Your SlideShare is downloading. ×
Business startup
Business startup
Business startup
Business startup
Business startup
Business startup
Business startup
Business startup
Business startup
Business startup
Business startup
Business startup
Business startup
Business startup
Business startup
Business startup
Business startup
Business startup
Business startup
Business startup
Business startup
Business startup
Business startup
Business startup
Business startup
Business startup
Business startup
Business startup
Business startup
Business startup
Business startup
Business startup
Business startup
Business startup
Business startup
Business startup
Business startup
Business startup
Business startup
Business startup
Business startup
Business startup
Business startup
Business startup
Business startup
Business startup
Business startup
Business startup
Business startup
Business startup
Upcoming SlideShare
Loading in...5
×

Thanks for flagging this SlideShare!

Oops! An error has occurred.

×
Saving this for later? Get the SlideShare app to save on your phone or tablet. Read anywhere, anytime – even offline.
Text the download link to your phone
Standard text messaging rates apply

Business startup

2,383

Published on

0 Comments
1 Like
Statistics
Notes
  • Be the first to comment

No Downloads
Views
Total Views
2,383
On Slideshare
0
From Embeds
0
Number of Embeds
0
Actions
Shares
0
Downloads
58
Comments
0
Likes
1
Embeds 0
No embeds

Report content
Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
No notes for slide

Transcript

  • 1. NC SMALL BUSINESS TECHNOLOG OGY AND TECHNOLOGY DEVELOPMENT DEVELOPMENT CENTER Star t-Up Resource Guide kStarting a business in North Carolina
  • 2. Publication Data © 1997 by the University of North Carolina’s Small Business and Technology Development Center 5 West Hargett Street, Suite 600 Raleigh, North Carolina 27601-1348 Phone 919/715-7272 or 800/258-0862 (in NC only) All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form and by any means— electronic, mechanical, photocopying, recording, or otherwise—without the prior written permission of the publisher. Revised edition January 2002 This material is based on work supported by the US Small Business Administration (SBA). Any opinions, findings, conclusions, or recommendations expressed are those of the author(s) and do not necessarily reflect the views of the SBA.
  • 3. Contents Table of Contents Start-Up ChartBusiness Star t-Up Planning Chart ............................................................................... 1 Yourself PotentialAssess Yourself as a Potential Business Owner ........................................................... 2 Personal characteristics ............................................................................................................ 3 Demands of owning your own business ...................................................................................3 Business experience and management skills ...........................................................................3 Action items ..............................................................................................................................4 Results of self-analysis ............................................................................................................... 4 Conclusions ..............................................................................................................................5 FeasibilityDetermine Concept Feasibility .................................................................................. 7 Define your business idea.........................................................................................................7 Refine the concept ...................................................................................................................7 Define your market through research and analysis ..................................................................8 Enhancing your chance for success ........................................................................................ 9 Make ImportantExamine Critical Issues & Make Impor tant Decisions .............................................. 11 Entry options ........................................................................................................................... 11 Buying an existing business..................................................................................................... 11 Finding a business for sale ......................................................................................................11 Evaluating the business .......................................................................................................... 11 Buying a franchise .................................................................................................................. 13 Starting a new business .......................................................................................................... 14 Selecting and using professionals .......................................................................................... 14 Selecting a business location ................................................................................................. 15 Minimizing your risks ................................................................................................................16 Insurance protection .............................................................................................................. 16Legal Considerations and Requirements ................................................................ 17 Requirements Regulatory requirements ........................................................................................................ 17 Tax information ....................................................................................................................... 18 Incorporating a business ........................................................................................................ 20 Insurance ................................................................................................................................ 20 Protecting your intellectual property ...................................................................................... 20 Select the type of business structure ....................................................................................... 21 Employee responsibilities ........................................................................................................ 23 Business structure chart ........................................................................................................... 25 Your Plan......................................................................................Develop Your Business Plan ...................................................................................... 27 Business plan outline ............................................................................................................... 27 Tips for writing a good business plan ...................................................................................... 29 Mistakes to avoid when writing a business plan ..................................................................... 29
  • 4. Contents Your FinancingArrange Your Business Financing ............................................................................. 31 Getting the funding you need ................................................................................................ 31 Equity funding ......................................................................................................................... 31 Debt funding .......................................................................................................................... 32 Operations-related financing ................................................................................................. 33 Business loans ......................................................................................................................... 33 How to choose a banker ........................................................................................................ 34 What a lender looks for........................................................................................................... 35 Tips for getting and using small business credit ...................................................................... 36 Worksheet: Uses and Sources of Funds ................................................................................... 38Resource and Information List ................................................................................. 39 State resources ....................................................................................................................... 39 Federal resources ...................................................................................................................39 Other resources ...................................................................................................................... 40 Internet resource addresses ................................................................................................... 4 0 Licenses, permits, and taxes ................................................................................................... 41Index ........................................................................................................................ 42
  • 5. Welcome Introduction S mall businesses are vital to the growth and development of communities throughout our state. They bring innovative products and service to the marketplace and provide a range of opportunities and jobs for North Carolina workers. Over the years, our state has made investments in business development support resources such as the Small Business and Technology Development Center, the North Carolina Biotechnology Center, and the Technological Development Authority. Today, as a result of our investments in small businesses and the successes of entrepreneurs, North Carolina is known worldwide as an excellent location to start and operate a business. It is my hope that our state can build on our record of past success. LetThe HonorableMichael F Easley . us continue to work together to make North Carolina a greatGovernor of North Carolina place to develop and grow businesses.
  • 6. OutlineBusiness Start-Up Planning Assess yourself as a potential business owner Determine concept feasibility Define Gather Assess Idea Information Feasibility Yes Re-evaluate No Examine critical issues and make decisions Investigate legalR esource & contact list considerations Develop your business plan Arrange your business financing 1
  • 7. 2
  • 8. Chapter 1 Assess Yourself as a Potential Business OwnerW hile owning a business may be a personal dream for CHECKLIST FOR STARTING A BUSINESS many, managing thatbusiness may prove difficult because o Assess yourself as a potential business ownerof a lack of prior business ownership o Determine concept feasibilityexperience or management skills. Anhonest self-evaluation will allow you o Examine critical issues & make important decisionsto assess your personal characteris- o Investigate legal considerations & requirementstics and determine your willingness tomeet the demands of owning your own o Develop your business planbusiness. o Arrange your financing Some of the questions belowmight be difficult to answer, but it iscritical to evaluate your personalweaknesses along with your strengths. o Do you possess computer skills? BUSINESSWhen owner weaknesses are identi-fied, partners, managers, staff mem- o Are you aware of your cur- EXPERIENCE ANDbers, and external resources oreducation and training may be found rent credit rating? MANAGEMENT MANAGEMENTto balance strengths and offset SKILLSweaknesses. o Do you know what basic skills Check the questions below that DEMANDS OF you will need to succeed inyou can answer with “yes.” OWNING YOUR business? PERSONAL OWN BUSINESS o Do you possess those skills? o Do you realize running a o If you discover that you doCHARACTERISTICSCHARACTERISTICS business may require working not have the basic skills 12-16 hours a day, six days a needed for your business, willo Are you a leader? week (and possibly Sundays, you be willing to delay youro Are you confident? late nights, and holidays)? plans until you have acquiredo Do you like to make your own the necessary skills? o Do you have the emotional decisions? strength and good health to o Have you ever worked in ao Do you handle responsibility handle the work load and managerial or supervisory well? daily schedule that owning position? your own business will re- o Have you hired or firedo Do you thoroughly plan quire? people before? projects from start to finish? o If required, are you prepared o Have you ever worked in ao Are you self-disciplined and to temporarily lower your business similar to the one you independent? standard of living until your are considering?o Are you flexible? business is firmly established? o Have you had any businesso Do you read business publica- o Is your family prepared to go training in school? tions? along with the pressures they too might face? 3
