STARTING A SMALL BUSINESS
By Ted Pouliot
Ted Pouliot can be reached at
tpouliot@unique-software.com
952.884.5785
MicroGrants – www.microgrants.net
Introduction to Starting a Small Business
I have written this guide as an outline from which you can plan your new
venture.
Of the small business I have started, some have been successful and some
not. I learned by my mistakes and hope to guide you to avoid the
disappointment of failure.
Before you start, it is important for you to carefully consider your answers to
the 14 questions list on page 3 as they will be a big help to you and your
advisors.
Also, a good business plan is crucial to your success. A great many new
businesses are gone after three years.
Rather than repeating the many forms, requirements and procedures you
will need, I have listed books easily obtainable that contain what you will
need.
The success or failure of your new business may well depend on how you
prepare. Good luck!
Ted Pouliot
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Before meeting with a business advisor, think through and answer the
following questions. On a separate sheet of paper, number your answers
with the number of the question.
1. Why do you want to start a business?
2. Have you had a previous business? If yes, explain.
3. Do you have experience in the business you want to start? Explain.
4. Do you plan to rent a location or start from your home?
5. How much money do you think you need to start your business?
6. Do you plan on keeping a full time or part time job until your business shows a profit, or do you have
a financial reserve or spouse’s income to live on?
7. How much money does your new business need to generate to cover your living expenses?
8. Will you need employees? If so, how many in your first year? Full Time _____
Part time _____.
1. How many hours a week are you willing to work in your new business?
2. Have you checked your competition? Do you have an advantage?
3. How are you planning to promote your business?
4. Do you have bookkeeping experience? Who will keep the books and file required reports?
5. What are your strengths?
6. What are your weaknesses?
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Be Patient
Take time to thoroughly understand the business you plan on starting:
1. Work for a company in the same field you want to enter. One or two years is best.
2. Check out the competition. Talk to everyone you can in the same or similar business you
wish to pursue. Those outside your trading area will not consider you a competitor and
may be very helpful.
3. Talk to suppliers you will need; they can be very helpful and interested in you as a potential
customer. List out your needs and review costs with your potential suppliers.
4. Go to trade shows that apply to your business. Depending on your business, you may meet
suppliers or potential customers.
5. Is location important to your business? Talk to commercial real estate agents regarding
buying or renting. They can supply you with cost figures.
6. Will you have commission sales representatives? Find out the standard rates for your
industry. Build the commission into the sales price.
7. Read the books we have listed. Most are available at the public library. They contain
valuable information you will need.
8. “Shoot For The Moon”
What is your ultimate business goal? Organize a program to eventually reach that
goal. It may take years, but it will give you the incentive to make your business as
profitable as possible in the early stages, as a step toward your ultimate goal. Success
does not come easy, but if you have a plan and work hard you can reach your goal.
Raising Money
1. Home Equity Loan:
If you own your own home it may be fairly easy to obtain a bank loan at a low interest
rate. The amount will be based on the amount of equity in your home. You may need
an appraisal.
If you do not own a home but have a close relative who does, they may take out the
loan and pass the proceeds on to you. The relative would have a benefit in that the
interest could be deductible on their tax return. You could arrange to pay interest only
for a period of time and then interest and monthly payments to reduce the principal.
1. Relatives:
These loans may be interest-free or at a low rate. Calculate a projected pay-back time.
Consider the consequences if your business fails.
1. Small business administration loans (SBA) www.sba.gov – consult book list.
2. State loans – See book list (No. 1)
3. Bank loans:
Banks are most interested in your ability to repay a loan.
1. Present a detailed business plan.
2. Present copies of your last 3 years tax returns.
3. Present a personal financial statement showing income and net worth.
4. Prepare a graph showing sales, expenses and profits projected for the first three years.
5. Describe your competition and your advantages.
6. Present a plan on how loan will be used and how it will be repaid.
7. See book section (No. 1, 16, 17) – Web site: www.businessfinance.com
From – “Legal Guide for Starting and Running a Small Business” by Fred Steingold.
