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If you’re an employer hiring workers, you’ll have to make a decision about whether you bring someone on as an employee on payroll or as an independent contractor. This decision will have an impact on how that worker is paid and how taxes are withheld from their paycheck. You’ll need to inform the IRS of your decision by turning in Form W-2 for employees on payroll and Form 1099-NEC for independent contractors.

Getting this decision right is important, with ramifications for your employees and your business, so understanding the difference between 1099 vs W-2 employees is key.

Employee Classification Basics

Depending on a worker’s role at a company, employers must supply the IRS with one of two types of tax forms. It can be, either a Form 1099-NEC or a Form W-2. Freelancers, or independent contractors, are typically asked to fill out a 1099. Employees on payroll will be asked to fill out a W-2.

W2 Employee Characteristics

A W-2 worker is someone who is formally employed with a company or an organization. They may work full-time or part-time and may be salaried or hourly employees.

Employers typically have a lot of control over how W-2 employees work, including over the tools and processes needed to reach a desired outcome. In return, W-2 employees are often entitled to a lot of protections, such as minimum wage, overtime, and family or medical leave. W-2 employees often participate in employer benefit programs, such as health insurance and retirement plans.

1099 Contractor Definitions

In general, independent contractors are self-employed. They are workers in an independent trade, business, or profession who supply services to the general public. For instance, this category could include professionals such as doctors, lawyers and accountants, or subcontractors who are providing skilled labor to an organization, such as software engineers or graphic designers..

Legally, employers cannot control the details of how services are performed by independent contractors, such as how work is to be performed and when. They can only control the result of the work. Independent contractors typically do not participate in employer benefit packages.

Tax Implications

The tax treatment of W-2 versus 1099 employees is one of the most marked differences between these types of workers. Employers carry much of the burden of withholding and paying taxes for W-2 employees, while 1099 employees shoulder all of the responsibility themselves.

A 1099 employee may be able to make more tax deductions against the equipment, supplies, and other expenses related to their business.

Recommended: A Business Line of Credit

Employer Responsibilities

W2 employees have taxes withheld from their paycheck by their employer, including income taxes, Social Security taxes, and Medicare taxes. Employers must pay the matching employer portion of Social Security and Medicare taxes, as well as unemployment taxes.

For 1099 employees, on the other hand, employers don’t have to withhold or pay any taxes on payments.

Employee/Contractor Obligations

For all intents and purposes, 1099 workers are their own employers. That means they are responsible for covering all taxes on their own, including self-employment tax. The current self-employment tax rate is 15.3%, which includes 12.4% for Social Security and 2.9% for Medicare. This self-employment tax is double what W-2 employees pay, as their employers cover half of this amount for them.

Deduction Differences

Taxes on wages for W-2 employees are withheld directly from their paychecks along with other payroll deductions. The employee never receives that money unless they get some back in the form of a tax return. When it comes to income tax, the employer will decide how much to withhold based on the employee’s Form W-4, Employee’s Withholding Certificate.

Ideally, the amount withheld over the course of a year would equal exactly the amount owed on an employee’s annual federal income taxes. If the employee’s withheld amount is more or less than this, they may want to adjust their withholding accordingly.

Because taxes are not withheld from 1099 employees’ paychecks, these workers may owe quarterly taxes instead. These are estimated payments to the IRS four times per year. Depending on an independent contractor’s income in a given quarter, these payments may vary. However, ideally, these too will add up to equal the amount owed on an employee’s annual income tax return.

Recommended: Startup Business Loans

Making the Right Choice

It is an employer’s responsibility to make the right choice between offering a W-2 and a 1099 to the workers they hire. It’s important to get this decision right. Failure to do so can result in legal or financial ramifications. For example, if workers are incorrectly identified as independent contractors, employers might be liable for back employment taxes.

In general, if an employer controls what a worker does and how, they are likely a W-2 employee. Similarly, if the employer controls aspects of their job such as how they’re paid and whether they’re reimbursed for expenses, they are likely a W-2 employee. The same is true if they are offered company benefits.

If none of these apply, the hired contractor is likely a 1099 contractor.

