Guides | Business Strategies
Learn how to start, run and eventually sell a successful business.
Starting a Business? 3 Things You Must Know
Starting a new business is a very exciting and busy time. There is so much to be done and so little time to do it in. If you expect to have employees, there are a variety of federal and state forms and applications that will need to be completed to get your business up and running. That's where we can help.
Employer Identification Number (EIN)
Securing an Employer Identification Number (also known as a Federal Tax Identification Number) is the first thing that needs to be done since many other forms require it. The fastest way to apply for an EIN is online through the IRS website or by telephone. Applying by fax and mail generally takes one to two weeks. Note that effective May 21, 2012, you can only apply for one EIN per day. The previous limit was 5.
State Withholding, Unemployment, and Sales Tax
Once you have your EIN, you need to fill out forms to establish an account with the State for payroll tax withholding, Unemployment Insurance Registration, and sales tax collections (if applicable).
Payroll Record Keeping
Payroll reporting and record keeping can be very time-consuming and costly, especially if it isn't handled correctly. Also, keep in mind, that almost all employers are required to transmit federal payroll tax deposits electronically. Personnel files should be kept for each employee and include an employee's employment application as well as the following:
Form W-4 is completed by the employee and used to calculate their federal income tax withholding. This form also includes necessary information such as address and social security number.
Form I-9 must be completed by you, the employer, to verify that employees are legally permitted to work in the U.S.
Form of Business Organization: Which Should You Choose?
Businesses fall under one of two federal tax systems:
1.) Taxation of both the entity itself (on the income it earns) and the owners (on dividends or other profit participation the owners receive from the business). This system applies to the business S-corporation-called the "C-corporation" (C-corp) for reasons we'll see shortly and the system of taxing first the corporation and then its owners is called the "corporate double tax."
2.) Pass-through taxation. This type of entity is in itself not taxed; however, each owner is each taxed on their proportionate shares of the entity's income. The leading forms of pass-through entity (further explained below) are:
Partnerships, of various types.
S-corporations (S-corps), as distinguished from C-corps.
Limited liability companies (LLCs).
Businesses fall under one of two federal tax systems:
1.) Taxation of both the entity itself (on the income it earns) and the owners (on dividends or other profit participation the owners receive from the business). This system applies to the business S-corporation-called the "C-corporation" (C-corp) for reasons we'll see shortly and the system of taxing first the corporation and then its owners is called the "corporate double tax."
2.) Pass-through taxation. This type of entity is in itself not taxed; however, each owner is each taxed on their proportionate shares of the entity's income. The leading forms of pass-through entity (further explained below) are:
Partnerships, of various types.
S-corporations (S-corps), as distinguished from C-corps.
Limited liability companies (LLCs).
A sole proprietorship such as John Doe Plumbing or Marcus Welby, M.D. is also considered a pass-through entity even though no "organization" may be involved.
The first major consideration (in this case, a tax consideration) in choosing the form of doing business is whether to choose an entity (such as a C-corp) that has two levels of tax on income or a pass-through entity that has only one level (directly on the owners).
Co-owners and investors in pass through entities may need to have their operating agreements require a certain level of cash distributions in profit years, so they will have funds from which to pay taxes.
Losses are directly deductible by pass-through owners while C-corp losses are deducted only against profits (past or future) and don't pass through to owners.
Business and tax planners therefore typically advise new businesses-those expected to have startup losses-to begin as pass through entities, so the owners can deduct losses currently against their other income, from investments or another business.
The major business consideration (as opposed to tax consideration) in choosing the form of business is limitation of liability, that is, to protect your assets from the claims of business creditors. State law grants limitation of liability to corporations (C and S-corps), LLCs, and partners in certain forms of partnership. Liability for corporations and LLCs is generally limited to your actual or promised investment in the business.
Types of Business Entities
C and S-Corps
The S-Corp (so named from a chapter of the tax code) is a tax device created by federal law in 1958. It is a regular corporation with regular limited liability under state law, whose owners elect pass through status for federal tax purposes. That status requires compliance with a number of often constricting rules but, with some exceptions, complying corporations escape federal corporate tax. As regular business S-corporations under state law, they may be taxed under state tax law as regular corporations, or in some other way. Corporations whose owners don't choose to make the federal S-corp election are called C-corps (after another chapter of the tax code).
Partnerships
Ordinary partnerships, called "general partnerships," do not have limited liability under state law.
