The number of Americans who quit their jobs in 2021 is mind-boggling, as documented by the Job Openings and Labor Turnover Survey (JOLTS) of the U.S. Bureau of Labor Statistics. Inc. sums up the resignations from July to September to reach 12.7 million people. SHRM added that 4.2 million more resigned in October, and a record-breaking 4.5 million resigned in November. There is no data yet on the number of resignations by the end of December.
According to Inc., statistics tracked by The Wall Street Journal show that a significant number of those who quit their jobs did so to set up shop for themselves. The percentage of self-employed workers in the country increased to 5.9 percent in November 2021 from 5.4 percent in February 2020 before the pandemic struck. That represents 500,000 additional self-employed people. Also, new applications for federal tax ID numbers used by businesses increased by 56 percent from 2019 to 2021. Two-thirds of the applications were for firms to be manned by the owner alone.
One platform used by many self-employed creatives is Etsy. The online marketplace had 2.6 million sellers in September 2019. By November 2021, it had 7.5 million active sellers. All these statistics are very encouraging to those also planning to set up a business.
Types of Business Structures
Most people believe that if they do not intend to hire employees for starters, they should automatically set up a sole proprietorship. This is, indeed, the easiest type of business structure to establish. It also carries a high risk, though. In a sole proprietorship, you and your company are the same entity in terms of tax and legal obligations. Hence, if your business incurs liabilities, your personal assets will be used to pay these off. If you do not have enough cash, your properties will be liquidated to cover such liabilities.
It is more prudent to set up a limited liability company (LLC) instead. In an LLC, the owner has limited liability for debts incurred by the business. You can be the sole owner of an LLC, or you may have co-owners.
If you set up the business with a partner, you can draw up a partnership agreement and set up a limited liability partnership (LLP). You are both protected, similar to the LLC. Lawyers and accountants often use the LLP.
Larger companies with more owners are better suited to be corporations. Here, too, the owners have limited liabilities. The default status of any corporation is as a C corporation. Here, the corporation pays taxes on its income. Individually, its owners also pay taxes on any income they receive from the company. This results in double taxation. To avoid this, you can apply to change the corporation’s status to an S corporation. An S corporation does not pay business taxes. Only the individual owners pay taxes on their share of the business income.
There are limitations on an S corporation, though. While a C corporation can have an unlimited number of shareholders from around the globe, the S corporation can only have a maximum of 100, and all of them must be U.S. citizens. Furthermore, an S corporation can only be owned by individuals, not by any corporation, LLC, or trust. This limits the potential for selling the business in the future.
Types of Insurance Needed
The U.S. Small Business Administration (SBA) includes the need for business insurance in its checklist for new business owners. Apart from the insurance coverage of your choice, certain states have their own business insurance requirements. It is your responsibility to find out and comply.
The most basic insurance policy you need is general liability insurance. You can then file a claim to pay for defense against lawsuits if you are sued for property damage, bodily injury, libel, and slander. If you lose the case, you can file a claim to pay the other party for medical expenses, settlement, and other judgments.
Commercial property insurance protects your business from losses due to damage from extreme weather events, fire, vandalism, and even civil disobedience. If your business is operating from your home, you also need home-based business insurance on top of your home insurance.
If you are rendering professional services, you need professional liability insurance, often referred to as errors and omission (E&O) insurance. If you are sued for errors, omissions, negligence, or malpractice, you can file a claim. Even independent insurance agents need E&O insurance.
If you are selling a product, you need product liability insurance. You can file a claim if you are sued for injury or harm caused by your product.
There is also a business insurance policy for cybersecurity. In addition to implementing strict cybersecurity measures, you must have this insurance to cover your losses in case of a breach.
Any business is a risk, and every entrepreneur is a risk-taker. It pays, however, to minimize your risks as much as you can by getting as much protection as possible.