Be aware that a worker’s relationship to a business can change over time, so it’s important to reassess it periodically to determine if their W-2 or 1099 status has changed.

Employee Status Tests

There are several tests from the IRS, Department of Labor (DOL), and the Equal Employment Opportunity Commission (EEOC) that employers can apply to workers to help determine whether they are 1099 contractors or W-2 employees.

•  IRS common law rules look at behavioral control, financial control, and the type of work relationship.

•  The DOL uses an economic reality test, to determine if a worker is a W-2 employee and covered by the Fair Labor Standards Act. This law entitles workers to minimum wage, overtime, and other protections.

•  The EEOC offers a set of criteria for W-2 employees as well, such as whether work is performed on the employer’s premises or the employer provides tools and materials to complete the work.

The Takeaway

The differences between W-2 employees and 1099 contractors is largely based on the relationship that worker has to your business and the work they do for you. The classification you choose will have a big impact on your business and how your workers are paid. For this reason, it’s important to consider it carefully and to avoid potential financial and legal penalties.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop for small business loans and compare financing options for your business in minutes.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.

FAQ

Do 1099 employees pay more taxes than W-2 employees?

1099 employees are responsible to pay the full federal employment tax amount of 12.4% for Social Security and 2.9% for Medicare. W-2 employees only pay half that amount.

Can a worker be both 1099 and W-2?

There are a couple scenarios in which you may have a W-2 and a 1099. It is common for workers to work for multiple employers. One may hire a worker as an independent contractor with a 1099, while another may hire a worker as an employee with a W-2. It’s possible to receive both from the same employer if a worker performs two completely different duties for the company with one qualifying as a W-2 employee and another as independent work.

What benefits do W-2 employees receive?

W-2 employees pay less in employment taxes and may receive greater access to employer benefit plans, such as retirement accounts.

Is it better to be a 1099 contractor or W2 employee?

Both 1099 contractors and W-2 employees receive benefits that may be advantageous. For example, 1099 contractors may be able to write off more expenses on their taxes, while W-2 employees pay less in employment taxes.

Can a company switch me from W-2 to 1099?

If your role changes at your company, your employer may switch you from a W-2 employee to a 1099 contractor.

Photo credit: iStock/Anchiy

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

SOSMB-Q424-113

Creating a Limited Liability Company (LLC) in New Jersey is one of the first steps to officially launching your business within the state. You can have one or more owners (called members) as an LLC and receive personal liability protection in case your LLC is ever sued or faces bankruptcy. That means you won’t risk losing any of your personal assets like your home or car if your business has legal or financial issues in the future, which is one of the primary differences between an LLC and sole proprietorship.

Looking for easy ways to open a company in New Jersey as an LLC? Here’s everything you need to start your new business in the Garden State.

Pre-Formation Checklist

Before you learn how to start an LLC in NJ, follow a few steps to set yourself up for success over the long run.

•  Write a business plan: The state of New Jersey provides a free online business plan template. If you need help, the state also offers free business counseling through the New Jersey Small Business Development Center Network.

•  Research local regulations: Depending on your industry and location, your county or municipality may have additional regulations you must adhere to in addition to state laws.

•  Get additional help: On top of the NJ SBDC Network, the state also recommends resources like the Small Business Administration, SCORE Mentors, Women’s Center for Entrepreneurship (Northern New Jersey), and LAEDA Southern New Jersey.

Once you’ve done the prep work, you can formally start the process of forming your New Jersey LLC.

Name Selection Requirements

The first step is to research available business names in New Jersey. You can’t use a name for your LLC that is already taken by another business in the state. Perform a search through the NJ Department of the Treasury’s database of business names.

While not required, you should also make sure your preferred business name isn’t trademarked through the U.S. Patent and Trademark Office.

Once you select an available name, you can reserve it for up to six months for a $50 fee. You can officially register your business name once you have your Certificate of Formation from the state.

Registered Agent Selection

Another part of the LLC formation process in New Jersey is to identify a registered agent. This is a person or company tapped to receive legal documents for the business. It can be you or someone else as long as the registered agent has an address in New Jersey.

