Corporations come in all shapes and sizes: there are massive companies like Apple and Nike but also single-person corporations or those with only a handful of employees.
A corporation, for tax purposes, doesn’t have limits on its size. If you are a small business owner, you may want to consider establishing yourself as a corporation. In the eyes of the IRS, you can either become a C corporation or an S corporation. Understanding the difference between these 2 concepts can help you file for the correct status—and file your taxes more easily.
Learn about the differences between C-corp and S-corp business designations to decide which type of business is best for you.
S-Corps Use Pass-Through Taxation
One of the biggest differences between S corporations and C corporations is that S-corps utilize pass-through taxation. Essentially, the business itself doesn’t actually pay taxes, which means the tax burden passes through to its owners.
Pass-through taxation is often used for small business owners, partners, and sole proprietors. For example, a freelance web designer might establish an LLC to protect their personal finances. Even though their clients pay the LLC, all profits go to the individual who owns it. The LLC doesn’t have any profits to report, which means it can’t pay taxes. Even if the company reported profits, the business owner would have to pay taxes twice (once as a business entity and once as an individual).
With a pass-through entity like an S-corp, all of the company profits are credited to the shareholders. This is the taxable income, not the revenue from the business. The shareholders and owners will report the earnings on their personal income tax forms and pay the IRS in this manner.
With a C-corp, the corporation is taxed, which means the owners pay taxes twice. First, the company pays corporate income tax, and then the shareholders pay personal income tax. There is also a greater risk of double taxation when corporate profits are paid to shareholders as dividends. The IRS has guides for both S-corps and C-corps to fill out the proper tax forms and report their income rates each year.
While setting up pass-through taxation might seem like a strategic move for your business, there are benefits to creating a C-corp instead of an S-corp. Whether you will reap these benefits depends on the future growth plans and structure of your organization.
S-Corps Have Limited Shareholders
Startup founders who want to bring in several stakeholders and eventually become a publicly-traded company often prefer C-corps. You aren’t limited by the number or types of shareholders you can have with a C-corp.
With an S-corp, however, the number of shareholders you can have is limited. No S-corp can have more than 100 shareholders, and they must all be US citizens. Additionally, you can only have 1 class of stock for your shareholders. While different shareholders can hold different percentages of the company, they each have the same type of stock.
For example, Google has 3 different classes of stock. Each class is meant to provide different benefits to shareholders and powers to the founders:
Class A: This is the standard option, where 1 share means 1 vote. If you invest in Google today, then you will most likely be a Class A shareholder.
Class B: This stock is primarily held by the founders who want to maintain control of the company even when people keep buying it. With this option, each share grants the holder 10 votes.
Class C: This stock is mostly held by employees. This class has no voting rights.
This structure gives the most voting rights to the founders. Similar structures at other companies deny voting rights to some classes of shareholders. If you plan for your business to go public or if you want to open your company to new shareholders, you may need to create different share classes.
C-corps are better able to raise venture capital because of their share structures. It may be harder to lure investors to your business if you choose to open an S-corp—important if you don’t plan to bring your business public but want to grow your working capital through private investment in the future.
However, this is a non-issue if you only have a few key owners. Many S-corps are run by sole proprietors who are their only owners. They own 100% of the shares and take home 100% of the dividends. If you only plan to bring on a few investors, you might not need to consider the complexity of a C-corp.
In the case of both S-corps and C-corps, you will need to report all of your shareholders in your tax documents. The S-corp application allows owners to add additional pages if there are more than 10 shareholders when the business is established. This proves that all of the shareholders approve of the formation of an S-corp and the tax burdens that come with it.
C-Corp Is the Default Formation Option
When you decide to form a corporation, C corporation is the default option. It is possible to register with your state or file articles of incorporation today as a C corporation. However, if you want to become an S corporation, you will need to take steps to apply for this status through the IRS.
Companies that want to reach S-corp status need to complete IRS Form 2553. With this form, you’ll need to explain when your fiscal year starts and ends (if different from December 31), and this date will determine your deadline to file.
Companies that start their fiscal year on January 1 need to file Form 2553 by March 15 to qualify for the current tax year. If your fiscal year starts earlier or later, then the IRS sets different time deadlines. If you fail to complete Form 2553 by the deadline, then you might not qualify as an S-corp for another year.
The IRS will let you know if your business qualifies to operate as an S-corp. The application process typically takes a few weeks—longer if Form 2553 is filled out incorrectly or if the IRS is experiencing backlogs in its mail.
Regardless of whether your company gains approval to become an S-corp, you’ll still need to follow the same steps to form your business, submit an annual report to your state, and pay incorporation fees. You’ll also need to appoint a registered agent to act on your company’s behalf and create bylaws and guidelines for shareholders. Each year, if the number of shareholders or the percent each owner has under their name changes, you’ll need to report the adjusted ownership to the IRS.
It Is Harder to Transfer Stock With an S-Corp
With standard corporations and publicly-traded firms, the market determines the value of each share. This is why a shareholder can buy the stock at different prices—they might buy at 1 level and then increase their shares when the price drops in the future. However, with an S-corp, there is no public listing to determine a share price. There also aren’t easy ways for shareholders to sell their stock and buy from other companies.
With an S-corp, an existing shareholder will need to work with the owner and other shareholders to sell their holdings. They’ll also need to agree on a market price for the buyout, typically based on the initial investment and changes to the company since then.
For example, if an initial shareholder invested $10,000 and the company has grown significantly in the past few years, they might sell their shares for $20,000 because of the increase in the company’s perceived value. If the owner wants to buy out a shareholder, they will make a compelling offer for the shares in order to entice them to sell.
With IRS Form 2553, the owner needs to list each shareholder and their percent ownership. If a company has an ineligible shareholder—like someone outside of the United States or over the 100 person limit—then the S-corp status may be disqualified. While you can bring on new shareholders and buy out other shareholders as an S-corp operator, think about the challenges of transferring stock and how it could affect your business.
Your Corporation Status Can Help or Hurt Your Taxes
While the main difference between S-corps and C-corps is how they are taxed, it’s also important to look at the rate at which corporations are taxed. For example, according to the 2017 Tax Cuts and Jobs Act, individual taxable income can range as high as 37%. However, C-corps are taxed at a flat 21%. This means that the taxes that business owners pay as a C-corp might be lower—even if they have to pay both corporate and personal taxes.
However, according to the same act, owners of pass-through entities (like S-corps) may be able to deduct up to 20% of their business income from their tax returns. This provides a significant tax deduction if you are paying a high rate of personal income tax.
While these 2 tax rate benefits are significant, it’s hard to determine which option is better. If you want to look at different scenarios based on your current financial situation, a tax specialist or accountant should be able to help you work out the numbers and find ways to help you save money.
Consider Whether You Are Distributing or Reinvesting
While your shareholders can help to determine whether an S-corp or C-corp is better for your business, you also need to consider what you plan to do with your profits.
If the majority of your profits will get distributed to your shareholders, you may be better off operating as an S-corp. This way, you won’t pay taxes on your profits as corporate income and then pay taxes on personal dividends.
However, if you plan to reinvest the majority of your profits within the organization, your business may be better off as a C-corp. For example, as an owner or manager, you would pay taxes on the salary you get from the company and submit a standard W-2 form with your personal income taxes. You can then spend your company profits on additional investments—like paying down the mortgage on your office space or investing in additional fleet vehicles to grow your team. In this case, the profits become line items on your balance sheets as tangible assets.
