Starting your own Business

Starting your own business is tremendously exciting and also can be a little frightening.


starting your own business guide
In hyping the small business start-up, the supposed industry gurus tend to minimize the risks involved in starting your own business. You may imagine yourself missing mortgage payments when you can’t cover your business costs and having to face angry employees when you can’t make payroll.

Having an action plan can eliminate the fear, allowing you to get a good start on a satisfying and rewarding journey.

There are always great small business ideas. Too many of them fall victim to poor planning, inadequate business financing and the general failure of their creators to understand the realities of starting a new business.

How To Start A Business: Reality First

In Small Business Consulting: Professional Help For Small Business, you read how important a business plan is to building the foundation of a sound business.

But even though a good business plan vastly improves the likelihood of long-term success, it is not the most important single requirement for starting your own business.

Customers are!

The first reality of starting a small business – perhaps, the only thing that truly matters – is you need customers. You can do everything else discussed below and then some, but your venture will fail with no customers.

This may seem so obvious that you wonder why you’re reading it.

The reason? Because many entrepreneurs become so immersed in the details of starting a new business, they forget about the customer – who he is, where he is, what needs of his your new business will fulfill, and how to connect with him. Most of your energy in the beginning stages of starting your own business should be keenly focused on the customer, defining and refining your target customer base.

In short, you must have a market, because without one, you’re finished before you even start.
Starting Your Own Business: Myth & Reality

Myth
: You will be your own boss
Reality: You are not your own boss, your customers are.

Myth
: You will be independent
Reality: Starting your own business won’t make you independent. After you make all the money you will ever need, you will be independent.

A Simplified Plan For The Small Business Start-up

Starting your own business does not mean you have to write an elaborate business plan. In fact, for the self-financed home-based business, your plan may be in your head and not on paper, and that might be enough for you. Not every plan is the same, not every business needs the same level of detail.

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You can start simple and then prepared a detailed, written plan later if you need small business loans, private loans, or want to seek venture funding.

But you definitely need a plan. Your plan will help you move forward and make decisions. And it will give you a head start toward understanding your business. You can continue to develop your business plan as your business evolves.

You may not be able to escape the preparation of a detailed written plan if you’re starting a business that requires a large initial payroll, store front or plant, intensive product development, sophisticated packaging, office equipment, a website, and so on. Unless you're wealthy enough to finance these costs yourself, then you should invest the time to learn how to write a business plan that impresses prospective lenders..

Ultimately, then, the form and content of your business plan will be dictated by your initial small business financing requirements. If no outside financing is needed, you are free to chose the form your plan will take and level of detail it will contain.

Start-up Costs

Starting your own business means spending money before you ever open your doors. Many entrepreneurs either underestimate or fail to adequately plan for start-up costs, and they launch their small business start-up on shaky footing. At best, their new business gets lucky; at worst, customers see through the flimsy veneer, and it falls flat.

How Much Money Will I Need?

When starting your own business, you have to project beyond the initial expenses and accept another harsh reality: It is quite likely your new company won't book a dime of profit for quite some time. New companies fail primarily because the owners lack sufficient business capital to both pay the initial costs and to finance the operating expenses until the business can support itself.

Of course, your planning must include all the expenses associated with setting up your business – physical plant, equipment, professional fees, licensure and registration, and the like. But unless you're one of the very few new companies fortunate enough to open its doors will a positive cash flow, it's the six to twelve months of operating expenses needed to firmly establish your firm that will consume the most cash. Here are couple of things to consider:

• Product businesses usually require more investment than service businesses.

• “Bootstrapping” (starting a new business without start-up capital) is much harder for product businesses than service businesses.

Licenses, Permits & Business Registration

Starting your own business it too important to make needless and potentially costly mistakes at the formative stage. If in doubt, see an attorney.

For example, the trade-offs involved in incorporation vs. partnership vs. limited liability company vs. sole proprietorship are significant an cannot be taken lightly. Avoid big problems later on with some simple, inexpensive, legal advice.

Licenses and Permits

Licenses and permits required for your small business start-up depend on what your company will do and where it is located. To find out what is needed in your area, check with your local government, Chamber of Commerce, and the Small Business Development Center.

If you are starting a home-based business, for example, you may have local zoning laws that require a special permit (also called an "exception" or "variance") to operate in a residentially-zoned neighborhood. Most zoning ordinancesrestrict commercial traffic and prohibit business signs on lawns and houses.

Even if you discover that your small business start-up doesn’t need a local business license, many service businesses and those operating in regulated industries require licensure by state government. The criteria for licensure will vary widely, from simply filling out a form and paying a fee, to obtaining many hours of formal education and passing a rigorous examination.

Sales Taxes

If you are starting a retail business in a state that has a sales tax, you may have to collect sales taxes on your sales (some states also have a services tax, as well). Before you open for business, you will have to register for a sales tax account with the state revenue collection agency. Once your business is open, you will have to collect the tax from your customers and periodically send a report of sales activity and the collected taxes to your state.

Federal Taxpayer ID and State Employer Numbers

You may need to apply for employer identification numbers from both the Internal Revenue Service and your state tax collection agency. If you incorporate your business, or you will withhold payroll taxes – such as income and unemployment taxes, Social Security and Medicare – from employees, you will need an IRS-assigned federal taxpayer ID number; otherwise, your social security number is your taxpayer ID. In most cases, states assign their own number.

Talking to an accountant when starting your own business is always a good idea. Look for a CPA in your area with a business practice. They are valuable not just for business tax help, but for general small business advice as well.