Hiring a registered agent service is beneficial in several scenarios:

•  You have a home-based business and don’t want your address published

•  You live outside of New Jersey or operate in multiple states

•  You want a professional to help you stay in compliance with state regulations

Business License Research

In addition to forming your LLC in New Jersey, you may need additional licenses in order to remain in compliance. Typically, local jurisdictions require you to get a general business license, and certain industries may also be subject to additional licensing from the state.

Search the New Jersey Licensing and Certification Guide to see what permits, licenses, and certifications may be required at the state level for your business.

Recommended: Startup Business Loans

Filing Requirements

With much of the preliminary work complete, it’s time to start completing forms for your New Jersey LLC.

EIN Registration

An employer identification number (EIN) is required before you submit your formation documents with the state of New Jersey. An EIN is like a social security number for businesses and is obtained through the IRS, even if you’re a single-member LLC with no employees.

The fastest way to get your EIN is to apply through the IRS website during the available hours, which are Monday through Friday, 7 a.m. to 10 p.m. EST. There’s no fee and it takes just a few minutes to get your number online.

Certificate of Formation

Once you have your EIN from the IRS, you can form your NJ LLC online using the state’s Business Formation tool. Be prepared to have the following information on hand to complete your form:

•  Business name

•  Business structure

•  Employer identification number (EIN)

•  Business description and address

•  Registered agent information

After the state approves your registration, you’ll receive a Certificate of Formation along with a state Entity ID.

Recommended: Business Lines of Credit

Operating Agreement

While an operating agreement isn’t required in New Jersey, it can be a useful document to have on hand as you grow your business. The main purpose of an operating agreement is to outline how the LLC will make financial and business decisions. It’s especially helpful when there are multiple members.

For instance, it could outline the process of how to buy out a business partner and how and when to apply for LLC business loans.

It could also explain how you will handle lending personal funds to your own LLC.

Costs and Timeline

The Certification of Formation for an LLC in New Jersey costs $125. There is also a $100 fee if you need to file an amendment or a correction. The state doesn’t offer a timeline for how long it takes to process a standard formation request, but there are expedited services available for an additional fee.

However, these faster turnaround times don’t apply to online applications. Instead, you’ll need to make your request in person at the Trenton office, via fax, or courier service. Here are the additional fees for a faster processing time:

•  Same-day fax filing: $50

•  2 hour service fee per document: $500

•  1 hour service fee per document : $1,000

Post-Formation Requirements

After receiving your Certificate of Formation, you also need to register for taxes with the NJ Division of Revenue & Enterprise Services using Form NJ-REG.

Once that is complete, you can obtain a Business Registration Certificate, which allows you to apply for public contracting opportunities and New Jersey grants and tax credits. You can also take advantage of federal tax benefits of an LLC, such as pass-through taxation.

Maintaining Your LLC

Another responsibility to remember after forming your LLC is to file an annual report each year, which costs $75. It’s due on the last day of the month in which you formed your business. The annual report process is simple and involves confirming your business and registered agent addresses are current.

Recommended: Business Equipment Financing

The Takeaway

Now that you know how to create an LLC in NJ, you’ll feel confident every step of the way as you launch your new business. You’ll also be prepared for growth opportunities when you have a strong foundation in place.

Explore SoFi’s small business loan network to get the financing you need at the right time.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.

FAQ

How much does it cost to form an LLC in New Jersey?

It costs $125 to get a Certificate of Formation in New Jersey. You can also pay additional fees to reserve a business name in advance and expedite the processing time.

How long does it take to get approved?

New Jersey does not provide a clear timeline on how long it takes to process a business formation application. However, you can get same-day service for an extra cost.

Do I need a lawyer to form an LLC in NJ?

No, you aren’t legally required to use a lawyer when forming an LLC in New Jersey. However, it may be wise to hire one if you have multiple members and need to create an operating agreement that covers everyone’s best interests.

What are the ongoing requirements for NJ LLCs?

Each year, you need to file an annual report with the state in order to confirm your business address and registered agent details. This service costs $75. You also need to comply with any relevant business license regulations and state and federal tax filing deadlines.

Can I form an LLC if I live outside New Jersey?

