Business Basics

Making a Business Plan

The first step in starting your own business is to have business plan. Specifically, you should make a written plan that does the following:

Explains the product that you will manufacture or sell, or the service that you will provide, and why you expect to be able to sell your product or service profitably.
Sets forth the qualifications and experience of you and any other key individuals who will be involved in the business.
Includes financial statements that project the income and expenses for your business for at least three years.
Provides an explanation of the funding (capital) that will be needed to operate the business and your expected sources of such funding.
Identifies any professional advisors that you will be using including an accountant, lawyer, tax advisor, banker, and insurance agent.

Your business plan will help make sure that you are taking into consideration all of the issues. A business plan is also essential in convincing a lender to provide a loan or an investor to provide capital funds.

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Funding Your Business

Obviously, one source of funds is your own savings. Other sources include loans from banks or other lenders, and investments from other individuals.

Your Savings: It is a good idea for you to invest some of your own savings. If you are not risking any of your own capital, it will be more difficult to obtain loans or capital from others.
Loans: You can obtain loans from banks, other lending institutions, and individuals. You will need to provide them with a business plan and financial statements that show your ability to repay any borrowed funds.
Capital Investments: A capital investment is different than a loan. Instead of obtaining funds that will need to be repaid with interest, you are obtaining capital funds from investors who will be co-owners with you.

Choosing a Name

When choosing a name, make sure that it's not identical or confusingly similar to the name that is already owned or used by another company.

Most states have laws that regulate names for corporations, limited liability companies, limited partnerships, and business entities for professionals. Usually these statutes require that a word be included that clearly identifies the type of entity. For example, a corporate statute might require a corporation to include "corporation", "corp.", or "inc." as part of the corporate name.

If you choose a name for a sole proprietorship or general partnership that doesn't include your own personal name, you may be required by law to register the name of your business.

Ownership Changes

As a small business owner, you may wish to protect yourself against the possibility that one of the other owners will transfer his or her ownership interest to an undesirable third party. Obviously, this is not a problem for the sole proprietor or the sole stockholder of a corporation. However, it is a potential problem with any business that has more than one owner.

Business owners can (and should) address these issues in the partnership agreement (all partnerships), the operating agreement (LLCs), and buy-sell agreements (corporations). These agreements should include at least the following:

appropriate restrictions on the transfer of an ownership interest, except in accordance with the agreement;
a method for determining the value of an ownership interest;
provisions for handling a voluntary withdrawal from the business by one of the owners;
provisions for handling the ownership interest of an owner who dies;
provisions for handling the disability of an owner who was involved significantly in the business before becoming disabled; and
a means of funding any required purchase of an ownership interest (for example by using life insurance to buy the ownership interest of an owner who dies).

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Federal Identification Number

In most cases, the new business will need a federal identification number. The exception may be the sole proprietorship that has no employees. To get a federal ID you must prepare, sign and file Form SS-4 with the Internal Revenue Service.

Payroll Issues

Employers are required to withhold federal and state income taxes, as well as FICA taxes, from employee wages. These withholdings must then be properly deposited with the federal and state governments. If you plan to have employees, you will need to comply with these requirements, as well as any requirements regarding withholding of other taxes.

Most employers are subject to federal and state laws that require you to pay unemployment insurance. This insurance is used to pay unemployment benefits to employees who lose their jobs.

Types of Insurance Needed

There are several kinds of insurance that should be obtained:

Workers' Compensation. Most states have workers compensation laws that pay benefits to employees who suffer job related injuries. Employers are required to obtain this insurance from private insurance companies.
Liability Insurance. Although you may choose a business entity that will enjoy "limited liability", you will still need appropriate and adequate liability insurance.
Property Insurance. Your new business will need property insurance to protect the business assets. If you transfer any personal assets to your new entity, you should make sure that your insurance policies are issued for the person or entity that owns the assets.

Permits and Licenses

For many types of businesses it is necessary to obtain certain permits and licenses. For example, if you are involved in retail sales, you may need a sales tax permit. A contractor may be required to obtain a contractor's license. A restaurant may be required to obtain a license in order to sell beer or liquor.

Franchises

A franchise is an agreement under which an owner of a business idea, trademark and business "know-how" sells you the franchise rights to use these items. For example, your local Chevrolet car dealer is probably operating his or her dealership under franchise arrangements with General Motors who owns Chevrolet. You might be interested in a franchise so that you can sell a well-known product, obtain management advice, and participate in joint advertising.

If you want to consider this type of arrangement, make sure that the details are stated in a written agreement that you understand. Obtain the advice of a lawyer if you have any questions.

Working from Home

You may wish to locate your business in your home to save the cost of buying a building or renting space for your business.

In some cases, you can obtain an income tax deduction for the cost of having the business in your home. However, the rules are very strict, and in many cases, your business must be located in a building that is separate from your residence (for example, in an unattached garage).

In some locations there may be zoning laws or other local regulations that limit or prohibit the operation of businesses in homes that are located in residential areas. In addition, there may be permits or licenses that you are required to obtain to operate a business in your home.