  • 9. Yourself Assess Yourselfo Do you understand business financing and cash flow management? RESULTS OF SELF-ANALYSIS RESULTS SELF-ANALYSIS This self-test is simply an overview of theo Are you aware of the recordkeeping require- personal characteristics and basic skills needed in ments expected in managing a small business? small business ownership. The questions with ao Do you understand the fundamentals of market- “yes” answer indicate the presence of a strength or ing and marketing development? attribute needed to successfully manage a small business. Those not checked might indicate weak- nesses or a lack of willingness to make the sacrifices necessary to run a small business. If you decide to continue with plans to establish a business, then you should resolve to change each blank to a “yes.” A partner or other solution may provide balance for weak areas, thus changing a few blanks to “yes.” If there are a significant number of unchecked boxes, however, overcoming problems may require more development on your part.ACTION ITEMSIdentify the five most important interests, skills, or Based on your interest, abilities, and experience,previous work experience that you enjoyed: summarize your strengths and weaknesses as they relate to the business skills necessary to start and grow a successful business.______________________________________________ _____________________________________________ ______________________________________________ ___________________________________________________________________________________________ _____________________________________________ ______________________________________________ ___________________________________________________________________________________________ _____________________________________________ ______________________________________________ ___________________________________________________________________________________________ _____________________________________________ ______________________________________________ ___________________________________________________________________________________________ _____________________________________________ Also ask someone that knows you well toWrite below any opportunities that may be associated identify your strengths and weaknesses. Comparewith these characteristics, skills, or previous work your answers with theirs.experience. My strengths are: ____________________________________________________________________________________________________________________________ _____________________________________________ ______________________________________________ ___________________________________________________________________________________________ _____________________________________________ ______________________________________________ ___________________________________________________________________________________________ _____________________________________________ My strengths identified by someone who knows me well are:______________________________________________ _____________________________________________ _______________________________________ ______________________________________________ _____________________________________________ ______________________________________________ _____________________________________________4
  • 10. Yourself Assess YourselfMy weaknesses are: ______________________________________________________________________________My weaknesses identified by someone who knows me well are:_______________________________________________________________________________ ___________________________________________________________________________________________ ___________________________________________________________________________________________Identify ways you can overcome these weaknesses: ____________________________________________________What kind of commitment are you willing to make to get your business off the ground? ___________________________________________________________________________________________ ___________________________________________________________________________________________ ___________________________________________________________________________________________ ___________________________________________________________________________________________ Time commitment: ________________________________________________________________________ Resources commitment: _________________________________________________________________Are you prepared to lose your investment and other savings? ____ Yes ____ NoWhat are your expectations for the business within one year? _______________________________________ ___________________________________________________________________________________________ ___________________________________________________________________________________________ ___________________________________________________________________________________________ After three years? ________________________________________________________________________ ___________________________________________________________________________________________ ___________________________________________________________________________________________ ___________________________________________________________________________________________CONCLUSIONSCONCLUSIONS Understanding your personal characteristics,required business skills, and demands of businessownership are critical in helping you find the busi-ness best suited to you and your interest. Honestlyassessing yourself will help you determine what youneed to do to acquire the skills you need, clarify yourexpectations, and motivate you to seek ways to keeplearning as you proceed to develop your businessidea. 5
  • 11. 6
  • 12. Chapter 2 Determine Concept FeasibilityM any questions must be answered and certain CHECKLIST FOR STARTING A BUSINESS information gathered beforedetermining the feasibility of your o Assess yourself as a potential business ownerbusiness idea. Careful research and o Determine concept feasibilityanalysis will help you in evaluatingyour concept and assist you in assess- o Examine critical issues & make important decisionsing your idea. o Investigate legal considerations & requirements YOUR DEFINE YOUR o Develop your business plan o BUSINESS IDEA Arrange your financing The first step is to begingathering as much information as o How will your customer knowpossible about your business. You you have products or services REFINE THEwill want to read articles, books,and trade publications. It is also a available? CONCEPTgood idea to visit existing busi- o How much will your custom- As you refine your idea, therenesses and begin the research and ers pay for your product or are business-specific issues thatplanning process. service? need to be addressed: It is important to remember Using the answers you have o What specific product orthat every business is unique. provided to the questions above, service will your businessTaking time to explore your write a paragraph describing your provide?concept will help you identify business concept. o Do you have the capability orthose specific factors which makes _________________________________ skills to provide this productyour business concept unique. The _________________________________ or service? If not, how will youfollowing questions will guide overcome this deficiency?you in defining your business _________________________________concept. While looking for the _________________________________ o What makes your businessanswers, also attempt to identify idea, product or servicethe potential problems which _________________________________ unique?might relate to your business idea. _________________________________ o What will be your competitiveo What business will you be in? _________________________________ advantages?o What product or service will _________________________________ o What competitor disadvan- you provide to your custom- _________________________________ tages do you have? ers? o Have you identified any _________________________________o Who will buy your product or _________________________________ potential problems? If so, how service? will you overcome them? _________________________________o Why will your customer buy In addition to looking at the _________________________________ business concept, you should also from you? explore the market and the indus-o When will your customer buy try you are interested in by seek- your product or service? ing out the opportunities and 7
  • 13. Feasibility Concept Feasibilityidentifying potential problems. Answering the MARKET RESEARCHfollowing questions will help you assess your market Market research tells you who your customersand industry: are, where they are, and how large the potentialo What industry competition exists in your town or market is. Through research, you will be able to region? gather certain information and data such as:Identify your competition: u Demographics__________________________________________________ u Size of your potential market u Customer lifestyles and buying behavior__________________________________________________ u Specifically who the customer is__________________________________________________ u Determine demand for your product or__________________________________________________ serviceo What will you do to better provide a unique or There are two basic types of market research— better product or service then your competition? primary and secondary: Primary research is research gathered first-hando If there is little or no competition, why not? through techniques like surveys, questionnaires,o Is there potential international or government focus groups, or in-depth interview. Primary research procurement opportunities in your product or can be time consuming and possibly expensive. service? If so, identify them. However, it provides the business owner with theo Are there emerging opportunities in the market opportunity to hear customer feedback and act place? If so, identify them. accordingly.o Are current business and economic trends favor- PRIMARY RESEARCH METHODS u Customer habit tracking able? u Surveys u Interest rate u In-depth interviews u Inflation u Competitor analysis u Business climate u Questionnaires u Business trends u Focus groups u Unemployment u Advertising response rate tracking Remember, it is important to evaluate all aspects u Field studiesof your business concept and to continually balance Secondary research is already published re-your ideas against reality. search. It includes sources like directories, industry After defining and refining your business idea, journals, and association publications. Secondarydoes it still look like a good idea to you? If so, you research is accessible, less expensive, can be con-will now want to do more in-depth market research ducted on a continuous basis, and can be combinedand analysis to better define your market and oppor- with business owner’s knowledge of the business,tunity. geographical conditions, and customer base. The business owner can informally tailor the research YOUR DEFINE YOUR MARKET findings to meet the needs of the business. THROUGH S ECONDARY RESEARCH SOURCES u Business encyclopedias and directories ANALYSIS RESEARCH AND ANALYSIS u Newspapers While market research provides data and infor- u Business magazinesmation about the industry and its customers, market u Trade publicationsanalysis helps the business owner understand the u Market analysisbusiness environment and the basis on which s/he Market analysis helps the business ownersmust compete. understand the business climate in which s/he must compete. It is through market analysis that a business8
  • 14. Feasibility Concept Feasibilityowner determines if a certain business or industryprovides an attractive opportunity. Market analysis provides competitive analysiswhich includes:n Industry analysis: evaluates the industry’s overallopportunity and attractiveness including ease ofentry, availability of substitutes, and buyer/supplierissuesn Competitor analysis: who are the primary com-petitors, and what are their strengths and weak-nesses.n Your business analysis: identifies strengths,weaknesses, opportunities, and threats within youridentified market. YOUR ENHANCING YOUR CHANCE FOR SUCCESS There are always risks in starting a new busi-ness. As a business owner, you will want to loweryour risks by incorporating the following ideas intoyour start-up plan:o Plan ahead.o Make sure you have experience in management and in the type of business you want to start.o Try to best use your strengths and interest in the most appropriate way.o Make decisions based on facts or reliable informa- tion. Don’t make hasty decisions.o Make sure your family is supportive and under- stands the emotional support needed during the start-up phase or when things get difficult.o Be persistent, and DON’T GIVE UP! 9
  • 15. Notes10
  • 16. Chapter 3 Examine Critical Issues & Make Important DecisionsA s you explore starting your own business, you will find CHECKLIST FOR STARTING A BUSINESS there are many decisionswhich must be made and important o Assess yourself as a potential business ownerissues to consider so as to minimize o Determine concept feasibilityyour risk and increase your success.Four important topics covered in this o Examine critical issues & make important decisionssection are: o Investigate legal considerations & requirementsn Entry options o Develop your business plann Selecting and using professionalsn Selecting a business location o Arrange your financingn Minimizing your risks ENTRY OPTIONS ENTRY The decision to buy a busi- outside your area of expertise, it is You may be considering ness requires careful evaluation of important to make certain that thestarting your own business as a many factors including pricing key employees will stay after theresult of a life situation triggering and financing your purchase. sale or that you can hire someoneyour entrepreneurial desires. Such with similar experience. The potential buyer mustevents could include corporate understand their criteria fordown-sizing, an accident that selecting a business as well as the Finding a business for salelimits your physical abilities, or motivation for wanting to pur- Finding a good businessreceipt of an inheritance. There are chase the business. opportunity is not always easy.many reasons why people want to Sources to consider:go into business for themselves, Consideration should be given n Printed advertisementsand there are various options for to the following: : n Trade sources and suppliersentering a business of your own.The most common entry options o What is your experience with n Friends and acquaintancesare: the industry and/or manage- n Intermediaries such as brokers ment? or acquisition specialistsn Buying an existing businessn Purchasing a franchise busi- o Does the business match your strengths? Evaluating the business nessn Starting a new business As a buyer, first evaluate a o Is the business what you business by reviewing its history enjoy doing?Buying an existing business and the way it operates. Develop o Is it in a desirable location? an understanding of the business’ Purchasing an establishedbusiness can lighten the burden of o What are you willing to in- method of acquiring and servingstart-up costs, lag time without a vest? its customers, determine how itsalary, establishing markets, and generates its sales, learn its mar- o Can you get financing?other costs associated with the keting strategy, and develop an o What size business do you understanding of its finance andcreation of a new business. Estab- desire in terms of sales, profit, operations functions.lished businesses may have and employees?existing good will—intangibleassets such as reputation or his- If the business under consid-torical value. eration has a product or service 11