Yes, New Jersey offers an out-of-state business registration. It’s designed for companies that have operations in NJ, only have employees or sell goods in New Jersey, or want to apply for contracts with any level of the New Jersey government.

Photo credit: iStock/LeoPatrizi

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

SOSMB-Q424-110

Small business capital, by definition, is usually money from an outside source that a small business needs to fund operations, business purchases, and growth. Small businesses can acquire capital though business loans or in funding sources,, such as grants, that do not need to be paid back.

Continue reading to learn how to determine your business’s financial needs and the sources to turn to to help fund them.

Assessing Your Business’s Financial Needs

Your business’s financial needs will likely depend on a variety of factors, including where you are the life of your business. For a startup, your financial needs are equal to the cost of starting your business. This will likely include several one-time costs such as beginning inventory and supplies, advertising, and permits, licenses, and related fees.

If you’re an established business, you may be looking at a couple of different things. Working capital is the amount of money you need to keep your doors open. It’s essentially the difference between your business’s current assets and its current liabilities. If your company’s liabilities are greater than your assets, you may have trouble keeping up with your financial obligations and may need an infusion of capital.

Beyond working capital, you may need to find a source of capital if you are looking to pursue a project to help you grow your business, such as opening a new location. Your financial needs will be equal to the cost of this project.

Recommended: Guide to Trade Working Capital

Traditional Business Loans

There are several types of small business loans you may apply for to help cover your capital needs, including:

SBA Loans

An SBA loan is a small business loan that is offered through lenders, including banks, and is partially guaranteed by the U.S. Small Business Administration. To be clear, the SBA itself does not lend money directly, but its guarantee helps reduce risk to its lending partners. For that reason, SBA loans may offer competitive rates terms.

Business Line of Credit

Having cash on hand to cover day-to-day business expenses, bigger purchases, and emergencies can be important to your business operation. Rather than take out a loan as the need arises, you may consider a business line of credit. A business line of credit is a revolving credit line that allows you access to cash as you need it up to a certain limit. As you repay what you borrow, those funds become available to borrow again. You will only pay interest on the amount you borrow.

Equipment Financing

If you find that you need to purchase new equipment to help grow your business — whether it’s a tractor, a dentist chair, or a new computer — you may want to consider equipment financing. The equipment itself often acts as collateral, so this type of loan may offer lower interest rates than other conventional loans. Repayment options will vary, but typically span a few years.

Startup Loans

Startup loans help new businesses get off the ground. These loans may be easier to qualify for in some ways. For example, they may be willing to lend to borrowers with relatively low revenue streams. However, because startups are often unproven, lenders may require that you offer more collateral to back the loan.

Working Capital Loans

As we mentioned above, working capital is the money your business needs to operate on a daily basis. If you have negative working capital, you may want to pursue a working capital loan to help you cover expenses, such as payroll, monthly bills, debt payments, inventory, and operational expenses.

Recommended: 7 Things to Know About Small Business Cost of Capital

Alternative Financing Options

In addition to loans from traditional lenders, such as banks, there are other ways you may seek a cash infusion to help your business grow.

For example, you might consider crowdfunding or a peer-to-peer (P2P) loan where an individual or a group of people loan you money via a P2P platform.

You might also explore venture capital, which is private equity financing that might be provided by high-net-worth investors, investment banks, or other financial institutions.

💡 Recommended: Recommended: Apply for a Business Credit Card

Equity Financing

Another way to raise capital is to sell shares of your company to investors. By purchasing those shares, investors are also purchasing ownership rights of your company. When a company is private, equity investors might include individuals, such as angel investors, venture capital firms, and corporate investors. It is also possible to raise equity financing through crowdfunding.

When a company goes public through an initial public offering (IPO), they are offering shares that can be purchased on public stock exchanges.

Government Grants and Programs

In additional loans and other financing options, small business owners have access to grants for new and existing businesses that can provide capital. Grants are gifts of money that do not need to be repaid.

The federal and state governments offer a range of small business grants. Some may be designed for companies that focus on specific fields such as science of technology, while others might be focused on community building, for instance.