Limited partnerships limit liability for some partners but not others. A limited partnership has both general partners (who manage the business) and limited partners (who, in essence, are passive investors). The liability of limited partners is generally limited to their investments. The liability of general partners is theoretically unlimited, but can be limited in practice where the general partner is an entity, such as a corporation, with limited liability. A limited partner who takes on what state law considers "too much" management participation is treated as a general partner, losing limited liability.
Both general and limited partnerships are treated as pass-through entities under federal tax law, but there are some relatively minor differences in tax treatment between general and limited partners.
A still more recent development, not yet adopted everywhere, is the limited liability partnership (discussed below) which was designed for professional practices.
Other partnership forms are the giant "publicly traded partnerships" (treated as C-corps for tax purposes) and limited liability limited partnerships (adopted in only a few states) which limit the liability of general partners (where two or more) as well as of limited partners.
Limited Liability Companies (LLCs)
LLCs have become the most popular business form for new entities, and many existing entities have converted to this form. They exist in some form in every state. They embody limited liability features of corporations and pass-through characteristics of partnerships and S-corps, but are more flexible than S-corps.
For business law purposes, LLC members may be either passive investors or active investor-managers. Unlike with limited partnerships, active management won't affect limitation of liability. For federal tax purposes, LLCs are treated as partnerships (unless they elect otherwise).
Since LLC rules vary from state to state, a characteristic, power or rule in the state where an LLC was created may not apply in some other state where it does business.
Some states do, and some states do not, authorize LLCs with only one member.
Where one becomes the sole surviving LLC member in a state that doesn't allow single member LLCs, consider quickly incorporating (to regain limited liability) and electing S-corp status (to retain pass through treatment).
Choosing the Tax Treatment
Since 1997, the IRS has allowed business owners a previously unheard-of measure of choice as to how the entity will be federally taxed. It allows you to choose between C-corp and pass through treatment (universally called "check-the-box").
A few choices are not allowed. If the entity is incorporated, it must be treated as a corporation (which doesn't preclude an S-corp election if otherwise available). Publicly traded partnerships and publicly traded LLCs must be treated as C-corps.
Special rules apply to foreign entities.
All other forms of partnership may be taxed either as C-corps or as pass-through entities (either as partnerships or, if S-corp status is available and elected, as an S-corp.)
An LLC with two or more members may choose to be taxed as a C-corp, a partnership or an S-corp (if elected). An LLC with a single member (where this is allowed) may choose either to be taxed as a C-corp or an S-corp (if elected) or to have the entity disregarded. In this case, if the LLC is owned by an individual, the individual is taxed directly (and can deduct losses) as with a sole proprietorship.
Typically, partnerships and multimember LLCs choose to be taxed as partnerships while single member LLCs choose to have the entity disregarded. With "check-the-box," the IRS will no longer question your right to combine limited liability with pass through treatment or, if you wish, to waive pass through treatment for an entity otherwise entitled to it (with the exceptions noted above).
Any choice has consequences. For example, if you opted last year for corporate treatment and want partnership treatment this year, you'll be treated as liquidating the corporation, and taxed accordingly (discussed below).
Most-but not all-states that impose corporate taxes follow a taxpayer's federal "check-the-box" choice for state tax purposes. This doesn't necessarily mean that the tax treatment will be the same. For example, a state may accept an LLC's election to be taxed as a partnership and still impose an entity-level tax on the LLC.
An election to be taxed as a certain type of entity for federal tax purposes does not make it such an entity under state business law.
Choosing the Form
Now consider which form will work best for the way you want to run your business and capitalize on its profits or startup losses. "Compared to what?" will be a major consideration so it is necessary to compare a taxable entity (the C-corp) with a pass through entity as well as compare the pass through entity with other types of entities. Tax consequences of changing from one entity to another should also be examined.
A major decision of whether to use a C-corp or some form of pass through C-corp is sometimes necessary from a business standpoint. For example, if interests in the enterprise are to be publicly traded, only the C-corp is appropriate.
For some activities, states may require the corporate form (banks, for example) and S-corp rules may preclude the S-corp form.
From a tax standpoint, while C-corporations present two levels of tax, the first tax (on the corporation) can be at a rate lower than the tax on the owner and the second tax (on the owner) is usually postponed until the owner receives dividends or other assets from the corporation.
