Fundamentals of Starting
a Business
What we do … Building Better Businesses
Consulting – No Charge
• Assistance available to startup & existing businesses
• Comprehensive Individualized Consulting – Business
planning, growth strategies, financing options, financial
analysis, market analysis, etc.
Training
• Affordable
• Classroom
• Online – www.ksbdc.org
Today’s Agenda
• Legal Entity Options
• Feasibility – Is small business ownership for you?
• Steps to Creating a Business:
– Business Licensing, Permits and Registration
– Federal Tax ID Number & Federal Tax Obligations
– Register with KY Department of Revenue & State Tax
Obligations
– Obtain a Local Business License & Local Tax
Obligations
– Employees & Your Responsibilities
• Business Financing Basics
Legal Entity Options And Tax
Considerations
When Starting A Business
Entity Choices
1.
2.
3.
4.
5.
6.
Sole Proprietorship
General Partnership
Limited Partnership
Limited Liability Company
Regular or “C” Corporation
Subchapter “S” Corporation
Sole Proprietorship
•
No Separate Existence
•
File Assumed Name with County Clerk
General Partnership
•
File Assumed Name Certificate
with State and County
•
Partnership Agreement
Recommended
•
Obtain Employer Identification
Number (EIN) for partnership
Limited Partnership
•
File Certificate of Limited
Partnership with State
•
Filed Assumed Name Certificate if
operating under name other than
Partnership Name
•
Obtain EIN
Limited Liability Company
•
•
File Articles of Organization with State
File copy of Articles of Organization with
County
•
•
File Assumed Name Certificate if
operating under name other than
Company Name
Prepare Operating Agreement
•
Obtain EIN
Corporation
•
•
File Articles of Incorporation with State
File copy of Articles of Incorporation with County
•
File Assumed Name Certificate if operating under
name other than Company Name
•
Obtain EIN
•
Prepare By-laws
•
Issue Stock
•
Prepare Organizational Minutes of Stockholders
and Directors (elect officers and directors)
Subchapter S Corporation
•
Same as Corporation but File Form 2553 with
IRS (Subchapter S Election)
Independent Contractors vs. Employees
• Criteria and Definitions of
each
• How to handle paying
funds-1099 or W2
• Use of Contracts
• Other Considerations
• Resource:
http://www.dol.gov/elaws/
Feasibility
Is Small Business
Ownership for You?
Personal Considerations
• Access your readiness to be a business
owner
• Take the SBA Readiness Assessment
http://web.sba.gov/sbtn/sbat/index.cfm?To
ol=4
• Develop a household budget to examine
how the business will effect personal
finances
Business Considerations
• Beginning stage of due diligence , starting
point for developing financial assumptions
• What will it take to operate the business
on a day to day basis?
Market Factors
Research and be able to answer:
1.Who is your target customer?
2.Who are your competitors?
3.What trends are taking place in your
industry?
Financial Considerations
1. Determine start up costs in detail.
2. Identify what capital you have to contribute
to the project.
3. Where will the capital come from?
4. If financing is necessary, lenders require a
minimum 20% capital injection. The bank
will not assume all the risk.
5. If financing is necessary do you have
collateral to secure the loan?
Development of a business plan to
test overall feasibility is strongly
advised!
The Business Plan
Page 28
Resource Packet
 Justification for yourself and others (lenders or
investors) why your business will succeed
 Reference manual
 Tool that can helps define and improve your
operations before you start business
 Powerful tool to solicit funding – Required for
startup financing
 Emphasis on Marketing Plan (Customers,
Competition, Trends & Strategy)
Financials of
the Business Plan
Common financials include:
1. Sources and Applications of Funding
2. Cash Flow Statement
3. Income Statement
4. Balance Sheet
Match what is stated in the narrative
Steps to Creating a
Business
The “How”
Naming It
Legal Considerations
Formal Entities
•
•
•
•
Corporations – C or S
AND
Limited Liability Company (LLC)
Filing process begins at the KY Secretary of State’s Office
(www.kysos.com). Once approved paperwork must be filed
with local county clerk.
Name must be available for use.
Online Name Availability Search
http://apps.sos.ky.gov/business/obdb/nameavail.aspx
Watch for trademark infringements www.uspto.gov search
trademark database
Financing – Debt vs. Equity
Debt Financing …
• Borrowing money and
agreeing to pay it back in a
particular time frame
• Interest rate will reflect level
of risk
• You owe the money whether
your venture succeeds or not –
Loan is personally guaranteed
• NO 100% FINANCING!!! Rule
of thumb, a minimum 20%
capital injection.
Equity Financing …
• Selling a partial interest in your
company
• Investor/Partner assumes all
(or most) of the risk
• Investor/Partner seeks much
greater return on their
investment due to high risk
• Equity investors look for
companies with high growth
potential, not lifestyle
businesses. Example: Extreme
Software = High growth
What the bank looks for …
5 c’s + experience
1. Conditions – Market conditions, industry
trends
2. Character/Credit – Personal credit history
(know your score)
3. Capital – Cash you are willing to invest
4. Cash Flow Capacity – Repayment ability of
the business
5. Collateral – Assets to secure the loan
6. Experience – Industry experience
Why Use a SBA Guarantee
•
•
•
•
Longer term period to repay loan
Limited interest rated lender can charge
Lender guaranteed loan 75 – 85%
SBA technical assistance through SBDC
and SCORE partners
Overview of the SBA Process
• There are three principal players – the
small business borrower, lender and the
SBA.
• Lender will determine if the bank can do
the loan without an SBA guarantee.
• If the loan needs additional backing the
lender will engage the SBA.
Overview of SBA Products
Depending on your need there is a guarantee
program to fit your needs. Commonly used
programs at a glance.
1. 7(a) Guarantee Program
2. Community Express
3. 504 Program
Page 37
Resource Packet
4. Patriot Express
NOTE: Other programs exists.
Our service area
Anderson , Bourbon , Boyle , Clark , Fayette , Franklin ,
Harrison , Jessamine , Mercer , Nicholas , Powell , Scott , Woodford
Bluegrass SBDC
330 East Main Street, Suite 210
Lexington, KY 40507
Phone: 859.257.7666 or 1.888.475.SBDC
Sean.moore@uky.edu
www.ksbdc.org