How to Start a Small Business
At his final press conference as Fed Chair, Jerome Powell said that the labor market was essentially stuck in neutral. “There’s effectively no new net job creation” because companies aren’t adding a lot of new positions and fewer people are quitting. As a result, those out of work and others who are nervous about their current jobs are increasingly turning to gig work or considering launching their own businesses to survive in the current climate.
Just in time for Small Business Week, Americans are jumping on the small business bandwagon. According to analysis by Torsten Slok, Chief Economist at Apollo, technology is helping in a big way. “The surge in new U.S. business formation is being fueled by AI and large language models that are dramatically reducing the cost and complexity of launching a company.
If the so-so labor market is getting you down, just know that we have been here before. One catalyst for writing my book, The Great Money Reset, was talking to podcast listeners about their ideas for making money while they were sidelined during COVID. “Times of personal difficulty often are just what we need to get our entrepreneurial juices flowing.”
But where should you start? Before you plow through your savings or raid your retirement account, consider smaller steps, perhaps a side hustle, to test the concept and see if it gains traction. You can continue to cobble together part time work to pay the bills, or if you still have a full-time job with benefits, it’s great to see how you feel about the business and whether it is financially viable before assuming the risk of going solo.
Before you get freaked out about operating a business, consider morphing what you already do into a consulting practice. This is particularly appealing to those nearing retirement. Working as a freelancer might allow you to transition from the intensity of your professional career, without the pressures and time commitment that come with full-time employment. If you are younger, the flexibility and autonomy of working for yourself may be appealing but there are some downsides, primarily losing healthcare benefits and an easily accessible retirement plan, which may have a matching component.
Additionally, you need to think about taxes, which also brings up the question of your business structure. According to the Small Business Administration (SBA), the answer “affects how much you pay in taxes, your ability to raise money, the paperwork you need to file, including registering your business and getting a tax ID number, and your personal liability.
The most common small business structures include:
Sole Proprietorship: You're automatically considered to be a sole proprietorship if you do business activities but don't register as any other kind of business. All income you earn passes through to your personal return. The big downside of this structure is that your business assets and liabilities are not separate from your personal assets and liabilities, which means that you can be held personally liable for the debts and obligations of the business.
S-Corporation: An “S Corp” allows profits, and some losses, to be passed through directly to owners’ personal income without being subject to corporate tax rates. The SBA notes that an S Corp is a tax election, not a legal structure. Electing S Corp taxation could help cut the cost of self-employment tax significantly if your business income is a lot higher than a reasonable salary for your work. S Corps are also a pass-through tax structure, meaning you're still eligible for the Qualified Business Income (QBI) deduction, which can further lower your tax bill.
Limited Liability Company (LLC): An LLC protects you from personal liability in most instances, your personal assets, like your vehicle, house, and savings accounts, won't be at risk in case your LLC faces bankruptcy or lawsuits. Profits and losses can pass through to your personal income, but as a member of an LLC, you are considered self-employed and must pay self-employment tax contributions toward Medicare and Social Security.
The most common small business retirement plan options include:
Individual Retirement Account (IRA): You can choose either a traditional IRA, where you pay taxes in the future or a Roth, where you pay taxes today.
Contribution Limit: Up to $8,000 for 2026, plus a $1,100 catch-up contribution for those aged 50 or older.
Deadline: Tax return filing deadline (not including extensions).
Simplified Employee Pension (SEP-IRA): This is a good option for businesses with up to 25 employees that want to offer an easy-to-operate retirement benefit.
Contribution Limit: The lesser of 25 percent of your net earnings from self-employment (net profit less half of your self-employment taxes paid and your SEP contribution), up to $72,000 for 2026, with a $360,000 limit on compensation.
Deadline: You can establish and fund the SEP plan as late as the due date (including extensions) of your income tax return for that year.
SIMPLE IRA (Savings Incentive Match PLan for Employees): These plans are aimed at slightly larger small businesses (usually up to 100 employees) that want to provide employees a way to save for retirement.
Contribution Limit: Net earnings from self-employment up to $17,000 in 2026, plus an additional $4,000 if you're age 50 or older ($5,250 for ages 60, 61, 62 or 63) plus an employer contribution of either a 2 percent fixed contribution or a 3 percent matching contribution. The compensation limit for factoring contributions is $360,000 in 2026.
Deadline: You can establish a SIMPLE IRA plan at any time Jan 1 through Oct 1.
Solo 401(k): Alternatively referred to as an “individual 401(k)” or “uni-401(k),” this plan is geared to small business owners who have no employees (other than a spouse) and have the capacity to sock away a lot of dough.
Contribution Limit: Salary deferrals up to $24,500 in 2026, plus an additional $8,000 if you're 50 or older ($11,250 if you are 60, 61, 62, or 63 by year end), either on a pre-tax basis or as designated Roth contributions. You can add another 25 percent of your net earnings from self-employment for total contributions of $72,000 for 2026, including salary deferrals. The limit on compensation that can be used to factor your contribution is $360,000 in 2026.
Deadline: Plan must be established before calendar year end and funding allowed up to tax filing deadline (including extensions).
Because there are so many choices, and each person’s circumstances are so different, you should consult with your financial planner or tax pro to determine which makes the most sense for you.