Distribution of appreciated assets to the owner, or sale of such assets and distribution of the proceeds, are taxable both to the corporation and then to owners. They are no longer opportunities, as they once were, to avoid two levels of tax.
The tax on the owner may be at reduced capital gains rates. This is the case for appreciated assets distributed in corporate liquidation and, after 2002 and before 2009, it's also usually the case for dividends distributed by ongoing corporations.
Funds can build up in the corporation at a relatively low rate until distributed. However, the eventual tax on the owner, plus the corporate tax, may eat up more of the profits than the single (pass through) tax on the owner does.
A C-corp can minimize corporate tax by paying out all or almost all of its income to owners in the form of compensation and fringe benefits. Assuming these payments are deductible as business expenses, this approximates pass through treatment, since the corporation isn't taxed on what it receives and then deducts; the owner-recipients alone are taxed on this. This arrangement works best in personal service businesses, where full business expense deduction is more likely to be allowed.
The IRS and the courts may limit deduction in other settings, finding owner compensation to be "unreasonable" and partly nondeductible where it reflects a distribution of profits from capital or from the efforts of non-owners.
To summarize, some businesses may find C-corp status necessary for business purposes. But only comparatively rarely will it be a preferable tax choice for a new business.
Choosing the Pass through Entity
If you decide on a pass-through entity, which of the several do you choose? The following is a brief discussion of the rules applicable to each.
S-corporation
Limitation of liability gives S-corps the edge-for business reasons-over general partnerships, sole proprietorships, limited partnerships (as to limited partners whose partnership activity might expose them to unlimited liability), and LLCs in states that don't allow single member LLCs.
Limited liability comes at a cost, however, since states may impose a tax on S-corps not imposed on entities with unlimited liability.
S-corps are subject to a number of significant rules and restrictions:
All owners must agree to S-corp status. This means that one co-owner can exact a price or impose conditions for his or her agreement.An S-corp can have only one class of stock, which means that income, losses and other tax attributes are allotted among stockholders in proportion to stock ownership.The number of co-owners is limited (to 100, with qualifications, counting members of the same family as one stockholder).There are limitations as to who can be co-owners (for example, a nonresident alien cannot) and as to the kind of business that can qualify for as an S-corp (for example, an insurance company cannot).
Failure to meet, or ceasing to meet, these requirements means loss of S status and conversion to C-corp status and C-corp taxes.
These limits and restrictions will be contrasted, below, with the more liberal tax rules for partnerships and LLCs.
S-corps are often preferred because they are simple to operate. However, they are not suitable for many businesses. The much wider range of options for partnerships and LLCs introduces tax planning complexity which may be more than many or most small businesses can effectively use or understand.
LLCs vs. S-corporations
LLCs and S-corps share the same business advantage-limitation of liability. S-corps are a bit better understood by the business community because LLCs are new and vary from state to state.
The tax advantages of LLCs, as compared to S-corps, are the tax advantages of partnerships.
All the points below where LLCs outscore S-corps arise because LLCs can choose partnership tax status.
LLC can to some degree allocate tax attributes, like income or certain kinds of income, depreciation deductions, etc., disproportionately among members to suit their individual tax situations (unlike S-corps limited by the effect of the single-class-of-stock rule).S-corp owners can deduct startup or operating losses up to their investment plus any debt that the S-corp owesthem. LLC members can do the same but can deduct further, up to their share of the debt the LLC owesothers.Adding co-owners after the entity is formed is easier with LLCs. An outsider's transfer of appreciated property for an LLC membership interest is tax-free. A comparable transfer to an S-corp is taxable unless the new co-owner-transferor (or group of transferors) owns more than 80 percent of the S-corp after the transfer.Complex tax adjustments ("basis adjustments") can be made by the LLC when LLC interests change hands or LLC property is distributed. These adjustments, unavailable with S-corps, can have the effect of reducing amounts taxable to certain LLC members.Distribution of appreciated LLC property to LLC members is not taxable to the LLC. Comparable S-corp distributions to stockholdersaretaxable to the S-corp.
Depending on circumstances, S-corp status can be preferable to LLC status when the owners leave the business. The LLC is not taxed when appreciated property is distributed to its members, which is a standard form of business liquidation. But the members would be taxed on distributions exceeding the "basis" (broadly, the amount they invested) of their interests. S-corp owners, on the other hand, can arrange a tax-free exit, via a corporate reorganization in which they transfer their S-corp stock for stock in a corporate acquirer. (Later sale of stock in the acquirer would be taxable.)