If you have strong plans for growth in the future, then a C-corp may be a better option. You will turn most of your liquid capital into assets instead of paying out cash to shareholders.
Both S-Corps and C-Corps Provide Personal Protection
One of the main benefits of both S-corps and C-corps: they protect the income and assets of the individual owners and investors. This is why you see sole proprietors and partnerships become corporations—particularly limited liability corporations (LLCs).
If you operate as an individual owner without protection, your clients or employees can pursue your personal assets if they feel you have wronged them. For example, if you fail to complete a project for a client and they win a lawsuit against you, then the creditors claiming the damages may be able to go after your personal assets, like your house or savings accounts. If you can’t pay the damages in cash, these creditors might be able to claim your car as an asset.
However, with a corporation, the creditors can only claim funds from the company, not the individual. If you have a company car under the business’s name, then the creditors can use that. However, they can’t touch any of your private assets. In the case of sole proprietors who form S-corps, most of the income passes through to the individual. This makes the business almost worthless except for any reported assets, equipment, or funds that haven’t been paid out.
Even if you aren’t sure whether you want to form an S-corp or C-corp, take steps to become a corporation to protect yourself as your business grows.
Management Still Operates the Business
Another similarity between S-corps and C-corps is that management still operates the business, even if there are multiple shareholders. For example, a startup founder might own 60% of the business and have 4 shareholders who each own 10%. If the founder is managing the day-to-day operations of the company, they’ll continue to run the business regardless of who the shareholders are.
Corporations aren’t run by shareholders. Just because you buy stock in Apple doesn’t mean you work there. Most corporations still have a C-suite (CEO, CFO, etc.) and senior leadership levels that are responsible for managing the business.
However, the owner and executive board of directors need to act in the best interest of the shareholders. This is called the “fiduciary duty of loyalty,” and it states that any executives must act in the best interest of the business or shareholders. This prevents owners from making decisions that they would directly profit from but could hurt shareholders and negatively impact employees.
This fiduciary duty is often why employees have different shareholder classes where they cannot vote on issues related to the company. They might know more about the operations than other voters—potentially leading to insider trading—or they could impact the company’s performance in order to profit personally.
As you file to become a corporation, don’t get confused by what it means to be a shareholder or investor. If any confusion arises, create written guidelines in your bylaws about the rights of shareholders and the ethical responsibilities of owners. Ask a lawyer to review them and have your shareholders sign them before becoming cleared to buy into your firm.
Evaluate Your Current and Future Business Goals
If you want to grow your shareholders and improve your working capital by working with investors, you may want to establish your business as a C-corp. If you plan to grow your business and keep your capital tied up in assets, you may benefit from working as a C-corp.
However, if you want to continue operating as a pass-through entity and expect to have a limited number of investors, an S-corp might be a better option. Review your choices and your plans for your future before you begin the S-corp application process.
If you ever need to change your status with the IRS, you will need to fill out extra paperwork and navigate a waiting period. While it’s possible to change your status, you will have fewer headaches if you move forward with the right business structure on your first application.
If you operate a small business or are self-employed, you may want to establish your business as a corporation. In the United States, you have the option of becoming an S corporation (S-corp) which allows for pass-through taxation and shareholder dividends.
If you’re considering turning your business into an S-corp, you’ll need to become familiar with Form 2553. Use this guide to learn more about this form and how to submit it.
What Is Form 2553?
Form 2553 is the Election by a Small Business Corporation form, which establishes a sole proprietorship or partnership as an S-corp. Becoming an S-corp will change how you file your taxes and potentially increase your tax return.
Form 2553 is a 5-page document that asks filers about their organization, fiscal year, and shareholders. However, if you have several shareholders, you may need additional pages.
Once you’ve completed Form 2553 and any supplemental documents to form a corporation, the IRS will confirm whether your organization is approved to operate as an S-corp. If your organization doesn’t qualify, then you may need to recheck your paperwork or apply as another operating entity.
How Do I Fill Out Form 2553?
Some parts of this form are self-explanatory, while others might be confusing. If you are confused by Form 2553’s instructions, follow this guide to walk through each page. These instructions have been updated as of May 2021. Changes to Form 2553 might affect the form placement on each page.
Page 1: Mailing Address
The title page of Form 2553 highlights the address to send your application to. Identify your state and use the address to submit your form. The IRS doesn’t have a street address for either its Kansas City, MO, or its Ogden, UT, locations: the organization receives so much mail that it has its own zip code.
Page 2: Basic Information
Like most IRS forms, the first fillable page of Form 2553 is meant to identify and learn more about your organization. To complete this form, you’ll need the following information:
Your name and Employer Identification Number (EIN)
Your business street address (city, state, zip code)
The date your business was incorporated and the state where it was incorporated
The planned start date for your S-corp election
Your company’s tax year
The name and title of your legal representative, along with their telephone number (By providing this, you authorize the IRS to call them for more information.)
Many companies follow the calendar year as their tax year (January 1–December 31). However, some organizations create fiscal years that align better with their organization. For example, if a business has a major season in the summer, the company might choose to end its fiscal year in the fall.
This page of Form 2553 also asks whether you have more than 100 shareholders (which can limit your eligibility) and if you are filing late. Form 2553 must be filed before the 16th day of the third month of your corporation’s tax year.
If your tax year starts on January 1, you have until March 15 to complete the form. However, you can also file ahead for the upcoming tax year if you have already missed this deadline.
If you are filing for your S-corp past the approved deadline, you’ll need to write an explanation as to why—and the steps you took to correct your actions. If you file Form 2553 too late, the IRS may deny the application, and you’ll need to reapply next year.
Page 3: Shareholder Consent
The third page of Form 2553 covers shareholder consent to become an S-corp. It also reviews the number of shares (or percentage of the company) each shareholder owns, their Social Security number or EIN, and their tax year.
For example, if 2 people form a partnership and decide to become an S-corp, 1 person would file Form 2553. However, they would both be listed on this page. Whoever owns more of the company—typically in the form of money invested—would have a higher percentage of shares.
Deciding who owns your shares is important before you file to become an S-corp. This will determine how your dividends are paid each year.
Form 2553 currently has spaces for 7 shareholders. However, if you have more, you’ll need to add all of them to ensure that your full company is represented.
Page 4: Fiscal Tax Year
The fourth page of Form 2553 reviews the fiscal tax year of your corporation. Section O asks if you are adopting the same fiscal tax year that you specified in Section F (back on page 2) or if you are changing it. If your tax year is changing, this form will ensure that your shareholders are in agreement about this measure and that their tax years line up with the company's. This part also asks about contingency plans in the event that your tax year is denied by the IRS.
The IRS sets a standard tax year of January–December (with certain exceptions for various departments). In order to avoid penalties for missing different filing dates or creating confusion, you need to tell the IRS if your tax year differs from this one.
If you already operate on a tax year that ends on December 31 and plan to continue with it, this page is pretty straightforward. It may look complicated, but it won’t be a problem if you have a standard tax year.
Page 5: Trust and Late Classification
The final page of Form 2553 covers 2 aspects: if the S-corp is to be left in a trust and rules for late classification. You can fill out the trust information if you plan to leave the company and its assets to a beneficiary, like a child or partner, when you pass away. You will need to include the beneficiary’s name and address, along with their Social Security number. You will also need to include the trust’s name and EIN.
