It’s no secret that many new ventures are started when founders are working at other companies. Indeed, the chart below reveals that most businesses that are incorporated through BizFilings.com are formed during the lunch hour (East Coast and West Coast lunch hours, to be exact). And for many entrepreneurs, it makes sense to moonlight at first. Keeping a day job means maintaining financial security through the early years of your startup’s existence when revenue is uncertain.
It may make sense, but it’s not easy.
Moonlighting entrepreneurs have to find windows of time when they can further their businesses without creating conflicts with their employers. If you’re an entrepreneur thinking of starting a venture while working at another organization, you may benefit from the following tips:
1. Read your employment agreements.
While laws vary by state with regard to what employers can ask of employees, many workplace nondisclosure, non-compete and employment agreements prohibit an employee from starting a competing business while still employed. Some non-compete agreements limit your options even after you quit your job.
You may also have an assignment agreement, which says that your ideas related to your employer’s business belong to them. Some strict contracts even wholly prohibit employees from holding other jobs while at the company.
Running afoul of your various employment contracts and agreements could be grounds for dismissal. In some instances, if your startup is a success down the road, your employer could claim ownership over it. Before starting your business, take a close look at your employment contracts to make sure that you’re not violating any rules. If in doubt, show the contracts to an attorney for advice.
2. Consider tax implications.
When earning income from multiple sources, be sure to file taxes properly with the IRS. Entrepreneurs must calculate their business income using Form 1040, Schedule C. The Schedule C amount is then reported on the Form 1040 itself, as is the wage and salary income from their day job and any other types of income received over the year.
Additionally, it is important that you keep track of expenses, including costs related to office supplies and travel, while starting your business. Rather than being deducted all at once like the expenses of an ongoing business, these types of expenses, also known as organizational startup costs, must be deducted over 180 months for startups.
In order to take advantage of these business deductions, small business owners need to show a profit motive, which proves to the IRS that the endeavor is more than just a hobby. Because businesses often don’t make money in the first few years -- especially companies whose founders are still working full-time at other organizations -- a profit motive may be difficult to show.
3. When success happens, be ready.
If the goal is to one day quit your day job and work on your business full time, set up your enterprise for success from the start so when that day arrives, you’ll be ready. For example, you may wish to discuss your options with an attorney to protect any intellectual property that you develop for your business while working at another.
In addition, understand that incorporating your business early on will reduce your personal liabilities, and may help you pursue opportunities such as loans, grants and the ability to bid on certain contracts. Incorporating, combined with accurate recordkeeping and demonstrated expertise, can also help to show the IRS that you have a serious business and not just a hobby.
Be prepared to manage your business like you mean business. This includes paying attention to your cash flow, building a business plan and marketing strategy, and making decisions for the long-term health of the business.
4. Be mindful not to use your employer’s time and resources
Unless your employer expressly encourages and provides resources for employee startups, avoid using company time or supplies for your new venture. For example, be mindful of checking personal emails or making phone calls related to your startup during working hours.
Additionally, while it may be acceptable to take a personal phone call or two during work hours, make sure that your entrepreneurial work is not disruptive to the workplace.
5. Finally, breathe.
Moonlighting entrepreneurs are, quite literally, working two jobs at once. This often means working nights and weekends, which can be overwhelming. Be sure to map out your goals and objectives for time management so work doesn’t swallow you whole. Carve out time for your loved ones, for exercise and for eating well. Nothing slows down a new venture more than a founder who is exhausted, strapped and stressed.
Be good to yourself, and you will be your company’s best asset.
Average number of Business Started on www.bizfilings.com, by hour