Depending on state law, S-corps, and LLCs may be taxed at the entity level in states where they do business.
LLCs vs. Partnerships
LLCs, with their limited liability for all members, have the edge on general and limited partnerships from a business standpoint. While the federal tax treatment of partners and LLC members is basically the same, there are occasional special tax rules for limited partners (especially self-employment tax rules).
It is not clear whether these special tax rules extend to non-manager LLC members.
LLCs are more likely than partnerships to be subject to a state tax.
LLCs vs. Proprietorships
LLCs, with their limited liability, are preferable, where available, for sole proprietors from a business standpoint. Where the sole proprietor so elects, the LLC is ignored and the proprietor is taxed directly under federal tax rules as if no separate entity existed.
Some states do-and some do not-ignore the LLC entity for state tax purposes.
Professional Practice Entities
Professional practices (such as doctors and lawyers) have a number of options as to their form of business entity.
Professional Corporations (P.C.s)
These provide limited liability for general business debts but not for the professional's own malpractice and, in some states, no limited liability for malpractice of fellow practitioners in the firm. They may be C-corps or S-corps. Unlike many other C-corps, a P.C. C-corp can use the cash method of accounting.
LLCs
Most states allow professionals to practice in LLCs, either under a general LLC law or a special Professional Limited Liability Company law (PLLC). In either case, liability is not limited for the professional's own malpractice but, depending on the state, may be limited for the malpractice of other firm members and for other firm debts. These LLCs share the comparative advantages (and minor disadvantages) of other LLCs.
Limited Liability Partnerships (LLPs)
LLPs are general partnerships whose general partners have limited liability. They are designed for professional practices. A partner is liable for his or her own malpractice but not for a partner's malpractice or, depending on state law, other acts of partners. Typically they are required by state law to maintain malpractice insurance, and are obliged to pay a per-partner fee to keep their status, but are not subject to entity-level tax.
Sole Proprietors and Partners
Many practitioners choose to practice as sole proprietors or partners, rather than in a limited liability entity. They reason that their main exposure to liability is to malpractice claims, and the entity won't protect against claims for their own malpractice (or, in some states, for a partner's malpractice). They therefore, choose to rely on malpractice insurance (which practitioners in limited liability entities may have too).
Sole proprietorships and partnerships are less likely than limited liability entities to be subject to state entity level tax.
Other Pros and Cons of C-Corps
A C-corp can be preferable to pass through entities as to fringe benefits. As employees, owner-employees of a C-corp qualify for certain employee fringe benefits. On the other hand, self-employed persons (partners, LLC members, sole proprietors, and more than 2 percent stockholders in S-corps) don't qualify.
Health insurance can be wholly tax-free to C-corp owner-employees (through full deduction by the C-corp and full tax exemption for the owner-employee). However, it is only partly tax-free to the self-employed, because of their limited tax deduction for this item.
Another modest advantage of the C-corp is that they are less likely to be subject to passive loss deduction limitations. These limit the opportunity to deduct losses from activities the taxpayer doesn't "materially participate" in, against income from investments or other businesses. Typically, limited partners have been the group most subject to passive loss limitations.
Another tax disadvantage of C-corp status is its limited ability to report for tax purposes on the cash method of accounting, which generally defers tax as compared to the accrual method.
Further Insights on S-Corps
A qualifying S-corp, generally nontaxable, can be subjected to C-corp taxation on certain items without losing S status for other items. This happens when a C-corp converts to an S-corp and carries over appreciated property later sold at a gain. The S-corp pays a corporate tax on the gain, which is then taxed to stockholders (reduced by the corporate tax). Because S-corps are intended to be operating companies rather than holding companies, this also happens when the S-corp has "excessive" passive investment-type income (interest, dividends, and the like, in excess of 25 percent of gross receipts). Here the excess is subject to corporate tax and is then taxed to stockholders (minus the corporate tax).
Some see S-corps as a way to reduce employment taxes. For example, one earning $120,000 in a sole proprietorship might convert to an S-corp and take $70,000 in pay and $50,000 in dividends. Income taxes are unchanged by this but, it's reasoned, $50,000 now received as dividends escapes employment tax (the $120,000 of self-employment earnings was subject to both retirement and Medicare tax up to $102,000 for 2008 and $97,500 for 2007 and Medicare tax above that). In abuse situations, such as where little or no wages were paid, IRS has treated the dividends as pay subject to employment taxes on the owner-employees and on the S-corp employer. But in cases where substantial wages were paid, along with substantial dividends, IRS has not objected.
