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Choosing the Legal Structure of Your Business
Questions You Must Ask Yourself Before Starting a Business
Avoiding Common Business Loan Mistakes
The Venture Capital Startup Dictionary
Choosing the Legal Structure of Your Business
For tax and legal reasons, you'll need to decide on the form (legal structure) your business will take. It will be an important element of your business plan. Here's where professional advisors play a key role. Consult with your attorney and accountant before you decide what form to use for your new business. They can advise you on tax advantages and which form offers you the best protection of personal assets.
Generally, the legal structures for businesses fall into one of five broad categories: sole proprietorship, partnership, corporation, S corporation, and limited liability corporation. Your choice of legal structure will affect your exposure to personal liability, how you draw profits and pay taxes, your ability to raise capital, and how you run the business.
Sole Proprietorship: Generally the quickest, easiest way to start a business. It is an unincorporated business owned by one individual. Profits and losses are included on your individual tax return, and if someone sues your business, your personal assets may be subject to those claims.
Partnership: An association of two or more people working as co-owners of a business with the intent of making a profit. This increases the complexity and amount of paperwork. In addition, general partners can share unlimited liability and each is usually responsible for the acts of the other.
Corporation: an entity that functions somewhat like an individual, legally and for tax purposes. Setting up a corporation involves numerous filings and meeting specific organizational regulations, such as appointing a board of directors. The corpporation, while minimizing personal liability for owners, may not protect you from a lawsuit. Also, with new and small corporations, many lenders require officers' personal guarantees.
S Corporation: provides the advantages of a corporation, but is treated as a flow-through entity for income tax purposes. The owners report income individually on their personal income tax returns and owners may deduct the corporation's losses against other sources of income.
Limited Liability Corporation: distributes income and tax responsibility among partners, but the partners are not personally liable for debts. This is a relatively new legal form of business, so be sure to consult a knowledgeable attorney for the most up to date information.
Key words: business structure, forming a corporation, form a corporation, form a sole proprietorship, sole proprietorship, startup, small business startup, business law, small business law
Questions You Must Ask Yourself Before Starting a Business
The first step in starting a new small business or home business is to determine what you like to do and what you’re good at. This is important because you’re going to spend a lot of time in your business.
You also need to decide what your personal life goals are. Otherwise, you might be working against what you really want out of life.
You might want to take some time to ask yourself these questions and seriously ponder your answers to them, because they will form the basis of your business plan.
Getting Started
List your reasons for wanting to go into business. Some of the most common reasons for starting a business are:
You want to be your own boss.
You want financial independence.
You want creative freedom.
You want to fully use your skills and knowledge.
Next you need to determine what business is right for you. Ask yourself:
What do I like to do with my time?
What technical skills have I learned or developed?
What do others say I am good at?
How much time do I have to run a successful business?
Do I have any hobbies or interests that are marketable?
Then you should identify the niche your business will fill. Conduct the necessary research to answer these questions:
Is my idea practical and will it fill a need?
What is my competition?
What is my business advantage over existing firms?
Can I deliver a better quality service?
Can I create a demand for your business?
The final step before developing your plan is the pre-business checklist. You should answer these questions:
What business am I interested in starting?
What services or products will I sell? Where will I be located?
What skills and experience do I bring to the business?
What will be my legal structure? (see overview below)
What will I name my business?
What equipment or supplies will I need?
What insurance coverage will be needed?
What financing will I need?
What are my resources?
How will I compensate myself?
Your answers will help you create focused, well-researched business plan that should serve as a blueprint. It should detail how the business will be operated, managed and capitalized.
Keywords: startup, start a new business, new business, new small business, entrepreneurship, entrepreneur, business opportunity, make money at home, home business
Avoiding Common Business Loan Mistakes
By Lee Kendrick
Surveys show that 94.7% of small business owners feel their only lending resources are local banks or personal credit cards. This common sense advice will help you avoid these common business loan mistakes, regardless of your personal credit history... and avoid pledging your personal property as collateral.
First of all, getting approved for a commercial loan is definitely easier than getting personal loans... regardless of your personal credit scores. Additionally, getting the right types of corporate credit is absolutely critical: if you want to protect your personal assets, minimize the risk of a personal lawsuit affecting your business, and to your ability to weather the economic changes that happen overnight.
