Factors to consider before setting up that business

While it is not impossible, it is difficult to create substantial wealth from a salary income alone.

However, it may be possible to do so if you have alternative sources of income, popularly known as passive income.

Passive income is that income which you earn without active participation in the cash generation activity.

Broadly speaking, passive income means letting your money to work for you while you work elsewhere to earn a salary.

This means you use your salary to start a business which can generate a regular income for you.

Perhaps this is the same way that your current employers started their business, that is, using capital derived from their past salaries to generate even more returns to strengthen their net worth.

It is even possible that their participation in the business is minimal with only a few of them involved directly in its day to day running, instead hiring directors to oversee the operation and the affairs of the company on their behalf.

Their passive income comes after all statutory deductions are made as the company declares its financial performance perhaps at the end of the year.

Many employees realised the need to create passive sources of income in 2008 when the impact of the global recession started to be felt by many households.

Around this time, many companies begun to cut down on their operational costs through lay-offs among other measures and soon the employment crisis hit the headlines.

This caught many salary-dependent workers by surprise.

But there were some lucky ones. These were the employees who had started their income-earning ventures before the onset of economic crisis.

Business risks

According to market analysts, it was quite interesting that the Small and Medium Enterprises were less affected by the recession in terms of job cuts as compared to established companies that exercised massive job cuts.

But this does not mean that the small businesses were spared by the recession.

Many of the small businesses collapsed due to lack of effective risk mechanisms as they were vulnerable to almost all kinds of business risks.

Something that stood peculiar was that a great proportion of these investments were sole proprietor businesses started by individual income earners as ventures for passive income.

As a result, the effects of recession in terms of increased liabilities from creditors due insolvency were felt directly by the sole owners.

Since they had little protection from business liabilities, the owners had no option but to sell or auction their personal assets to offset the liabilities.

This means that they had not considered protecting their personal investments from business liabilities.

While such businesses are established to generate additional incomes to strengthen personal net worths, they also have a double effect of eroding the same completely through liabilities if no measures are put in place to separate business from personal assets.

If you are planning to set up a business, an important starting point would be to consider the legal structure of your envisaged business.

This may ultimately safeguard your personal assets from business liabilities.

Unfortunately, most upcoming entrepreneurs today want to start sole proprietorship businesses the easy way, often rushing through the registration process.

Despite all the advantages of a sole proprietorship, its structure poses great threat to the owner’s personal assets due to its unlimited liability.

For instance, supposing you establish a sole proprietor business that offers courier services to deliver parcels to households.

It is possible that you may encounter a delay or interruption in the course of delivery.

Let us assume that some parcels even get damaged in accident during the process.

As a result, the customers decide to sue your business for damages amounting to millions of shillings, a figure that surpasses the business net worth.

As a sole proprietor, your personal assets are at stake if your customers win the law suit and are awarded damages.

You will be personally be responsible both in the law suits as well as in paying for the damages.

You will have no veil to protect you even from creditors who may sue you for liabilities.

This makes a strong case against establishing a sole proprietorship business in this day and era when business risks are so numerous, of course, unless prior plans are made to cover for business liabilities.

Regardless of the benefits that come with the ease of registration, there are other business structures that protect owners from vulnerability to lose associated with business liabilities.

These include limited partnerships, private limited liability structure and public limited structures.

In private limited companies, shareholders are protected by law from law suits or liabilities associated with the business entity.

The shareholders or owners personal assets are treated separately from the business assets as they are considered as separate legal entities.

As you consider your passive income plan, you should also be aware that a limited liability structure could further boost your image to potential investors willing to inject additional capital to take your business to another step of growth.

This is unlikely in a sole proprietorship structure, where most investors might shy away from injecting their capital.