Changing To Another Entity
The many advantages of LLCs, for both business and tax reasons, have encouraged many business owners to convert, or consider converting, to the LLC form. But other changes of entity may suit particular situations-for example, general partnership to LLP (for business reasons) or C-corp to S-corp (for tax reasons). For tax purposes, a change of entity via a check-the-box decision is treated for tax purposes as an actual change of the entity (whatever may happen under state business law).
Here, briefly and in broad outline, is what happens for federal tax purposes when entity status is changed (or treated as changed under-check-the-box). How these apply in your own situation must be reviewed in depth with a tax/business advisor.
C-corp converts to S-corp or vice versa. No tax on the conversion. Pass through treatment applies while it is an S-corp.
C- corp or S-corp converts to LLC, partnership or sole proprietorship. Generally, a tax on the liquidation of the corporation, with pass through treatment for the new entity (in modified form in the case of a liquidating S-corp).
Partnership converts to LLC or vice versa; sole proprietorship converts to single member LLC or vice versa. No tax on conversion-pass through treatment continues.
LLC, partnership or sole proprietorship converts to C or S-corp. Generally, no tax on conversion. Pass through treatment (in modified form) for S-corp income.
Government and Non-Profit Agencies
The Small Business Administration (SBA) has offices located throughout the United States. Contact SBA through their website.
Advantages of Incorporating
Why Incorporate?
All legal and tax professionals agree, if your business is not incorporated you may be throwing away thousands of dollars in tax savings and deductions.
In addition, all of your personal assets such as your home, cars, boats, savings and investments are at risk and could be used to satisfy any law suits, debt or liability incurred by the business. Forming a Corporation can provide the protection and tax savings needed to give you peace of mind and make your business even more successful and profitable.
Some Benefits Include:
Liability Protection: Properly forming and maintaining a corporation will provide personal liability protection to the owners or shareholders of the corporation for any debt or liability incurred by the business. Personal liability of the shareholders is normally limited to the amount of money invested in the corporation.
Tax Advantages: Another important benefit is that a corporation can be structured many ways to provide substantial tax savings. You can minimize self-employment taxes and increase the number of allowable deductions lowering the taxes you pay on the income of the business. Many corporations structure retirement and tax deferred savings plans for their owners and employees which can provide even greater tax savings.
Raising Capital: Sale of stock for the purposes of raising capital is often more attractive to investors than other forms of equity sales. A corporation can also issue Corporate Bonds to raise capital for expenditures without compromising the ownership of the business.
Advantages of Limited Liability Companies
Combining the Best Aspects of Partnerships and Corporations
A Limited Liability Company, or LLC, is not a corporation, although it offers many of the same advantages. An LLC is best described as a combination of a corporation and a partnership. LLCs offer the limited liability of a corporation while allowing more flexibility in managing the business and organization.
An LLC does not pay any income tax itself. It's a "flow through" entity that allows profits and losses to flow through to the tax returns of the individual members, avoiding the double taxation of C corporations.
While setting up an LLC can be more difficult than creating a partnership (or sole proprietorship), running one is significantly easier than running a corporation. Here are the main features of an LLC:
Limited Personal Liability
Like shareholders of a corporation, all LLC owners are protected from personal liability for business debts and claims. This means that if the business itself can't pay a creditor -- such as a supplier, a lender, or a landlord -- the creditor cannot legally come after any LLC member's house, car, or other personal possessions. Because only LLC assets are used to pay off business debts, LLC owners stand to lose only the money that they've invested in the LLC. This feature is often called "limited liability."
While LLC owners enjoy limited personal liability for many of their business transactions, it is important to realize that this protection is not absolute. See Exceptions to Limited Liability.
LLC Taxes
Unlike a corporation, an LLC is not considered separate from its owners for tax purposes. Instead, it is what the IRS calls a "pass-through entity," like a partnership or sole proprietorship. This means that business income passes through the business to the LLC members, who report their share of profits -- or losses -- on their individual income tax returns. Each LLC member must make quarterly estimated tax payments to the IRS.
While an LLC itself doesn't pay taxes, co-owned LLCs must file Form 1065, an informational return, with the IRS each year. This form, the same one that a partnership files, sets out each LLC member's share of the LLC's profits (or losses), which the IRS reviews to make sure the LLC members are correctly reporting their income.