Business Entities

One of the key decisions you will make in starting your own business is how it will be structured. Legal entities vary by state, so if you are not sure of what you are doing in this regard, this is one aaspectof starting a small business where a good attorney definitely earns his fee.

The main types of entities are the:
  • Sole proprietorship
  • Partnership
  • Corporation (either the standard “C” or the small business “S”)
  • Limited Liability Company (LLC)

Sole Proprietorships

A sole proprietorship is the easiest way of starting your own business. By default, your firm is a sole proprietorship unless you create a separate legal entity for it. For tax purposes, your firm’s profits and losses pass through to your personal taxes, which you will report on a separate form (schedule “C”) of your personal tax return.

A main disadvantage of the sole proprietorship is that you are personally liable for its actions and debts. If your business is sued or it fails, your personal assets can be taken from you to satisfy its obligations.

Partnerships

If you a starting a new business with others, a formal partnership agreement may work for you. Be forewarned, though, that forming a partnership can be complicated and prone to mistakes that could cause problems and cost you a lot of money later.

Partnerships are governed by state law. Although a Uniform Partnership Act is used in most states, it does little other than to establish the "partnership agreement" as the legal foundation of a partnership. So, agreements can vary widely, both among partnerships in a given state and among the states themselves.

Partnerships can include “general” partners and “limited” partners, with different levels of risk for each type. Your partnership agreement should define in detail:
  • What happens if a partner withdraws from the partnership
  • The buy and sell arrangements for the partners
  • And a procedure for dissolving and liquidating the partnership
Partnerships are not taxed separately. As in the case of a sole proprietorship, the profits and losses from a partnership pass through to the individual partners themselves.

If you decide to form a partnership, save yourself headaches, heartaches and maybe a great deal of money by finding an attorney with experience in partnerships to draw up your agreement.

Corporations

A corporation is a separate legal entity, with its own identity and taxation. Its main advantage is that it shields the owners and other stockholders from personal liability for its actions and debts.

Corporations are either a:
  • Standard “C” corporation, or
  • Small business “S” corporation.
C corporations are the entity of choice for companies that depend on the public sale of stock for raising a significant share of their required business capital. An S corporation, on the other hand, is used for family-owned companies and smaller, private ownership groups.

The main distinction between the two is in how they are taxed. An S corporation's profits and losses pass straight through to its stockholding owners without being taxed separately. The C corporation must pay taxes on its profits before it can distribute them to its stockholders, who are then taxed on those distributions themselves (double taxation). But most states limit the number of stockholding owners an S corporation can have, and in an S-corporation, stock cannot be held by other corporations, only private individuals. So, when starting your own business, your future business capital needs will be the main consideration when deciding between the two.

You can always change your mind later, since the IRS allows a corporation to switch from C to S and back to a C again – but not often, and not without potential complications. Again, when in doubt, get professional advice before you act.

Most of the professional small business advice is in agreement: When starting your own business, give serious consideration to incorporating it for the best legal protection and the excellent tax benefits afforded by a corporation.

Limited Liability Company (LLC)

A newer form of legal entity, the LLC can offer new business owners similar benefits to an S corporation – some protection from personal liability and certain tax advantages – but many of the legal details vary from state to state. So an LLC may be more or less advisable than other entities depending on where you are and what your business will do. To understand how LLCs work in your state and for your business type, your best bet is to get some local small business advice.

Choosing Your Business Name

Chances are, if you’ve been thinking about starting your own business for any length of time, you have also been brainstorming potential names. You already know the choice of a business name is important and worth your time to develop. You want something that sounds nice, describes your business, isn’t too long, and is easy to remember.

There is a lot of confusion about naming businesses, and once again, the precise rules depend on where you are.

In large part, the confusion stems from the different type of laws protecting intellectual property. Trademark laws exist to protect product names, trade names, slogans, and logos, but no law federal law protects business names or guarantees exclusive use of a name to just one company, just as there is no legal protection or exclusive use of your own, personal name.

For the small business start-up, then, the two main issues with naming a company are the legal requirements and the commercial use of the name.

First, find the business naming authority in your area. It could be and agency in your state government, your local government, or both.

Find out whether the names you are considering have already been taken. Most agencies will either search potential names for you or offer a computerized search online.

If you are starting a small business using your own name – common among sole proprietorships – you might not haveto do anything at all, though you may have the option to register your name as a business. By registering, your name is officially established as a business entity and future businesses in your area will not try to use it.

If you want to use a different name, you will normally have to register a fictitious name (also known as a “DBA” for “doing business as”) with your local government. A fictitious name gives you the right to operate your business – create signs, open bank accounts, advertise, an so forth – with an identity other than your own, and, in most cases, to enjoy its exclusive use you within your locality (but, not always, as you will see below).

If you incorporate your small business start-up or form a limited liability company, you will register your business name with your state government. Even though no two corporations or LLCs can have the exact same name in any state, you still no guarantee of exclusivity. Non-corporate entities may use the same name as registered DBAs at the local level anywhere in your state without your knowledge or consent. And because each state maintains its own corporate registry, your company name can legally exist in many other states, and in many other localities within them.


Starting your own business is fun and exciting but also can be hard work. There is plenty of professional help available for small business, but there are so many free and low-cost resources available to guide people starting a small business, you may find that you don’t need outside help. In fact, with a little local-specific information, simple home-based businesses can be up and running in as little as few hours!

Bottom line? If you have any doubts about starting your own business by yourself or your new business is complex, don’t hesitate for a moment to pay for the small business advice you need. In the long run, it may well be the best money you will ever spend.

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