Test before you leap
Interest is not demand. Ask prospective customers what they did the last time they had the problem and what they paid, because accounts of past behavior are reliable and promises about future purchases are not. Aim for twenty such conversations, then try to collect money through a deposit, a preorder or a paid pilot. Five strangers paying is stronger evidence than five hundred compliments.
Keep your job while you test. First read your employment agreement for clauses on outside work and on who owns inventions, and never build the business on company time. Bureau of Labor Statistics data show that about one in five new businesses closes within the first year and about half within five, so save six to twelve months of living expenses, separate from the business's own needs.
Set it up correctly
- Choose a structure. A sole proprietorship requires no filing but leaves your personal assets exposed to business debts and lawsuits, while a limited liability company, formed through your secretary of state, separates the two. Fees vary widely by state.
- Get a free employer identification number from the IRS.
- Open a business bank account and run every business dollar through it, because mixing funds is what lets a court ignore your liability protection.
- Check for a local business license, a sales tax permit and any professional license your trade requires.
- Keep books from the first sale, and put every client agreement in writing.
Taxes nobody withholds
No employer is withholding for you now. Net self-employment earnings carry a 15.3 percent tax for Social Security and Medicare on top of income tax, and the IRS expects estimated payments four times a year, in April, June, September and January. Move 25 to 30 percent of profit into a separate account the day it arrives. You also lose employer health coverage, so price a Marketplace plan before you resign.
Named mistakes
The first is starting with a partner on a handshake. Put ownership, roles and what happens when someone leaves into a signed agreement while you still like each other. The second is personally guaranteeing a loan or a lease without understanding that the liability shield does not cover it. The third is pricing too low to win early customers, which sets an anchor. The fourth is quitting on enthusiasm, not revenue.
Tip Write your rule for going full time before you start, such as three straight months of profit equal to half your salary. It turns a frightening decision into a threshold you have or have not crossed.