Preparing Your Business for Funding

Securing funding is easier with a strong plan. First, define your needs, including how much funding you’re looking for and how that money will be used. Next, make sure you have a strong business plan that demonstrates your business idea, goals, and projected revenue. With these supporting materials in hand you can begin researching funding options and applying for loans, grants, and other sources of funding. Once you receive funding, it’s critical to track how it is used, and the return on your investment.

💡 Recommended: Funding Your Business During a Downturn

Small Business Funding

When it comes to funding, the right option for you will depend on your needs. And it may be that over the life of your business, you’ll need to pursue several different types of funding to meet your goals and objectives.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.

FAQ

What are the different ways to obtain capital for a business?

You may obtain capital for your business through small business loans or alternative methods, such as grants, equity financing, venture capital, or peer-to-peer lending.

How do I determine how much business capital I need?

The amount of business capital you need will depend on your goals. Startups may need to cover all the costs of getting a new business off the ground. Existing businesses may need to cover the cost of working capital, a piece of equipment, or other growth related projects, such as opening a new location.

What is the difference between debt financing and equity financing for business capital?

Debt financing is when you borrow money and agree to pay it back with interest over time. Equity financing, on the other hand, is when you raise capital by selling shares of your company.

What types of businesses are eligible for small business loans?

Eligibility will depend on the type of loan you’re considering. For example, to qualify for an SBA loan, manufacturing companies typically must have 500 employees or fewer, while most non-manufacturing businesses will need annual receipts under $7.5 million.

How can I improve my chances of securing business capital from investors?

A strong business plan that demonstrates clear financial projections and strong market potential can help woo potential investors. It is also important to demonstrate that you have the experience, tools, and resources you’ll need to successfully carry out your plan.

Photo credit: iStock/djiledesign

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

SOSMB-Q424-102

Building a business from scratch isn’t easy. It involves a lot of careful planning and startup costs to get off the ground. For this reason, buying an existing business is a popular choice. In fact, in the next decade or so, it is estimated that 12 million businesses will change hands, with that projection increasing over time as baby boomers reach retirement age.

Before pursuing the purchase of a business, learn important steps to help ensure the process goes smoothly and to avoid potential pitfalls along the way.

💡 Recommended: How to Get a Loan to Buy a Business

Benefits of Buying a Small Business

Buying an existing business may be appealing for the several advantages it has to offer, including:

•  Shorter lead time: When you buy a business, you skip the startup process, which can be lengthy in terms of securing financing, finding the right space, developing systems and processes, hiring employees, and building a customer base.

•  Historic data: You’ll have access to past data on the financial history of the business. You can easily see historic trends instead of trying to predict what the costs and revenues of an entirely new business might be.

•  Name recognition: An existing business already has customers who know and understand the company and provide a steady stream of income from day one.

•  Supplier relationships: A steady supply chain is critical to the success of a business. An existing business may already have long-term relationships with vendors.

•  Trained staff: You may also be able to retain relationships with trained employees who understand how to run the business. Otherwise, hiring and training new employees can be a huge time commitment and a costly part of starting a new business.

•  Low risk: The potential benefits mean that buying a business may be less risky than starting one from scratch. That can be a big advantage if you need to seek financing.

Recommended: Small Business Startup Loan

6 Steps to Buy a Business

The basic process for buying a business is the same for many enterprises you may be considering.

No. 1) Identify Your Business Goals

Before you even begin looking for a business to buy, identify what you’re hoping to get out of a business you purchase. Consider your own interests, skills, and past experience. For example, if you’re highly knowledgeable about landscaping and plant care, maybe you would like to own a nursery or landscape design business. If you’ve worked at a company for many years and enjoy the business, you might consider buying it if it comes up for sale.

You’ll also want to consider factors, such as how much revenue you’ll need to make to meet your financial needs and goals. Understanding your material and immaterial goals will help you narrow your search.

No. 2) Research and Identify Potential Businesses

Once you’ve decided on your own goals and other criteria, you can begin your hunt for businesses that match your needs. Cast your net as wide as possible and search online marketplaces, classified ads online and in print, and local business brokers.

