One of the most common questions I get from new entrepreneurs is “what do I do first?” They want to know if they should you start with the business license or the LLC.
But that is the wrong question.
These are the questions I ask:
- Why are you doing this business?
If your primary reason is to make money, you are in the wrong business. You need to do something you are passionate about. A desire to change the world, or at least change the lives of the people you serve. Without that passion and desire, you will burn out. - How many customers do you have?
If you have not already been doing the work, either in your job or free to help friends, then slow down. You need to have experience and demand for your services before you start a new business. Recently one of my IEM clients started a business in genealogy research. She is passionate about genealogy, and people often ask her to help them research their family tree. So she had a solid base of customers and experience. She went from idea to profit in one day.
What about the license and LLC? My rule of thumb is, do not bother with either until you know you have a viable business you enjoy. Oh yes, and also profit! The minute you start to take money for what you do, your legal status is a sole proprietorship. This is all you need.
Exceptions:
Without going into detail, here are the exceptions to the above rule.
- You will be raising capital through investors.
- You are starting a high-risk venture where someone will get hurt. For example, a motorcycle theme park.
- You have significant wealth. The number varies per your risk, but if you are worth over $1 million, I would consider you a higher risk.
Other than these exceptions, just do it. Define your products and services, go find customers, serve them well, and grow your business. Once you have real profit and customers and you love what you are doing, go back and take care of the legal details.
About two years ago I did a short video on this subject, which can be found at Do I Need a Business License?
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Hey Dale, if I’m reading you correctly you’re saying (not including the exceptions) that an entrepreneur doesn’t need to get a business license or the LLC until after they’ve generated “real profit.”
So my question is this: how much real profit should someone generate before they get a business license? Just curious.
It really depends on your local/regional rules. Some area very strict and hard to do ANYTHING. But for most I start thinking about this either once I know it will work (It is easier to start a license sometimes then to close it down…so be sure) or sometimes I just do not worry about it until they ask.
But if I had to put a number on it – I would say once you have a business that has enough profit that you will keep operating. So – for those with a day job – a business that generate 10% of what you make on the day job is a keeper – so go ahead.
Even then – do not kill yourself. If they cannot tell you what to buy – move on. There is not always a license for all kinds of businesses. Internet based businesses for instance often have no license.
Thanks. Good rules of thumbs.
I didn’t know that internet based businesses often have no licenses. Interesting. Thanks.