The final part is only relevant if you are seeking late corporate classification election representation. You will need to complete additional forms to qualify for these special exceptions.
Take your time filling out Form 2553. By making sure each form is correct, you can avoid refiling with corrections and prevent delays on your S-corp approval.
Can You File Form 2553 Online?
Form 2553 cannot be filed online. If you want to become an S-corp, you will need to print the form and either mail it or fax it to the IRS. The IRS has 2 different locations where it can receive S-corp documents: Missouri and Utah. The state you send form 2553 to is listed on page 1 of the document and is based on your current location.
Do not mail Form 2553 to your closest location. IRS locations are not based geographically: just because you live closer to Utah doesn’t mean your form goes to the Ogden location. Failing to send your form to the correct address could cause delays in approval—or it could cause the IRS to ignore your application completely.
How Do I Know If My Form 2553 Was Approved?
If you have submitted Form 2553 to the IRS and are confident that it was completed correctly, you can call the department at any time to check on your current status. The phone number is (800) 829-4933.
If your S-corp application is approved, the IRS will send you a letter confirming this status. Save this copy for your records. The IRS should also send you a letter if your status has been denied.
How Long Does It Take to Process Form 2553?
The IRS will approve your Form 2553 within 60 days of filing. If your paperwork is correct and you file on time, then you shouldn’t experience any delays in the approval process.
However, 2020 and 2021 have not been standard years. Due to the COVID-19 pandemic and partial government shutdowns, the IRS experienced a massive backlog of unopened mail last June.
IRS Deputy Commissioner Sunita Lough estimated that more than 11 million unopened pieces of IRS mail needed to be reviewed and processed. Even before the pandemic, the IRS estimated that it could take up to 16 weeks to process written tax returns and other forms.
The IRS continues to experience a backlog of mail and has extended the 2021 tax season. If you submitted Form 2553 at the start of the year (before the March 15 deadline for businesses on a calendar year) but still haven’t heard back, the issue likely isn’t on your end. You can call the IRS to check on your S-corp status and see if they’ve processed your application yet.
Learn More About Becoming an S-Corp
At Lendio, we strive to offer resources to small business owners. Whether you want to incorporate your company or just need help with tax deadlines, our guides are here for you. Turn to the Lendio blog for everything you need to establish your brand and increase your profits.
After your 5th (or 6th, or 7th) Zoom meeting of the day, you may feel like you’re just talking to yourself, especially when there’s a mix of people on calls with cameras on and off.
While video conferencing tools like Zoom make it much easier to collaborate with coworkers remotely, it can also lead to “Zoom fatigue,” which refers to the mental and physical exhaustion you feel after taking a video call. That’s because your brain has to work harder to process information with video, from facial expressions, time lags, and the general feeling of being “on” for hours at a time without a rest.
“It’s similar to what we tend to think of as exhaustion or burnout,” Krystal Jagoo, MSW, RSW, told Healthline. “Increased cognitive demands of video conferencing communication [means] folx need to create the illusion of eye contact while also mentally processing their verbal communication.”
With so much Zoom fatigue, would it be better to keep cameras off?
Why you should keep your cameras off.
For a growing number of people, the answer is yes.
“In person, we are able to use our peripheral vision to glance out the window or look at others in the room. On a video call, because we are all sitting in different homes, if we turn to look out the window, we worry it might seem like we’re not paying attention,” writes Liz Fosselien for Harvard Business Review. “Not to mention, most of us are also staring at a small window of ourselves, making us hyper-aware of every wrinkle, expression, and how it might be interpreted. Without the visual breaks we need to refocus, our brains grow fatigued.”
Turning cameras off is a simple but effective way to reduce Zoom fatigue, but it also takes the pressure off on appearance—both in terms of looking engaged but also keeping a squeaky-clean background, worrying over dogs or housemates strolling through the frame, and personal appearance.
An ongoing meme speaks to this anxiety. What started as a joke account rating celebrity Zoom backgrounds now has over 400,000 followers on Twitter, adding to the idea that everything has to be “perfect” and eliminating boundaries between work and home.
But that’s not the only reason. Turning off your camera can actually help the environment, too. Keeping cameras off can reduce the carbon footprint of virtual meetings by up to 96%. That’s because streaming high-definition content requires significant data processing, which uses electricity and other forms of energy.
One hour of videoconferencing emits 150–1000 grams of carbon dioxide and requires up to 12 liters of water. While this is still better than carbon emissions from gasoline, which emits about 8,887 grams in the same timeframe, it’s not nothing.
“The internet’s carbon footprint had already been increasing before COVID-19 lockdowns, accounting for about 3.7% of global greenhouse gas emissions. But the water and land footprints of internet infrastructure have largely been overlooked in studies of how internet use impacts the environment,” Yale senior fellow Kaveh Madani shared in a press release. “Banking systems tell you the positive environmental impact of going paperless, but no one tells you the benefit of turning off your camera or reducing your streaming quality. So without your consent, these platforms are increasing your environmental footprint.”
Why you should keep your cameras on.
Not everyone is in camp camera-off for exactly the same reasons why we all jumped on Zoom in the first place: keeping cameras on makes you feel more connected to the person you’re talking with.
“Turn the focus back to what you are saying and how you are saying it. Your message and how you are delivering it will take the pressure off your appearance and allow you to be present on camera,” writes public speaking coach Vanessa Wasche for Fast Company. “Most people are more comfortable without the camera, but you can use this to your advantage.”
If you’re giving a presentation, working through a tough problem, or simply want to feel more present in a meeting, it’s best to turn your camera on if you want to get your message across more clearly. Cameras on is the best approximation we have for in-person meetings, especially the nonverbal cues like hand gestures, smiles, and nodding.
For others, keeping cameras off feels rude or inappropriate.
“Most times, when people turn off their video options in a Zoom meeting, it is because they are doing something else while the meeting is going on. Or because something else is wrong; either they are not appropriately dressed, or they are in the wrong environment, or are not adequately prepared for the meeting,” writes communications expert Jaime Abbott. “[It feels like you’re not prioritizing] the other participants in the meeting.”
So, what to do?
Your colleagues may be completely burned out on video conferencing, and that’s OK. Whether you’re planning a hybrid approach or a full return-to-work plan, it’s important to get a pulse check on your teammates or direct reports and figure out what’s best for them.
If you’re not sure whether to keep cameras on or off, try:
Determine ahead of time whether the meeting needs to be a Zoom (for example, for a strategic or brainstorming meeting) or if a phone call will suffice (for status updates, all-hands, or 1:1s).
Schedule breaks from video calls for yourself or implementing a policy with calls ending on the :45 or :50 as the norm, rather than the full hour.
Encourage standard backgrounds or blurring features for employees to prevent background-gawking or pressure.
Keep virtual meetings smaller. The more people on the call, the more pressure. Think mindfully about who will best contribute to the discussion and if everyone needs to be there.
Whether you turn your camera on or off, the most important thing is to stay mindful of yourself and others. While it may seem like you’ve been Zooming for years, it’s still relatively new for most people—and like any new technology, our norms and etiquette will evolve.
Many small businesses, including every American business with employees, need to be uniquely identified by the Internal Revenue Service according to the tax code. To get this number, you first have to fill out Form SS-4 for the IRS. Not only is this form important for your taxes, but potential lenders and investors often request it.
What Is Form SS-4 Used for?