  • 17. Issues and DecisionsChecklist of material for the evaluation o Are all of the books in order and well main-process* tained? Have you reviewed the past and current financial statements with the counsel of an ac- Obtain the following information from the countant? Are there any liens against the propertyexisting business: for sale? Are there any claims on inventory orn 3-5 years financial statements equipment? Have the taxes been paid to date?n 3-5 years tax returns o Have you reviewed existing business contractsn Interim financial statements and the effect of the transaction on those con-n Copies of all real estate, leases, or deeds tracts? Are they loyal because of a personaln Debt schedule relationship or because of the level of qualityn Accounts receivable and aging schedule service?n Accounts payable and aging schedulen Inventory list o Will the lease be transferred into your name orn Supplier list (including contracts) will the owner require a new lease? Is the locationn Customer list (including contracts) suitable for your plans? Are there any environ-n Projections mental concerns with this location? Are theren Organizational charts and employee contracts licensing concerns?n Industry information to which the owners may o What contingent liabilities exist? have access o What policies have been established with then Details of equipment leases and other contingent employees regarding work environment, salary/ financial commitments commissions, benefits, vacation pay, and fringe* Checklist provided by the SABRE Group—Confidential Business Sales and Valuations of Greensboro/ benefits? Raleigh/Durham/Greenville o Will the owner be cooperative with the transition of ownership with regard to tax issues, utilityImpor tant questionsImportant transfers, government requirements, employees, Evaluate the business’ potential according to and other procedures?your goals, employer responsibilities, product or o Are there any environmental issues with respectservice demand, market, and financial consider- to your chosen business?ations. Ask and get answers to questions regardingall aspects of an existing business before entering any o If using a broker, do you realize s/he is represent-purchase agreements. Start with basic questions, like ing the interest of the seller?those listed below. Others may be required depend- o Consider a non-compete agreement with existinging on the specific business: owners(s)o Why is the business for sale? Has it been making o Consider a contractual arrangement with present a profit? If not, do you have a plan to make the owners for a period of consultation business profitable? o Consider whether owner is willing to finance allo What kind of reputation does the establishment or some of the purchase price have currently? How would you change that The services of an accountant, attorney, and reputation? What is the price of good will? What banker are recommended when buying an existing is the consistency of the client base—a few large business. Investigation and research will be crucial to clients or many smaller customers? uncovering as much information as possible abouto Will the sale include equipment, property, inven- the business for sale. tory, debts, employee contracts, name, logo, slogans, signage, customer files, etc?12
  • 18. Issues and DecisionsBUYING A FRANCHISE Franchising has emerged as a popular way for potential business owners to start a new business. Afranchise offers advantages in name and product recognition, proven operation procedures as well as volumepurchasing power. In this arrangement, the provider, or franchisor, contracts with you, the franchisee, to giveyou the right to sell or distribute a service or product under the franchisor’s system in a particular area. Aswith any opportunity, both advantages and disadvantages must be examined before a decision to invest ismade.ADVANTAGES OF A FRANCHISE:ADVANTAGES FRANCHISE: DIS ADVANTAGES OF A FRANCHISE: DISAD ANTAGES ADV FRANCHISE:n Some require relatively small capital investment n Complicated legal negotiations with franchise financing n Restrictions on purchasingn Initial corporate support for start-up n Franchising feesn Continuous management training and counseling n Required to share portions of business profitsn Existing goodwill and brand name appeal (some- with corporation (sales/royalties) times) n Loss of control over some aspects of operationn Standardized quality of goods/services (e.g., use of name/logo for advertising, territory,n Proven products and business format uniforms, product purchasing requirements)n Group purchasing power n Less freedomn Some opportunities require no prior experience in n Potential problems if owner wants franchisor to that business field buy franchise backn Buying power and programs n Limited control over pricing, product lines, andn Development of advertising and promotions suppliers programs (both local and national) n Human resources policies may be instituted byn Site analysis corporation (potentially unsatisfactory training programs) n Actions by the corporation may affect business of franchisee (especially new store locations close to yours) Locate a list of lawyers specializing in franchisenegotiations while in the research stage. Once afranchise opportunity has been selected, retain alawyer for every step of the negotiations. The nego-tiations serve as the foundation of the franchise.Working with the lawyer, set policies and agreementsthat will enable the franchise to thrive now and in thefuture. All obligations, rights, privileges, risks, oppor-tunities, assets, and liabilities must be detailed andagreed upon by all parties before the contract is The US Department of Commerce offers a publication,signed. Franchise Opportunity Handbook, which is up-dated every two years. For a low cost it can be ordered from Superintendent of Documents, US Government Printing Office, North Capitol and H Streets NW, Washington, DC 20402. There are also a number of books on franchising available at public libraries and bookstores. 13
  • 19. Issues and DecisionsSTARTING A NEW BUSINESSSTARTING Most banks today will require you to personally guarantee the corporate loans for start-up businesses. Starting your own business can be a very excit- Consequently, all your assets will be at risk.ing endeavor. It allows you great freedom and oppor-tunity to explore and develop your own business You might ask, “How do I know what kind ofidea. It is an opportunity for you to exercise your business to start?” or “How are businesses formed?”creativity and thinking ability to do the following: Business ideas emerge in may ways. Examples are:n Research your business idea n Finding and meeting an unfulfilled market needn Develop a strategy n Building a business on an existing customern Determine your marketing approach relationshipn Address key operational issues n Spinning off a business based on your experiencen Make your own decisions and knowledgen Develop your business idea from the ground up n Capitalizing on a new invention or technology Successfully starting your own business canprovide a sense of accomplishment and satisfaction n Growing a part-time business or hobby into a fullin knowing you did it yourself. However, if the time opportunitybusiness fails, you must assume all the liabilities and You must decide what kind of business youemotional strain that goes with it. There are many want to start. It is also important to examine yourselfmisconceptions surrounding owning one’s own and decide what you want from the business.business. Consider the following common miscon- Keep in mind that starting a business requiresceptions: careful thought and planning. Many aspects of then I will be my own boss. Being your own boss does business must be considered including legal issues,not mean you can play golf or go fishing anytime you financing, marketing concerns, employee relations,want. Reality is, the business and your customers accounting procedures, equipment purchases, andbecome your boss and can demand 50-65 hours per location.week. Research, preparation, organization, and plan-n I can get rich overnight. Small business and free ning are critical in a start-up venture to minimize riskenterprise provides a great opportunity to build and enhance your chance for success. Contact yourwealth; however, it will take time. Studies indicate small business assistance providers to assist youthat more than a third of small businesses that grow during this critical time (see Resource List).significantly, do so after ten or more years of exist-ence. SELECTING AND USINGn I can expect immediate income from my business.This is not likely. Generally, it takes 6-12 months PROFESSIONALSbefore a new business can start to pay the owner a Starting your own business involves manydecent salary. You should have a cash reserve or decisions which often times seem overwhelming. Itsavings to provide financial support for you and your has been shown that there is a strong correlationfamily during the start-up phase. between using outside professionals and businessn I can start my business with little or no money. success. In today’s business world, where many newPoor capitalization is one of the major causes of businesses fail within the first five years, it onlybusiness failure. Lack of capital results in negative makes sense to increase your chances for success bycash flow which can result in poor business decisions seeking the broad experience and expertise thatand serious credit problems. professional resources and advisors can provide. Outside advisors assist you in making decisionsn I will incorporate and use other people’s money. based on facts, not wishful thinking. They can alsoMany books and articles have been written about provide a reality check and give you insight in start-OPM (other people’s money). It is difficult to borrow ing and guiding your business.your way to wealth as a new business. The corporateshield probably will not protect you in case of failure.14
  • 20. Issues and Decisions There are two important categories of advisors:informal and professional. SELECTING A BUSINESS LOCATION LOCATIONInformal advisors include: Location is more important to some businessesn Other business owners than to others. The importance of the location isn Friends and family determined by certain characteristics of the business.n Members of other entrepreneurial groups or Factors that must be considered are: projects o Do customers travel to the business or do em-n Members of your board of directors ployees travel to the customer?Professional advisors include: o Is convenience a key factor in relationship to what your business offers the customer?n Lawyersn Accountants o Is your business offering a special product withn Bankers little accessible competition?n Insurance agents o Will your product or service require a specificn Marketing professionals location?n Consultants o Will proximity to vendors and customers play ann Small business assistance providers important role in your location? Most professional advisors will expect to be o Are transportation, labor, utilities, state and localcompensated for their assistance while informal taxes, zoning, and other regulations criticaladvisors typically only need to be asked to help. factors to consider in your site selection? When selecting a professional advisor, look for a o Do traffic flow, parking and other business estab-skilled advisor who meets your needs. Attributes you lishments impact your site selection?should look for include: o How much space is required?o Strong professional skills and knowledgeo Integrity o Do you need expansion capability?o Small business orientation o Should you lease or buy a facility?o Engaging and creative o What are the terms of your lease, if leasing?o Positive attitudeo Willing to listen o How is your rent determined?o Team member and advisor NOTE: Rent = cost of space + advertising Selecting the right professional advisor will not o What are the insurance requirements?only provide advice and consistency to help your o Do you understand home-based business ex-business succeed, but s/he can also be instrumental penses and requirements?in identifying other professional team members. These questions represent some of the issues To go about finding the right professional that need to be answered before making a businessadvisor, you should: site selection. Additional questions and informationo Ask small business assistance providers may be required depending on whether your busi-o Ask other business owners ness is a service business, retail store, or manufactur-o Call the professional and schedule an appoint- ing facility. ment. Interview them as you would an employee. Local resources are available to assist you with Be sure to request references. your site selection. Resources include your Chambero Look for a comfort level and confidence; confi- of Commerce, NC Department of Commerce, Eco- dence in their integrity, discretion, and concern nomic Development Board, commercial real estate for your business. brokers, and your SBTDC counselor. If you already have a good relationship with abanker or other professional, s/he is a good source ofreferral. 15
