When my husband and I noticed that a night club was opening in this particular area we both thought it was an odd choice for its location. However, the building is prefect for a night club/concert venue. While the building itself is perfect that doesn’t matter if it cannot attract clients or doesn’t meet city code/regulations. I wonder why type of research Sam did to determine the demographics and geographics of his target market. The night club would have to attract a decent population that does not reside in the area, mainly because it is a suburb with a lot of families.

According to the article the night club owner, Sam, was given a list of 10 things that the three neighboring businesses asked him to do so that his business didn’t impede upon their business. Sam said that he did “most” of the items on the list. This was one of his many mistakes. There either should have been an agreed upon compromise on the 10 items or Sam should have conceded to all 10. By not doing so he created an adversarial relationship, either intentionally or unintentionally, with others.

In the article it mentioned that Sam applied for a liquor license and signed some sort of agreement with the landlord acknowledging the type of business he was going to establish there. No where did Sam defend that he applied for the appropriate business licenses or followed the covenants of the strip mall location. So, I have to wonder if his business was doomed from the beginning. An agreement by the landlord is technically irrelevant if the business itself doesn’t meet the requirements of the covenants, codes, and/or regulations.

In addition, the article stated the neighboring businesses did not care for the type of “clientele” the night club served. Duh! What did Sam do to minimize their fears? It appears nothing, as he didn’t even fulfill the 10 items they asked him to. It does not appear that Sam took the time to build relationships with the other business owners. Sam owned another business for 20 years. Shouldn’t he have known better?

Even if you think a business plan is a waste of time, at least take the time to verify you can actually operate your business with no risk of being shut down shortly after opening your doors.

A corporation might sound like a good idea to a small business owner because Corporations are their own separate entity. Meaning that the corporation stands alone so there is little to no risk of loss of the owner’s personal assets, unless they personally guarantee a business debt. Whereas this is not the case when you operate as a Sole Proprietorship- where the owner is at risk for ALL business related debts.

Forming a corporation might not be the best decision for a small business owner, but it might be the right decision for larger businesses. There are several reasons why this is so.

After a corporation is formed there are many rules and regulations that must be followed by the business. These rules and regulations might not sound bad at first but for a small business owner these rules might be a bit constricting. Also, there are forms that must be filed on an annual basis to maintain the corporation in “good standing” with the local Corporation Commission.

Other disadvantages are associated with how items are taxed within the Corporation. Sometimes corporations are subject to what is known as double taxation. This occurs when a Corporation pays a dividend to the shareholder, i.e.,owner. The Corporation does not get to treat the dividend as an expense, yet the shareholder treats the dividend as income. With a Sole Proprietorship or LLC any losses flow through to the business owner on their personal income tax returns. But with a Corporation those losses remain within the Corporation until the entity generates positive taxable income. For a small business owner this can be tough, because it could be a number of years before that business really turns a profit.

If at some point in the future you want to “go public” consult with your CPA or attorney to determine if a Corporation is the right decision today. Sometimes it might make sense to start as an LLC then convert to a Corporation when the timing is right. There may be tax consequences with this approach so you have to weigh the benefits of another entity type, such as an LLC, with the limitations of a Corporation.

One primary disadvantage of a sole proprietorship is that the owner is personally liable for ALL business debts and lawsuits. Meaning a sole proprietorship, i.e., the business owner, can lose personal property (such as their house, cars, jewelry, etc.) and savings to cover business related debts or to cover the costs of lawsuits. The sole proprietor is also responsible for the mistakes made by employees, if any, that can result in lawsuits or loss of income.

A sole proprietorship is also limited in the ability to obtain business financing. Financing for this type of entity structure is usually in the form of personal loans and credit cards because the business is not separate from the owner. Another disadvantage of a sole proprietorship is that it will be dissolved upon the death of the owner meaning this entity structure does not have continuity.

When choosing a business structure think about the future of the the business. Decide what the current and future business goals are for the company. Think about the longevity of the business and the protections afforded by organizing under a different form, such as a Limited Liability Company, S-Corporation or Corporation. Consider the ability to raise capital by adding partners or shareholders.

A sole proprietorship can be started simply by setting up “shop”, but unlimited liability is the main reason you should consider another form of organizational structure. Take into account the long term goals of the company and the protections afford by certain forms of organization. It is best to consult with your CPA or attorney to determine which entity structure makes the most sense for your business.

Ultimately, the owner makes the decision as to which form of organization is best. It is ease and relatively inexpensive to register an LLC, Corporation or S-Corporation with your local Corporation Commission. Visit their website to read the instructions and determine the fees based on the entity type you choose. If you decide you need help, there are many online sites that can help for a small fee.

Business credit is determined in a different manner. The business credit score is determined by the payment history of the bills that are specifically for the business. This can include utility bills, bank loans, and payments to vendors that report to the credit bureau (Dell is one company who reports your payment history to D&B).Your financial assets are also included in determining your credit worthiness. Financial history, current assets and liabilities are three important aspects that will help you to determine your score. It is a good idea to avoid revolving credit lines or the use of business credit cards when possible as these may lead to a lower score.

It is important to keep the two scores entirely separate. In the event that the business fails, you would not want to lose your home or your savings in the process. Try to avoid “guaranteeing” any bank loans that are for the business, when possible. The more you can separate your individual credit from the business the better. Otherwise, your risk negatively impacting your personal credit if the business is unable to pay its debts.
 
Good credit is something that everyone and every business should strive to achieve. To learn more about business credit visit the D&B website.

Angel Investors are individuals that are looking for a higher return than they can earn in traditional markets so they put their money into non-traditional investments, such as start-up businesses. Most Angel Investors will invest large amounts of Capital into businesses that they have experience in or industries that they like. They can then use their expertise to help the business succeed.