All business owners must be much more proactive about developing relationships with the right types of lending institutions. You usually want to start your application process with out-of-state, national lenders... not your local or regional banking institutions. National lenders typically won't require a personal guarantee or your social security number.
Follow this simple roadmap to obtain a small business startup loan, a business debt consolidation loan, a bad credit business loan, or a government business loan... although I strongly recommend that you find a commercial loan expert who can help you through the process of building a strong corporate credit rating.
Finding a competent business loan expert will give you a head start on your competition & also let you focus on running your day-to-day activities... instead of dealing with the hassles of establishing a strong business credit rating. An excellent business credit score can help your company's image, overnight. And, finding a small business loan expert isn't that difficult. You just need to know where to look.
Now... let's get started... before you start applying for any business loans!
1. How is your business structured? Is it a sole proprietorship, C-corporation, S-Corporation, Limited-Liability Corporation (LLC), Partnership, or Trust?
2. How long has your business been recognized by your State & Local government?
3. Has your company ever had derogatory information reported against it to either of the two (2) most popular business credit reporting agencies, Dun & Bradstreet or Experian?
4. Are your commercial permits, licenses and registrations current?
5. Does your business have a physical address, or are you trying to use a U.S. Post Office Box instead?
6. Is your business telephone number recognized by directory assistance?
7. Are your incoming telephone calls professionally answered in your business name?
8. Have you established a business checking account?
9. Have you registered & asked for an Employer Identification Number (also known as an EIN) from the IRS?
If your answer to the first question was a sole proprietorship, partnership or trust; I urge you to re-establish your company as a corporation or LLC. I'm not going to provide you with legal advice, but many CPAs and attorneys highly recommend
LLCs (Limited Liability Corporations) as a way of protecting your personal assets & estate... in the event of any lawsuits being filed against your company.
As a sole proprietor, your personal assets are at direct risk of seizure or forfeiture when faced with most types of legal action. Additionally, if you are applying for business loans in a corporation's name... most lending institutions will not require you to provide any personal guarantee!
A corporation can still face difficulties applying for business credit, if it has been in business less than two (2) years or had previous credit problems reported against it. Here are some ways to fix these problems.
Purchasing a "shelf corporation" or "aged corporation" that's been in good standing with your State government (for longer than 2 years) can drastically improve your chances for small business loan approval.
- You can attempt to repair your business credit rating by writing dispute letters to Experian or Dun & Bradstreet, which isn't always possible.
- Some corporate credit experts will help you find, select & purchase an established "shelf" or "aged" corporation, some of which already have strong credit ratings established... saving you alot of hassles!
I cannot stress this enough... you MUST have a physical address (not a PO Box) if you want to establish a solid business credit rating. The same thing is said for telephone numbers & the way incoming phone calls are handled. Would you lend
money to a company that does not appear to have a physical address or documented telephone number?
And, don't forget to always keep your commercial permits, licenses & registrations current... and always keep copies of these documents in case a potential lender asks for this information.
Business checking accounts are a must. Again, this proves stability to your potential lenders. Here are a couple of tips for you, in case you've had any checking accounts closed by a financial institution. Pay off the outstanding balance (if any) that's being reported by the bank, or open a checking account at a bank or credit union that doesn't use the ChexSystems credit reporting system. Most credit unions don't use ChexSystems, and you can always find a list of banking institutions in your area that don't use ChexSystems... by simply doing a search on Google, Yahoo or MSN.
Small business credit ratings are tracked using your business name, business address and employer identification number (EIN). You can apply for & receive an EIN at the IRS's website (irs.gov). You can also call the IRS, but be prepared for long waits.
Then you'll want to obtain a D-U-N-S number from Dun & Bradstreet, the largest business credit reporting agency. You can apply for this without any fees at Dun & Bradstreet's website (dnb.com), and you'll usually receive this number within
thirty (30) days. Do not apply for this number until you've prepared your self thoroughly, because any information you give to them... goes into your credit file... permanently.
After you've obtained your D-U-N-S number, you're probably ready to start establishing some vendor credit. Vendor credit is where many business owners start establishing business credit ratings. Simply go to staples.com, officemax.com or officedepot.com to get started. Then, you'll also need to fax your business telephone bill & the credit application to them... on your business letterhead (which you can create using your favorite word processing software if you don't have expensive stationery). They usually don't require any personal guarantees (if you've followed the outline above), and you'll usually receive a starting credit line of $750.