LLC Management
The owners of most small LLCs participate equally in the management of their business. This arrangement is called "member management."
The alternative management structure -- somewhat awkwardly called "manager management" -- means that you designate one or more owners (or even an outsider) to take responsibility for managing the LLC. The non-managing owners (sometimes family members who have invested in the company) simply sit back and share in LLC profits. In a manager-managed LLC, only the named managers get to vote on management decisions and act as agents of the LLC.
Business Plans: How To Prepare An Effective One
One of the major steps in starting a new business or getting financing is to prepare a business plan. This Financial Guide provides you with the basic information that you need to include in your business plan.
A well thought out business plan is a valuable tool for any new company or one that is seeking financing. It also provides milestones to gauge your success and the process of developing a business plan helps you think through some important issues that you may not have considered yet.
Before you begin preparing your business plan, take the time to explore and evaluate your business (and personal) goals. You can then use this information to build a comprehensive and effective business plan that will help you reach these goals.
The purpose of this Financial Guide is to provide a basic introduction to preparing a business plan, rather than specific details to be incorporated into the plan since those depend on your specific goals and the nature of the specific business. Professional guidance is recommended when it comes to the actual preparation of the plan, particularly for the financial components.
If You're Starting a New Business
If the reason for preparing the business plan is that you are starting a new business, you should first examine 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 is what business is "right for you." Ask yourself these questions:
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?Will I have the support of my family?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. Start by conducting the research necessary to answer questions like these:
What business am I interested in starting?What services or products will I sell?Is my idea practical, and will it fill a need?What is my competition?What is my business's advantage over exiting firms?Can I deliver a better quality service?Can I create a demand for my business?
You will also need to consider several options for getting your business off the ground:
Do you want to purchase an existing business or start one from scratch?Are there franchises available for this type of business? If so, does a franchise make sense for you?
The final step before developing your plan is the pre-business checklist. You should answer these questions:
What skills and experience do I bring to the business?What will be my legal structure?How will my company's business records be maintained?What insurance coverage will be needed?What equipment or supplies will I need?How will I compensate myself?What financing will I need?Where will my business be located?What will I name my business?Your answers will help you create a focused, well-researched business plan, and that should serve as a blueprint. It should detail how the business will be operated, managed, and capitalized.
Based on your initial answers to the questions listed above, the next step is to formulate a business plan. A business plan sets forth the mission or purpose of the business venture, describes the product or services to be provided, presents an analysis of the market state, outlines goals that the business has and how it intends to achieve those goals, and last but not least, includes a formal financial plan.
In most cases, a business plan is necessary to obtain external capital for your business, but it also serves a number of other purposes. It forces you to critically evaluate the feasibility of your business and whether it will provide a return which is appropriate to the time and money you will invest in the business. The plan provides a benchmark against which you can evaluate the success of your business in later years.
What the Business Plan Should Include
Whether you are starting a new business, seeking financing for an existing business, attempting to analyze a new market, or wanting to define and evaluate future growth, the following outline of a typical business plan can serve as a guide. However, you should adapt it to your specific business.
Introduction and Mission Statement
In the introductory section of your business plan, you should:
Give a detailed description of the business and its goals.Discuss the ownership of the business and its goals.List the skills and experience you bring to the business.Discuss the advantages you and your business have over your competition.
Products, Services and Markets
In this section, you must describe your products and/or services and:
Identify the customer demand for your product/service.Describe how your product/service is unique.Identify your market, as well as its size and locations.Explain how your product/service will be advertised and marketed.Explain the pricing strategy.
Financial Management
In this section, you should:
Explain the source and amount of initial equity capital.Develop a monthly operating budget for the first year.Develop an expected (return on investment), or ROI, and a monthly cash flow for the first year.Provide projected income statements and balance sheets for a two-year period.Discuss your break-even point.Explain your personal balance sheet and method of compensation.Discuss who will maintain your accounting records and how they will be kept.Provide "what if" statements that address alternative approaches to any problem that may develop.
Operations
In this section it is important to:
Explain how the business will be managed on a day-to-day basis.Discuss hiring and personnel procedures.Discuss insurance, lease or rent agreements, and issues pertinent to your business.Account for the equipment necessary to produce your product or services.Account for production and delivery of products and services.
Concluding Statement
In the ending statement, you summarize your business goals, objectives, and express your commitment to the success of your business.
