Business and Commercial Law

— Starting Your Own Business —

Should I start my own business?

Most small business owners usually start their business with some initial hesitation. To start and effectively run a business requires much work and dedication. You will be your own most important employee, so an objective appraisal of your strengths and weaknesses is essential. Some questions to ask yourself before starting a business are:

Am I a self-starter?

How well do I get along with a variety of Personalities? How good am I at making decisions? Do I have the physical and emotional stamina to run a business? How well do I plan and organize? Are my attitudes and drive strong enough to maintain motivation? How will the business affect my family? If you can honestly answer these questions in the positive, then starting a small business may be right for you.

What business should I choose?

Usually, the best business for you is the 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.

What is a business plan and why do I need one?

A business plan precisely defines your business, identifies your goals and serves as your firm’s resume. Its basic components include a current and pro-forma balance sheet, an income statement and a cash flow analysis. It helps you allocate resources properly, handle unforeseen complications, and make the right decisions. Because it provides specific and organized information about your company and how you will repay borrowed money, a good business plan is a crucial part of any loan package. Additionally, it can tell your sales personnel, suppliers and others about your operations and goals.

What do I need to succeed in a business?

There are four basics of success in small business; (1) Sound management practices.; (2) Industry experience.; (3) Technical support.; (4) 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.

Why do I need to define my business in detail?

It may seem silly to ask yourself, What business am I really in but some owner-managers have gone broke because they never answered that question. One watch store owner realized that most of his time was spent repairing watches while most of his money was spent selling them. He finally decided he was in the repair business and discontinued the sales operations. His profits improved dramatically.

What about advertising?

How well you plan and execute an advertising program will influence your business growth. Because it is one of the main creators of your business` image, it must be well planned and well budgeted. Money spent on hiring a professional to create an effective advertising strategy is usually money well spent.

Where can I go for help?

The U.S. Small Business Administration has offices in nearly every major city in the country. SBA’s Office of Business Initiatives operates the toll-free Answer Desk at 1-800-8-ASK-SBA, to give callers direct referral to appropriate sources of information. Sponsored by SBA are a variety of counseling, training and information services including the Service Corps of Retired Executives (SCORE), Business Information Centers (BIC’s) and Small Business Development Centers (SBDC). In addition, procurement center representatives can be found at each major military installation. More than 2,700 chambers of commerce are located throughout the country to provide additional assistance.

Do I need a computer?

Small business today faces growing inventory requirements, increased customer expectations, rising costs and intense competition. Computers can provide information that leads to better returns on investment. In addition, a computer with the appropriate software can assist you in most areas of your business. Before buying a computer, it is wise to educate yourself on the different types of computers and the types of software that is available to your business. A good starting source is to consult the trade organizations that are connected with your type of business.

How much money do I need to get started?

Once you have taken care of your building and equipment needs you also must have enough money on hand to cover operating expenses for at least a year. These expenses include your salary as the owner and money to repay your loans. One of the leading causes of business failure is insufficient start-up capital. Consequently, you should work closely with your accountant to estimate your cash flow needs.

What financial statements will I need?

You should prepare and understand two basic financial statements: (1) the balance sheet, which is a record of assets, liabilities and capital; and (2) the income (profit-and-loss) statement, a summary of your earnings and expenses over a given period of time.

What financial statements will I need?

How do I set up the right record keeping system for my business?

The kind of records and how many you need depend on your particular operation. An accountant can provide you with many options. When deciding what is and is not necessary, keep in mind the following questions: 1. How will this record be used? 2. How important is this information likely to be? 3. Is the information available elsewhere in an equally accessible form?

What does marketing involve?

Marketing is your most important organizing tool. There are four basic aspects of marketing, often called the four P’s: *Product: The item or service you sell. *Price: The amount you charge for your product or service. *Promote: The ways you inform your market as to who, what and where you are. *Provide: The channels you use to take the product to the customer. As you can see, marketing encompasses much more than just advertising or selling. For example, a major part of marketing involves researching your customers: What do they want? What can they afford? What do they think? Your understanding and application of the answers to such questions play a major role in the success or failure of your business.

What is my market potential?

The principles of determining market share and market potential are the same for all geographic areas. First determine a customer profile (who) and the geographic size of the market (how many). This is the general market potential. Knowing the number and strength of your competitors (and then estimating the share of business you will take from them) will give you the market potential specific to your enterprise.

How do I set price levels?

The price of a service or item is based on three basic production costs: Direct materials, Labor and Overhead. After these costs are determined, a price is then selected that will be both profitable and competitive. Because pricing can be a complicated process, you may wish to seek help from an expert.

How do I find out about suppliers/manufacturers/ distributors?

Most suppliers want new accounts. A prime source for finding suppliers is the Thomas Register, which lists manufacturers by categories and geographic area. Most libraries have a directory of manufacturers listed by state. If you know the product line manufacturers, a letter or phone call to the companies will get you the local distributor-wholesaler. In some lines, trade shows are good sources of getting suppliers and looking over competing products.

What legal aspects do I need to consider?

Licenses required, zoning laws and other regulations vary from business to business and from state to state. Your local Small Business Administration (SBA) office and/or chamber of commerce will provide you with general information, but you will need to consult your attorney for advice specific to your enterprise and area. You also must decide about your form of organization (corporation, partnership or sole proprietorship) or tax status (e.g., should you opt for a Subchapter S status?).

