STARTING A SMALL BUSINESS - MicroGrants



STARTING A SMALL BUSINESSBy Ted PouliotTed Pouliot can be reached at tpouliot@unique- 952.884.5785MicroGrants – Introduction to Starting a Small BusinessI have written this guide as an outline from which you can plan your new venture.Of the small business I have started, some have been successful and some not. I learned by my mistakes and hope to guide you to avoid the disappointment of failure.Before you start, it is important for you to carefully consider your answers to the 14 questions list on page 3 as they will be a big help to you and your advisors.Also, a good business plan is crucial to your success. A great many new businesses are gone after three years.Rather than repeating the many forms, requirements and procedures you will need, I have listed books easily obtainable that contain what you will need.The success or failure of your new business may well depend on how you prepare. Good luck!Ted PouliotBefore meeting with a business advisor, think through and answer the following questions. On a separate sheet of paper, number your answers with the number of the question.Why do you want to start a business?Have you had a previous business? If yes, explain.Do you have experience in the business you want to start? Explain.Do you plan to rent a location or start from your home?How much money do you think you need to start your business?Do you plan on keeping a full time or part time job until your business shows a profit, or do you have a financial reserve or spouse’s income to live on?How much money does your new business need to generate to cover your living expenses?Will you need employees? If so, how many in your first year? Full Time _____ Part time _____.How many hours a week are you willing to work in your new business?Have you checked your competition? Do you have an advantage?How are you planning to promote your business?Do you have bookkeeping experience? Who will keep the books and file required reports?What are your strengths?What are your weaknesses?Be PatientTake time to thoroughly understand the business you plan on starting:Work for a company in the same field you want to enter. One or two years is best.Check out the competition. Talk to everyone you can in the same or similar business you wish to pursue. Those outside your trading area will not consider you a competitor and may be very helpful.Talk to suppliers you will need; they can be very helpful and interested in you as a potential customer. List out your needs and review costs with your potential suppliers.Go to trade shows that apply to your business. Depending on your business, you may meet suppliers or potential customers.Is location important to your business? Talk to commercial real estate agents regarding buying or renting. They can supply you with cost figures.Will you have commission sales representatives? Find out the standard rates for your industry. Build the commission into the sales price. Read the books we have listed. Most are available at the public library. They contain valuable information you will need.“Shoot For The Moon”What is your ultimate business goal? Organize a program to eventually reach that goal. It may take years, but it will give you the incentive to make your business as profitable as possible in the early stages, as a step toward your ultimate goal. Success does not come easy, but if you have a plan and work hard you can reach your goal.Raising MoneyHome Equity Loan:If you own your own home it may be fairly easy to obtain a bank loan at a low interest rate. The amount will be based on the amount of equity in your home. You may need an appraisal.If you do not own a home but have a close relative who does, they may take out the loan and pass the proceeds on to you. The relative would have a benefit in that the interest could be deductible on their tax return. You could arrange to pay interest only for a period of time and then interest and monthly payments to reduce the principal.Relatives:These loans may be interest-free or at a low rate. Calculate a projected pay-back time. Consider the consequences if your business fails.Small business administration loans (SBA) – consult book list.State loans – See book list (No. 1)Bank loans:Banks are most interested in your ability to repay a loan.Present a detailed business plan.Present copies of your last 3 years tax returns.Present a personal financial statement showing income and net worth.Prepare a graph showing sales, expenses and profits projected for the first three years.Describe your competition and your advantages.Present a plan on how loan will be used and how it will be repaid.See book section (No. 1, 16, 17) – Web site: From – “Legal Guide for Starting and Running a Small Business” by Fred Steingold. Ways to Organize Your BusinessEntityMain AdvantagesSole ProprietorSimple and inexpensive to create and operateOwner reports profit or loss on his or her personal tax returnGeneral PartnershipSimple and inexpensive to create and operate Owners (partners) report their share of profit or loss on their personal tax returnsLimited PartnershipLimited partners have limited personal liability for business debts as long as they don’t participate in managementGeneral partners can raise cash without involving outside investors in management of businessC CorporationOwners have limited personal liability for business debts Fringe benefits can be deducted as business expenseCorporate profit can be split among owners and corporation, resulting in lower overall tax rateS CorporationOwners have limited personal liability for business debts Owners report their share of corporate profit or loss on their personal tax returnsOwners can use corporate loss to offset income from other sourcesProfessional CorporationOwners have no personal liability for malpractice