  • 21. Issues and Decisions YOUR MINIMIZING YOUR RISKS TO DO Risks abound in the business world. As anentrepreneur, you will want to protect your interest List below the things you must now consider inand minimize your risk from the beginning. order to buy and existing business, start a business, or purchase a franchise. The time to address these important issues isduring the planning stage. Advice of professionals inaccounting, insurance, banking, and law will helpyou make decisions to best minimize your risks andto identify your best protection options.INSURANCE PROTECTION Insurance protection is an important consider-ation in minimizing risk. Oftentimes business ownerslack expertise when it comes to insurance needs.Basic steps in developing an insurance program are:o Review your current coverageo Identify your insurance needso Develop a plan (including the cost)o Seek professional advice Most businesses will require the following typesof insurance:n Fire insurancen Liability insurancen Automobile insurancen Worker’s compensation insurance Depending on the type of business you arestarting, other coverage you may need includes:n Business interruption insurancen Crime insurancen Group life insurancen Key man insurancen Disability insurancen Bonding Most banks require insurance as a condition oftheir loan.16
  • 22. Chapter 4 Legal Considerations and RequirementsA s an entrepreneur, it is your responsibility to ensure that C HECKLIST FOR STARTING A BUSINESS your business is properlycomplying with state and federal Assess yourself as a potential business ownerregulatory requirements, registra- Determine concept feasibilitytion, permits, licenses, and employerresponsibilities. Stiff penalties may Examine critical issues & make important decisionsbe assessed against you and/or Investigate legal considerations & requirementsyour company if you are found inviolation of certain government Develop your business planrequirements. This section will Arrange your financingaddress three primary legal consid-erations: Regulatory requirements PERMITS PERMITS Legal structure of your business Employee responsibility Most new small businesses are For information regarding state unlikely to require any federal permit or licenses, contact: license to operate unless they are Business License Information engaged in: REGULATORY REGULATORY NC Secretary of State Rendering investment advice 919/807-2166 (in Raleigh) or REQUIREMENTS Preparing meat products 800/228-8443 Selling alcohol, tobacco, and 110 South Blount StreetPERMITS, LICENSES, AND firearms Raleigh, NC 27601REGULAREGULATIONS Federal permits or licenses are http://www.secretary.state.nc.us/blio/ Most businesses are required to also necessary to start some default.aspobtain some kind of license or per- large-scale operations in The services provided by thismit—city, state, and/or federal. Certain regulated industries, such as: office include:types of businesses may be required to Radio or television stations Individualized assistance fromobtain special permits from local health Common carriers (telephone counselors in identifyingauthorities, building inspectors, and companies) appropriate licenses andpolice/fire departments. The business Produce drugs or biological permitsowner should take steps to ensure that products Customized informationthe business does not violate any zoning Consult an attorney regarding packages including applica-regulations or ordinances regarding regulatory requirements. tions and instructions onhazardous activities. Mistakes in obtain- Although a prospective busi- applying for licenses anding the proper permits and licenses can ness may not strictly fit in one permitsbe expensive, at best. of these categories, it is impor- Resource center for informa- tant that you make certain that tion on over 600 businessFEDERAL LICENSES AND no federal regulations apply licenses and permits before starting your business. To determine liability for license TA S TATE LICENSES AND fees/taxes, contact: 17
  • 23. L egal Issues NC Department of Revenue In some cities, zoning and other related requirements must License and Excise Tax Division be approved before you can obtain a license. If the business 501 North Wilmington Street is not located in a city, county privilege licenses may be PO Box 25000 applicable. The business should contact the County Licensing Raleigh, NC 27640 Office. 919/733-3673 Web site: w w.dor.state.nc.us/DOR/ w Zoning The inspections or Planning Department, city or county,SPECIAL LICENSES AND PERMITS determines if a business location is zoned correctly for the In certain instances, such as contractors’ licenses and proposed business type. Some areas are not zoned forbonding, day care certificates of competency, etc., you will commercial businesses, therefore, inquiries need to be madeneed to obtain specific industry licenses and permits. The before establishing a business. Some home-based businessesBusiness License Information office should be able to help are required to have a Home Occupation Use Permit.you in this area, or refer to the numbers listed below: Others qualify as a “limited use business” that does notBusiness License Information 919/807-2166 or require a permit. 800/228-8443Alcoholic Beverage License 919/733-3641 SignsAlcoholic Beverage Permit 919/779-0700 Sign sizes and locations are regulated within city orRest Home License 919/733-2855 county limits and are determined by the Inspection orArchitecture License 919/733-9544 Planning Department. Contact the city or county prior toAuctioneer License 919/733-2182 design and construction of a business sign to ensure it meetsBarber Examiners License 919/733-3650 the regulations.Cosmetic Arts License 919/790-8460Electrical Contractors License 919/733-9042 TAX INFORMATION INFORMATIONGeneral Contractors License 919/571-4183 The SBTDC does not provide tax counseling.Mortuary Science License 919/733-9380Plumbing & Heating Contractors 919/733-9350 Income taxesReal Estate 919/733-9580 Every business entity is responsible for federal and stateNursing Home or 919/733-2342 income taxes. If your business is a sole proprietorship, Home Health Facility partnership, S corporation, or limited liability corporationChild Day Care License 919/733-4801 (LLC), pre-tax income is taxed by reporting it on your This represents only a partial list. To verify the require- individual return.ments for your business, contact the Business License Infor- If your business is a regular corporation, it will bemation Office at 800/228-8443 or in Raleigh at 807-2166. subject to corporate income taxes. Different report forms LOCALCITY OR LOCAL LICENSES AND are required for different types of organizations.PERMITS All federal tax forms may be obtained from: Business owners need to explore local licenses and Internal Revenue Servicepermit requirements and, in some cases, special licenses 320 Federal Placewhich may be required (such as for alcohol, amusement, or Greensboro, NC 27401child care) 800/829-1040 (information/assistance/forms) Web site: w w.irs.ustreas.gov/ w These licenses include privilege licenses, occupationallicenses, and other miscellaneous licenses. Contact the Tax IRS NumbersCollector’s Office in the county in which the business will be Forms & Publications 800/829-3676located for more information. Questions 800/829-1040 Tele-Tax 800/829-4477Privilege License Call and ask for a “Getting Started” package for the All for-profit businesses located within city limits musthave a privilege license before beginning business operations.18
  • 24. Legal Issuesparticular type of business organization your are starting. You 919/733-7395will receive a form SS-4 which you should file to obtain a Web site: w w.esc.state.nc.us wfederal identification number. This ID number is needed Filingonly if you plan to hire employees. Employee portions of the federal/state income taxes State tax forms and requirements may be obtained by and the Social Security tax, must be remitted along with thecalling: employer portion to the federal and state taxing authorities, NC Department of Revenue919/733-3166 following the schedules provided by the agencies. You must (all tax departments and forms) also complete quarterly returns for submitting payroll information to the federal and state agencies. An explanation You can obtain your state identification number by of these reports should be included in information youcalling 919/733-4626. A state identification number is receive from the IRS, the NC Department of Revenue, andrequired only if employees are to be hired. Otherwise, send the Employment Security Commission.quarterly payment with tax form, NC-40. Note that filingestimated federal and state income taxes during the taxable Sales and use tax, retail/wholesale licensesyear may prevent penalties from being assessed. All retail operators must collect sales tax. To find outPayroll taxes what to remit and how to avoid tax on wholesale purchases, contact:Employee Taxes There are several types of payroll taxes. As an em- North Carolina Department of Revenueployer, you must withhold taxes on behalf of your employ- Sales Tax Divisionees. These taxes are collected by you and are employee 501 North Wilmington Streetcontributions. They include the following: PO Box 25000 Raleigh, NC 27640 Federal income tax 919/733-3661 State income tax Web site:www.dor.state.nc.us/DOR/ Social Security (FICA) tax (employee portion) Wholesalers: If your business is that of distribution Employees must complete forms W-4 and NC W-4 and you do not sell to the end-user or consumer, you shouldbefore you can determine the amount to withhold for obtain a wholesale license.federal and state income taxes from their salaries (Form8109). Social Security is determined by a legislated percentage Other state taxeswhich may be obtained through the Internal Revenue Servicepublications. NC Department of Revenue 501 North Wilmington StreetEmployer Taxes PO Box 25000 The second type of payroll taxes involve your expense Raleigh, NC 27640as an employer. These are taxes that you, the employer, pay 919/733-3661and include the following: Web site: w w.dor.state.nc.us/DOR/ w Social Security (FICA) tax (employer portion) Amusement Tax 919/733-3673 Federal Unemployment Tax (FUTA)—form 508 Excise Tax: State Unemployment Tax (SUTA)—Unemploy- Cigarettes 919/733-3673 ment Acct# (form NCU1-101/625) Soft Drinks 919/733-3673 The IRS “Getting Started” package will include infor- Franchise Tax 919/733-3166mation on submitting your portion of FICA and federal Corps. Initial Franchise Tax Returnunemployment tax. —Form CE-302 Each new business should contact the Employment Fuel Tax 919/733-3409Security Commission at the address for information on Installment Paper 919/733-7548unemployment taxes: Employment Security Commission 700 Wade Avenue Raleigh, NC 27605 19
  • 25. L egal Issues Dealer Tax Workersí CompensationIntangibles Tax 919/733-4147 Workers’ Compensation is a form of insurance forTaxpayer Assistance 919/733-4684 employees. Due to your potential legal liability for job-related Application for Sales and Use Tax Registration & accidents, Workers’ Comp is strongly recommended for allAnnual Whole License—Form NC E-504 businesses. If you are a sole proprietorship, partnership, Local Taxes: List Tangible Property Tax (as of 1 LLC, estate, or trust, you are required by law to carryJanuary 1996) Tax Listing Form coverage once you have three employees (in addition to the business operators/controlers). If you are incorporated, youINCORPORATING A BUSINESSINCORPORATING must carry coverage once you have three people (including corporate officers) in the corporation. There are exceptions Corporations Division to these rules: for instance, if you run an agricultural opera- North Carolina Secretary of State tion, you must carry Workers’ Comp coverage when you 300 North Salisbury Street employ ten or more regular, non-seasonal employees. For Raleigh, NC 27603 specific information, contact your insurance agent, attorney, 919/733-4201 or: Web site: w w.secstate.state.nc.us/secstate/ w c rp.htm o Workers’ Compensation 430 North Salisbury Street Call and request either “NC Business Corporation Raleigh, NC 27611Guidelines” (which will explain how to incorporate your 800/688-8349 or w w.comp.state.nc.us wbusiness in North Carolina) or “NC Non-Profit Corpora-tion Guidelines.” PROTECTING INTELLECTUAL PROPERTYASSUMED NAME ACT When you begin your business, your ideas and know- how may be some of your most valuable assets. Patents, If you decide that your company will be a sole propri- trademarks, copyrights, and trade secrets, together, are calledetorship or partnership, and you wish to use a name other intellectual property. The wise business owner will review histhan your own name, you must perform a name search at the own company’s activities in each of these areas, list possibleCounty Registrar of Deeds to see if the name of your assets that should be protected, and evaluate their commer-company is already being used. cial importance to the company. With small business assis- tance providers, the business owner can develop a realisticINSURANCE plan and budget for the company’s intellectual property There are four types of insurance that are generally issues.considered essential for small businesses: Hazard (includes fire, wind, water, theft) Resources Web site ww.uspto.gov w Fire insurance will compensate you for the loss of US Patent & Trademark Office 800/786-9199and damage to your business property by fire. Copyright Office 202/707-3000 Liability insurance will help protect you against suits Trademark Assistance Center (NC) 703/308-9000for physical damages done to someone on your property NC Dept. of Commerce 919/733-4151and for liabilities arising for the use of the products or (business names)services your company sells. Other protections: directors, crime (robbery, burglary,employee vandalism, business interruption, key person). Auto insurance, either private or business, is requiredby law for any vehicle used for business purposes. Beforebuying any insurance, consider the risks that should becovered, compare costs from the different companies, andget professional advice from an insurance agent.20
