Invest With Stimulus Check Funds
The triple round of stimulus checks provided welcome relief to families and individuals besieged by the pandemic. Most of the funds went toward paying bills, buying day-to-day essentials, and paying down debt, a Bankrate survey has discovered. However, a small proportion of those surveyed — 11% — planned to invest the funds. One great way to do that is by starting a business.
That’s a good idea on two accounts. Entrepreneurs benefit personally, of course, when their businesses are successful. But those businesses are only successful if they contribute to the welfare of society. New businesses increase overall economic welfare by providing new products, services, and, of course, employment.
The recent surge in new business starts appears counterintuitive. An economic downturn hardly seems the best time to start a business. Yet, thousands of Americans are doing just that, and you could be one of them.
Necessity may be the force driving the comeback in entrepreneurialism. However, another reason has been suggested. Did the government safety net — unemployment insurance, economic impact payments, etc. — mitigate risk to such an extent that it encouraged the entrepreneurial spirit across the nation?
If you’re worried about where your next meal will come from or how to pay the rent, it’s going to be difficult to focus on opening a business. But if those necessities are manageable, you can turn your attention to being the next Horatio Alger hero. Nevertheless, as the old proverb points out, necessity is undoubtedly the mother of invention.
Starting a Business in a Recession Is a Good Idea
Perhaps the best reason to start a business in a downturn is that most other people won’t. You can learn lessons on investing in a new business by observing the stock market. Falls in the market generally precipitate a selloff, which triggers a further market decline, and further selling, setting up a vicious cycle.
One famous pro recommends a contrarian approach. In Berkshire Hathaway’s 2004 annual newsletter, Warren Buffett urged readers to “be fearful when others are greedy and greedy only when others are fearful.” This warning is often quoted, but it seems to be hardly ever followed.
There’s No Better Time Than the Present
There are good reasons for starting a business. Why not now? If starting a new venture is a way of investing, then waiting for a better time is a bit like market timing, that is, picking a “good time” to buy stocks. Study after study has shown that market timing — choosing the “best” time to invest — is a futile endeavor. If your business really has something of value to offer, it has a good chance of succeeding.
Real Gross Domestic Product
Besides, recessions typically do not last very long, as the chart above shows. Recessions and downturns are indicated by the grey columns. In recent times, the Great Recession, which lasted 18 months from Q4 2007 to Q2 2009, has been the longest. The previous two downturns before that were short-lived, both lasting just one quarter, not even qualifying to be called recessions. The Financial Press typically defines a recession as two consecutive quarters of economic decline. The recent decline in economic activity, which commenced in February 2020, will probably be one of the shortest, lasting around five to six months. The National Bureau of Economic Research’s Business Cycle Dating Committee is likely to declare May or June 2020 as the official turning point from recession to recovery.
Talent May Be Less Expensive
During any prolonged economic downturn, the unemployment rate rises. It stands to reason that with a large number of people looking for work, the price of their labor will fall. Many people will prefer to work at a reduced rate rather than not work at all, particularly if they are offered good benefits or an option to take up equity. A corollary is that the pool of candidates available for a particular position is likely to be larger and of higher quality. Additionally, recruiting costs tend to go down.
As the chart shows, there is a positive relationship between the unemployment rate and declines in GDP (i.e., both the unemployment rate and falls in GDP tend to go up together or decline in tandem).
When the Going Gets Tough...
Establishing an enterprise during a downturn positions it well for success when economic conditions improve. A business that makes it through a recession is hardly likely to fail during boom times. Starting a new enterprise means, first of all, getting all the parts to work cohesively. An ecommerce proprietor, for instance, has to source products that will sell at a profit. They have to find a cost-effective way to purchase those products. Attention must be paid to digital marketing, or the goods will sit unsold. The logistics of delivering orders also need to be worked out. If they can get all these things right, the rise in demand that boom times bring won’t throw the operation into disarray.
Startup costs, naturally, vary considerably depending on the type of business. Some costs a new business owner may have to consider include rent, wages, utilities, equipment, furniture and fittings, and business entity formation expenses.
Business entities are created under state law, which varies from state to state. Setting up a limited liability company (LLC) is, perhaps, the least costly in Arizona. In the Grand Canyon State, forming an LLC costs just $50. And there is no annual registration fee. However, setting up an LLC in Massachusetts will set you back $500 for the filing fee, plus $500 every year to stay in good standing.
There are many advantages of starting an LLC. Here are the three main ones:
- An LLC structure limits the liability of its owners, called members, to the amounts they have invested in the LLC. Limited liability prevents business creditors from going after owners’ personal assets.