of other ownersNonprofit CorporationCorporation may not have to pay income taxesContributions to certain charitable corporations are tax-deductibleFringe benefits can be deducted as business expenseLimited Liability CompanyOwners have limited personal liability for business debts even if they participate in managementProfit or loss can be allocated differently than ownership interestsIRS rules allow LLCs to choose between being taxed as partnership or corporationProfessional Limited Liability CompanySame advantages as a regular limited liability companyGives state-licensed professionals a way to enjoy those advantagesLimited Liability PartnershipMost of interest to partners in old-line professions such as law, medicine, and accountingOwners (partners) aren’t personally liability for the malpractice of other partnersOwners report their share of profit or loss on their personal tax returnsImplications of Entity TypeTaxation, liability protection, and the effects of bankruptcy can be different for different entity types. Proprietorship - No Separate EntityKeep a separate check book for your business.Keep your business records separate from your personal records.Profits are taxed for the year earned whether you take them or not.No separate tax return; reported as part of the proprietor’s individual tax return.Check to see if you need a business license.File your business name with the state.Business losses can be used to offset income from another source. Under a proprietorship you are also personally responsible for losses and monies owed. The business cannot go bankrupt; any bankruptcy would be personal.Single-owner Limited Liability Company (LLC)Similar to proprietorship in operation and for income tax purposes; no separate return.Separate legal entity for state law purposes, including contracts.Liability protection – however, if you are providing services or working in the business yourself, you may be sued individually for your actions as well as the LLC. Most lenders will require the owner to sign as co-borrower, so not much difference from a bankruptcy perspective.“C” CorporationSeparate entity for legal and tax purposes. A C corporation is a taxpayer, and files separate income tax returns.Business profits are taxed to the corporation, and are taxed again when the owners take them as salary or dividends. Corporate formalities must be followed, such as Board of Directors, corporate officers, meetings, minutes, etc.Losses cannot offset the owner’s other income; a corporation can go bankrupt.“S” CorporationSimilar to a C corporation, except that business profits “flow through” and are taxed to the owners; eliminates the double-tax problem of C corporations. Files separate tax returns, but doesn’t pay tax at its level (similar to a partnership). TaxesProfits of the business will generate income taxes, the reporting of which will depend on the entity type. In addition to income taxes, the business may be required to collect and remit state sales taxes. If the business has employees (including the owner, in the case of a corporation), employment taxes will have to be withheld from wages and remitted to the federal and state government agencies. AccountingA good bookkeeping system is one of the most important pieces of a well-functioning business. Many new business owners don’t understand this and let the books go, saying they are too busy promoting the business to spend time on the books. Such an attitude,more often than not, leads to failure. Different types of businesses will have different needs. For example, a retail store will need point-of-sale and inventory software, or at least a cash register, while a sales rep or consultant may be able to keep his books with a simple spreadsheet program. BookkeepingHave a bookkeeper or accountant set up your books. If you or a family member cannot do the bookkeeping on a timely basis, use a bookkeeping service. One can often find a retired person with bookkeeping experience to provide this service at low cost.Cash FlowYou cannot succeed without an adequate cash flow. You need money available to pay bills and payroll. A key determination is your “break-even point” – where you have enough cash flow to continue the business. AccountantYou need a good CPA accountant to review your books on a regular basis; a good CPA’s analysis can guide you to increased profitability. Credit CardsMost people use “Visa” cards, so start with them and add others if needed. The bank’s fee is usually 2% and they accept the risk if payment is not made. You may be charged a start-up fee and a fee for the card swiping machine. Read your contract with the bank carefully.PayPalUsed if you do business on-line. Go to Avoid Bad ChecksAccept only checks from local banks.Be sure name, address and phone number is on check.Be sure check has cleared before giving a refund.Don’t accept third party checks.Don’t accept post-dated checks.Set an account limit or call the bank.Ask for driver’s license and write number on check.For steps on bad checks collection see book No. 4 (pages 333-336)Extending CreditSee book No. 4 (pages 338-349)Buying an Existing BusinessThis may not be your first choice but in some cases it is the best way forward.Reduces your risk, as there is an established track record.Finding a business for sale:ClassifiedsTrade magazinesOn-line:Business brokersAsk for tax returns for the last three years.Have a good qualified business accountant review the books and tax returns.Offer small down payment with monthly payments based on profits. Similar to a contract-for-deed, if you are unable to make the payments, the business will typically go back to the seller, and the amounts you’ve paid will be seen as rent.See book list (No.’s 7 & 8, as well as No.4, Chapter 10, pages 163-188)Prepare a Business PlanIn writing a business