Getting Your Small Business Started
Introduction
One of the first points to consider when starting your own business is the major financial risk you will be taking. Owning and operating a business is always a risk. Still, a half-million Americans try it every year. Unfortunately, thousands of businesses also close each year. Research indicates that many of these business failures could be avoided by better planning and preparation. Frankly, there is no way to eliminate the risk. You can, however, make it a calculated risk and not a gamble.
One way of looking at the causes of failure or success is to remember that a new business is starting at zero momentum; newly entering a market, having to establish supplier relations, finding proper financing, and training employees. To coordinate all these facets and start them simultaneously is a tremendous job. If you don't have experience and management capability, success won't be very likely. You'll also find that undercapitalized businesses, those without enough cash to carry them through the first six months or so before the business starts making money, don't have good survival prospects. In such cases, even businesses with good management can founder.
There are four basics of success in small business:
- Sound management practices
- Industry experience
- Technical support
- Planning ability
Few people start a business with all of these bases covered. Honestly assess your own experience and skills; then look for partners or key employees to compensate for your deficiencies.
Are you a self-starter?
[ ] I do things on my own. Nobody has to tell me what to do.
[ ] If someone gets me started, I follow through well enough.
[ ] Easy does it. I don't put myself out until I have to.
How do you feel about other people?
[ ] I like people, and can get along with just about anyone.
[ ] I have plenty of friends; I don't need anyone else.
[ ] Most people irritate me.
Can you lead others?
[ ] I can get most people to go along when I initiate something.
[ ] I can give the orders if someone tells me what we should do.
[ ] I let someone else get things moving, then I take part if I feel like it.
Can you take responsibility?
[ ] I like to take charge of things and see them through.
[ ] I'll take over if I have to, but would rather let someone else be responsible.
[ ] There's always some eager beaver around wanting to show how smart he is. I say let him.
How good an organizer are you?
[ ] I like to have a plan before I start. I'm usually the organizer when the group wants to do something.
[ ] I'm fine unless things get too confusing; then I quit.
[ ] Something usually occurs that presents too many problems. So I just take things as they come.
How good a worker are you?
[ ] I can stay motivated as long as I need to. I don't mind working hard for something I want.
[ ] I'll work hard for a while, but when I've had enough, that's it.
[ ] I can't see that hard work gets you anywhere.
Can you make decisions?
[ ] I can make up my mind in a hurry if I have to. It usually turns out fine, too.
[ ] If I have to make up my mind quickly, I later think that I should have decided the other way.
[ ] I don't like to be the one to decide things.
Can people trust what you say?
[ ] You bet they can. I don't say things I don't mean.
[ ] I try to be on the level most of the time, but sometimes I just say what is easier.
[ ] Why bother with the truth if the other person doesn't know the difference?
Can you stick with it?
[ ] If I make up my mind to do something, I don't let anything get in the way.
[ ] I usually finish what I start - if it goes well.
[ ] If things don't go right immediately, I quit. Why beat my brains out?
How good is your health?
[ ] I never run down!
[ ] I have enough energy for most of the things I want to do.
[ ] I run out of energy sooner than most of my friends.
Total the number of checks you have next to the first, second and third answers. If most of your checks are beside the first answer, you probably have the skills needed to run a business. If not, you're likely to encounter more trouble than you can handle by yourself. It would be advisable to find a partner who is strong in the areas where you are weak. If many of your checks are beside the third answer, even a good partner will not be able to shore you up.
Is self-disciplined
You must have training or experience in the type of business under consideration. You cannot hire a person who has the experience you lack, in hopes that his/her knowledge will make the business go.
2. Capital
It takes money to start a business. To borrow money is possible, but only if you have sufficient funds of your own in cash, inventory or equipment to provide a reasonable equity for loan consideration. Sufficient funds should be available to meet overhead, take advantage of discounts and make it possible to arrange credit to eliminate immediate financial problems and worry.
3. Location
Space leased or owned must be sufficient to meet the needs of the business considered. Location should be convenient for the customers serviced, with adequate parking facilities.