VCs are investors that also invest large amounts of money into businesses. The main difference between Angel Investors and VCs is that Angel Investors will typically invest into start-up companies while VCs will invest in established companies. Both VCs and Angel Investors look to invest in businesses in which they can get at least a 25% return on their investment.

The amount of money an Angel Investor invests is much smaller than the funds invested by a VC. Angel Investors tend to invest less than $150,000. In return for their investment, they often want to to participate in managing the company. Because VCs invest in already established companies, generally they will not try to manage the company. However, VCs will invest $1,000,000 or more. If the business fails to perform as expected, the VC might require significant changes of the management team.

For a company to receive Venture Capital, they will need proof that they are an established and successful company. To get funding from Angel Investors, you need an idea and a good business plan. In general, it is easier for a company to receive funding from Angel Investors. Once the business is established and has proven successful, it is possible to receive additional funding via a Venture Capitalist.

Keep in mind that the money you might receive from an Angel Investor or VC is expensive, with required returns starting around 20-25 percent. Also, they might want to exercise their power to manage or dictate who will be the members of your management team. The best advice is to do your homework and make sure the investor or VC group is a good fit for your business as well as your personality.

There may be other reasons why an investor would fund a business. They possibly would do it for ownership equity, to use their skills and experience as a extra-curricular activity, to keep ahead and/or updated on projects or developments within a a particular industry, or to simply mentor an entrepreneur. The benefits to having an angel would be the funds received to start up the business, getting management advice and potential access to valuable contacts they may provide to help you grow your business.  

Being an angel investor is also risky business. For an investor, if the business that he invested in does not succeed, he may lose part or all of his investment unless an “exit” strategy was arranged prior to funding the business. As the business owner, you may have to relinquish some management control over the business in return for the funds that you receive. You need to have a honest and cooperative relationship with the angel investor in order to keep him from taking over the business, but you also need to be able to follow through with your promises too.  

Now finding an angel investor is a different business altogether. You need to know where to look to find the investor that will best suit your business and is willing to fund and take a risk with you. The typical investors usually are in their 40′s, educated and wealthy. They’re usually community orientated people who want to help potentially successful entrepreneurs which in turn makes them more successful. Make your business presentable. Ask people in your network if they know of any Angel Investors or groups in your area where Angels gather. Angel investing is risky but can be extremely beneficial.

Some of the benefits of the sole proprietorship are:
1. Easy to form. No legal paperwork involved. You decide to start your business and you start working.

2. Ownership controlled. Since you are the sole owner of the business you maintain all of the control.

3. The sole proprietorship is reported directly on your income tax return via the Schedule C; therefore, there is no separate filing requirement.

However, there are some significant detriments to the sole proprietorship:
1. Unlimited liability. This means if someone wants to sue you they can go after your business assets as well as your personal assets. Since there is no corporate structure, such as an LLC, S-Corp, etc. your personal assets are entirely exposed.

2. You have limited resources. Since you are the sole owner of the business you may not have the capacity to accept larger projects or your skills may be limited to a particular area.

Is it okay to operate for a few months as a sole proprietorship? I say NO. Setting up an LLC is very easy and fairly inexpensive. You can do it your self or hire a business that specializes in entity formations or attorney to do it for you. The cost really is not prohibitive, for example, if you do it yourself you can incorporate as an LLC for around $100. Most states recognize single member LLCs so you will establish some legal protection for you and your family.

If you are operating as a Sole Proprietorship, I recommend that you add an item to your to-do list; incorporate your business TODAY. You’ll be glad you did.

An LLC S-Corporation is best for owner operators who do not plan on seeking funding from an external investor. In an S-Corporation the allocation of profits or losses are pro-rata based on ownership percentages. This is true for distributions, known as dividends, too. For example, if Shareholder X needed a $5,000 distribution to help pay for his income taxes associated with the profits allocated to him via the S-Corporation then Shareholder Y (assuming 50/50 ownership split) would also receive the $5,000 distribution whether or not you wanted to distribute money to Shareholder Y.

The LLC S-Corporation is attractive to many new business owners because of how FICA taxes are treated for owner wages. Note: owner wages in an S-Corporation must be reasonable (see your tax adviser for more information). In an S-Corporation one-half of the FICA taxes on wages are paid by the company and the other half is paid by the employee (which is the owner). In an LLC partnership the Guaranteed Payment is not subject to any tax withholdings and instead ALL earnings from the LLC are reported and paid on the individual income tax return as self-employment earnings. Truly, the overall tax savings with an S-Corporation is minimal, depending on the profits of the entities, and should not be the sole item the entity choice is based upon.

With an LLC treated as a partnership the profit or loss allocations as well as distributions need not follow ownership percentages; however, they must have economic substance. Therefore, an LLC partnership is a great tool for businesses that will required outside funding from an investor.

Before deciding which option (S-Corp or partnership) is best for your business consider these items:

1. Who is the source of funding? You, a bank or external investor?

2. How do you want profits or losses allocated? In proportion to ownership or another formula?

3. Will one or more owners receive regular distributions?

4. What are the future plans for this business? Do you plan on selling in 5 or 10 year? Maybe you plan on converting the LLC to a Corporation to prepare for a public offering? Which structure will result in the least amount of cost to do so?

5. Ease and maintenance of entity structure. S-Corporations require a Board of Directors and annual meetings must be held and the minutes must be filed with the state. Also, there are limits on the number of and types of entities that can be shareholders.

Choosing the right entity structure for your business is important for many reasons. Be sure to ask your CPA or attorney to support the reasons they are recommending one option over the other.