Form SS-4 is used to obtain an Employer Identification Number (or EIN). Form SS-4 is 1 page and requires pretty simple information to put together.
Form W-9, which requests the taxpayer identification number of a taxpayer, is different from Form SS-4. While W-9 can seek certification of an EIN, Form SS-4 is used to actually apply for an EIN.
What Is an Employer Identification Number?
An EIN is a unique number that identifies your business with theIRS. It is similar to an individual’s Social Security number, except that you aren’t issued a card like your Social Security card. The IRS created the EIN system in 1974.
Does My Small Business Need an EIN?
The IRS has a simplechecklist for if your small business will need an EIN. Most small businesses that aren’t sole proprietorships will likely need an EIN.
If any of the following questions apply to your small business, you will need an EIN:
Do you have employees?
Is your business structured as a corporation or partnership?
Do you file tax returns for Employment, Excise, or Alcohol, Tobacco, and Firearms?
Do you withhold taxes on non-wage income paid to a non-resident alien?
Do you have a Keogh plan (an uncommon retirement plan)?
Is your business involved in any of the following types of organizations: trusts, IRAs, Exempt Organization Business Income Tax Returns, Estates, Real estate mortgage investment conduits, nonprofit organizations, farmers’ cooperatives, or plan administrators?
If you answered “yes” to any of these questions, you should fill out SS-4 and submit it to the IRS.
Using Form SS-4 To Obtain an EIN
Applying for an EIN with the IRS is always free. Beware of any services or websites that claim you must pay to receive an EIN. You can apply for anEIN online, which is similar to filling out Form SS-4 but without the physical paper.
To apply for an EIN through fax or mail, though, you will have to fill outForm SS-4.
You can do this before opening the doors to your business if you know your company will need one.
“If you are thinking about setting up a business, IRS Form SS-4 is a critical step to take because it’s your business’ unique identifier to the IRS. This number is linked to bank accounts and many other aspects of your business,” explains tax preparerH&R Block.
Whether applying online or with Form SS-4, the application must list the name and taxpayer identification number (that is, the Social Security number, EIN, or Individual Taxpayer Identification Number) of the true principal officer, general partner, grantor, owner, or trustor. The IRS calls this person the “responsible party,” and the person “controls, manages, or directs the applicant entity and the disposition of its funds and assets,” theIRS says.
The IRS requires you to keep the information up-to-date on your Form SS-4 in regards to your company and the responsible party. Changes can be submitted using IRSForm 8822-B.
“Keep the Form SS-4 information current,” the IRS continues. “Use Form 8822-B to report changes to your responsible party, address, or location. Changes in responsible parties must be reported to the IRS within 60 days.”
Once accepted by the IRS, you will receive a notice from the agency.
How to Fill Out Form SS-4
Filling out Form SS-4 is straightforward, and the information required for the 1-page form should be easily available. While the specifics of how you fill out the form will depend on your business, structure, and industry, you generally are providing identifying information for your company and the responsible party filling out the form.
Expect to provide information like:
The business’s name and address
The responsible party’s name and taxpayer identification number
Structure of business
The date your business was created
Your reason for applying to the IRS for an EIN
The number of employees that work at your business
Your business’s main activities
The main types of products and/or services your business offers
How Lenders Use Your Form SS-4
Beyond registering with the IRS, you will likely also need to have your Form SS-4 handy whenapplying for business loans.
Form SS-4 shows that your business is officially verified with the IRS and, therefore, the United States government. Your SS-4 notice and EIN are both important to have in hand when you go about applying for commercial loans.
Lenders look at your EIN and Form SS-4 much in the same way your Social Security card is used to verify your identity in the US. It also shows that your business is based in the U.S.
Remember, unlike your Social Security number, no card is issued when you receive an EIN. Your Form SS-4 notice serves the same purpose as a Social Security card, which is why lenders will want to see a copy of it.
Entrepreneurs come in all shapes and sizes. They aren’t just tech geniuses with seed money from millionaires.
Most entrepreneurs start in their hometowns with a handful of employees. In fact, according to the Census Bureau’s Annual Survey of Entrepreneurs, 89% of firms have fewer than 20 employees. While Hollywood might want you to think that entrepreneurship only happens in Silicon Valley, the majority of the time, it’s happening right down the street.
Thousands of successful businesses launch every year in small towns across the country. If you’re considering starting a business, you should know that by launching a company in your hometown, you can change your life and the lives of your neighbors.
Here are 30 small town business ideas to change the economy of your area.
1. HVAC repair and maintenance.
HVAC is the acronym for heating, ventilation, and air conditioning. In short, you’re fixing heating or AC issues for homes and commercial properties.
You can complete your HVAC certification within 6 months–2 years. During this time, you can build up your business model, acquire the right equipment, buy a fleet vehicle, and build your online presence.
If you specialize in residential HVAC, you’ll need to be ready to work nights and weekends—because air conditioners can break at any time.
HVAC repair teams typically have steady business throughout the year, but calls will peak during extremes like the winter and summer months.
2. Plumbing
Plumbing is another service that everyone in your small town needs. While many people can change a flapper or fix a leak, you can expect emergency calls throughout the year for various pipe and water heater-related problems.
It takes longer to become a plumber—typically around 5 years. During this time, you will complete your plumbing trade school requirements and spend a few years as an apprentice.
After you’re ready, you can launch your own outfit and begin growing your book of business.
3. Car repair
Car mechanics are another necessity for towns across the US. If your small town is in a rural area where people have to travel several miles to and from work every day, a car repair business could be a gold mine.
Without access to public transportation services, residents need reliable vehicles. They also can’t afford to drive to the next town for car repair—especially if their vehicle isn’t working.
Great car care is important for longevity and resell value on automobiles. Help your friends and protect their investments by starting a car repair company.
4. General repair
If you aren’t interested in cars, consider opening a shop that repairs various appliances and home items. Active Right to Repair bills are moving through different states, and more people want to repair items instead of throwing them out and buying new ones.
If you enjoy taking apart items and learning how they work, opening a repair shop could be a fun career choice with applicable value in your town.
5. Secondhand stores
A secondhand store is another unique business idea for small towns. You can build up your inventory by attending garage and estate sales. You can also hold swap events where people donate clothes and items in exchange for store credits.
Secondhand stores provide affordable buying options for residents while allowing you to procure your inventory at a low cost.
6. Signage and printing.
Both residents and businesses need signage and printing services. Local families print signs for student graduations or weddings, while businesses need signage for their store locations.
Businesses also need business cards, T-shirts, and other marketing materials with their brand name and logos. You can help local businesses in your area grow by starting a signage and printing business.
7. Real estate agencies.
If you want to launch a business with low startup costs, consider becoming a real estate agent. After you complete your license, you can work with families and businesses to buy and sell property. Eventually, you may even decide to get a brokerage license so you can broker other real estate agents.
This career is optimal for areas with high growth levels, as you know your town better than most people who want to move there. If you’re an outgoing person who loves marketing, starting a real estate firm could make a lot of sense.
You can also start a franchise with a real estate company. Opening a Keller Williams or RE/MAX location is one of the top small business ideas for small towns.
8. Home inspection services.
There are multiple professions related to the real estate process outside of becoming a realtor or broker. You can also receive your home inspection certification and help buyers learn about the homes they put offers on.
As an inspector, you will check everything from the roof to the plumbing and the electrical wiring. The information you provide can help buyers request repairs or better negotiate deals with sellers.