4. Product or Service
Reasonable assurance should be evident that there is a need for the product or service offered, or that a demand can be developed through advertising to provide a profitable return on your time and money involved.
5. Bookkeeping
A system must be in use to reflect all transactions of the business, to provide records of the operation and data for the preparation of reports to meet city, state and federal requirements.
6. Records
Reports should also be prepared for internal use covering receivables, payables, inventory, payrolls, insurance, also financial statements as needed, and, if possible, monthly operating statements.
7. Management
Experience in management will contribute much to a successful operation. If lacking, it may be developed by understanding and using the reports listed under Item 6. Most business failures are due to poor management.
8. Personnel
Sufficient manpower, experienced in the business, should be available to service customers and carry on during the absence of the owner.
9. Inventory
Inventory should be ample in quality and quantity to meet customer demand.
10. Advertising
Advertising is necessary to make a business grow. Do not contract for paper space, radio or television time without experienced help. It's not the media that counts - it's the gray matter that goes into it.
11. Tax Payments
Be sure all payments are made on time. The Internal Revenue Service (IRS) has tightened its regulations on the prompt payment of withholding moneys.
12. Attorney
Every business should have an attorney to call upon as needed. This especially applies to leases, partnership agreements--particularly on a 50-50 basis--to assure a satisfactory prearranged buy-and-sell signed agreement, or if a corporation is being considered.
13. License and Registration Requirements
You must be sure the business you are considering is properly licensed and registered to meet legal requirements.
14. SCORE (Service Corps of Retired Executives)
SCORE is an organization of retired business persons who have volunteered to assist, at no charge, individuals in business or considering a business venture.
To succeed you must find the best business for you, one in which you are most skilled and interested. As you review your options, you may wish to consult local experts and businesspersons about the growth potential of various businesses in your area. Matching your background with the local market will increase your chance of success.
If you already have a concept of what you want to do, you will still need to do a great deal of investigating. In either case, a lot of initial research and footwork is necessary, unless you want to close your eyes and indulge in wishful thinking.
To quote a well-known brokerage firm, "Investigate before you invest." This often means doing your own marketing feasibility study before committing yourself to opening a new business.
A marketing feasibility study is an analysis of all the information you can obtain about the potential market for your product or service. The study should include information on your competitors, the amount of sales you can reasonably expect to obtain, and whether that level of sales will be adequate for your business to operate at a reasonable profit.
Some questions to answer for your marketing feasibility study are:
- How do you describe the product or service you will offer?
- How is your product or service different in terms of quality and price from what is already on the market?
- Is there good reason to believe that your customers will recognize the difference? If so, why?
- What is different about your marketing strategy or distribution strategy that will enable your product or service to succeed in a market where there is little, if any, growth?
- Describe your ideal customer's age, gender, educational level, geographic location and income level.
- Describe your plan or strategy for reaching potential customers.
- Describe your main competitors.
- What are the annual sales of your competitors? If you can generate that amount of sales, will it be sufficient for you to operate successfully?
- Can you list five reasons why customers would buy from you rather than your competitors?
- Can you list five weaknesses you have compared to your competitors, and how you will overcome them?
After completing your marketing feasibility study, you should have a strong feeling as to whether your idea for a business is going to be economically feasible.
Evaluating Prospective Sites When choosing a location for your business, having a method for evaluating the strengths and weaknesses of each potential site is crucial. Below is a basic checklist to help you in this process. First, read through the criteria and weight them on a scale of 1 to 5 according to their importance to the success of your venture (1 is low, 5 is high). Then make a copy of this list with the weights filled in for each site you are evaluating. Go through the criteria again and grade them on a scale of 1 to 10. Multiply the grade times the weight to determine your site's points on each factor. Add up the points to get a total score Repeat this process for each site The one with the highest number of points best meets the most important requirements for a good location. Name And Legal Structure Through self-analysis you have learned of your personal qualifications and deficiencies, and through market analysis you have learned of the demand for your product or service. Preparing for opening your business is the only critical area that remains.The following questions and explanations are grouped according to function and are designed to help you prepare for Opening Day.
- What will be the name of your business?
- Will it be a sole proprietorship, partnership or corporation?