- There is less legal paperwork in setting up and running an LLC than a corporation. For example, a corporation is required to have an annual general meeting (AGM) of directors and shareholders. There is no similar requirement for an LLC.
- Perhaps, best of all, an LLC can be treated as a sole proprietorship, partnership, C corporation, or S corporation, depending on the number of members. Accordingly, an LLC can be a pass-through entity for federal and state income tax purposes… or not. A pass-through entity is not subject to income tax. Its income is apportioned and taxed at the owner level.
Steps to Forming an LLC
Check Name Availability
Generally, states make it possible to check name availability online by maintaining databases of business entity names. Name availability takes into account all types of business entities. The name of an LLC must be distinguishable from the names of other LLCs, corporations, or limited partnerships, for instance. Therefore, a formation filing for the Acme LLC is likely to be denied if there is an Acme Corp. The name of an LLC must include the words “Limited Liability Company” or some abbreviation. Additionally, some words and phrases are usually prohibited.
Articles of Organization
The articles of organization are the legal basis for the formation of the LLC. Usually, very little information is required. New York’s Articles, for example, require just four pieces of information:
- The name of the limited liability company (LLC).
- The county within New York State in which the office of the LLC is to be located.
- A registered agent address.
- Filer’s Name and Mailing Address.
Although state LLC laws include provisions on internal governance, in general, they allow the “operating agreement” to override many of these provisions. This is in contrast to state corporation laws, which usually cannot be changed. Thus, the internal governance of LLCs can vary considerably. A good operating agreement should include clauses on capital contributions, allocation of profits and losses, voting, management, and books and records, amongst other issues.
Arizona, Nebraska, and New York require newly-formed LLCs to publish an announcement of their formation in local newspapers over a set period of time (i.e., it varies from state to state).
Permits and Licenses
Some business activities require business licenses or permits from state and/or local governments.
For more details, read our article on how to start an LLC.
Many large enterprises have started from quite humble beginnings. Giant multinational Amazon started life as an online bookseller in Jeff Bezos’s garage. Google also operated out of a garage that belonged to Susan Wojcicki (now CEO of YouTube) in its early days. Most businesses start because someone has a unique skill or knowledge they can utilize commercially, there is some activity they enjoy and think money can be made doing it, or they have an idea or invention that could have commercial promise.
To give you an idea of the top business categories for business formation right now, here is an extract from the Census Bureau’s data on new business starts.
In March 2021, there were 440,165 applications for the Employer Identification Numbers (EINs) required for many new business entities. Sole proprietorships with no employees can use the Social Security number of their owners since there is no legal separation between a sole proprietorship and its owner. More new businesses (81,469) formed in the retail industry than in any other category, although that figure represented a decline of 5.3% from February’s total.
High Tech, Low Tech, and No Tech
Despite the variety of categories, businesses today might be sorted into three groups: traditional businesses, traditional businesses using digital technologies, and businesses based on digital technologies. Traditional businesses are enterprises doing business purely the customary way. The provision of services and products and how these are brought to market continue to follow time-honored practices. Starting and operating such a business is not a good idea. The absence of technology makes such businesses less efficient in production and less able to engage customers.
But by employing digital technologies, traditional businesses can improve performance, in effect transforming their business models. This is possible with any process the business requires to operate. For instance, in Thailand, food vendors, a feature of Thailand’s streets for decades, accept payment by Quick Response (QR) barcodes that can be read using smartphones. In a world where mobile phones are ubiquitous, increasing convenience in this manner will, very likely, boost demand.
Indeed, at present, updating traditional businesses with the latest digital technologies offers a “low hanging fruit” route to business success. This is taking a leaf from a very successful playbook. Consider how Robinhood disrupted the billion-dollar brokerage industry by offering no commission trades (among other things). Or how online platforms have transformed the marketplaces for real estate, cars, and other goods. Or the advent of food delivery services.
And then there’s the opportunity to launch an entirely new business using a combination of the latest advanced digital technologies. Salesforce, founded in 1999, has grown into a $200 billion company because it found clever ways to use digital technologies. The company’s CRM software includes features such as contact management, workflow creation, task management, opportunity tracking, collaboration tools, customer engagement tools, analytics, all accessed through an intuitive, mobile-ready dashboard.
For the new entrepreneur, the world is your oyster. The rapid development of digital technologies since the 1980s has altered society and the economy, creating entirely new industries, markets, products, and services. There couldn’t be a better time to start a business. Good luck!
About the Author
Anthony is the owner of Kip Art Gifts, an ecommerce store that specializes in art-inspired jewelry, fashion accessories, and other objects. Previously, he worked as an accountant and financial analyst. He enjoys writing on small business, financial intermediation, and economics. Anthony was educated at Wilson’s School and the London School of Economics and Political Science.