9. Landscaping
Landscaping is another popular choice for entrepreneurs launching a new business in a small town. After all, who likes doing their own yard work?
Good curb appeal can increase the value of a home, and lush landscaping is the dream for most homeowners.
You can start a basic landscaping business that offers weekly lawn care to local residents, or you can become a specialized consultant who develops blueprints for lawns and turns them into welcoming outdoor spaces.
10. Construction and development.
Over the past few years, more people have opted to move to small towns from big cities. These towns are typically more affordable and offer more space for families. The COVID-19 pandemic only exacerbated this trend by allowing people to work from home. Now people from all backgrounds are choosing homes in less populated areas.
Now may be a great time to start a construction or development business if interest in your town is growing. You can help your chamber of commerce keep up with demand and help your town grow into a thriving center within your region.
11. Junk removal
Junk comes in all forms—from bulky furniture and refrigerators to leaves and clothes. If you invest in a large box truck or van, you can offer junk removal services to business owners and residents who don’t have time to get rid of items on their own.
You can also help people who physically can’t lift items. Eventually, you can grow your business by hiring other junk removers and growing your fleet of vehicles.
12. 24-hour diners.
Diners are popular eateries in large and small towns alike. Look at your local economy and consider whether your area could benefit from a 24-hour diner.
For example, if you have a nightlife industry where people get off work late, you could attract a night rush. If there is a local factory that has shift work, you could have multiple dining rushes throughout the day. Even having a location near an interstate can attract weary travelers.
13. Specialty restaurants
Success in business is all about offering something unique. What do you sell that no one else in your area has? You may be able to carve a niche in your area with a specialty restaurant that offers flavors that aren’t easy to get nearby.
Research current food trends and consider what local residents would like. You could potentially open the next best restaurant in your area by offering a vegan menu or creating a fusion between 2 international cuisines.
14. Breweries
The number of breweries in the United States has skyrocketed in recent years. According to the National Brewers Association, there were only 1,511 breweries in the country in 2007. By 2020, there were 8,884.
Many of these breweries specialize in small-batch beer and support their local communities. If you have a passion for good beer and want to turn it into a business, consider opening a brewery in your area.
Check local laws before you debut your brewery. You may benefit from opening a brewpub that sells food alongside your beer or caterers to families.
15. Bars and nightlife.
You don’t have to make your own beer or wine to enter the nightlife industry. Identify the needs of your town to see what kind of business would thrive. If your region caters to tourists, consider opening a craft cocktail bar where visitors can Instagram images of unique drinks. If your town needs a dance floor, open a bar that offers late-night dancing and socializing.
Location is a key part of opening a nightlife spot. Look for other bars in your area so you can create a full night out experience with your business.
16. Coffee and breakfast.
If you are looking for a sector that has a high profit margin, consider opening a coffee shop or brunch restaurant. Coffee is exceptionally popular in the United States (just look at the proliferation of Starbucks and Dunkin’).
Adding a breakfast component is also a safe option with a high profit margin. Eggs are one of the cheapest ingredients out there, but restaurants can charge $10–$15 for breakfast egg platters.
Look into the business of breakfast in your area.
17. Bed and breakfasts.
If you live within a few hours of a city, consider setting up a bed and breakfast and marketing your boutique hotel to couples looking for weekend getaways. You can work with your local chamber of commerce to develop marketing materials to encourage visitors.
Weekend getaways are popular because working adults don’t have to take off work, and they are more affordable than major vacations. Check out this list of best small towns for getaways to learn how to market your area and lure visitors.
18. Local tours
If you’re looking for a budget-friendly small business idea, consider starting a local tour. This will obviously depend on your location and whether tourism is a part of your local economy, but if you have the right environment, tour guide businesses can be very profitable.
You could launch a nightly ghost tour like the ones offered in Savannah or New Orleans or use your love of nature to take visitors hiking and kayaking. With the right tours, your company can become a top-rated travel experience in your area.
19. Event planning
Even small towns can have big events. From weddings and bar mitzvahs to graduation and bachelor parties, there is no shortage of festivities that need planning. If you can manage vendors and balance budgets, event planning might be a great business for you.
While you might not need a customer-facing storefront as an event planner, you may need a storage area for all of your supplies (unless you plan to rent tables, chairs, etc. each time).
20. Florists
Florists often work alongside event planners for major events. However, you can also work alongside local businesses while helping residents in your area.
Florists provide flowers to hotels, restaurants, and businesses that want to create a warm experience for customers. They also have peak seasons (like Valentine’s Day and Mother’s Day) when their flowers are in high demand.
Becoming a florist could be an ideal business idea if you love working with plants and have an artistic eye for colorful displays.
21. Beauty services
Regardless of where you live, everyone wants to look good. You can become a hairstylist within 2 years, but some programs can help you get certified in as little as 6 months. Barbers also have set guidelines for training processes and state licensing.
One of the benefits of a beauty certification is that you can work in established businesses. Many stylists and barbers rent chairs in existing salons. You can decide whether you want to open a salon or simply rent space while you grow your personal brand.
22. Spa and salons
Outside of hair care, there are other salon and spa services you can offer in your small town. You can become a certified massage therapist and help residents relax and reduce their pain levels. You can enter the field of cosmetology, providing nail styling or makeup. With the skills you acquire, you can eventually open a full-service spa and salon for people in your area.
23. Pet care
People love spending money on pets. On average, most pet owners spend $1,000 during the first year of owning a pet. Pet owners need supplies (beds, food, leashes, etc.), as well as medical care and grooming.
Depending on your experience and education, you can start a pet care business. At a basic level, you can walk and watch pets for local owners. You can also open a retail store that offers unique treats and toys for cats and dogs of all sizes.
24. Artisan crafting
Do you have a skill that few other people have, like knitting or woodworking? If so, consider starting a business related to artisan crafts.
You can use local materials (like knitting blankets with sheep’s wool) and sell your gifts and crafts to tourists. If you aren’t in an area that attracts tourists, you can turn your local crafts into a global trend by opening up an online business or Etsy store.
25. Organic products development.
Alongside artisan crafting, you can develop organic products. You can use local resources (like honey made by local bees or milk from local cows) to develop face creams, moisturizers, and other products that people can use on their skin and in their bodies.
This is another instance when you can keep your products local and open a physical storefront, or you can sell items online and let the world enjoy what you have to offer.
26. Bicycle sales and repair.
In 2020, bicycle sales skyrocketed as people stayed home during the pandemic and looked for ways to exercise outside of the gym. More than $4 billion worth of bikes were sold in 2020 between January and October, a 62% increase from the previous year.
Consider opening a bike shop to tap into this bike boom and help residents keep them in good shape with your repair services.
27. Tutoring and college prep.
Most parents don’t want to relive their high school algebra days. Most probably didn’t do well enough to tutor their kids now—especially considering some of the changes in technology and concepts.
If you have a knack for a specialty subject like math or science, consider starting a tutoring service in your area. You can travel to meet with students at their homes or ask parents to drop them off with you. You can also offer private SAT/ACT prep for college-bound teens in your area.
28. Green innovations
If you care about the planet and want to protect Mother Nature, look into starting a green specialty business. You can install and maintain solar panels to promote clean energy or create compost bins for local residents. Even reusable bags have a lasting market and can sell if you develop unique designs.
