BUSINESS START-UP CONSIDERATIONS

PERSONAL CONSIDERATIONS

Aside from getting married, starting your own business will probably be the most risky, the most frustrating, the most unbalancing experience you will ever have! But like marriage, owning your own company can become one of the most gratifying times of your life! IF you prepare yourself physically and mentally .... IF you do careful, detailed planning .... IF you manage every single day .... IF you stay flexible .... IF you never lose sight of your objectives .... IF you constantly watch your company's performance and make timely changes to keep your venture on course-

That's a lot of "IF's"!!!

Speaking of marriage, when you're working for somebody else, you can pretty well segregate your family life from your work life. Not true for the small business owner! The effects of starting a business, on you and your family can be devastating - both from a physical and mental standpoint - IF you fail to deal with potential personal risks before you begin!
  1. Be certain that you can afford this venture - That with your own money, and/or borrowed money, your business and your family can weather that critical first year. Be certain you can afford to not succeed!
  2. Be certain that both you and your family understand and accept the potential impact of starting a business - no vacations - late meals - working weekends - tight household budget!
  3. Be certain that you have good health. The demands on your time can be fierce. If you go down physically, your new business will surely go with you!
  4. Be certain you are a decision maker. Can you avoid procrastinating? Can you make the tough decisions? The tough ones are the people ones! Dismissing an employee is no fun - regardless of the reason - but it goes with the territory!
CHOOSING YOUR FORM OF BUSINESS ORGANIZATION

One of the most important decisions you must make is how to set up your business as a Sole Proprietorship, a Partnership or a Corporation. Forming the business organization depends on:
  1. Legal restrictions.
  2. Type of business operation.
  3. Need for capital.
  4. Tax advantages or disadvantages.
  5. Liabilities assumed.
  6. Intended division of earnings.
  7. Number of people associated with the venture.
  8. Perpetuation of the business.
A comparison of the three major forms of business organizations follows:

Sole Proprietorship: This is the least costly way to start a business. You can form a Sole Proprietorship by finding a location and opening the door for business. There are the usual fees for registering your busness name and obtaining necessary licenses.

Attomey's fees for starting your business will be less than for other organizational forms because there is less preparation of documents.

Advantages:
  1. Easiest to get started.
  2. Greatest freedom of action.
  3. Maximum personal authority.
  4. Income tax advantages in very small firms.
  5. Social Security advantage to the owner.
Disadvantages:
  1. Unlimited personal liability.
  2. Death or prolonged illness can endanger business.
  3. Growth usually limited to personal energy.
  4. Personal affairs too easily mixed with business.
Partnership: You can form a Partnership simply by an oral agreement between two or more persons. That is very risky! While legal fees for drafting up a Partnership are higher than those for a Sole Proprietorship, you would be wise to have an attourey draw one up to help resolve future conflicts.

A Partnership Agreement should include:

  1. Type of business.
  2. Amount invested by each partner.
  3. Division of profits or losses.
  4. Compensation fof each partner.
  5. Distribution of assets upon dissolution of Partnership.
  6. Provisions for dissolving the Partnership.
  7. Provisions for withdrawal or admission of additional partners.
  8. Duration of Partnership.
  9. Dispute Settlement Clause.
  10. 10. Restrictions of Authority (expenditures).
  11. 11. Settlement in case of death or incapacitation.
Advantages:
  1. Two heads are better than one.
  2. Additional sources of venture capital.
  3. Better credit rating than corporation of similar size.
Disadvantages:
  1. Death, withdrawal or bankruptcy of one partner.
  2. Difficult to get rid of bad partner.
  3. Hazy lines of authority.
  4. Growth usually inhibited.
Corporation: You can incorporate without the guidance of an attorney. You may think that a small family corporation does not need an attorney. However, sound legal counseling in structuring your corporation and in writing your corporate by-laws can avoid future family hard feelings and squabbles.

Of the organization forms discussed, the corporation is the most costly to institute.

Advantages:
  1. Limited liability to stockholders.
  2. Continuity of the enterprise.
  3. Transfer of shares.
  4. Ownership change need not affect management.
  5. Easier to raise capital (equity - not debt).
  6. Possible to divide functions/responsibilities.
Disadvantages:
  1. Heavier taxes.
  2. Power limited by Corporate Charter.
  3. Less personal freedom of activity.
  4. Extensive legal formality.
  5. Expensive to launch.

PROS AND CONS OF THE VARIOUS BUSINESS ORGANIZATIONS


Control of the Business:

Sole proprietorship: You have absolute authority over all business decisions.

Partnership: Control of the business is shared with your partners, which can lead to disputes. A Partnership Agreement can be helpful in preventing or resolving possible disputes. However, you are responsible for your partners' business action, as well as your own.

Corporation: Control depends on stock ownership. In other words, ownership of 51% of the stock distributed allows you to control all policy decisions.Control is exercised through regular Board of Directors Meetings and Annual Stockholders' Meetings. Permanent records must be kept that document decisions made by the Board of Directors. Small, closely-held corporations can operate less formally, but keeping meeting minutes is a legal requirement. Officers of corporations can be held personally liable to stockholders for improper action.

