agreements
  3. Intellectual property rights (trademarks, copyrights, patents)
  4. Business licenses and regulatory requirements
  5. Client dispute resolution
• Finance and accounting
  1. Budgeting and managing cash flow
  2. Invoicing, bookkeeping and financial tracking
  3. Understanding self-employment taxes
  4. Pricing your products or services correctly
  5. Securing business loans or funding
• Branding and marketing
  1. Creating a strong brand identity
  2. Digital marketing (search engine optimization, social media, email marketing)
  3. Content creation and storytelling
  4. Networking and building a professional reputation
• Sales and negotiation
  1. How to sell your products or services effectively
  2. Understanding customer needs and pain points
  3. Contract negotiation and closing deals
  4. Building customer loyalty and retention
• Customer service and relationship management
  1. Handling client expectations professionally
  2. Dealing with difficult customers
  3. Building long-term customer relationships
• Technology and digital tools
  1. Using accounting software
  2. Website development and maintenance
  3. Cybersecurity to protect business data
• Business management
  1. Goal setting and strategic planning
  2. Managing growth and scaling your business
• Productivity and time management
  1. Setting and staying focused on priorities
  2. Using productivity tools
  3. Balancing work-life responsibilities
• Self-motivation and resilience
  1. Staying disciplined without a boss
  2. Overcoming setbacks and failures
  3. Maintaining motivation during slow periods
So much for passion. You started your business because you have a passion for something, but instead you’re finding yourself spending most of your time engaged in all the activities listed here. Considering all these obligations, when exactly is the baker supposed to find the time to bake?

3

There’s no work-life balance for the entrepreneur.

Entrepreneurs tend to work 60 to 80 hours per week. Sure, you can work part-time, like an Uber driver, but that’s a gig and an entirely different conversation. It’s not entrepreneurship in the context of this discussion. If you think working so many hours Is dumb, then entrepreneurship isn’t for you.

Questions to Ask Yourself First

Before you take the leap, honest self-assessment is essential. Anyone considering self-employment should think carefully about the following:

Will becoming self-employed truly meet my career goals?
Am I willing to work long hours, often longer than I do now?
Do I have skills in a profession, trade, or hobby that can realistically be converted into a business?
Does my business idea effectively use those skills and abilities?
Am I a good planner and organizer?
Can I make difficult decisions on my own?
Am I willing to get more education or training if my idea requires it?
Does my family support this endeavor and do they understand the sacrifices involved?
Can I afford the financial and emotional risks if the business fails?

What Running a Business Actually Costs

Starting a business requires capital, because it may be years before you produce meaningful revenue and turn a profit. In the meantime, you’ll spend hours on tasks you may not have anticipated — bookkeeping, administrative paperwork, marketing, scheduling, billing and more.

Consider someone who turns a photography hobby into a business. The photography itself may be the smallest part of the job. The rest of the time is spent marketing to clients, scheduling events, billing, managing expenses and handling taxes. There are no paid vacations, no employer-paid health insurance and no company pension. Every customer, in a real sense, becomes your boss.

Your family must be on board, because they’ll feel the impact too. You’ll have less time at home, and it may be a while before you bring home a consistent income. If you’re starting a business with a partner, you’ll need a clear, written agreement, including a plan for what happens if one of you wants out, becomes disabled or dies. Partnerships that begin without that plan rarely end well.

This isn’t meant to talk you out of it. Entrepreneurship is part of the American dream. Just go in with your eyes open and your sleeves rolled up.

Is Business Ownership the Path to Wealth?

Many people assume that starting a business is the fastest route to financial independence. The data tells a more nuanced story. Among a large survey of ordinary Americans who had achieved significant financial success, only 6% cited business ownership as their primary path to wealth. The vast majority built their wealth through consistent saving, long-term investing in diversified portfolios and taking full advantage of employer retirement plans.

That doesn’t mean entrepreneurship can’t build wealth — it clearly can. But it’s not the only path, and for many it isn’t the most reliable one. The more important point is this: if you do start a business, your business cannot be your entire financial plan. Building wealth outside the business is just as critical as building the business itself.