plan you need to analyze what you want to do and how you are going to do it. Any investor or loan officer will insist on reviewing your business plan.Fully describe your business and those involved.Describe your market.Describe your competition and advantages you will have over them.Who will do your books, financial statements, tax returns?Sales forecast; who is responsible for sales? Are commission sales staff involved?Why business will succeed under current market conditions.Amount of money required.List projected first year expenses and sales, as well as projected overall income.List start-up requirements:Equipment, office supplies, vehicle etc.Check book list (No.’s 3, 12, 17)Starting or Buying a Business on a ShoestringCreate a sound business plan.Read the books on attached book list.If necessary, find a silent partner. You have the skills and ideas – your partner has the money. Be careful, research partnership guidelines.Try to get 60 or 90 day payment plans with your suppliers.Start a home-based business or low rent location.Buy used equipment as needed.Often a small business owner just wants to retire. Buy the business with a low down payment and low payments out of profits.Keep your day job as long as possible and then go to part time.Retain some personal cash reserves for emergencies.Avoid using credit cards for purchases due to high interest rates.Offer your customers the ability to pay with credit cards. Start with “Visa” and add others if needed. Accept checks, but follow the guidelines listed in this pamphlet. Carrying accounts costs too much time and money.Home-Based BusinessCheck your zoning ordinances and license requirements. Usually a home business is allowed if most of the home is used as a residence.Check if signage is allowed.If your business causes parking problems, your neighbors may complain.Excessive deliveries may cause neighbors to complain.Some zoning ordinances are very old and no longer enforced – check.If you are in an apartment or condo, check on restrictions.Check on insurance. Your homeowner’s policy may not apply. If your house burns down, you may find your fire insurance does not apply if you did not disclose your business use. Accidents by delivery persons may not be covered.Taxes – for tax deduction rules consult IRS Publication 587 “Business Use of Your Home” . For you to be able to claim an office-in-home deduction, the space must be used exclusively for your business. Manufacturer’s RepresentativeMost companies that produce a product need salesmen. Some use staff employees but many more hire manufacturers’ representatives. They are independent sales people who work out of their home. Many carry more than one manufacturer’s products that are not in competition with one another. In this case, they call on buyers for all of their lines.Example:A representative calling on furniture stores may carry a lamp line, a picture line, and a decorative accessory line. The sales rep’s territory may be one state or may include bordering states. As it is an independent business, the rep must cover all travel, entertainment, and other expenses, which are deductible for tax purposes (with certain limits). See IRS Publication 535 “Business Expenses” at . Oftentimes a home office can qualify as a business expense for tax deduction purposes as well.Attend trade shows for industries in which you are interested to apply for a rep position. Attend on the opening days when the company’s executives are in attendance. At the show, pick up trade literature, which often lists territory openings. ImportingYou can start an importing business out of your home if you can import small products. Scarves, jewelry, or watches would be a few examples.There is extensive competition in any import line. You should not consider importing unless you are a designer or at least a very creative person. You need to check retail stores to see what is offered, and at what price, in your chosen product.For resources try the following: For above products, check the trade office in New York or Washington . Internet D.C. for China, India and Philippines. Ask for a list of manufacturers for your product. Select a high class name for your company. Include “Import” or “Importing” in the title.Have high class stationery and business cards printed. You will look more professional if you have the back of the card printed in Chinese. Write the foreign sources you have obtained, indicate that you want to add to your existing line and their company was highly recommended. Ask for photo-quotations on their highest styled designs. Try to obtain photo-quotes from at least ten manufacturers from each country.Select the designs you think would sell the best and order samples. They would ship by air parcel post, UPS or FedEx, an invoice would be attached indicating “Samples” – no commercial value” therefore you will not have to pay duty.Your next step will be to place a small order. Indicate that the order is just for salesmen’s samples and a stocking order will be placed later for the items which are most popular with your many customers.You will have a price advantage over many importers operating on a national basis with high overhead. The next suggested step is for you to call on the appropriate retailers in your area. Start with just a double mark-up from your landed cost.You will soon learn if your product selection is saleable. If you were well received then place your next order for the best selling items.If you are successful in your area, you could show at a jewelry show and post a sign “Some Territories Open” to add sales representatives in other states.Your next step would be to visit foreign trade shows and visit the factories from which you are buying. If your business in not successful, you will be out very little as you are home based and could at