  • 26. Legal Issues In a general partnership, each partner is held person- SELECT THE TYPE OF ally liable for all debts, taxes, and other claims against the BUSINESS STRUCTURE partnership. There are several forms of business structures for you to consider. A limited partnership has both general partners andSelecting the business entity which is right for you will involve tax, limited partners. It restricts the amount of personal liability tobusinessandestateplanning,andfinancialconsiderations. In this section, a limited partner. It allows investors to contribute but willwe discuss the various structures and identify the advantages and expose them to a limited amount of liability AND manage-disadvantages of each. The legal structure you choose will determine the ment control. A limited partner is only personally liable up toorganization,debt liability, and tax requirementsaswell as other the amount of investment made.aspects of business questions. ADVANTAGES OF PARTNERSHIPS: ADVANTAGES PAR ARTNERSHIPS:SOLE PROPRIETORSHIP Simplest form of business for two or more owners Sole proprietorship means that one person indepen- Business can be established with minimal formaldently owns and operates an unincorporated business for documentation (However, it is recommended thatprofit. The business is considered an extension of the owner partnerships have a formal written agreementrather than as a separate legal entity. For tax purposes, the with provisions for death, disability, liability,profits/losses of the business are combined with other compensation, benefits, and dissolution)owner income sources. Profits and losses belong to the partners Partners have freedom to operate the business onADVANTAGES OF SOLE PROPRIETORSHIPS:ADVANTAGES behalf of the partnership (i.e., they can hire/fire Simplest form of ownership to establish and employees, borrow money, or enter into contracts)operate No income tax on partnership entity (it’s passed One owner on to individual partners) Owner has complete control over management Buy/sell agreements decisions and policies Availability of resources/skills from all partners Use of all profits at the discretion of the owner Limited liability partners enjoy lower risks Limited paperwork to state and federal agencies DIS ADVANTAGES OF PARTNERSHIPS: DISAD ANTAGES ADV PAR ARTNERSHIPS: All losses are incurred by the owner (owner’s General partners liable for all debts and actions ofincome directly linked to success/failure of the partnership (joint and several liability)business) Limitations apply to raising investor capital (e.g.,DISADVANTAGES OF SOLE PROPRIETORSHIPS:DISAD ANTAGES ADV all investors would be partners) All management decisions—staffing, policies, Responsibilities and actions of partners, if notproblems—must be handled by owner specifically written out, can overlap or contradict Owner personally liable for all debts, taxes, and one another claims incurred by the business Partnership income added to other sources of May be difficult to raise capital (i.e., will depend income and taxed at owner’s personal tax rateon owner’s credit history) Complications with taxes arise if fiscal year varies Continuity of business disrupted by owner death from calendar yearor disability Partnership entity lacks perpetual existence in the Combined with other income sources, profits event of death, disability, or withdrawal of ataxed at owner’s individual tax rate partner (provisions must be made in advance)PARTNERSHIP CORPORATIONS CORPORATIONS A partnership is a legally recognized entity between two There are three types of corporations: subchapters S, Cor more people who agree to contribute money, labor, corporations, and limited liability companies. The majorproperty, or skills and share in the business profits, losses, differences are centered around taxation, initial profitability,and management decisions. There are two types of partner- shareholder compensation, and deductibility of fringe benefitships—general and limited. payments. After completion of the incorporation process, a corporation is automatically classified as a C corporation by the IRS. Board of Director approval is required, and a form 21
  • 27. L egal Issuesmust be submitted to the IRS to change the status to sub- Subchapter S corporation requirementschapter S corporation. This action must occur within the first It must be a domestic corporation75 days of incorporating the business. Use IRS form #2553. It must not have more than 75 shareholders (if A corporation is a legal entity that exists under the stock is purchased jointly, a husband and wife areauthority of state law and separate from the people who considered one shareholder)own, manage, and control its operations. Corporations Citizens or resident aliens must own all stockacquire assets, incur debt, pay taxes, enter into contracts, sue/ It must have individuals, estates, and certain trusts asare sued, have perpetual existence, and issue shares of stock shareholdersas evidence of ownership. It must have only one class of stock To incorporate, articles of incorporation are filed with It must have an election with all shareholders presentthe Secretary of State’s office. These articles define thestructure of the business (including its business purpose, ADVANTAGES OF SUBCHAPTER S ADVANTAGESamount of capital stock authorized, number of shares, and CORPORA CORPORATIONS:organization of a board of directors). The responsibility of Limited liabilitythe board of directors is to create by-laws and oversee Avoids double taxationmajor corporate policies and practices. Retains advantages of a corporation with respect to business obligationsADVANTAGES OF CORPORATIONS:ADVANTAGES CORPORA Maintain status of corporation with assets and Can provide a single business owner with limited unlimited life separate from its ownersliability Owners can participate in management Separate legal entity (with rights and responsibili- No restrictions on the right to transfer ownershipties of a legal “person”) DIS ADVANTAGES OF SUBCHAPTER S DISAD ANTAGES ADV Limited liability for owners/shareholders Transferability of ownership (i.e., shareholders CORPORA CORPORATIONS: 75 or fewer stockholders; only one class of stock may trade or sell stock) Stockholders limited to individuals, estates, or trustees Continuity of existence beyond original founders Must be a domestic organization and not a member ofor shareholders an affiliated group Absence of “mutual agency” (i.e., stockholders, Stockholders limited to citizens or resident aliens of the acting as owners, may not enter the corporation United States into contracts or agreements) Ability to raise large amounts of capital by issu- LIMITED LIABILITY COMPANY (LLC) ing stock A limited liability company has a combination ofDISADVANTAGES OF CORPORATIONS:DISAD ANTAGES ADV CORPORA partnership and S corporation characteristics. An LLC has the corporate characteristic of limited liability and the tax Cost related to setting up the corporation and advantages and flexibility of partnerships. Under the law an,filing the required forms with the Secretary of L LC is considered a separate legal entity and is formed byState’s office. filing Articles of Organization with the North Carolina Formalities required by law (e.g., maintaining Secretary of State. Two or more owners, or “members,”corporate minutes, having a board of directors, must submit the appropriate paper work.recording shareholder rights, maintaining corporate records and filings) LLCs merit a word of caution to potential business Considerable organizational costs owners. There is a lack of public, judicial, and administrative May take considerable time to set-up and orga- authority and familiarity regarding the classification andnize a corporation operation of an LLC. An accountant and a lawyer versed in Greater amount of regulation and supervision by the legalities and organizational structure are recommended.governmental agencies Corporations are subject to real estate, personal ADVANTAGES: LLC ADVANTAGES:property, and franchise taxes LLC is considered a separate legal entity C corporations are subject to double taxation Unlimited number of shareholders unlike the S-(corporation and shareholder earnings taxed) corporation limit of 7522
  • 28. Legal Issues INSURANCE BENEFITS PLAN Tax benefits of a partnership (e.g., members are taxedfor profits at individual tax rates) Most employees today expect some kind of benefit Members have management control of business without package. There are always costs associated with these plans.risking liability We recommend you seek professional advice to help you Members can be individuals, partnerships, trusts, corpo- evaluate the options available to you.rations, or other LLCs Membership can be transferred (this is regulated by the REGULATIONS REGULAArticles of Organization) Limited space in this booklet prevents us from identify- Various capital-raising options ing and describing all the workplace and environmental Free of regulations imposed on S corporations regulations that could potentially affect your business. A few common agencies you may encounter are: DISAD ANTAGES: ADVLLC DISADVANTAGES: Significant cost involved OSHA: The Occupation Safety and Health Act. This agency Requires time to file appropriate paperwork sets guidelines for worker safety. Failure to comply with Legal and accounting assistance recommended OSHA regulations can result in severe financial penalties. Requires at least two members Compliance with these regulations are not optional. Lack of familiarity by public, professional advisors, AMERICANS WITH DISABILITIES ACT: As anjudicial, and administrative authorities employer, you cannot discriminate against the disabled. This LLC has a finite existence (30 or fewer years) applies to your work force as well as your facilities if you are Congressional investigation could potentially change open to the public. You are encouraged to get copies of theLLC tax status regulations and determine which sections apply to your Lack of legal precedent (i.e., no past history indicating business.how a court is likely to interpret the law) HARASSMENT: The government and the courts are For more information about incorporating, a booklet taking a strong position in trying to discourage harassment inis available by contacting: Office of the Secretary of State, the workplace. Harassment, including sexual harassment, canCorporate Division, 302 Legislative Office Building, 300 take many forms. An employee policy which specificallySalisbury Street, Raleigh, NC 27603-590 or 919/733-4201. addresses these issues and provides for enforcement can help you avoid problems in this area. EMPLO YEE EMPLO CONSUMER PROTECTION: Federal and state gov- ernments have passed laws to protect the consumer. These RESPONSIBILITIES regulations affect everything from consumer credit to No matter what form of business you decide to enter, warranties. The NC Attorney General’s Office can provideif you plan to have employees you will face certain employee information and assistance regarding these regulations.responsibilities; including payroll taxes, unemployment taxes, ENVIRONMENTAL LAWS: In the past 30 years,employee insurance and benefits, and providing a safe work several environmental acts have been passed which impactplace. virtually every business and real estate transaction. The NC Department of Environmental and Natural Resources has AYROLL TAXES EMPLOP AYROLL TAXES AND EMPLO YMENT established an ombudsman office to assist small businessTAXES with environmental issues. Their telephone number is pro- The Internal Revenue Service provides excellent vided in the “Resource and Contact List” on page 39.publications by request or from their Web site (see “Resourceand Contact List). These publications specifically addresscritical tax and payroll issues that new business owners mustunderstand and comply with. 23
  • 29. L egal IssuesTO DO24
  • 30. Legal Issues SOLE PROPRIETORSHIP PAR TNERSHIP CORPORATION (S OR C) LIMITED LIABILITY CORPPR E F E R R E D B U S I N E S S Sole-owner business Business with one or Sole or multiple-owner Sole or multiple-ownerSTRUCTURE where taxes or more people where business where business where product liability are taxes or product liability owner(s) need(s) owner(s) need(s) not a concern are not a concern company-funded limited liability fringe benefits and but want to be taxed liability protection as a partnershipNUMBER OF OWNERS One Two to be classified as 1-75 for S Two (initially, and to be a partnership 1 for C classified as a partnership)TYPE OF OWNERS Individual Any Limited to US residents Any and citizens and to certain trusts/estates (S); any (for C)ATTRIBUTES OF ENTITY Inseparable from owner Inseparable from owner Separate legal entity Separate legal entity but can have debt or property in its nameMAJOR ADVANTAGES Inexpensive to form Inexpensive to form Limited liability Limited liability as a Few administrative Few administrative Capital is easy to raise corporation duties through sale of stock Capital is easy to raise Company-paid fringe through sale of benefits (C only) interests Tax savings through Pass-through taxation income splitting (C like a partnership only) Unlimited number of ownersMAJOR No tax benefits No tax benefits Can be costly to form Can be costly to formDISADVANTAGE: Unlimited liability Unlimited liability, also More administrative More administrative Business dissolves upon liable for partners acts duties duties death of owner Legally dissolves upon S corp limited to 75 change or death of shareholders partnerLIABILITY AND Owner is responsible Partners are responsible C corp pays taxes and Usually taxed as aREPOR TING File Schedule C with File form 1065 files form 1120 partnership, but can form 1040 S corp passes taxes be taxed as a corp. through to owners and in some states (usually files 1120S form 1065)DEDUCTIBILITY OF Losses may be used by Partnership losses Do not pass through to Same as partnershipLOSSES owner subject to passed through to shareholders (C corp) passive loss rules partners Passed through to (subject to at-risk rules shareholders (subject and passive loss rules) to at-risk rules) for S corpCHOICE OF FISCAL Calendar year Must be same as No restrictions (C corp) Same as partnershipsYEAR principal partners Must use calendar year unless IRS consents or show as a business purpose (S corp)COST OF FORMATION Nominal None for general $125 filing fee $125 filing fee partnership $10 annual fee for each $200 annual fee $50 filing fee for limited partnership SOLE PROPRIETORSHIP PAR TNERSHIP CORPORATION (S OR C) LIMITED LIABILITY CORP 25