You may also want to build a network of local business owners, business accountants, and business attorneys who may have an ear to the ground when it comes to knowing what businesses are for sale or may soon be.

It may also be worth considering becoming a franchise owner. Franchisees buy the right to open a branch of a larger, established business.

Recommended: How To Buy a Franchise

No. 3) Conduct a Business Valuation

Once you find a business you’re interested in, determine how much it’s worth. The seller will likely have a valuation they can share with you, but you may want to get a third-party valuation of your own and see how it aligns. You can hire a professional to value the business, which could cost between $2,000 and $10,000 depending on how complicated the valuation is.

No. 4) Negotiate the Purchase Price and Terms

Once you have a good idea of how much the business is worth and that you want to buy it, it’s time to negotiate the price. To do so, you’ll usually make a nonbinding written or verbal offer. The seller may accept the offer, or they may counter with an offer of their own.

At this time you’ll also negotiate the terms of the sale. For example, sellers often prefer a “stock sale” in which business operations continue as they are with a new owner, and you agree to take on any outstanding legal liability. As a buyer, on the other hand, you might pursue an “asset sale” that helps limit your liability.

You’ll also negotiate other terms such as how much working capital is left in the business to fund daily operations, whether you want the seller to provide any training, and the sale of any other assets.

No. 5) Secure Financing

You may need to secure financing to purchase some of all of the business. In some cases, the seller may offer financing in which you make monthly payments to the seller, including an agree-upon interest rate. Alternatively, you may seek small business loans from banks and other lenders to help you buy the business, including business acquisition loans designed to help you acquire an existing company or franchise, a large business loan to cover the cost of acquisition, and unsecured business loans that don’t require collateral.

Many small businesses commingle personal assets and business assets, for example, a piece of equipment such as a truck or a tractor. Equipment financing or a business line of credit can help you purchase the equipment you need to operate and grow the business.

No. 6) Close the Deal and Transition Ownership

Before closing the deal on a business, do due diligence to find out as much about the business as you can. This includes looking at organizations documents, tax returns, account statements, revenue, employee information, customer information, and existing liabilities.

If nothing troubling comes up in this process you can close the transaction with a final purchase agreement. When both parties sign, you can set a date to close the deal and have your lender transfer money for the purchase. Funding may go into escrow in which a bank or law firm holds the money until all documentation is finalized.

As the deal is finalized, be sure you have the correct business permits in place to ensure you can continue operating through the transition and beyond.

The Takeaway

Buying an existing business can offer a real advantage in terms of the key factors you need to operate successfully. While it is potentially less risky to buy a business with a proven track record, there are potential disadvantages. Understanding the steps required to purchase a business — and make informed decisions — can help you steer clear of potential pitfalls or at least make a plan to address them.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.

FAQ

What should I look for when buying a business?

Look for the business that meets your personal business goals. Gather as much information as you can about the business, such as information on accounts, revenue, taxes, employees, supply chains, and liabilities to help ensure that the business is the right fit.

How can I finance a business purchase?

Lenders offer a variety of loan options designed to help you purchase a business, such as business acquisition loans, small and large business loans, and unsecured business loans.

What is due diligence when buying a business?

Due diligence is the act of gathering as much information about a business as possible before you buy it. Doing so can help you identify the potential advantages and risks of buying that business.

Are there risks to buying an existing business?

There are risks associated with buying a business. For example, if you finance the purchase, there could be the risk that you will have trouble making loan payments in the future. You could also lose existing customers or vendors after the transition. Or you may encounter unforeseen problems you missed during the due diligence process such as aging infrastructure or technology that needs to be replaced.

How long does it take to buy a business?

Finding the right business to buy can sometimes take years. But once you’ve got one in your sights, the process of completing a sale may take about two to six months.

Photo credit: iStock/AsiaVision

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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If you’re looking to start a small business, you typically have two options: You can start an independent business of your own or you can open a franchise. A franchise is a business model in which a franchisor — usually an established business and brand — allows a franchisee license to use its name and idea and to sell its goods or services. In return, the franchisee typically pays an upfront fee and ongoing royalties.

There are several advantages of buying a franchise vs. starting your own business. Get to know the potential benefits so you can make an informed decision about whether a franchise is right for you.