Once you have completed your business plan, review it with a friend or business associate. When you feel comfortable with the content and structure, make an appointment to review and discuss it with your banker. The business plan is a flexible document that should change as your business grows.
Raising Capital: How To Get Money For a Small Business
A well thought out business plan is a valuable tool for any new company or one that is seeking financing. It also provides milestones to gauge your success and the process of developing a business plan helps you think through some important issues that you may not have considered yet.
Before you begin preparing your business plan, take the time to explore and evaluate your business (and personal) goals. You can then use this information to build a comprehensive and effective business plan that will help you reach these goals.
The purpose of this Financial Guide is to provide a basic introduction to preparing a business plan, rather than specific details to be incorporated into the plan since those depend on your specific goals and the nature of the specific business. Professional guidance is recommended when it comes to the actual preparation of the plan, particularly for the financial components.
If You're Starting a New Business
If the reason for preparing the business plan is that you are starting a new business, you should first examine 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 is what business is "right for you." Ask yourself these questions:
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?
Will I have the support of my family?
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. Start by conducting the research necessary to answer questions like these:
What business am I interested in starting?
What services or products will I sell?
Is my idea practical, and will it fill a need?
What is my competition?
What is my business's advantage over exiting firms?
Can I deliver a better quality service?
Can I create a demand for my business?
You will also need to consider several options for getting your business off the ground:
Do you want to purchase an existing business or start one from scratch?
Are there franchises available for this type of business? If so, does a franchise make sense for you?
The final step before developing your plan is the pre-business checklist. You should answer these questions:
What skills and experience do I bring to the business?
What will be my legal structure?
How will my company's business records be maintained?
What insurance coverage will be needed?
What equipment or supplies will I need?
How will I compensate myself?
What financing will I need?
Where will my business be located?
What will I name my business?
Your answers will help you create a focused, well-researched business plan, and that should serve as a blueprint. It should detail how the business will be operated, managed, and capitalized.
Based on your initial answers to the questions listed above, the next step is to formulate a business plan. A business plan sets forth the mission or purpose of the business venture, describes the product or services to be provided, presents an analysis of the market state, outlines goals that the business has and how it intends to achieve those goals, and last but not least, includes a formal financial plan.
In most cases, a business plan is necessary to obtain external capital for your business, but it also serves a number of other purposes. It forces you to critically evaluate the feasibility of your business and whether it will provide a return which is appropriate to the time and money you will invest in the business. The plan provides a benchmark against which you can evaluate the success of your business in later years.
What the Business Plan Should Include
Whether you are starting a new business, seeking financing for an existing business, attempting to analyze a new market, or wanting to define and evaluate future growth, the following outline of a typical business plan can serve as a guide. However, you should adapt it to your specific business.
Introduction and Mission Statement
In the introductory section of your business plan, you should:
Give a detailed description of the business and its goals.
Discuss the ownership of the business and its goals.
List the skills and experience you bring to the business.
Discuss the advantages you and your business have over your competition.
Products, Services and Markets
In this section, you must describe your products and/or services and:
Identify the customer demand for your product/service.
Describe how your product/service is unique.
Identify your market, as well as its size and locations.
Explain how your product/service will be advertised and marketed.
Explain the pricing strategy.
Financial Management
In this section, you should:
Explain the source and amount of initial equity capital.
Develop a monthly operating budget for the first year.
Develop an expected (return on investment), or ROI, and a monthly cash flow for the first year.
Provide projected income statements and balance sheets for a two-year period.
Discuss your break-even point.
Explain your personal balance sheet and method of compensation.
Discuss who will maintain your accounting records and how they will be kept.
Provide "what if" statements that address alternative approaches to any problem that may develop.
Operations
In this section it is important to:
Explain how the business will be managed on a day-to-day basis.
Discuss hiring and personnel procedures.
Discuss insurance, lease or rent agreements, and issues pertinent to your business.
Account for the equipment necessary to produce your product or services.
Account for production and delivery of products and services.
Concluding Statement
In the ending statement, you summarize your business goals, objectives, and express your commitment to the success of your business.
Once you have completed your business plan, review it with a friend or business associate. When you feel comfortable with the content and structure, make an appointment to review and discuss it with your banker. The business plan is a flexible document that should change as your business grows.
The Home-Based Business: Some Basics You Should Consider
This Financial Guide reviews some of the special considerations of the home-based business.