Tax Considerations

Sole Proprietorship and Partnership:- All net income is taxable to the Sole Proprietor or in proportion to each Partner's share of ownership. Your tax rate depends on your own income bracket. You may be able to deduct from your gross income some personal expenditures which are directly related to your business. For example: Corporation: A corporation can be taxed as a straight Corporation or as a Sub-Chapter "S" Corporation. A straight corporation's profits are taxed at corporate rates which graduate from 15% of the first $25,000 of income to 46% of income over $100,000- Salaries of officers are deductible expenses and, as such, reduce the corporate profits subject to income tax. Your salary, as an officer, is subject to individual income tax. If officers' salaries become too high (relative to sales and pretax profits), the IRS may treat the excess as a dividend. This means double taxation, because the same money is taxed as part of the corporate profit and as income to the individual officers. If your form is a Sub-Chapter "S" Corporation, you are taxed the same way as a Sole Proprietorship or a Partnership-

In order to qualify for Sub-Chapter "S" Corporation status, you must meet the following requirements:

  1. Have individual shareholders.
  2. Have no more than 35 shareholders (husband and wife owning stock count as 1 shareholder).
  3. Have only 1 class of stock.
  4. Have no shareholders who are non-resident aliens.
  5. Have no more than 80% of gross receipts from outside the U.S.
  6. Have not more than 20% of the corporation's gross receipts from royalties, rents, dividends, interest, annuities, and gains on sales or exchange of stock or other securities (gross receipts from such sources in excess of 20% are permitted during the corporation's first taxable year or the next succeeding taxable year, provided the amount thereof is less than $3000).
Ability to Raise Capital

Sole Proprietorship and Partnership: The sources of capital are usually limited to the personal assets of the Proprietor or Partners. The ability to get credit depends on the personl reputation of the proprietor or partners. Third parties cannot invest in the business without incurring responsibilities for the business debts.

Corporation: A corporation can theoretically sell stock to raise capital. Practically speaking there is seldom a market for stock in small corporations, except friends or relatives. You could be limited to the personal resources and credit of the owners. However, should you have a unique Product (better, cheaper or never done before) that has potential for the near term large increase in the company's worth, You may be able to attract professional venture capitalists.

Continuity of the Business

Sole Proprietorship: The business ceases when the owner closes it or dies.

Partnership: If one partner is disabled, the other(s) may be able to fill in until the disabled partner recovers. One partner cannot sell his share in the partnership without the consent of the other partners. Death dissolves the partnership automatically. Heirs of the deceased Partner inherit his share of the partnership assets. Without a Partnership Agreement, the heirs often have to sue the surviving partners to enforces their legal rights.

Corporation: A corporation is a separate legal entity. Its existence is not affected by the death or disability of shareholders. Shares of stock can be sold if one owner wants to leave the business. On the death of a shareholder, his stock goes to his heirs,

Personal Liability of Owners

If you are borrowing from a bank or other lending institutions, personal guarantees of all the principles and their spouses will be required.

Certain types of liabilities can be insured against, such as accidents to customers on your premises, damage to customers' property and your products causing damage.

Liability for Trade Debts:

Sole Proprietorship: All your personal assets are available to creditors to satisfy claims against you. This does not generally mean that creditors can sell your home. If your home is jointly owned by you and your spouse, your spouse is not liable for your business debts and his or her interest in the property is not divisible. A creditor can not obtain a judgement against you that is good for 2O years. In that period of time your spouse may die, leaving you as sole owner. You and your spouse may divorce or, more commonly, you may wish to sell and move elsewhere. if any of these occur, you would have to come to terms with your creditors.

Partnership: The general rule is that all personal assets are on the line for business debts incurred by you and your partner(s). This may include your home, in which case the personal liability is same as for a sole proprietorship, unless your spouse is a partner. If you have more money than your partner(s), you may have to bear the brunt of the business debts, even though the Partnership Agreement says you will split debts evenly. A Partnership Agreement does not bind third parties who are not aware of the agreement.

Corporation: If you invest an amount of money in a corporation, you can lose only that amount plus the time and effort you put into the enterprise. Creditors of corporations cannot reach your personal assets to satisfy corporate debts.

OCCUPATIONAL LICENSE

You must obtain an Occupational License for your business. If the business is located in a city or town, both a city license and a county license are required. If your business will be in the unincorporated portion of a county, only a county license will be required. Before going to the city or county Occupational License Office you must first obtain a Zoning Use Permit from the city or county Zoning Office.

You must bring the following information to the Zoning Office:

  1. Your business name, address and telephone number.
  2. A description of your business activitity.
  3. A legal description of the property on which the business is located (section,township,range, lot or parcel number),
  4. Name of the property owner (If other than the applicant, a copy of the lease agreement or a letter of authorization signed by the property owner must be attached to the application).
  5. Personal identification.
If you plan to operate your business out of your home, you will find that city zoning restrictions vary widely.

FICTITIOUS NAME

A "Fictitious Name" is any name under which a person or persons transact business in Florida that is other than his or her or their legal name(s), including corporations. The fictitious name must be advertised in a newspaper in the county where the applicant's principle place of business will be located.

COPYRIGHTS AND PATENTS

The uniqueness of your firm's name, logo or brand and, in some cases, your product need legal protection. If your company is successful, people will try to use your name. If your proprietary product takes off in the marketplace, someone will try to copy it. Count on that!

Copyrights: Most new businesses usually limit themselves to local, county or state markets- If this is the case, you can register your trademark or servicemark with the Florida Secretary of State If you plan to do business on an interstate or nationwide basis, it would be wise for you to apply for a Federal Copyright through the U.S. Patent Office. This trademark registration protects you for 40 years.

Patents: Unique products, specialized processes, formulation of material mixes can possibly be patented. These items must be novel, unique and of public interest. You can apply for a patent without professional assistance. However, if your idea is not properly described and thoroughly documented, one of two things could happen:

  1. The Patent Office could deny the application.
  2. Another party could circumvent the specifications on your device and come up with essentially the same product, leaving you with no legal recourse. If you want to avoid or win possible infringement suits, you should invest in the services of a competent patent attomey.

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