29. Childcare
Childcare is one of the most important services within an economy. Parents trust you with the lives of their kids each day. By dropping their kids off, parents can work to earn money for their families. Studies show that having access to childcare increases the mobility of women and allows them to participate in the local economy.
Offering childcare could send ripple effects through your small town as more people can work. Give parents the relief they need knowing their child is in a safe place each day.
30. Community services
If you notice tservices are lacking in your community, step in to offer them. This could mean creating after-school care for kids who are too young to stay at home by themselves. You could open a traveling medical van that offers basic doctor and dental care to residents who can’t leave their homes. Start with a problem and brainstorm ways to solve it.
Start your business with a budget.
It’s possible to develop a business plan and launch a brand for $5,000 or even less. Map out your expenses and learn your costs to get a feel for how much money you need. If you’re ready to seek funding for your business, check out the online lending portal at Lendio. We can help you find a microloan, business credit card, or line of credit to get your brand up and running.
Are you dreaming of becoming an entrepreneur? Could your skill set or experience help other small businesses? Do you thrive in a fast-paced, ever-changing environment? Are you known for your collaboration and networking skills?
If that describes you, read on to learn how to start your own consulting business. You can go all-in as a full-time endeavor or ease into it as a side hustle or a freelance opportunity.
How Lucrative Is Consulting?
The million-dollar question—how much do business consultants charge? In other words, will you make a profit as a small business consultant? Or, as your potential client may ask—are business consultants worth the money?
The short answer is yes. Business consulting can be lucrative for anyone consulting in a growth industry or who has specialized skills. And the right consultant can provide significant benefits to the companies that hire them.
How much business consultants charge varies widely based on a variety of factors. Specialized services and experts in an in-demand field (e.g., business resilience or digital-first operations post-COVID) can command a higher rate. A consultant’s rate also depends on what customers are willing to pay.
Our guide to small business pricing can help you set your consulting rate. Charge too much, and you could price yourself out of the market. Charge too little, and potential clients will think you provide lower quality services.
We’ll cover pricing strategy in more detail later in this guide.
Why Do Businesses Hire Consultants?
A small business consultant provides a service or fills a void for their clients. That could include:
Leading a specialized project (e.g., a software implementation)
Training management or employees (e.g., a diversity workshop series)
Augmenting staff (e.g., backfilling an employee on parental leave)
Initiating change (e.g., you don’t know what you don’t know)
Scaling a business process (e.g., helping another business expand)
Those aren’t the only services business consultants offer. Small business owners frequently need expert help, and your skills may be just what they need.
Type of Business Consultants
Business consultants work in a variety of industries. Some skill sets (e.g., computer skills) are valuable across multiple sectors. In contrast, a specialized skill set (e.g., healthcare) may narrow your target market to a single industry. Some consultants intentionally focus on a specific niche (e.g., fundraising for nonprofits).
While there is no complete list of consultant types, you could be a consultant in these industries:
How do you become a small business consultant? High-level steps to start a consulting business include:
Figure out why
Identify your target market
Create a pricing strategy
Develop your brand
Establish a financial plan
Write a business plan
Form your business entity
Open business accounts
Secure licenses
Pursue certifications
Buy business insurance
Create a client contract
Set up backend processes
Market your business
Pitch
Review your progress
Figure Out Why
Before you even step into the “what,” identify your “why.”
What motivates you? What are your strengths and weaknesses? Why do you want to be a consultant?
Consulting can be a rewarding and profitable venture, but it requires you to run your own business while providing services to your clients.
That means, at a minimum, to become a consultant, you should:
Be a self-starter
Be detail-oriented
Have exceptional follow-through skills
Excel at multitasking
Project confidence
Adapt quickly
If you despise project planning or creating project scopes, then consulting may not be the right fit. However, suppose you lack knowledge in 1 area (e.g., how to organize a day based on multiple projects). In that case, you could take a project management training class to offset that weakness.
Identify Your Target Market
You should identify your target market to:
Determine what services to offer
Create your pricing strategy
Develop your customer personas for marketing
The consulting services you provide are based on your skills—a registered nurse isn’t apt to set up a cybersecurity consulting business and vice versa. But the services you offer also depend on your target market.
Aim for a target market large enough to let you grab a share of the pie without being so big that you don’t know who your ideal customer is.
Start at a high level and then dive deeper to identify the specific markets you could target. For example, a cybersecurity consultant may identify a target market of “government organizations” and then narrow that to “government organizations in cities with a population of 25,000–50,000.”
Use these questions to help identify your target market:
What industries could use your services?
What size companies do you want to target?
Are you targeting a specific geographic location, or can you travel or work remotely?
Does the industry have any regulations you’ll have to meet (e.g., some states regulate fundraising consultants for nonprofits)
Who are your competitors, and what are their weaknesses?
What is the current and the future potential size of the market?
Are there gaps in the market (e.g., is there something needed that isn’t being offered)?
You don’t have to do all the research yourself. Use industry associations and local SCORE chapters or small business development centers to help. Librarians are also excellent at researching this type of information.
Create a Pricing Strategy
How much do small business consultants charge? Or, better said, what should your pricing strategy be?
Start by reviewing our guide to small business pricing. It’ll walk you through how to approach the question of what to charge.
It’s not as simple as saying, “what are my competitor’s rates” or “what should I charge to survive this year.” Your competitors may not provide the same level of service you will. You also have to determine a pricing strategy that gives you the net profit margin to support your 3–5 year vision.
Typically, a consultant’s billing rate is:
Per hour: You bill for every hour you work. There may be an agreed-upon number of hours per scope of work.
Per project: Flat fee based on a scope of work. Typically, the contract will specify when invoicing will occur (e.g., every week or as milestones are completed).
Retainer: The client pays a specific amount whether you work or not. Essentially you agree to be available if they need you. This option can give you a consistent income, but it may require that you sign a non-compete.
It’s unlikely you’ll have a one-size-fits-all rate. Pricing packages or bundling services together (e.g., project completion with continued support for 6 months) may be a good fit for your business model.
You may even find that a tiered pricing model works for your customer base. Following the good-better-best theory, some customers may only want support during regular business hours (“good” tier). Others may want on-demand support even on weekends and holidays (“best” tier). It’s even possible that offering a “free” tier could lead to paying customers.
You may have to run lean for a while as you reinvest your profits into growing your business. But eventually, you’ll want to take a look at how much you should pay yourself and possibly adjust your pricing strategy.
Develop Your Brand
You might read “brand” and immediately think “business name and logo.” But so much more goes into a brand, including your colors, typography, and tagline.
You don’t have to have your brand wholly ironed out before starting your marketing efforts. But the more consistent your brand is across all communication channels, the sooner you’ll achieve brand awareness with potential leads.
Establish a Financial Plan
To remain in business long-term, money coming in needs to be greater than money going out. Sounds simple, right? But anyone who has experienced a cash flow crunch in their personal life knows how important a financial plan is.
Create a framework for making business decisions by writing a business plan. Outlining goals in a reference document eliminates the guesswork for future decisions.A business plan also helps boost your credibility if you seek financial funding.
Incorporate your business. It may offer a level of protection for your personal assets. It also signals to the IRS and potential clients that you have a business, not a fly-by-night operation.
Most likely, you’ll need to apply for an Employer Identification Number (EIN). It’s necessary for some industries (e.g., working with nonprofits) and some business structures (e.g., LLC). Even if you don’t need it, it’s a good idea as you’ll avoid sharing your Social Security number with clients.