Choosing a Name
Choosing a name and legal structure for your business is important, especially if you plan to borrow money for start-up. Many entrepreneurs seldom consider these points until the questions appear on the loan and licensing applications.The name you choose for your business can be important from a business image standpoint and also in communicating to the public what you have to offer. You should select a name that clearly describes the product or service provided. Select a name that is catchy and easy to remember. Get ideas from your family and friends; they are an excellent source for ideas.
Once you have decided on a name for your business, you should find out whether the same name, or a confusingly similar name, is already being used by someone else. This involves checking with the office of the secretary of state in your state. You should also check the name with the county clerk in each county where you will do business.
Deciding on the Legal Structure
Think carefully before deciding on the legal structure of your business. Many small business owners choose to operate as sole proprietors, but you may discover that incorporating or forming a partnership offers more advantages. Whatever legal structure you choose, be aware that there are advantages and disadvantages for each. What you must do is select the structure that provides the optimum advantages for your business.Consider the following points when choosing the legal structure for your business.
Sole Proprietorship - A business owned by one person, which can be formed simply by deciding on a location. All you need are the proper state and local licenses. Then you can open your door for business. This is the simplest and cheapest form of business structure. The owner is the business. You must file business and personal income tax returns at the same time.
Advantages:
Simple and inexpensiveDisadvantages:
Personal legal liability
Partnership - You and one or more people agree to share the ownership and management of a business. (General partners participate in business operations and are personally liable for the company's obligations. Limited partners are only liable to the extent of their investment in the business.) You should have a formal written, not oral agreement setting forth how much start-up capital each will contribute and how the business will be managed and how the responsibility and authority will be divided. You will need a legal mechanism that divides profits and losses between participants. Partnerships are governed by the laws of the jurisdiction in which they are formed.
- Advantages:
For the protection of each partner and to ensure effective management of the business, partners should enter into an agreement which sets forth their respective rights and responsibilities.Allows some businesses greater financial resources
Allows individuals with complementary skills to become part of the management of the business
Disadvantages:
Unlike corporations, each partner is personally liable for the partnership's debts.
Corporation - Incorporating is the most complex and expensive way to structure a business. A corporation is a legal entity distinct from its owners thus protecting a shareholder's personal assets if the company can't pay its debts. The owners are often not the same people who manage it. A corporation is a likely choice for businesses with employees or bank financing. Attorney and fees cost from $400 to $1,000 (fees vary by jurisdiction).
- Advantages:
Credibility and personal assets are protected if the business fails or is sued.- Disadvantages:
Taxes on profits potentially higher than with a sole proprietorship.
Subchapter S Corporations - An S corporation, having no more than 35 shareholders, has limited liability and the tax advantages of a partnership or sole proprietorship. The S corporation pays no tax itself - all income of the company, after expenses, is taxed at the individual shareholders' rates - and the earnings are divided among the shareholders. A regular corporation treats the corporation as a separate entity from the owners. The owners are stockholders but the managers may or may not be. It allows business profits and losses to become part of the owner's personal taxes.
Limited Liability Companies - A limited liability company is the newest form of business organization. Available in 49 states, it's a hybrid entity that comprises favorable aspects of the corporation and partnership. The LLC features pass-through taxation of the partnership, and limited liability of the corporation. You may choose to see it like this - the LLC is a partnership that offers the limited liability protection of a corporation. Or conversely, it's a corporation that's taxed like a partnership. Yes, it is much like an S corporation without the 35 shareholder limitation. The limited liability company is a promising type of business entity, but it does have a couple of disadvantages.
- Advantages:
Limited liability
Pass-through entity
Unlimited number of owners
Capital is easy to raise through sale of interests- Disadvantages:
It's newness means that laws regarding the LLC are still evolving and some issues regarding its operations remain unsettled.
The LLC is taxed as a partnership, business owners will lose some comapny funded benefits.
Legal Requirements
As a small-business owner, you are not expected to be a lawyer, but you should have a basic knowledge of the laws affecting your business. Here are some of the legal matters with which you should be acquainted:Do you know which licenses and permits you may need to operate your business?
Do you know the business laws you have to obey?