least sell off your imports at cost.Negotiating a Favorable LeaseDo not pay high rent for a high traffic location if location is not important or if most of your business is over the phone. Remember that a website is also a location. There may be more detail than you realize. See: “Legal Guide for Starting and Running a Small Business” by Fred Steingold (Chapter 13 pages 229-248)AdvertisingMany new businesses waste money on newspaper, radio and TV spots. Better to use the yellow pages and local free classified newspapers. Use well-designed business cards which include your web address; ask satisfied customers to pass them on to friends and business associates. See book section (No. 6)CompetitionThe success of your business may depend on thoroughly knowing your competition.List all of the competition in your trading area. For each, list their services and product categories.Call or visit your competition for their prices on goods and services that you will also offer.List advantages you will have over your competition.PriceQualityServiceLocationPull up and analyze your competitors’ websites.Creating a WebsiteEight out of ten Americans now spend as much time on-line as they do watching television. No matter how small your business, you will appear larger and more professional with a good website. Buyers new to your area will check the web to find the business they want. You can prepare a simple website yourself. Check out the following:Adobe DreamweaverMicrosoft FrontPageNamo Web EditorBe sure to check the websites of your competition as well as others, to get an idea of what would be best for you. If you want to hire a web developer check the following:You can get bids from freelancers. Check book list (No. 3). For a class, check out:“Website Design and Maintenance”Winnetka Learning Center7940 55th Avenue North New Hope, MN 55428Tel. 763.504.6980BooksThe books listed are available from the public library.“A Guide to Starting a Business in Minnesota” - *available without charge from Minnesota Department of Employment and Economic Development, Small Business Assistance office.1st National Bank Building332 Minnesota Street Suite E-200St. Paul, MN 55101-1351Tel 651.556.8425E-mail: deed.mnsbao@state.mn.usWebsite: “Complete Idiots Guide to Starting Your Own Business” by Edward Paulson (Includes CD with over 100 Documents and Agreements).* “The Small Business Bible” by Steven Strauss* “Legal Guide for Starting and Running a Small Business” by Fred S. Steingold“Tax Savvy for Small Business” by Fredrick W. Daily.“Marketing without Advertising: Easy Ways to Build a Business your Customers will Love and Recommend” by Michael Phillips and Sally Rasberry.“Buying Your Own Business” by Russell Robb.“Mergers and Acquisitions from A to Z” by Andrew Sherman.“How to Start a Business in Minnesota” by Enterprise Press 199 Forms and worksheets, CD ROM.“The Women’s Small Business Start-Up Kit” by Peri Pakroo“Financial Management” by Jae Shim“Ultimate Start Up Directory” by James StephensonWeb-sites for many specialized businesses.“Small Business Survival” by Arthur Anderson“How to Form Your Own Partnership” by Edward Haman“Marketing without Advertising” by Nolo Press“The SBA Loan Book” by C. Green“Small Business Financing” by Alice Magos“Keeping The Books” by Linda Pinson“Small Store Survival” by Arthur AndersonBooks for Specialized Businesses by Entrepreneur Magazine Press 800.274.6229 – for further selection“Start Your Own Clothing Store” by J. Miller“Start Your Own Lawn Care Business” by E. Sandlin“Start Your Own Hair Salon & Spa”“Start Your Own Cleaning Service”“Start Your Own Crafts Business”“Start Your Own Coin-Operated Laundry”“Start Your Own Vending Business”How to Start a Home-Based Mail Order Business” by G. FiumaraAnyone starting a business in Minnesota needs to get the book “A Guide to Starting a Business in Minnesota” from the Minnesota Department of Employment and Economic Development (DEED). The book is updated yearly and available at no charge or on-line. See book list.Important Sections are as follows:License RequirementsBondingPatentsTrademarksCopyrightsTrade secret protectionBusiness plan formatsState and federal grantsSmall business administration loansInsuranceEmployment agreementsLabor standardsMinimum wage requirementsOvertime pay requirementsRecord keeping requirements Deductions from wagesRest breaks and leave timeEmployee testing and background checksTime off to voteChild labor standardsImmigration law complianceWorkplace safetyWorkman’s compensation insuranceGroup health insuranceCheck list for hiring an employeeBusiness taxesTax I.D. numberBusiness income taxSales and use taxIncome tax withholdingUnemployment taxResource directoryAccounting principlesIncome forecasting techniquesFICA taxFederal tax requirementsState of Minnesota tax requirementsSpecialized legal research and assistanceManagement assistance for minority businessesSpecial ServicesCentral Minneapolis LibrarySmall Business ConsultantsNo charge2nd and 4th Tuesday of Month10:30 – 1:302nd FloorRoom N 201 – One on one consultations on all aspects of small business. Consultants are retired business entrepreneurs.Room N 202 Attorneys available to answer small business legal questions.Women Venture2324 University Avenue Suite 200St. Paul, MNTel 651.646.3808Classes on starting a small businessMinneapolis Star & TribuneCheck Business section – Small Business Calendar for educational eventsWeb Site Design and maintenanceWinnetka Learning Center7940 55th Avenue North New HopeTel 763.504.6980Small Business Development Centers:For free counseling – contact nearest locations: .sbdcOnline Women’s Business Center:content/womens-business-centersMBDA – Minority Business Development AgencySmall Business Sites:smallbusiness ................
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