  • 31. Notes26
  • 32. Chapter 5 Develop Your Business PlanA n effective business plan serves at least four useful CHECKLIST FOR STARTING A BUSINESS purposes:1) It helps you focus your ideas; o Assess yourself as a potential business owner2) It creates a track for you to follow o Determine concept feasibilityin the early stages of business growth;3) It creates benchmarks against o Examine critical issues & make important decisionswhich you can measure progress; and o Investigate legal considerations & requirements4) It provides a document for attract-ing equity or debt financing. o Develop your business plan The business plan brings to- o Arrange your financinggether the goals, plans, strategies,and resources of a business. Bydeveloping a comprehensive planprior to commencement of operations, A. Name of company B. Answer as many of the followit can minimize risk and may save you B. Company address ing questions as are appropriate:from significant financial and profes- C. Company phone numbers 1. What business are you in?sional losses resulting from an D. Logo (if you have one) (a) merchandisingunprofitable business. E. Names, titles, and addresses of (b) manufacturing There are many different sugges- owners (c) wholesaletions for organizing and presenting a F. Month and year in which the (d) servicebusiness plan. Organize and prepare plan was completed 2. What is the nature of youryour plan so that it meets your style G. Indicate that the plan is “Confi- product(s) or service(s)and needs as well as the needs of dential” 3. What will be special aboutthose who will read it. your business? Following are the elements that II. TABLE OF CONTENTS C. What market do you intend toare important in a comprehensive and serve?detailed plan. Let this serve as a step- SUMMARY III. EXECUTIVE SUMMARY 1. What is the total marketby-step guide to help you gather and A brief, one-page summary repre- 2. What is your expectedevaluate your thoughts and develop senting the various sections of share?your plan. your business plan. Address the D. How can you serve the market following questions and add PLAN BUSINESS PL AN additional information that will better than your competition? E. Present status of the business: OUTLINE help you achieve your goals. start-up, expansion of growing (NOTE: The executive summary is concern, or take over of an existing COVER PAGEI. COVER PAGE written last, but is the most impor- business?Name, address, and phone num- tant part of your plan.) F. If you will be doing any contractber of business IV. BACKGROUND IV. BACKGROUND work, what are the terms? Refer-Give your plan a professional ence any firm contracts and INFORMATION INFORMATIONappearance by typing it on high- include them as supportingquality paper and placing it in a A. Business concept documents.vinyl or cardstock binder. 1. mission statement 2. goals and objectives of G. Do you have letters of intent business from prospective suppliers? 3. description of business 27
  • 33. Business PlanAdd for Existing Business: : D. Market strategies 1. market positioningH. What is the history of the business? 2. marketing tacticsI. Why does the owner wish to sell at this time? 3. packagingJ. If the business is declining, why? How can you 4. pricingturn it around? 5. promotionK. How will your management make the business 6. distribution 7. advertisingmore profitable? 8. public relationsL. What changes do you plan to make in the busi- 9. customer serviceness?M. What is the purchase price formula? Give break- VII. MANAGEMENT STRUCTURE ANDdown for building, improvements, equipment, ORGANIZATIONinventory, and good will. A. Legal form of ownershipNOTE: If your business will be a seasonal business, B. Management and personnelmake sure the seasonality is reflected in your narra- 1. How does your background and businesstive and financial projections with appropriate foot- experience help you in this business?notes. 2. Describe your management team 3. Identify their strengths and weaknesses?V. DESCRIPTION OF PRODUCTS OR 4. What will be their duties and responsibilities?SERVICES 5. Do you have job descriptions that clearly defineA. Features of proposed products/services their duties?B. Describe benefits to your customer 6. Are there additional resources available to yourC. Intellectual property and proprietary rights issues business?D. Productions plan 7. Will you have to train people and at what cost?E. Future products/services C. Describe your organizational structure, and in- clude a brief description of who does what (include PLANVI. THE MARKET PLAN an organizational chart, if necessary)A. Description of industry D. Are there additional resources or advisors? 1. background of industry 2. current and future trends OPERATIONS VIII. BUSINESS OPERATIONS 3. business fit in industry A. Business locationB. Your market 1. What is your business address and why did 1. customer profile and target market you choose that location? 2. description of your trade area 2. Will the building be leased or owned? 3. size of your market 3. What are the terms and length of the lease 4. market potential contract? 5. trends 4. What renovations will be needed and at whatC. Competition cost? 1. direct competition 5. Describe the neighborhood (e.g., stable, chang- 2. indirect competition ing, improving, deteriorating) 3. evaluation of competition 6. What other kinds of businesses are in the area? 4. your competitive advantage (a) Briefly describe your competition and tell how their operations are similar AND dissimilar to yours. (b) What is your unique selling proposition, and how will you use it to control your market share?28
  • 34. Business PlanB. Licenses and permits TIPS FOR WRITING A GOOD BUSINESS 1. Is your business name registered with the PL AN Secretary of State and/or local county Regis- trar of Deeds? o Keep it simple and focused 2. How will you be affected by local zoning o Make it easy to read regulations? o Use understandable language, a layout that is 3. What other licenses or permits will you be pleasing to the eye, and charts or graphs to required to obtain? explain difficult concepts. o Be objective PLANIX. FINANCIAL PL AN o Review the plan with the critical eye of an out-A. Start-up investment requirements sider who doesn’t know your business and isn’t 1. Start-up costs committed to the business. 2. Business needs/capital equipment list o Be honest 3. Source and application of funds statement o Acknowledge your weaknesses as well as your strengths.B. Cash flow projections 1. Estimate of sales and expenses o Review and revise the document regularly 2. Assumptions o Consider your business plan a “living” docu- 3. Projected income statement ment. Schedule periodic revisions to keep it (a) detail by month for the first year current. (b) detail by quarter for the second year o Get your staff to participate in the development of (c) notes of explanation and assumptions the plan 4. Projected balance sheet (with notes of explana- Not only will they have good ideas for improv- tion and assumptions) ing it, they will work harder to support something 5. Break-even analysis (at what level of operation that they helped to develop. do your expenses equal your sales?) 6. Summary of financial plans and needs MISTAKES TO AVOID WHEN CREATING A MISTAKES AV CREATING PLAN BUSINESS PL ANC. For an existing business (include one or more ofthe following) n Submitting a “rough draft” of the business plan 1. income statements —coffee stains and crossed out words indicate to 2. balance sheets the reader the owner is not serious about the 3. tax returns for past three years business—there are a number of businesses or printers that can help the small business owner CONCLUSIONX. CONCLUSION with professional quality presentations.A. Statement of feasibility n Out-dated historical financial information orB. Action plan industry comparisons will indicate a lack ofC. Supporting documents current research and investigation on the owner’s part n Unsubstantiated assumptions can undermine a business plan. The owner must anticipate doubts or questions about every point of the plan n Failure to consider potential problems will lead the reader to view the plan as unrealistic n A lack of understanding of financial information is a drawback. If an outside source is used to prepare financial statements, the owner must fully comprehend the information 29
  • 35. n Absence of any consideration of the impact of CONFIDENTIALITY outside influences on the business is a problem. The business plan contains sensitive information The owner needs to discuss the potential impact about every aspect of the business and the personal of competitive factors as well as economic factors financial status of all owners. Therefore, it should be at the time of the request. treated like a top secret document. All copies shouldn Difficulties will arise if there is no verification of be consecutively numbered and strictly accounted for 30% investment by the owner. The lender will in writing. All recipients of the plan must sign an typically expect the potential owner to have at agreement that s/he will not make copies of the plan least 30% equity in potential business. or disclose details to anyone other than financialn If the owner does not or cannot personally guar - advisors. The receipt also requires that if the person is antee a loan, questions will arise. not interested in investing in the company’s futuren Proposing unrealistic loan repayment terms. After growth, the business plan will be returned. Distribute the lender evaluates the viability of a business, he the business plan on a strict “need-to-know” basis for will discuss realistic loan terms. the protection of the business and all those involved.n Too much focus on collateral is a problem in the business plan. Even for a cash secured loan, the banker is looking toward projected profits for repayment of the loan. The emphasis should be on cash flow.ACTION ITEMSNow’s the time to complete your business plan... DO IT NOW!___________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________30
  • 36. Chapter 6 Arrange Your Business FinancingO ne key to the successful start- up and expansion of your CHECKLIST FOR STARTING A BUSINESS business is your ability toadequately capitalize your company. o Assess yourself as a potential business ownerRaising capital is an on-going activity o Determine concept feasibilitythroughout the life of a business.Many entrepreneurs quickly discover o Examine critical issues & make important decisionsfinding financing is not always easy o Investigate legal considerations & requirementsand often results in a frustratingexperience. With proper information, o Develop your business planpreparation, and planning—and o Arrange your financingrealistic expectations—you should besuccessful in accomplishing yourfinancing needs. used personal savings, loans from Sources for equity funding GETTING THE friends and relatives, or obtained consumer loans from banks or include private investors, venture capital firms, and friends and YOU FUNDING YOU mortgage companies to fund the relatives. start-up of their companies. Only NEED 19 percent relied on commercial Debt Funding is simply borrowing the money that you Where do you go to find bank loans and only 2 percent need to finance operations andfinancing for the operation and received money from venture growth. Like automobile loans orexpansion of your small business? capital firms. mortgages, you enter into a legal The answer depends on Once you establish a profit- obligation to repay the amount ofseveral things: able track record, you will find money borrowed. Debt funding,o How much money do you that it’s easier to get financing, or credit, is available from banks, need? and then you will have a greater non-bank institutions (such aso What personal financial variety of funding sources to asset-based lenders and broker- resources are you willing to choose from. ages), and friends and relatives. invest in the business?o How long have you been in EQUITY VS. DEBT EQUITY FUNDING business, and what is your track record? FUNDING Equity financing allows investors to buy shares of owner-o How much are you willing to There are two basic types of ship in your business. Equity give up, either in cost of credit funding for a small business— partners will require an exit or ownership of the company, equity and debt. You need to strategy. to get the money you need? decide which type best suits your needs.START CLOSE TO HOMESTART CLOSE Equity Funding requires that Most small business owners you sell a partial interest or own-suggest that you search “close to ership in your company. In returnhome” for funds during the early for their money, equity investorsstages of your company. The vast ask for a share of your profit.majority of Inc. 500 companies 31