Do you have a lawyer who can advise you and help you with legal papers?
Are you aware of:
Occupational Safety and Health Administration (OSHA) requirements?
Regulations covering hazardous materials?
Local ordinances covering signs, snow removal, if applicable?
Federal Tax Code provisions pertaining to small business?
Federal regulations on withholding taxes and Social Security?
State Workmen's Compensation laws?
Local Business Licenses
Almost every business needs a city or county business license, or both. These licenses can be obtained at the local city hall or county offices.
State Licenses
Most states impose license fees or taxes on a wide range of businesses, occupations and professions. The fees often vary widely among the different types of businesses.
Federal Licenses
Most new small businesses are unlikely to require any type of federal permit or license to operate, unless they are engaged in investments, alcohol or tobacco products, preparing meat products, or making or dealing in firearms.
For specific information on business-license and permit requirements, regulations and procedures, contact your local licensing office or the office of regulatory affairs. The telephone number is listed in your local telephone directory under municipal government offices.
Tax Obligations
As a small-business owner, you will pay both federal and state taxes; however, the legal structure of your business will determine the amount of your taxes and the forms used.Although the Internal Revenue Service (IRS) prescribes no specific accounting records, documents or systems it does require that you maintain permanent books of account or records which can be used to identify your firm's income, expenses and deductions. Your records must be accurate and reflect taxable income and allowable deductions Records must also be kept so they are available for inspection by IRS officers.
In most tax matters, the burden of proof lies with the taxpayer. Therefore, your records must reflect all your income and all your expenses, just in case they are inspected by an IRS agent. Otherwise, IRS may disallow any deductions which you have made and cannot substantiate. As a result, you may have to make another tax payment and pay interest as well. Additionally, if you have adequate records, all the facts you need for filing a tax return are easily accessible. You are less likely to make a late filing for which there are severe charges and penalties. Moreover, you remove any suspicion of willful negligence and fraud for which you can be fined or imprisoned.
For specific information on Federal Tax Code provisions pertaining to small businesses or for information on business tax laws and requirements ask for IRS Publication 344 by contacting your local IRS office.
Insurance Protection
It is becoming increasingly important that attention be given to security and insurance protection for your business. Here are some of the things for which it should cover
- Fire
- Theft
- Robbery
- Vandalism
- Accident liability
- Natural disasters
Discuss the types of coverage you will need and make a careful comparison of rates and coverage with several insurance agents before making a final decision. For specific guidelines on evaluating your insurance needs, talk to a broker; he or she can provide you with the information necessary to enable you to select a policy that will provide optimum coverage for your business.
One of the most difficult tasks you must do prior to opening your business is also the most important, and that is to write your business plan. A business plan is a presentation of the resources goals, plans and future outlook of a business. It contains detailed information about the company marketing and management plans as well as financial data. For more information on writing a business plan, see Writing a Business Plan, available on line at this site or from the Small Business Development Center.
Financing
All businesses, but especially small businesses, are at one time or another faced with the necessity of raising money. Even if you started out on a very small scale, in your basement or garage, using your own savings as capital, in order to grow you will need to raise money. There are several ways of doing this, including taking on partners or incorporating and selling stock. You may borrow money from friends or family or from a bank. You may consider a mortgage if you need to enlarge or buy a building for your business. If you are willing to share ownership, you may want to talk with a venture capitalist. A letter of credit may satisfy your need to improve cash flow if business is a little slow and you have to replenish stock in preparation for the coming busy season.For more information on financing, see Small Business Development Center publication, Financing
Your Small Business which is available from the Small
Business Development Center.
Resources
Maryland Small Business
Development Center
Southern Region
College of Southern Maryland
8730 Mitchell Rd., P.O. Box 910
La Plata, MD 20646-0910
(301) 934-7583
Maryland Small Business Development Center Portal site:
Additional SBDC locations throughout Maryland
http://www.mdsbdc.umd.edu
Chamber of Commerce:
Calvert County (410) 535-2577
Charles County (301) 932-6500
Bibliography
Starting and Operating a Business in Maryland, Michael D. Jenkins, 1994, Oasis Press.