This is critical & I repeat... critical! Always pay your invoices before the grace periods begin... especially on unsecured credit cards or vendor credit lines. Dun & Bradstreet will lower your credit score for every day a creditor reports your bill as unpaid while you're within your grace period. Whereas, personal credit scores are not lowered unless you are 30+ days past your due date.
Dun & Bradstreet reports what's known as a Paydex score (your corporate credit score), and a score of 80 is very good... with 100 being the highest score you can achieve. Your Paydex score is issued once you've established a known
vendor/credit relationship with at least five (5) creditors.
There are shortcuts that will help you get much more than $750 alot faster. When using a business credit expert, most small business owners (even startups) can be approved for vendor credit lines of $25,000-$50,000 and open credit lines of
$50,000, $250,000, $500,000 or more... in as little as 45-60 days... by using their knowledge of the application process & "shelf" corporations.
Now, it's your choice. Are you going to go against the grain & try to establish business credit on your own (which could prove costly to your business health, growth & survival)? Or, will you choose to utilize a corporate credit expert... allowing you to remain focused on your daily business needs?
Most business owners make the mistake of trying to do this on their own... usually trying to find grants, investor "angel" money, or falling back onto the "personal credit card sword". Don't be a casualty like the rest. Learn more about how you can use the same tools that informed, educated millionaires have been using for decades.
About the Author :
Lee Kendrick has been featured by several national magazines as a credit expert, finance professional & public speaker. Register for his newsletter at http://leekendrick.net/credit-expert/ & discover how you can be approved for $250,000 or more... in as little as 45-60 days... regardless of your personal credit.
Keywords: small business loans, business loans, startup funding, startup loans
to take you seriously? You have to speak their language. Here are some of the most important terms you must know.
The Venture Capital Startup Dictionary
By C. Worral
I graduate from college with an engineering degree. I knew almost nothing about money or the economy or finance. Then I went to business school.
(Okay, I worked for a few years in between.) About half-way through my first year, I realized that I had spent my entire life knowing nothing about what made the world go 'round.
No, not love (no love at b-school). Money! Most importantly, I learned that you can program Excel spreadsheet six ways to Sunday, but if you can't speak the language of money, no one will take you seriously. So I started on a mission to learn how people talk about money including watching movies like Wall Street, reading books like Barbarians at the Gate (also a movie) and Liar's Poker.
Of course, many years later, I've forgotten what I didn't know, and I forget that entrepreneurs often have great ideas, but don't have the finance language for moving through the investment world.
So here are a few basic definitions when you are looking for money.
Investor - someone who exchanges money for a share of your company.
Angel - an individual who invests a decent chunk of money in your company ($100-500K) in exchange for some ownership. They tend to be entrepreneurs who have made it big themselves and are often less demanding and interfering than venture capitalists. (This is not always true, by the way.)
Venture Capitalist - a person who is a partner in a venture capital (VC) firm who helps find, select, and manage investments made by the VC firm. In general, VCs get their money from limited partners (these can be anyone from rich investors to corporations to pension funds). The limited partners do not have a say in the investments.
Associate - a junior person at the VC firm who holds no power, but will arrogantly act like they do. If you spend a lot of time with an associate, you are probably wasting it.
Principal - a associate whose been promoted. The power of this person depends on the firm. Still not a decision maker, but can blackball you.
One Pager - a one page (usually front and back) describing your company. Includes some history, mini financials, management description, product description, and business strategy. Your business plan in miniature.
Executive Summary - like the one pager, but a little longer. Your abbreviated business plan. Your Business Plan - a 20-30 page document that will only be read by the associate. It still has to be good though or they'll think your not taking this seriously.
Executive Summary - like the one pager, but a little longer. Your abbreviated business plan.
Your Business Plan - a 20-30 page document that will only be read by the associate. It still has to be good though or they'll think your not taking this seriously.
Pitch Deck - otherwise known as a presentation (see I told you the lingo was different). Usually a Powerpoint presentation that you use when you present to the VCs. If they are really interested, you probably won't get past the first couple slides. Make those slides count!
Term-sheet - a non-binding offer of the terms under which the VC is willing to invest (see Elements of a Term-sheet).