More than 52 percent of businesses today are home-based. Every day, people are striking out and achieving economic and creative independence by turning their skills into dollars. Garages, basements, and attics are being transformed into the corporate headquarters of the newest entrepreneurs - home-based businesspeople.
And, with technological advances in smartphones, tablets, and iPads as well as a rising demand for "service-oriented" businesses, the opportunities seem to be endless.
This Financial Guide discusses some of the basics you should consider in starting a home-based business. It does not attempt to cover all aspects of home-based businesses, but rather, addresses the general requirements of what's needed to start up a business in your home.
Is a Home-Based Business Right for You?
Choosing a home business is like choosing a spouse or partner: Think carefully before starting the business. Instead of plunging right in, take the time to learn as much about the market for any product or service as you can. Before you invest any time, effort, and money take a few moments to answer the following questions:
Can you describe in detail the business you plan on establishing?
What will be your product or service?
Is there a demand for your product or service?
Can you identify the target market for your product or service?
Do you have the talent and expertise needed to compete successfully?
Before you dive head first into a home-based business, it's essential that you know why you are doing it and how you will do it. To succeed, your business must be based on something greater than a desire to be your own boss: an honest assessment of your own personality, and understanding of what's involved, and a lot of hard work. You have to be willing to plan ahead, and then make improvements and adjustments along the road. While there are no "best" or "right" reasons for starting a home-based business, it is vital to have a very clear idea of what you are getting into and why. Ask yourself these questions:
Are you a self-starter?
Can you stick to business if you're working at home?
Do you have the necessary self-discipline to maintain schedules?
Can you deal with the isolation of working from home?
Working under the same roof that your family lives under may not prove to be as easy as it seems. It is important that you work in a professional environment; if at all possible, you should set up a separate office in your home. You must consider whether your home has enough space for a business and whether you can successfully run the business from your home.
Compliance with Laws and Regulations
A home-based business is subject to many of the same laws and regulations affecting other businesses and you will be responsible for complying with them. There are some general areas to watch out for, but be sure to consult an attorney and your state department of labor to find out which laws and regulations will affect your business.
Zoning
Be aware of your city's zoning regulations. If your business operates in violation of them, you could be fined or closed down.
Restrictions on Certain Goods
Certain products may not be produced in the home. Most states outlaw home production of fireworks, drugs, poisons, sanitary or medical products, and toys. Some states also prohibit home-based businesses from making food, drink, or clothing.
Registration and Accounting Requirements
You may need the following:
Work certificate or a license from the state (your business's name may also need to be registered with the state)
Sales tax number
Separate business telephone
Separate business bank account
If your business has employees, you are responsible for withholding income, social security, and Medicare taxes, as well as complying with minimum wage and employee health and safety laws.
Planning Techniques
Money fuels all businesses. With a little planning, you'll find that you can avoid most financial difficulties. When drawing up a financial plan, don't worry about using estimates. The process of thinking through these questions helps develop your business skills and leads to solid financial planning.
Estimating Start-Up Costs
To estimate your start-up costs, include all initial expenses such as fees, licenses, permits, telephone deposit, tools, office equipment and promotional expenses.
Business experts say you should not expect a profit for the first eight to 10 months, so be sure to give yourself enough of a cushion if you need it.
Projecting Operating Expenses
Include salaries, utilities, office supplies, loan payments, taxes, legal services and insurance premiums, and don't forget to include your normal living expenses. Your business must not only meet its own needs but make sure it meets yours as well.
Projecting Income
It is essential that you know how to estimate your sales on a daily and monthly basis. From the sales estimates, you can develop projected income statements, break-even points, and cash-flow statements. Use your marketing research to estimate initial sales volume.
Determining Cash Flow
Working capital--not profits--pays your bills. Even though your assets may look great on the balance sheet, if your cash is tied up in receivables or equipment, your business is technically insolvent. In other words, you're broke.
Make a list of all anticipated expenses and projected income for each week and month. If you see a cash-flow crisis developing, cut back on everything but the necessities.
Remember, preparation is the foundation of success. Learn how to strengthen your home-based business. Success doesn't just happen--you have to make it happen.
Get In Touch With Us
Address:
2805 Fruitville Road, Suite 215 Sarasota, Florida 34237
Phone Number:
Phone: (941) 365-1172
FAX: (941) 529-0350
Email: info@phmmcpa.com