Unfortunately, there is no one-size-fits-all answer to what business licenses or permits you may need. It’ll depend on zoning regulations in your area and your industry.
Check the SBA website for industry-specific guidance, but plan on researching your state and local requirements as well. Ask your attorney for advice—some cities require even a sole proprietor to have a business license.
Pursue Certifications
Certification programs “prove” you know your stuff and may give you an edge over your competition. But certifications cost money and time to complete and usually need to be updated regularly (especially in the technology field).
If your reputation could use a boost, then by all means, pursue certification. 2 general business consultant certification programs to consider are:
If your industry smiles upon those who are certified, get certified. IT professionals tend to be certified in specific applications or development tools. Project managers may want to consider the certification program offered by Project Management Institute (PMI). HR consultants could pursue Talent Optimization’s program. If you aren’t sure what certifications may be helpful, ask industry-specific associations for advice.
You could also boost your expertise by taking online courses for entrepreneurs. These may not result in a certificate, but they can increase your knowledge base (and your contacts).
Buy Business Insurance
Your business structure didn’t provide you with blanket immunity, so use business insurance to protect you and your business.
Your needs will vary based on your specific consulting business. Your insurance agent can suggest which of these elective business insurance types (or others) you may need:
As a consultant, you might provide boiler-plate services. But most likely, you’ll cater your services to each customer’s unique needs.
Thus, contracts are the key to keeping everyone on the same page for expectations and helping provide legal protection for disputes.
A standard client agreement template (vetted by your lawyer, of course) that you fill in for each client might be sufficient. As your client base grows, contract management software can help automate and track who has signed contracts, when deliverables are due, and when contracts expire.
Set Up Backend Processes
A consulting business isn’t just about billable hours. It also includes non-billable hours that are key to staying on top of your business’s finances.
Non-billable hours involve pitching to new clients, managing contracts and projects, invoicing for completed work, and tracking expenses. Those non-billable hours need a process to keep them from consuming your workweek.
A general rule of thumb is to hire out whatever costs less than your billable rate. If you can work a billable hour at $100/hour, and it’ll only cost you $50/hour to hire someone else to post to your social media channels, then the math looks obvious, doesn’t it?
An even better option is to automate your small business processes. For example, using email marketing tools allows you to send pre-canned responses to frequently asked questions.
The same goes for bookkeeping. For example, Sunrise can help automate expense tracking and invoicing tasks.
The free or budget packs of digital tools may be all you need initially. You can always upgrade once you hit the limits of the lower-cost options.
Market Your Consulting Business
You’ll use marketing techniques to generate sales leads and create brand awareness. When another company asks: “How do I find a small business consultant?” your goal is to be the first business that comes to mind (or to rank on the first page of search results).
But don’t stop there. There are many other ways to find new customers. You could become a thought leader, collaborate with other businesses, and sponsor other organizations (e.g., a local charity race).
Pitch
Spend time to create and rehearse the perfect pitch to help secure clients.
Don’t confuse pitching with marketing. Marketing creates brand awareness and generates leads. Your pitch is what convinces those leads that you are the right person to solve their problem.
As your reputation becomes better-known and your satisfied customer list grows, you may be lucky enough to have clients seeking you out.
Review
In business, nothing is ever set in stone.
Review your progress and profits regularly (this is where accurate bookkeeping helps). The challenges businesses may encounter (e.g., hiring employees, paying taxes strategically) can be met head-on with a bit of planning.
Knowing the market value of your business is important for many reasons, even if you aren’t thinking about selling anytime soon. By determining your business’s market value, you get a sense of what your company is worth beyond just income statements and balance sheets.
How Do You Determine the Value of a Small Business?
There are 3 main ways of thinking about your small business valuation: book value, present value, and fair market value.
Book value basically takes your balance sheet and values your company based on your assets minus your liabilities. Unless you are planning to liquidate, this isn’t a good way to calculate business value. In fact, you shouldn’t really consider assets when calculating a market value. A buyer won’t be interested in purchasing your company just to sell off your vehicles, property, and equipment—they will be interested in producing revenue from your company year over year.
Present value calculates your business’s value based on past and present data, like annual revenue. Most rule of thumbs methods of valuing a business calculate a version of present value. This can give you a good basic understanding of how much your business is worth.
Market value, in the end, is the most important number if you want to sell your business—this is the value that abuyer will pay for your business. While calculating the present value of your business can give you a baseline, the market value will ultimately be decided by—as the term suggests—the market.
What Is the Rule of Thumb for Valuing a Business?
There are 2 well-known rules of thumb for calculating a quick business valuation: percentage of sales and Seller’s Discretionary Earnings (SDE) multiples. While these formulas are quick, they won’t take into account all the unique aspects of your business. These methods are good for setting a baseline, but they won’t reveal the specific market value for your company.
Both methods requirelooking up either the SDE multiple or the percentage of revenue averages for your specific line of business. These multiples can be impacted by the size of your business and your location.
Percentage of Sales Method
The percentage of sales method of valuating a business is probably the most common way to quickly determine your company’s market value. While it is easy to calculate, it is pretty inaccurate because it fails to capture most of the specifics of your business.
To calculate your business value according to the percentage of sales method, start with your total revenue for a year. Then you mustlook up the average percentage of sales values for companies in your peer group. You can calculate your market value by using the percentage of your sales.
If the average market value of bars in your area is 30% of annual revenue and your bar brought in $1 million in sales last year, the market value of your bar is $300,000 according to this method.
SDE Multiples Method
SDE is a company’s annual EBITDA, meaning Earnings Before Interest, Taxes, Depreciation, and Amortization, plus the annual compensation paid to the business’s owner. SDE shows how much money a company brings in after non-essential expenses, taxes, and owner’s draw.
Your SDE doesn’t show your value in itself—that is where the multiple comes in. The SDE multiple is anindustry standard that is between 0 and 4. Based on your industry, it estimates what your company is worth by multiplying your SDE by the multiple number.
If your SDE was $100,000 last year and your company’s SDE multiple is 2.5, the value of your business according to this method is $250,000.
How Much Is the Average Small Business Worth?
Business acquisition platformBizBuySell claims that the average American business sells for 0.6 times, i.e., 60%, its annual revenue.
This multiple, though, is probably inaccurate for most small businesses because industry, location, customer base, and intellectual property are much more important than the average value of all small businesses in the country.
Atrendy startup could be worth $1 billion on the market, while a mom-and-pop dry cleaner will be worth much less. This is why the average value of small businesses doesn’t mean much.
How Much Revenue Should a Small Business Have?
The amount of revenue you should expect your small business to earn really depends on the size of your business, how long you’ve been open, your industry, your location, and the overall economy.
According to theUS Census, the average American small business without employees, i.e. 1-person operations, earned about $47,000 in annual revenue. Businesses with 5 to 9 employees average just over $1 million in annual sales. The average revenue increases along with the number of people employed.
Remember, though, that revenue is not the only factor when determining your business’s value. Your intellectual property, market share, and other factors can significantly bolster your business valuation.
There are multiple financing options for your business. You can seek out short term loans and microloans if you need a small influx of cash quickly, or you can take out large-scale loans to expand and scale your business. Each loan option comes with its own terms and restrictions on the money.
Another loan option that is particularly popular in real estate is the hard money loan.
What is a hard money loan?
Hard money loans are short-term loans where lenders use collateral like property to back the loan. If the borrower is unable to repay the lender, they can seize and sell the collateral.