Ways to Organize Your Business
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Entity
Main Advantages
Simple and inexpensive to create
and operate
Owner reports profit or loss on his
or her personal tax return
Simple and inexpensive to create
and operate Owners (partners) report
their share of profit or loss on their
personal tax returns
Limited partners have limited
personal liability for business debts
as long as they don’t participate in
management
General partners can raise cash
without involving outside investors
in management of business
Owners have limited personal
liability for business debts
Fringe benefits can be deducted as
business expense
Corporate profit can be split among
owners and corporation, resulting in
lower overall tax rate
Owners have limited personal
liability for business debts
Owners report their share of
corporate profit or loss on their
personal tax returns
Owners can use corporate loss to
offset income from other sources
Sole Proprietor
General Partnership
Limited Partnership
C Corporation
S Corporation
Professional Corporation
Nonprofit Corporation
Limited Liability Company
Professional
Company
Limited
Liability
Limited Liability Partnership
Owners have no personal liability
for malpractice of other owners
Corporation may not have to pay
income taxes
Contributions to certain charitable
corporations are tax-deductible
Fringe benefits can be deducted as
business expense
Owners have limited personal
liability for business debts even if
they participate in management
Profit or loss can be allocated
differently than ownership interests
IRS rules allow LLCs to choose
between being taxed as partnership
or corporation
Same advantages as a regular
limited liability company
Gives state-licensed professionals a
way to enjoy those advantages
Most of interest to partners in oldline professions such as law,
medicine, and accounting
Owners (partners) aren’t personally
liability for the malpractice of other
partners
Owners report their share of profit
or loss on their personal tax returns
Implications of Entity Type
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Taxation, liability protection, and the effects of bankruptcy can be different for different
entity types.
Proprietorship - No Separate Entity
1. Keep a separate check book for your business.
2. Keep your business records separate from your personal records.
3. Profits are taxed for the year earned whether you take them or not.
4. No separate tax return; reported as part of the proprietor’s individual tax return.
5. Check to see if you need a business license.
6. File your business name with the state.
7. Business losses can be used to offset income from another source.
8. Under a proprietorship you are also personally responsible for losses and monies owed.
The business cannot go bankrupt; any bankruptcy would be personal.
Single-owner Limited Liability Company (LLC)
1. Similar to proprietorship in operation and for income tax purposes; no separate return.
2. Separate legal entity for state law purposes, including contracts.
3. Liability protection – however, if you are providing services or working in the business
yourself, you may be sued individually for your actions as well as the LLC.
4. Most lenders will require the owner to sign as co-borrower, so not much difference from
a bankruptcy perspective.
“C” Corporation
1. Separate entity for legal and tax purposes. A C corporation is a taxpayer, and files
separate income tax returns.
2. Business profits are taxed to the corporation, and are taxed again when the owners take
them as salary or dividends.
3. Corporate formalities must be followed, such as Board of Directors, corporate officers,
meetings, minutes, etc.
4. Losses cannot offset the owner’s other income; a corporation can go bankrupt.
“S” Corporation
1. Similar to a C corporation, except that business profits “flow through” and are taxed to
the owners; eliminates the double-tax problem of C corporations.
2. Files separate tax returns, but doesn’t pay tax at its level (similar to a partnership).
Taxes
Profits of the business will generate income taxes, the reporting of which will depend on
the entity type. In addition to income taxes, the business may be required to collect and
remit state sales taxes. If the business has employees (including the owner, in the case of a
corporation), employment taxes will have to be withheld from wages and remitted to the
federal and state government agencies.
Accounting
A good bookkeeping system is one of the most important pieces of a well-functioning
business. Many new business owners don’t understand this and let the books go, saying
they are too busy promoting the business to spend time on the books. Such an
attitude,more often than not, leads to failure.
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Different types of businesses will have different needs. For example, a retail store will
need point-of-sale and inventory software, or at least a cash register, while a sales rep or
consultant may be able to keep his books with a simple spreadsheet program.