  • 37. FinancingADVANTAGES OF EQUITY FUNDING:ADVANTAGES The most important factors a venture capitaln Provides capital on a permanent basis with no firm considers are: requirement of repayment of principle or interest n management teamn Increases the company’s net worth, hence im- n ability to recover investment with substantial proving the financial stability of the company and return in 5-7 years its ability for other debt financing Venture Capital is typically available to less thann Can result in outside expertise being available for one half of one percent of all new businesses. management or Board of Directors responsibilities Public Initial Public Offering (IPO)DISADVANTAGES OF EQUITY FUNDING:DISAD ANTAGES ADV Most small business start-up will not consider an Carries a higher cost of capital; therefore, more public offering due to the expense and registration expensive requirements. But it can be an option for the profit-n Dilutes ownership control of the business able, well-managed, growing small business. Youn Profits must be shared should seek professional advice if you are consider- ing offering your stock to the public.n Equity capital is permanent financing and is often difficult to obtainn Potential for conflict between company founder DEBT FUNDING and investors Most small businesses prefer debt funding forn Controlling interest often becomes a critical issue financing. The cost is usually far less, since the owner with the founder does not give up ownership or control in how then Can require more detailed and timely reports business is managed. In addition, the cost of credit is generally far less than the return that an equity The types of equity partners to be considered investor will require.are: On the other hand, debt funding will be difficultInformal investors to get if the owner, or another key officer, has had Include family, friends, colleagues, suppliers, or previous credit problems, or if the business is a high-private investors often called “angels.” Private risk venture. Debt funding usually requires that theinvestors are difficult to find and will require detailed small business owner provide collateral that can bebusiness plans. Investors may be identified by con- used as a guarantee for repayment of the loan. Intacting accountants, bankers, stockholders, venture addition, if the business fails, the borrower is stillcapitalists, or investment clubs. legally obligated to repay the loan.Private or limited stock offering Limited offering provides an opportunity for TYPES OF DEBT FUNDINGyour company to raise significant amounts of equity There are three categories of debt funding thatfrom outside investors without the high cost and you should be familiar with:regulatory burden of a public offering. A limitedstock offering is still subject to some state and federal n Personal loansregulations. You must make sure your offering n Operations-related financingcomplies with all provisions that exempt it from the n Business loanspublic offering registration process.Venture Capital Firms Firms LOANS PERSONAL LOANS Venture capital firms are the most risk-oriented Funds from these sources are often the easiestinvestors. Most venture capital firms have specific for a new small business owner to obtain.investment preferences in terms of: Personal Bank Loans Loansn business stylen minimum size investment A personal bank loan is one that you obtain fromn rapid growth/high return a bank and pay back in monthly installments. A personal bank loan can either be secured (collateral is required as a guarantee that you will repay the loan) or unsecured (no collateral is required).32
  • 38. FinancingLoans From Life Insurance From Leasing You may be able to borrow against the cash Leasing is a rental arrangement that gives yousurrender value of your life insurance policy. In many the use of an asset—such as a car or a piece of ma-cases, an insurance company will let customers chinery—that someone else owns. Although the totalborrow up to 95 percent of the paid-in value of a cost of leasing will be more than purchasing the itemwhole-life policy. outright, this is a way to reduce the amount of up- front money you’ll need to get your business off theCredit Cards ground. Although it is a more costly form of credit, yourcredit card can provide ready access to cash. You Accounts- Receivable Financing Accounts-R Financingshould only use this source if you have a credit limit If you have receivables—accounts that havehigh enough to cover your needs, and if you can pay been invoiced but not yet paid—you may be able tooff the card quickly. use these as collateral for a small business loan. Lenders that offer accounts-receivable financing will MortgagesSecond Mor tgages (Home Equity Credit) generally offer between 50 and 80 percent of the total If you have enough equity in your home, you invoice amounts outstanding, depending on the typemay qualify for a home equity loan or a line of credit. of receivables and the ease of collection.Including the first mortgage, you can generallyborrow up to 80 percent for the appraised value of F actoringyour home. This type of borrowing may offer tax Instead of borrowing against your receivables,advantages; however, if you fail to repay the loan, factoring allows you to sell them to a financingyou are in danger of losing your home. source, called a factor. You will be paid a percentage of the total value of these accounts, depending on theFriends and Relatives Relatives type of receivables and the ease of collection. Once Friends and relatives may offer financial sup- you’ve sold the receivables, the factor will collect theport. If you use this option, make sure to treat the accounts and absorb any losses.transaction in a professional manner. Pay a fair rate ofinterest, sign a legal promissory note, and repay the Asset- Based Financing Asset-Based Financingmoney as agreed. You may be able to borrow money on the assets your business owns, including the inventory andOPERATIONS-REL ATED FINANCINGOPERATIONS-REL TIONS-RELA other fixed assets such as plant and equipment. This category of financing is dependent upon Asset-based financing can be structured as a one-timethe day-to-day operations of your business. Some of extension of credit or as a revolving line of creditthese options are available to start-up businesses. requiring a periodic review of the assets pledged as collateral.Supplier Credit The suppliers with whom you do business canbe a source of funds if they extend favorable creditterms to you, such as “net 30.” The availability of thisform of credit will vary, depending on the industriesyou and your vendor are in.Customer Credit By getting your customers to make a deposit orpay in advance for products or services, you cancreate a form of credit. You may want to offer adiscount as an incentive for your customers to pre-pay. 33
  • 39. Financing LOANSBUSINESS LOANS Government-assisted loans, like bank loans, This category of credit is the most traditional usually require that the small business owner haveand widely used among businesses. Listed below are their own money invested in the business in order tothe most common forms of business loans used by share the risk with the lender.small businesses: HOW TO CHOOSE ATerm Loans Loans BANKER These are simply installment loans that are paid Choosing a bank, or more precisely a banker, isback at regular intervals over a specified length of one of the most important decisions that a new ortime. These loans are granted for a specific purpose, young business can make. A good banking relation-such as for working capital or an upgrade in equip- ship can make the difference between life and deathment. The term of the loan will depend on the use of of a business during difficult times.the funds, but it can range from short term (less thanone year) to long term (more than five years). Because the choice of a banker is such an impor- tant decision, the new business should shop aroundDemand Notes before making a choice. The key watchword when choosing a bank should be service. Specifically, some A demand note is a single-payment loan that is important criteria in choosing a banker shouldintended for very specific short-term needs. Al- include:though the contract will usually call for payment infull within 90 to 180 days, the lender can call for (or 1) Size of the bank:demand) repayment of the note at any time. You may A bank that is too small may be appropriatebe asked to make periodic interest payments during while your company is small, however, they may notthe life of the note. be able to service your needs for larger loans as your company grows. A bank that is too large may beLines of Credit indifferent to your needs while your company is A line of credit, like a credit card, establishes a small.credit limit and specific terms for repaying moneythat is borrowed. Lines of credit are easy to access 2) Familiarity and desire to work with small Familiarityand offer flexibility in managing the cash flow needs businesses:of a small business. Many small business owners Some institutions maintain policies that areestablish a line of credit as a precaution, before they favorable to working with small business. They tendhave a real need for the money. Lines of credit are to be more familiar with special problems of theusually linked to short-term assets such as accounts young and growing companies.receivable, inventory, materials, etc. 3) How the bank will react to your problems:Government-Assisted LoansGovernment-Assisted Loans Will they foreclose the first time a payment is There are several loan programs in which the late, or will they be willing to give you some extragovernment either directly lends to small business time to meet your debt schedule?owners or provides a guarantee of repayment forother small business lenders. Government-assisted 4) Is the bank helpful:small business loans are offered by federal agencies Will they go out of their way for you, or are yousuch as the Small Business Administration (SBA), the just another account number?Economic Development Administration (EDA), andthe Rural Economic and Community Development 5) Has the bank some special experience in(previously known as the Farmers Home Administra- your industr y:tion or FHA), as well as by state and local agencies. A bank familiar with your industry is more likely to be tolerant of your problems and familiar with the workings of your company.34
  • 40. Financing chemistry:6) Is there good personal chemistr y: o Does it meet the classic criteria for good Do you feel comfortable with your banker? Do collateral?you feel they are responsive to your needs and really (a) ease of transfer of titlecare about your business operation? This is probably (b) low cost/no cost to maintain/serviceone of the most important considerations. (c) increasing in value On virtually every loan, a bank will make (d) a ready and liquid marketreservations or restrictions. Examples of loan restric- Repay 3) Capacity to Repaytions include the following: o How much profit will your companyn Restrictions on the level of borrowing generate?n Minimum working capital levels o Will your cash flow provide you with enoughn Pledging other assets as loan collateral money on a regular basis to cover the repay-n Keeping adequate insurance on people and ment of the loan? property o Are your projections for sales and profitsn Maintaining your equipment realistic when compared to other firms in then Submission of financial statements and tax re- same industry? turns to the lender 4) Conditions Failure to comply with any covenant or restric- o What are the economic, demographic, andtion can put a loan in default and give the lender the regulatory trends which impact your busi-right to call on you to pay the balance of the loan. ness?Loan restrictions are often as important as the interest o What terms can be negotiated to allow therate. Therefore, you should compare loan restrictions bank to evaluate the risk/reward consider-when you have the chance to choose between two ations?different banks. For example, a restriction on theamount that can be borrowed in the future could 5) Characterseverely limit the growth of a firm and cause a o What is your track record—personal andcrunch on cash flow. Before borrowing, the business professional—in managing finances andperson must decide which restrictions are acceptable. paying credit obligations? o Who are the key managers in your business; WHAT A LENDER LOOKS WHAT LOOKS do they have the experience and the ability to run this business successfully? FOR EVALUATE YOUR ALUA HOW WILL LENDERS EVALUATE YOUR A lender wants to be assured that your company PROPOSAL?can and will repay the loan as agreed, and that theloan will not saddle you with too much debt, which Lenders have rules and policies to follow in thecould cause financial problems for you. determining the risk and feasibility of your plan and evaluating your loan proposal. In addition to busi- To get this assurance, the lender will evaluate ness and financial projections a lender will look foryour business plan to learn about you, your associ- six important factors:ates, your objectives, and your plans for the company.The lender will be looking for the “Five Cs” of credit: 1) Equity The lender expects the borrower(s) to have1) Capital already invested from 10 to 30 percent of the loan o How much of your own money do you have amount. If your business has existed for less than invested in the business? three years, plan for 30 percent. o How much money do you have in reserve, in case of unexpected needs? Debt-to-wor -worth 2) Debt-to -worth ratio2) Collateral This is usually most critical on the first day after o What is the fair market value of the security loan approval and at the end of the first year of that you are offering to guarantee repayment operation. This ratio is calculated from the balance of the loan? sheet at dates which the lender will predetermine. 35
  • 41. Financing3) Collateral ACTION ITEMS Lenders require sufficient collateral to protect o Applicationthe loan. The items pledged to secure the loan are o Loan amountassets which reflect the following liquidity: o Statement of purpose for the loan proceeds Certificate of deposit 100% (itemize usage of funds) Real estate 75-80% o List start-up expenditures (e.g., capital purchases, Stock (publicly traded) 75% start-up expenses, licenses, deposits, fees) Vehicles 75-85% o Equity injection from owner: What amount, Equipment 50-75% source, and type? Accounts receivable 50-75% o Include three years past balance sheets and profit Inventory 0-50% and loss statements o Current balance sheet of business carry service4) Ability to carry debt ser vice o Tax returns for past three years The cash flow projections normally reflect this. o Cash flow, financial projections o Month-to-month cash flow projections for twelve5) A secondar y source of repayment secondary months with two years of quarterly projections Important especially in start up venture (e.g., o Justification of line item assumptions (i.e., What isspouse has a full time position) the basis for your sales figures?) o Proforma balance sheet and projected profit and6) Personal guarantees Personal loss statements for three years All parties to the loan request must be willing to o Break even analysispledge guarantees. Personal guarantees state that the o Résumés of key peopleborrowers truly believe in their venture. o Business plan o History and description of industry TIPS FOR GETTING AND o Your company: Why was it formed? o Competition; or what makes you unique? USING SMALL BUSINESS o Market study and market strategy CREDIT o List of current obligations (both business/per- sonal)n Be straightforward and honest in dealing with o Number of jobs created or retainedlenders. Stress your strengths, but admit your weak- o Collateral offered to secure loannesses. If you’ve had credit trouble in the past, be o Secondary source of repaymentopen about discussing what went wrong and how o Personal credit report (Your lender will haveyou corrected the problems. access to this information. If you wish, you mayn Be prepared with a business plan. A business request your credit report—see listings at end ofplan is your best representative for communicating this section).your plans and expertise to a loan officer. o Business references o Location of businessn Understand what you are getting into. Make surethat you clearly understand the repayment terms andthe cost of the credit you’ve chosen.n Be patient. Not everyone will get a loan the firsttime out. If you don’t, make sure you understandwhy you did not qualify and what you need to do inorder to be approved in the future.n Understand the risk associated with borrowing.You will be expected to provide security for your loanwhich means putting your personal assets at risk.36
