Business Basics
Creating a Business Plan
The first step in starting your own business is to have a business plan.
Specifically, you should make a written plan that does the following:
- Explains the product that you will manufacture or sell, or the
service that you will provide, and why you expect to be able to sell
your product or service profitably.
- Sets forth the qualifications and experience of you and any other
key individuals who will be involved in the business.
- Includes financial statements that project the income and expenses
for your business for at least three years.
- Provides an explanation of the funding (capital) that will be needed
to operate the business and your expected sources of such funding.
- Identifies any professional advisors that you will be using including
an accountant, lawyer, tax advisor, banker, and insurance agent.
Your business plan will help make sure that you are taking into consideration
all of the issues. A business plan is also essential in convincing a
lender to provide a loan or an investor to provide capital funds. If
you need help writing a business plan, you might want to check into
using a software program.
Funding Your Business
Obviously, one source of funds should be your own savings. Other sources
include loans from banks or other lenders, and investments from other
individuals.
- Your Savings: It is a good idea for you to invest some of your
own savings. If you are not risking any of your own capital, it will
be more difficult to obtain loans or capital from others.
- Loans: You can obtain loans from banks, other lending institutions,
and individuals. You will need to provide them with a business plan
and financial statements that show your ability to repay any borrowed
funds.
- Capital Investments: A capital investment is different than a loan.
Instead of obtaining funds that will need to be repaid with interest,
you are obtaining capital funds from investors who will be co-owners
with you.
Choosing a Name
When choosing a name, make sure that it's not identical or confusingly
similar to the name that is already owned or used by another company.
Most states have laws that regulate names for corporations, limited
liability companies, limited partnerships, and business entities for
professionals. Usually these statutes require that a word be included
that clearly identifies the type of entity. For example, a corporate
statute might require a corporation to include "corporation",
"corp.", or "inc." as part of the corporate name.
If you choose a name for a sole proprietorship or general partnership
that doesn't include your own personal name, you may be required by
law to register the name of your business.
Ownership Changes
As a small business owner, you may wish to protect yourself against
the possibility that one of the other owners will transfer his or her
ownership interest to an undesirable third party. Obviously, this is
not a problem for the sole proprietor or the sole stockholder of a corporation.
However, it is a potential problem with any business that has more than
one owner. Business owners can (and should) address these issues in
the partnership agreement (all partnerships), the operating agreement
(LLCs), and buy-sell agreements (corporations). These agreements should
include at least the following:
- appropriate restrictions on the transfer of an ownership interest,
except in accordance with the agreement;
- a method for determining the value of an ownership interest;
- provisions for handling a voluntary withdrawal from the business
by one of the owners;
- provisions for handling the ownership interest of an owner who dies;
- provisions for handling the disability of an owner who was involved
significantly in the business before becoming disabled; and
- a means of funding any required purchase of an ownership interest
(for example by using life insurance to buy the ownership interest
of an owner who dies).
Federal Identification Number
In most cases, the new business will need a federal identification number.
The exception may be the sole proprietorship that has no employees.
To get a federal ID you must prepare, sign and file Form SS-4 with the
Internal Revenue Service.
Payroll Issues
Employers are required to withhold federal and state income taxes, as
well as FICA taxes, from employee wages. These withholdings must then
be properly deposited with the federal and state governments. If you
plan to have employees, you will need to comply with these requirements,
as well as any requirements regarding withholding of other taxes. Most
employers are subject to federal and state laws that require you to
pay unemployment insurance. This insurance is used to pay unemployment
benefits to employees who lose their jobs.
Insurance Required
- Workers' Compensation. Most states have workers compensation laws
that pay benefits to employees who suffer job related injuries. Employers
are required to obtain this insurance from private insurance companies.
- Liability Insurance. Although you may choose a business entity that
will enjoy "limited liability", you will still need appropriate
and adequate liability insurance.
- Property Insurance. Your new business will need property insurance
to protect the business assets. If you transfer any personal assets
to your new entity, you should make sure that your insurance policies
are issued for the person or entity that owns the assets.
Permits and Licenses
For many types of businesses it is necessary to obtain certain permits
and licenses. For example, if you are involved in retail sales, you
may need a sales tax permit. A contractor may be required to obtain
a contractor's license. A restaurant may be required to obtain a license
in order to sell beer or liquor.
Franchises
A franchise is an agreement under which an owner of a business idea,
trademark and business "know-how" sells you the franchise
rights to use these items. For example, your local Chevrolet car dealer
is probably operating his or her dealership under franchise arrangements
with General Motors who owns Chevrolet. You might be interested in a
franchise so that you can sell a well-known product, obtain management
advice, and participate in joint advertising. If you want to consider
this type of arrangement, make sure that the details are stated in a
written agreement that you understand. Obtain the advice of a lawyer
if you have any questions.
Working from Home
You may wish to locate your business in your home to save the cost of
buying a building or renting space for your business. In some cases,
you can obtain an income tax deduction for the cost of having the business
in your home. However, the rules are very strict, and in many cases,
your business must be located in a building that is separate from your
residence (for example, in an unattached garage). In some locations
there may be zoning laws or other local regulations that limit or prohibit
the operation of businesses in homes that are located in residential
areas. In addition, there may be permits or licenses that you are required
to obtain to operate a business in your home.
