you are getting enough information about fees and services to make an informed decision about where you want to bank. Second, you are feeling out where you might be able to get a loan and what would be required in doing so. And finally, you are getting a feel for the “personality” of each bank and the people who run it. Based on these three kinds of information, you make your choice of bank.
If you develop a good, long-term relationship with your banker, you can get important business advice from her. Ask your banker to give you her definition of a healthy business. Ask her to describe the telltale signs of a business that’s getting into financial trouble. Remember that bankers make a career of determining which businesses are good credit risks and which aren’t. Ask them what ratios they like to see on small business balance sheets. Forge a relationship with not only a bank but also the people who run the bank: the branch manager, a loan officer, the person in charge of credit card services. Greet them by name when you come in to make a deposit. Make them your allies.
Other Consultants
The SBA supports several organizations whose purpose is to foster small business growth. Throughout the United States, this federal government agency has local offices whose sole purpose is helping small business owners.
For example, the SBA’s Small Business Development Centers offer free counseling, training, and technical assistance to small business owners. These centers are staffed by a mix of government and private sector consultants, mentors, and teachers. Their purpose is to direct you to experienced professionals who can teach you how to put together a business plan, find financing, or set up a profitable business. SBA consultants are available to small business owners who can’t afford to pay a private consultant to help them begin or expand their first small business. The SBA has at least one Small Business Development Center in each state. SBA offices are in the telephone directory under “U.S. Government,” you can check their Web site at www.sba.gov, or you can call the Small Business Answer Desk at 1-800-8-ASK-SBA.
Another service of the Small Business Administration is the network of Business Information Centers. These centers are high-tech laboratories that have computer workstations, videos, and other technical resources for start-up small businesses. Counselors can help you use these resources to set up your business or to improve your existing business. The Business Information Centers are less widespread than the Small Business Development Centers, but more than thirty are scattered throughout the country. Check your telephone directory under “U.S. Government” to see if there is one in your city.
For a novice business owner, one of the most valuable SBA resources is SCORE, the Service Corps of Retired Executives (www.score.org). These experienced volunteers work with the SBA to provide free counseling on most facets of starting and managing a small business. The SCORE program can help you find and supplement the areas where you are weak. For example, if you have experience in bookkeeping and accounting but have never done any management, SCORE can recommend a mentor with management experience. Be aware, however, that SCORE is a mentoring program. It’s not their job to run your business or to do your work for you. They can give you experienced advice, but only you can chart the course of your business.
Set Up the Legal Form of Your Business
Once you’ve assembled your team of professionals, it is time to enlist their help and make some important decisions. Before you put together your business plan, before you start applying for loans, you need to choose the legal form of your business.
The legal form of your business determines the way the IRS and the legal system see you and your business. Your choice will have tax and liability repercussions. In most states, you have five main options: sole proprietorship, partnership (general or limited), limited liability company, C corporation, or subchapter S corporation.
A sole proprietorship is owned an operated by a single individual (or that individual and a spouse). The business is financed by that individual or by loans in the individual’s name. Profits and losses are treated as personal income. The individual is personally responsible for paying any debts and liabilities against the business with his personal assets as well as those of the business.
A partnership is a business co-owned by two or more people. In a general partnership, the partners pool their time and abilities in the day-to-day operation of the business. Any member of the partnership can conduct business as an agent of the partnership. As in the sole proprietorship, profits and losses are treated as personal income, and all partners are personally responsible for any debts and liabilities against the business. A limited partnership gives only general partners the authority to conduct business. Limited partners are not involved in the day-to-day operation of the business and are liable for debts against the partnership only to the limit of their investment. Commonly, if one partner should die, a partnership must be dissolved.
A limited liability company is similar to a partnership or sole proprietorship, but the owners are not personally liable for business debts. Profits and losses are treated as personal income.
A C corporation is a separate legal entity. In other words, a C corporation in the eyes of the law exists as a separate “individual,” independent from its owners. A corporation is formed when papers are filed, usually with the state in which the corporation operates. The owners of a corporation are known as stockholders. They receive a return on their investment in the corporation as stock dividends. The stockholders of a corporation are not personally responsible for debts and claims against the business (unless they have guaranteed something personally). Stockholders are at risk only for the amount of money they have invested. And the corporation pays its own corporate income taxes.
Although a C corporation offers business owners more legal protection than either a sole proprietorship or partnership, it is more complicated and expensive to set up. Some states require an attorney to file the articles of incorporation. And many C corporations find that an accountant is necessary to manage the tax and other financial implications of incorporation.
A Subchapter S corporation, like a C corporation, is a separate legal entity. The owners of an S corporation have the same legal protection as other corporate owners. An S corporation, however, is not taxed as a corporation. Shareholders in an S corporation report their share of the S corporation’s profits as personal income when they file their personal income tax returns. Usually, an S corporation is a simpler financial and legal entity than a C corporation.
Learn as much as you can about the business structure options available to you. Consult with your accountant. Then take your questions and decisions to your attorney. The attorney will do the legal work necessary to set up your legal business structure.
Can you set up the legal form of your business yourself? Yes. In many states, you can file the paperwork yourself without going through an attorney. If you’ve done it before, or if you know someone you trust who has done it before, you may find the process is not too difficult. If, however, you make a single mistake, that mistake can cost you a great deal of time and money. If you plan to file by yourself, consider the possibility of pulling the paperwork together on your own and then paying an attorney to look it over before you file.
The choice of legal form for your business is not necessarily a permanent decision. As the business grows and changes, you may change forms later. But the decision you make will have legal, liability, and tax consequences from the very beginning. Educate yourself and consult with your advisors before making your choice.
Put Together a Professional Business Plan
It takes time and energy to put together a successful business plan. You may look at this outline and dismiss the process as too much work. Doing so would be an unwise decision. A business plan offers five very important benefits.
Why Put Together a Business Plan?
First, a business plan charts a course for your business. Think about the process a new student embarks on when she first begins practicing your art. You, as the teacher, know