  • 42. Financing PROVIDERSMAJOR PROVIDERS OF PERSONALCREDIT REPORTS TO BANKS As a rule, the request for a copy of your owncredit report must be in writing and include thefollowing data:n Full name, including middle initial, and Jr/Sr if applicable (and print neatly)n Spouse’s name, if marriedn Present address and addresses for past five years.n Social Security numbern Date of birthn Day and evening phone numbersn Verification of name/address (e.g., copy of driv- ers’ license, utility bill, etc.) 1. TRW Consumer Services (provides one FREE credit report per year) PO Box 8030 Layton, Utah 84041-8030 Phone: 800/682-7654 2. Equifax Information Disclosure Dept. (charges $8/report; free if credit denied within two months) PO Box 740241 Atlanta, GA 30374 Phone: 800/448-2321 3. Trans Union Customer Relations Dept. (charges $8/report; free if you were denied credit) PO Box 390 Springfield, PA 19064 Phone: 800/916-8800 CONCLUSIONS CONCLUSIONS This section has been designed to help youunderstand the critical issues concerning financingyour business. Begin to develop your financingproposal and determine the amount of financingyour business will require. It is also important to startdeveloping a good relationship with your banker aswell as networking with personal friends and profes-sionals that can be of assistance in accomplishingyour financing requirements. By seeking counseling advice in developing awell thought out business plan and a solid financingproposal, you should be successful in achieving yourfinancial needs. Be persistent in your efforts. 37
  • 43. WORKSHEET: USES AND SOURCES OF FUNDSWORKSHEET: LOAN EQUITY Leasehold improvements Equipment Inventory (operating) Inventory (office) Deposits (utilities and rent) Business organization costs Furniture and fixtures Signage Grand opening expenses Working capital TOTAL: $__________ $__________ Loan required: $__________ Owners contribution: $__________ TOTAL NEEDED: $__________38
  • 44. Chapter 7 Resource and Information List INFORMATION SOURCES INFORMATION TAS TATE RESOURCESNC Agricultural Finance Authority 919/733-0635 Potential financing for farmers ons interested in diversifying operationsNC Dept. of Commerce 919/733-4151 cy Economic development agency -Commerce Finance Center 919/733-5297 Administer commerce dept. financ- ing programsNC Dept. of Comm. Colleges & Small Bus.Cntrs. 919/733-7051 Information and managementNC Dept. of Environmental, Health, and Natural Resources (DEHNR) -NC Recycling Business Assistance Center 919/715-6522 Recycling information -Office of Small Business Ombudsman 800/829-4841 Air quality/regulator y informationNC Dept. of Labor 800/LABOR-NC OSHA, labor laws, trainingNC Employment Security Commission 919/733-3098 Employment informationNC Secretary of State 919/733-4143 Public information -Corporation 919/733-4201 Corporation information -Business License Office 919/807-2166 License and permit information -Trademark Registration 919/733-4129 State Trademark RegistrationNC Small Business and Technology Development Center (SBTDC) 919/715-7272 or in-depth, one-on-one business 800/258-0862 counselingNC State Data Center 919/733-4131 Census and other dataNCSU Industrial Extension Service/MEP 919/515-2358 Technical assistance, training for manufacturersNC Transportation Dept. of Highways 919/733-9770 Demographics, highway plans/ zonesState Library of North Carolina 919/733-3270 Data and researchFEDERAL RESOURCESFederal Drug Administration 301/443-3170 Information and registration for controled substancesFederal Information Center (NC) 800/347-1997 Information sourceGovernment Printing Office (Atlanta) 404/347-1900 Federal publications sourceIRS -Questions 800/829-1040 Answer desk -Employer ID Number 901/546-3980 ID numbers by phone -Forms & Publications 800/829-3676 Request forms and publicationsLibrary of Congress-Nat. Reference Service 202/707-5522 Topical informationSmall Business Administration (SBA) 704/344-6563 Federal agency for small businessSCORE 919/856-4739 Service Corps of Retired Executives 39
  • 45. ResourcesAnswer Desk 800/827-5722 Nationwide information serviceUS Patent & Trademark Office (PTO) 800/786-9199 Intellectual Property Information - Copyright Office, Library of Congress 202/707-3000 Information and forms - Trademark Assistance Center 703/308-9000 Information and formsOTHER RESOURCES (organizations providing services to small/new businesses—usually at no cost or minimal charg ) eNC Institute for Minority 919/831-2467 Economic DevelopmentNC Biotechnology Center 919/541-9366NC Lawyer Referral Service 919/828-1054 NC CPA Referral Service 919/469-1040Technological Development Authority 919/733-7022 INTERNET RESOURCE ADDRESSES http://) (all addresses begin with http://)Business Resource Center ww.morebusiness.com/ wCommerce Business Daily ww.gov. o w cmEmployment Securities Commission ww.esc.state.nc.us wIRS ww.irs.ustreas.gov wInternet Directory of phone/email for business and individuals ww.555-1212.com/ wInternet Use to Start Your Business asa.ugl.lib.umich.edu/chdocs/cyber pr eneur/Cyber.htmlMCNC - Electronic Info/Tech Resource ww.mcnc.org wNC Investor Network, Inc. ww.pagecr eator.com/~unis wNC Dept. of Commerce ww.commerce.state.nc.us/ wNC Dept. of Labor ww.dol.state.nc.us/DOL/doldosh.htm wNC Dept. of Revenue ww.dor.state.nc.us/DOR/ wNC Encyclopedia hal.dcr.state.nc.us./nc/cover.htmNC Institute of Goverment ww.ncinfo.iog.unc.edu wNC Minority Economic Development ww.ucansee.com/ncimed/ncimed.html wNC Recycling Business Asst. Center ww.owr.ehnr.state.nc.us/rbac1.htm wNC Secretary of State (Public Information) ww.secstate.state.nc.us/ wNSF (National Science Foundation) ww.nsf.gov wPopulation/Demographics Worldwide ww.pop.psu.edu/Demography/demography.html wRaleigh News & Observer ww.nando.net/nt/nao/search.html wRTP Directory of Firms w w.rtp.org wSBA (Small Business Administration) ww.sbaonline.sba.gov wSBA Regulatory Fairness ww.sba.gov/regfair wSBTDC ww.sbtdc.org wState Web Site ww.state.nc.us/ wTriangle Statistics ww.tjcog.dst.nc.us/TJCOG wUS Business Advisor ww.business.gov wUS Census Statistics/Federal Data ww.census.gov wUS Patent and Trademark Office ww.uspto.gov wWall Street sites offering small business info ww.geocities.com/WallStreet/2172/sites.htm wWomen’s Resource Directory www.ordweb.org/ wWorkers’ Compensation ww.comp.state.nc.us/ w40
  • 46. Resources TAXES LICENSES, PERMITS a n d TAXESLICENSES/PERMITSLOCALCity Privilege License local directory Processes applications for city business privilege license for all newPrivilege License Division contact local town (for businesses within city limits) or county office (for those in county jurisdiction)Business Name Registration local directory Application and information on sole proprietorship and partnershipCounty Register of Deeds Business name registrationABC PermitsCounty Revenue Collector local directory Beer and wine licenseCounty Health Department local directory Health inspectionsSTATESTANC Department of Secretary of State General information on incorporation, appliction, and corp. name availability -Corporations Division 919/733-4201 -Business License Information 919/733-0641 Information and assistance in locating and applying for business licensesNC Dept. of Revenue 919/733-3991 NC taxing and collection agencyNC privilege licenses 919/733-3661 -Sales & Use Tax Registration 919/733-3661 -NC Wholesale License Tax Division 919/733-3661 -License & Excise Tax Division 919/733-3673 -Corporate Income & Franchise Tax 919/733-3166NC State ABC Commission 919/799-0770 Information/application of ABC permitsTAXESFEDERALIRS Internal Revenue Office 800/829-3676 Distribution of federal tax forms; assigns employer tax numberSTATESTAEmployer Requirements and InformationNC Department of Revenue 919/733-4626 NC employer withholding revenue numberNC Employment Security Commission 919/733-7395 Unemployment insurance tax, registration and information 41
  • 47. Index D debt funding 32 demand notes 34A Eaccounts-receivable financing 33 electrical contractors license 18advisor 14 employer taxes 19 attributes 15 environmental laws 24 informal 15 equity funding 31 professional 15 excise tax 20alcoholic beverage license 18 Falcoholic beverage permit 18Americans with Disabilities Act 23 factoring 33amusement Tax 20 federal identification number 19amusement tax 20 Federal Unemployment Tax (FUTA) 19architecture license 18 financing 31asset-based financing 33 business loans 34assumed name act 20 government-assisted loans 34auctioneer license 18 how lenders evaluate proposals 35 lines of credit 34B term loans 34bankers 34 what a lender looks for 35barber examiners license 18 debt funding 32business loans 34 accounts-receivable financing 33business plan 27 asset-based financing 33 confidentiality 30 credit cards 33 executive summary 27 customer credit 33 mistakes to avoid 29 factoring 33 tips for writing 29 home equity credit 33business structure 21 leasing 33 corporations 22 personal loans 32 partnerships 21 supplier credit 33 general 21 equity funding 31, 35 limited 21 informal investors 32 sole proprietorship 21 initial public offering (IPO) 32buying a franchise 13 private or limited stock offering 32 Franchise Opportunity Handbook 13 venture capital 32 negotiations 13 form #2553 22buying an existing business 11 form SS-4 19 evaluating 11 forms 19. See also tax information: forms finding a business for sale 11 2553 22 508 19C 8109 19 CE-302 20C corporations 22, 25 corporate initial franchise tax return 20CE-302 20 federal identification number 19child day care license 18 NC E-504 20consumer protection 24 NC-40 19copyrights. See intellectual property NCU1-101/625 19corporate initial franchise tax return 20 NCW-4 19corporations 22 sales and use tax registration application 20cosmetic arts license 18 W-4 19credit cards 33customer credit 3342
  • 48. Indexfranchise tax 20 Nfuel tax 20FUTA. See tax information: payroll taxes: Federal Unem- NC E-504 20 ployment Tax (FUTA) NC W-4 19 NC-40 19G NCU1-101/625 19 nursing home licensure 18general contractors license 18government-assisted loans 34 OH Occupation Safety and Health Act 23 occupational licenses 18harassment 23home equity credit 33 Phome health facility 18home occupation use permit 18 partnerships 21 corporations 25I C corporations 22, 25 limited liability company (LLC) 23, 25income taxes 18 subchapter S 22, 25incorporating patents. See intellectual property assumed name act 20 permits 17informal investors 32 alcoholic beverage license 18initial public offering (IPO) 32 alcoholic beverage permit 18installment paper dealer tax 20 federal permits required for 17insurance 16 for architectural practices 18 benefits plan 23 for auctioneers 18 developing an insurance program 16 for barbers 18 loans from life insurance 33 for child day care 18 types of insurance 16 for cosmetic arts 18 against crime 16 for electrical contractors 18 automobile 16, 20 for general contractors 18 business interruption 16 for home health facilities 18 disability 16 for mortuary science 18 fire 16, 20 for nursing homes 18 group life 16 for plumbing/heating contractors 18 key man 16 for rest homes 18 liability 16, 20 home occupation use permit 18 Worker’s compensation 16, 20 occupational licenses 18intangibles tax 20 privilege licenses 18intellectual property 20 real estate 18L retail/wholesale licenses 19 personal loans 32leasing 33 plumbing/heating contractors 18licenses. See permits private or limited stock offering 32Limited liability company (LLC) 23, 25 privilege licenses 18location factors 15Mmarket research 8 primary 8 secondary 8mortgage, second. See financing: debt funding: home equity creditmortuary science license 18 43
  • 49. IndexR Vreal estate 18 venture capital 32regulations 18 for signs 18 W for zoning 18 W-4 19 workplace and environmental 23 wholesale license 19 Americans With Disabilities Act 23 Workmen’s Compensation 20 consumer protection 24 environmental laws 24 Z harassment 23 Occupation Safety and Health Act 23 zoning 18rest home license 18retail/wholesale licenses 19risk 16 insurance 16SS corporation 22, 25sales and use tax 19sales and use tax registration application 20Social Security (FICA) tax 19sole proprietorship 21starting a new business 14 misconceptions 14State Unemployment Tax (SUTA) 19subchapter S corporation 22supplier credit 33SUTA. See tax information: payroll taxes: State Unemploy- ment Tax (SUTA)Ttax information 18 excise tax 20 cigarettes 20 fuel tax 20 installment paper dealer tax 20 intangibles tax 20 soft drinks 20 franchise tax 20 other amusement tax 20 payroll taxes 19 employee responsibilities 23 employee taxes 19 employer taxes 19 Federal Unemployment Tax (FUTA) 19 filing 19 Social Security (FICA) tax 19. See tax information: payroll taxes: Social Security (FICA) tax State Unemployment Tax (SUTA) 19 sales and use tax 19term loans 34trademarks. See intellectual property44

×