4. Line up sources of funding. Here are some ways to find the money to get started:
•Savings: Most start-ups are funded with personal savings. (This is where a severance package comes in handy.) It's advisable to set aside at least six months of fixed living expenses. Try not to dip into your retirement savings: You'll be subject to withdrawal penalties and income taxes and lose the tax-deferred compounding that could serve you well in retirement.
•Credit cards: Use plastic with care. It's fairly easy to tap into, but this should be a last option. Most cards have double-digit interest rates, a very high cost of capital to carry on your new company's books.
•Home equity loans: This is an appealing option because the funds are usually taken as a lump sum that you can pay off over time. In this housing market, though, qualifying for such a loan can be tough. If you have equity in your home and a credit score above 700, it's worth exploring. You may also qualify for a tax deduction on the interest on a loan up to $100,000.
•Friends and relatives: Money is often lent interest free or at a low rate. Be sure to put the terms in writing so that there are no misunderstandings about interest and repayment. Be forewarned: Money can wreak havoc on relationships should things not work out as planned.
•Banks and credit unions: A tight lending environment has made borrowing a struggle. A solid business plan and a shiny credit record are prerequisites. You might try a bank that's familiar with you or your industry, or one that is active in small-business lending. To find a bank that offers SBA-guaranteed loans, check the "Local Resources" section of the agency's website (www.sba.gov). Keep in mind that a lender will still want you to put up collateral, usually in the form of a real estate asset. Plan to have some capital or equity that you personally put into the business. Lenders want you to have some skin in the game, so to speak.
•Angel investors and venture capital firms: These individuals and firms invest in exchange for equity or partial ownership. But they are typically overwhelmed by requests for financing and are exceedingly cautious with their funding. Some have a mission. San Franciso-based Investors Circle, for example, favors small companies that address social issues and environmental concerns. One source of venture capital is the SBA's Small Business Investment Company Program.
5. Purchase health insurance. Some sources to check for availability are eHealthInsurance.com, Coverageforall.org, and the National Association of Health Underwriters website (www.nahu.org), which can direct you to a local agent. Sole proprietors can deduct the premiums for medical, dental, and long-term-care insurance. Consider a health savings account that permits you to contribute pretax money that you can use tax free for future medical expenses. For individual coverage, you can contribute up to $3,050 to an HSA in 2010. For families, the maximum is $6,150. And you can contribute an extra $1,000 if you're 55 or older. For a list of insurers that offer these plans, see HSAInsider.com.
6. Hire an accountant. It's critical to know which business expenses are deductible. Careful record keeping is essential, and having a pro to guide you will come in handy. Go to the source to find what's deductible: IRS Publication 334, "Tax Guide for Small Businesses." Useful information is available at the IRS Small Business and Self-Employed Tax Center on the agency's site.
7. Don't neglect retirement savings. You have two basic ways to set aside pretax savings: a simplified employee pension, or SEP IRA, and an individual 401(k). With a SEP IRA, you can contribute up to 25 percent of your net self-employment income, up to a maximum of $49,000 in 2010. With a solo 401(k), you can contribute up to $16,500. In addition to the 25 percent contribution, self-employed business owners can contribute $16,500, plus $5,500 more if they're 50 or older.