Pre-Money Valuation - what the VC thinks your company is worth prior to their investment. This will be different than what you think it is worth (see Valuation (for a Venture Capital Investment)).
Post-Money Valuation - what your company was worth before the investment (Pre-Money) plus the investment. Your pre-money was $5 million, the investment is $5 million. Your post-money valuation is $10 million and the VC owns half.
Term-sheet - a non-binding offer of the terms under which the VC is willing to invest (see Elements of a Term-sheet).
Pre-Money Valuation - what the VC thinks your company is worth prior to their investment. This will be different than what you think it is worth (see Valuation (for a Venture Capital Investment)).
Post-Money Valuation - what your company was worth before the investment (Pre-Money) plus the investment. Your pre-money was $5 million, the investment is $5 million. Your post-money valuation is $10 million and the VC owns half.
Well, this is a decent list to start. If I think of other VC terms needing defining that are not otherwise defined on the site, I'll add them here.
Good luck.
Please visit my website for more small business finance advice: http://cfoyourself.com
Learn how to get startup money:
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Keywords: venture capital, startup capital, startup loans, startup grants, government grants, government startup programs, small business loans, SBA loans, new business loans, business loans
Should You Be an Entrepreneur?
This Article Can Help You Decide if You Should Start a New Business
In business, there are no guarantees. There is simply no way to eliminate all the risks associated with starting a small business - but you can improve your chances of success with good planning, preparation, and insight. Start by evaluating your strengths and weaknesses as a potential owner and manager of a small business. Carefully consider each of the following questions:
Are you a self-starter? It will be entirely up to you to develop projects, organize your time, and follow through on details.
How well do you get along with different personalities? Business owners need to develop working relationships with a variety of people including customers, vendors, staff, bankers, and professionals such as lawyers, accountants, or consultants. Can you deal with a demanding client, an unreliable vendor, or a cranky receptionist if your business interests demand it?
How good are you at making decisions? Small business owners are required to make decisions constantly - often quickly, independently, and under pressure.
Do you have the physical and emotional stamina to run a business? Business ownership can be exciting, but it's also a lot of work. Can you face six or seven 12- hour workdays every week?
How well do you plan and organize? Research indicates that poor planning is responsible for most business failures. Good organization of financials, inventory, schedules, and production can help you avoid many pitfalls.
Is your drive strong enough? Running a business can wear you down emotionally. Some business owners burn out quickly from having to carry all the responsibility for the success of their business on their own shoulders. Strong motivation will help you survive slowdowns and periods of burnout.
How will the business affect your family? The first few years of business start up can be hard on family life. It's important for family members to know what to expect and for you to be able to trust that they will support you during this time. There also may be financial difficulties until the business becomes profitable, which could take months or years. You may have to adjust to a lower standard of living or put family assets at risk in the short-term.
Why Small Businesses Fail
Success in business is never automatic. It isn't strictly based on luck - although a little never hurts. It depends primarily on the owner's foresight and organization. Even then, of course, there are no guarantees.
Starting a small business is always risky, and the chance of success is slim. According to the U.S. Small Business Administration, roughly 50% of small businesses fail within the first five years.
In his book Small Business Management, Michael Ames gives the following reasons for small business failure:
Lack of experience
Insufficient capital (money)
Poor location
Poor inventory management
Over-investment in fixed assets
Poor credit arrangements
Personal use of business funds
Unexpected growth
Gustav Berle adds two more reasons in The Do It Yourself Business Book:
Competition
Low sales
More Reasons Why Small Businesses Fail
These figures aren't meant to scare you, but to prepare you for the rocky path ahead. Underestimating the difficulty of starting a business is one of the biggest obstacles entrepreneurs face. However, success can be yours if you are patient, willing to work hard, and take all the necessary steps.
On the Upside
It's true that there are many reasons not to start your own business. But for the right person, the advantages of business ownership far outweigh the risks.
You will be your own boss.
Hard work and long hours directly benefit you, rather than increasing profits for someone else.
Earning and growth potential are far greater.
A new venture is as exciting as it is risky.
Running a business provides endless challenge and opportunities for learning.
Keywords: startup, start a new business, new business, new small business, entrepreneurship, entrepreneur, business opportunity, make money at home, home business
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