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Built-in Brand Recognition and Reputation

When you start a business from scratch, you must work hard to get the word out about the goods and services you offer. This can take a lot of marketing effort and years of building trust with a customer base. It’s no wonder that advertising is one of the major costs of starting a business.

A franchise, on the other hand, is leaning on the brand recognition and reputation of a well-known business. There is likely already an active customer base, and with it, a built-in understanding of what the business is and what it provides. Customers already know what to expect.

Proven Business Systems and Operations

A franchise is already a proven business model. You don’t have to develop it from scratch, nor do you have to spend the time to explore the best ways to operate the business successfully. Those steps have been taken for you.

Depending on how the business is structured and the agreement you make with your franchisor, you may get everything you need to operate the business, including equipment, supplies, and detailed business processes.

Other franchises may not offer a turnkey system. However, you will still have access to institutional knowledge, whether that is provided to you in material form or through the business founder.

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Training and Support Programs

As part of the operational assistance a franchisor may offer, there may be training and ongoing support to help you manage your business and bring on employees. Training will typically cover daily operating, the use of equipment, point-of-sale software, business systems, and other daily tasks.

Training programs are available to help the franchisee open their business and then on an ongoing basis to help ensure the continued success of business operations.

One advantage of a franchise is that franchise owners may be joining an existing network of other franchise owners. In addition to the ongoing support offered by the franchisor, this group may be able to share best practices and tips they have learned.

Marketing and Advertising Assistance

The franchisor will likely supply marketing strategies, materials, and techniques to drive sales effectively. For example, they might provide signage to include in ground locations or guidelines for advertising in local markets and budgeting suggestions.

Franchisees who are part of large chains can take advantage of the parent company’s broader marketing campaigns, which could include regional or national advertising in print, on the radio, online, or on television.

Established Supply Chains

Maintaining a steady supply chain can be a big challenge for independent businesses, who must establish relationships with trusted vendors and negotiate prices on their own. Franchisees can often take advantage of established supply chains. What’s more, the parent companies can often negotiate for better deals on products purchased in bulk. These lower costs can translate to lower operating costs for franchise owners.

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Financial Benefits and Performance Data

In addition to the financial benefits provided by immediate market share and increased purchasing power, franchises may benefit from better access to loans for startup businesses. A franchise presents lower risk than a brand new business. A franchisee is buying into an already successful business model, so they have lower failure rates than other entrepreneurs.

The low risk of opening a franchise may make it easier to secure loans, such as SBA loans. Some franchisors even have an in-house financing arm, though these options may not offer the lowest interest rates.

Franchisors may also offer access to performance data that gives franchise owners insight into marketing data, costs, and cash management. With this data on hand, owners can work with franchisors to help ensure continued growth and success.

The Takeaway

A franchise can provide many advantages for individuals looking to start a business of their own, established customer base and ongoing support from a successful parent company in the form of training, marketing support, buying power, and access to performance data.

They are not without disadvantages. For instance they often have high startup costs, ongoing royalty payments, and franchise rules that owners must continue to abide by. Weigh potential benefits against these risks to help determine if owning a franchise is the right business move for you.

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If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for small business loans in minutes.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.

FAQ

What are the main benefits of buying a franchise?

The main benefits of buying a franchise are access to a successful business model, an established customer base, and ongoing support from the parent company and the network of other franchise owners.

Is buying a franchise less risky than starting a business?

Buying a franchise may be less risky than starting a business of your own, because a franchise already has a proven business model and immediate name recognition.

What type of support do franchisors provide?

Franchisors may provide support in a variety of ways, including training, marketing support, the ability to collectively negotiate the purchase of supplies, and access to business data.

How does franchise marketing support work?

Franchises may offer marketing materials, including strategies and a budget. Franchisees may also benefit from regional and national marketing campaigns in print, online, on the radio, or on television.

Are franchises more profitable than independent businesses?

Franchises are generally more successful than most small businesses. Industry reports show that after two years, 92% of franchises remain in business. After five years, 85% are still open. Compare this to independent businesses where only 50% survive five years.

Photo credit: iStock/RerF

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Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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