Business startup

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Business startup

  1. 1. NC SMALL BUSINESS TECHNOLOG OGY AND TECHNOLOGY DEVELOPMENT DEVELOPMENT CENTER Star t-Up Resource Guide kStarting a business in North Carolina
  2. 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. 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. 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. 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. 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
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  8. 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. 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. 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
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  12. 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. 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. 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. 15. Notes10
  16. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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

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