You can work with money lenders to secure the funds you need with a short-term payback period. Learn more about these loans and the lenders who issue them.
Hard money loans are based on collateral.
Hard money lenders don’t look at the credit of the applicant. Instead, they are more interested in the property the applicant is borrowing against. The financial provider wants to ensure the collateral is worth the risk of lending before they approve the loan.
If the borrower can’t pay back the loan, the lender can seize the property. For example, in real estate investments, if a property is built over a sinkhole or lacks any real value, then the lender is unlikely to issue the loan.
Hard money loans are most frequently used by home flippers who want to take worn or damaged property and improve it for a profit. In this case, the land has potential and maybe even a structure built on it.
The home flipper will renovate the property and resell it—typically within a year or two. This is what makes the risk of the hard money loan worth it: the borrower gets the loan to purchase and flip the property while netting the difference when they resell it, and the lender knows that they’ll retain the property if the loan is not repaid.
You can also find people in need of hard money loans outside of the real estate field. These are often considered short-term bridge loans and require substantial collateral to secure the loan.
Do hard money lenders require a down payment?
Hard money lenders typically require a small down payment. This up-front payment is considered their “buy-in” to the loan and ensures they have personal financial assets at stake, too. The down payment or buy-in adds more accountability to the borrower and helps mitigate loan delinquency, which lowers the risk to lenders.
For example, lenders may require real estate investors to put in 10% to 50% of the property value for a down payment. The amount required will typically depend on the riskiness of the property.
Some hard money lenders will issue a loan without a down payment, but they might charge other fees or have stricter restrictions to ensure borrowers pay the money back.
What do hard money lenders charge?
Hard money loans are considered riskier than traditional loans, which is why they are more expensive. Borrowers can expect to pay interest rates of 10–15%, depending on the lender.
The interest rate might also depend on how much your hard money lender is willing to give you. Most lenders look at the loan-to-value ratio (LTV) when issuing funds. They will typically issue 65–75% of a property’s current value. This limit is another reason why borrowers need to be ready for a down payment: lenders won’t cover the full cost of the property.
Some hard money lenders don’t use the LTV model and instead look at the after-repair value (ARV). This number is the estimated value of the property after it has been flipped. If your lender calculates your loan based on ARV, you will likely get more money. However, this loan is riskier. There is no guarantee that the home will have that market value when the renovations are complete. As a result, these interest rates are typically much higher, close to 18% with extra points added.
For example, let’s say a flipper wants to buy a property that is listed at $200,000. Using the LTV model, their loan would be around $150,000, which means the flipper needs to bring in $50,000 of their own money plus funds for renovations.
If the lender uses the ARV model, they might place the flipped value of the house at $300,000. This method brings the loan up to $225,000. The borrower now has more money to work with but must cover these extra funds through the resale.
Who are hard money lenders?
Banks typically don’t offer hard money services, which means real estate professionals and other entrepreneurs who need hard money loans will need to turn to private investors. Hard money lenders are often individuals who support business owners or private companies specializing in hard money lending.
Hard money loans are known for being fast. While it might take up to 30 days to get a traditional loan through a bank, hard money loans can get approved within a few days. This speed allows real estate investors to move quickly when a property hits the market. Traditional banks don’t have enough time to evaluate the level of risk that comes with a property, which is why they don’t get involved in hard money systems.
Are hard money loans worth it?
Working with a hard money lender may be your best bet if you run your business in a competitive real estate market. If you have a solid down payment already, you can take steps to build it up and flip it. However, if this is your first foray into real estate, a hard money loan might be too expensive or risky for your needs.
Shop around to understand the costs of different hard money lenders that you want to work with. This can help you set an investment and renovation budget to start flipping homes for profit.
Consider other loan options before you borrow.
While a hard money loan might seem like a strong real estate option, other funding options are available if you operate in another industry. At Lendio, we match borrowers with all kinds of loan types, from startup funding to large-scale loans. Visit our online lending center to learn more and to find a financial provider that can help you.
Social media can be a game-changer for small businesses—if you know how to use it. This guide covers everything from choosing the right platforms to creating engaging content and growing your audience. With actionable tips and proven strategies, you’ll learn how to turn likes and follows into real business results.
Email marketing is one of the most powerful tools for small businesses—when done right. This guide covers everything from building your email list to crafting engaging campaigns that drive results. With actionable tips and step-by-step guidance, you’ll learn how to connect with your audience, boost sales, and grow your business through email.
Digital marketing doesn’t have to be overwhelming. This guide simplifies the essentials, from building an online presence to leveraging social media, email, and SEO. Packed with practical tips and step-by-step strategies, it’s designed to help small businesses succeed in the digital world without a big budget or a full marketing team.
Let’s face it. There’s a lot of bad marketing advice out there. Or great advice that’s far too in-depth for a small business owner who isn’t looking to start a full-time career in marketing. We created this guide to cut through the clutter and provide you with principles, direction and the applicable step-by-step how-tos to get the job done.
Your brand is more than just a logo—it’s the heart of your business. This guide walks you through the essentials of small business branding, from defining your identity and crafting your message to building a strong, lasting impression. With clear steps and actionable advice, you’ll create a brand that resonates with customers and sets your business apart.
Hiring for small businesses doesn’t have to be complicated. Your business can achieve success when you understand relevant legal requirements and find the right job candidates for your open positions. This comprehensive guide covers everything from finding the right employees to hire to employee training and development.
Your best customers are your biggest growth opportunity. This guide breaks down customer marketing strategies tailored for small businesses, helping you turn happy customers into loyal advocates. From building relationships to leveraging referrals, discover actionable steps to maximize lifetime value and drive sustainable growth.
From selecting the right franchise opportunity to navigating the financial aspects, this step-by-step resource equips aspiring entrepreneurs with the knowledge and strategies needed to thrive in the world of franchising.
Have a business idea but not sure where to start? Our comprehensive guide to starting a business has everything you need to know. From legal requirements to market research, we’ve got you covered.
Running and growing a business is no easy feat. Our guide to running a business has everything you need to know to keep things running smoothly. From managing employees to marketing your business, we’ve got you covered.
Take your business to the next level with our Accounting Guide. Master the language of numbers, understand financial statements, and make informed decisions based on accurate financial data. Discover the power of sound financial management.
Master the art of cash flow management with our comprehensive guide. Learn strategies to optimize your cash flow, forecast revenue and expenses, and keep your business financially stable. Take control of your finances and achieve long-term success.
Streamline your billing process with our Invoicing Guide. Learn how to create professional invoices, manage client payments, and maintain a healthy cash flow for your business. Get paid faster and efficiently track your revenue.
A great marketing strategy is the foundation of small business success. This guide takes you step-by-step through defining your goals, identifying your audience, and choosing the right channels. With practical tips and clear direction, you’ll build a tailored strategy that drives growth and delivers measurable results.
Navigate the complex world of taxes with our Tax Preparation Guide. From understanding tax obligations to maximizing deductions and filing quarterly taxes, we’ll help you stay compliant and minimize your tax burden. Unlock the secrets of tax success for your business.
Stay on top of your business finances with our Bookkeeping Guide. Learn the art of tracking income and expenses, maintaining financial records, and keeping your books in order. Unlock financial success with our expert tips.
Need help securing funding for your business? Our business loans guide simplifies the financing process, explains key terms, and walks you through your loan options.