What do I do when I’m ready?

Once you have done the required research – you have a complete business plan; you know where you want to operate; you know how much cash you will need; and you have specific information on employee, vendor and market possibilities. You now may want someone to look over your plans objectively. Contact the business department at a local college for another opinion. A SCORE representative at the Small Business Administration can also review your work and help with the fine-tuning. Then, when you have made the final decision to go ahead, it is time to call the bank and get going

What should I know about accounting and bookkeeping?

The importance of keeping adequate records cannot be stressed too much. Without records, you cannot see how well your business is doing and where it is going. At a minimum, records are needed to substantiate: 1. Your tax returns under Federal and State laws, including income tax and Social Security laws, 2. Your request for credit from vendors or a loan from a bank, and 3. Your claims about the business, should you wish to sell it. But most important, you need accurate business records to run your business successfully and to increase your profits.

What do I have to do to get a loan?

Initially, the lender will ask three questions: (1) how will you use the loan, (2) how much do you need to borrow, and (3) how will you repay the loan? When you apply for the loan, you must provide projected financial statements and a cohesive, clear business plan which supplies the name of the firm, location, production facilities, legal structure and business goals. A clear description of your experience and management capabilities, as well as the expertise of other key personnel, will also be needed. If your loan applications are declined by at least two banks, you may ask the banker to make the loan under SBA’s Loan Guarantee Plan or Immediate Participation Plan.

What are the alternatives in financing a business?

Committing your own funds is often the first financing step. It is certainly the best indicator of how serious you are about your business. Risking your own money gives confidence for others to invest in your business. You may want to consider a partner for additional financing. Banks are an obvious source of funds. Other loan sources include commercial finance companies, venture capital firms, local development companies and life insurance companies. Trade credit, selling stock and equipment leasing offer alternatives to borrowing. Leasing, for example, can be an advantage because it does not tie up your cash.

What kind of profits can I expect?

There are standards of comparison called “industry ratios” which can help you estimate your profits. Return on Investment (ROI), for example, estimates the amount of profit gained on a given number of dollars invested in the business. These ratios are broken down by Standard Industrial Classification (SIC) code and size, so you can look up your type of business to see what the industry averages are. These figures are published by several groups, and can be found at your library. Help is also available through the SBA and the trade associations that serve your industry.

Can I operate a business from my home?

Yes. In fact, experts estimate that as many as 20 percent of new small business enterprises are operated out of the owner’s home. Local SBA offices and state chambers of commerce can provide pertinent information on how to manage a home-based business.

Are some locations better than others?

Time and effort devoted to selecting where to locate your business can mean the difference between success and failure. The kind of business you are in, the potential market, availability of employees and the number of competitive establishments all determine where you should put your business.

Is it better to lease or buy the store (plant) and equipment?

This is a good question and needs to be considered carefully. Leasing does not tie up your cash; a disadvantage is that the item then has no resale or salvage value since you do not own it. Careful weighing of alternatives and a cost analysis will help you make the best decision.

What about a telecommunications system?

All small businesses share some common functions: sales, purchasing, financing, operations and administration. Depending on your individual business, telecommunications can support your objectives in any or all of these areas. In its basic form, the telephone (the terminal) and the network (local or long distance) make up the basic components of telecommunications. It is an effective tool that can easily change with needs and growth of the business. How you use telecommunications can affect how efficiently and profitably your company grows in the future.

What kind of security measures must I take?

Crimes ranging from armed robbery to embezzlement can destroy even the best businesses. You should install a good physical security system. Just as important, you must establish policies and safeguards to ensure awareness and honesty among your personnel. Because computer systems can be used to defraud as well as keep records, you should check into a computer security program. Consider taking seminars on how to spot and deter shoplifting and how to handle cash and merchandise; it is time and money well spent. Finally, careful screening when hiring can be your best ally against crime.

Would a partner(s) make it easier to be successful?

A business partner does not guarantee success. If you require additional management skills or start-up capital, engaging a partner may be your best decision. Personality and character, as well as ability to give technical or financial assistance determine the ultimate success of a partnership.

Should I hire family members to work for me?

Frequently, family members of the owner help out in the business. For some small business owners it is a rewarding experience; for others it can cause irreparable damage. Carefully consider their loyalty and respect for you as the owner-manager. Can you keep your family and business decisions separate?

How can I find qualified employees?

Choose your employees carefully. Decide before hand what you want them to do. Be specific. You may need flexible employees who can shift from task to task as required. Interview and screen applicants with care. Remember, good questions lead to good answers-the more you learn about each applicant’s experience and skills, the better prepared you are to make your decision.

What other financial responsibilities do I have for employees?

You must withhold federal and state income taxes, contribute to unemployment and workers compensation systems, and match Social Security holdings. You may also wish to inquire about key employee life or disability insurance. Because laws on these matters vary from state to state, you probably should consult your local information sources and/or SBA offices.

How do I set wage levels?

Wage levels are calculated using position importance and skill required as criteria. Consult your trade association and accountant to learn the most current practices, cost ratios and profit margins in your business field. While there is a minimum wage set by federal law for most jobs, the actual wage paid is entirely between you and your prospective employee.