Bookkeeping
Have a bookkeeper or accountant set up your books. If you or a family member
cannot do the bookkeeping on a timely basis, use a bookkeeping service. One can
often find a retired person with bookkeeping experience to provide this service at
low cost.
Cash Flow
You cannot succeed without an adequate cash flow. You need money available to
pay bills and payroll. A key determination is your “break-even point” – where you
have enough cash flow to continue the business.
Accountant
You need a good CPA accountant to review your books on a regular basis; a good
CPA’s analysis can guide you to increased profitability.
Credit Cards
Most people use “Visa” cards, so start with them and add others if needed. The bank’s fee
is usually 2% and they accept the risk if payment is not made. You may be charged a startup fee and a fee for the card swiping machine. Read your contract with the bank carefully.
PayPal
Used if you do business on-line. Go to www.paypal.com
Avoid Bad Checks
1. Accept only checks from local banks.
2. Be sure name, address and phone number is on check.
3. Be sure check has cleared before giving a refund.
4. Don’t accept third party checks.
5. Don’t accept post-dated checks.
6. Set an account limit or call the bank.
7. Ask for driver’s license and write number on check.
8. For steps on bad checks collection see book No. 4 (pages 333-336)
Extending Credit
See book No. 4 (pages 338-349)
Buying an Existing Business
This may not be your first choice but in some cases it is the best way forward.
1. Reduces your risk, as there is an established track record.
2. Finding a business for sale:
a.
Classifieds
b.
Trade magazines
c.
On-line:
www.businessesforsale.com
www.bizquest.com
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www.bizbuysell.com
a.
Business brokers
2. Ask for tax returns for the last three years.
3. Have a good qualified business accountant review the books and tax returns.
4. Offer small down payment with monthly payments based on profits. Similar to a
contract-for-deed, if you are unable to make the payments, the business will
typically go back to the seller, and the amounts you’ve paid will be seen as rent.
5. See book list (No.’s 7 & 8, as well as No.4, Chapter 10, pages 163-188)
Prepare a Business Plan
In writing a business plan you need to analyze what you want to do and how you are going
to do it. Any investor or loan officer will insist on reviewing your business plan.
1. Fully describe your business and those involved.
2. Describe your market.
3. Describe your competition and advantages you will have over them.
4. Who will do your books, financial statements, tax returns?
5. Sales forecast; who is responsible for sales? Are commission sales staff involved?
6. Why business will succeed under current market conditions.
7. Amount of money required.
8. List projected first year expenses and sales, as well as projected overall income.
9. List start-up requirements:
Equipment, office supplies, vehicle etc.
Check book list (No.’s 3, 12, 17)
Starting or Buying a Business on a Shoestring
1. Create a sound business plan.
2. Read the books on attached book list.
3. If necessary, find a silent partner. You have the skills and ideas – your partner has the
money. Be careful, research partnership guidelines.
4. Try to get 60 or 90 day payment plans with your suppliers.
5. Start a home-based business or low rent location.
6. Buy used equipment as needed.
7. Often a small business owner just wants to retire. Buy the business with a low down
payment and low payments out of profits.
8. Keep your day job as long as possible and then go to part time.
9. Retain some personal cash reserves for emergencies.
10.
Avoid using credit cards for purchases due to high interest rates.
11.
Offer your customers the ability to pay with credit cards. Start with “Visa” and add
others if needed. Accept checks, but follow the guidelines listed in this pamphlet.
Carrying accounts costs too much time and money.
Home-Based Business
1. Check your zoning ordinances and license requirements.
2. Usually a home business is allowed if most of the home is used as a residence.
3. Check if signage is allowed.
4. If your business causes parking problems, your neighbors may complain.
5. Excessive deliveries may cause neighbors to complain.
6. Some zoning ordinances are very old and no longer enforced – check.
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7. If you are in an apartment or condo, check on restrictions.
8. Check on insurance. Your homeowner’s policy may not apply. If your house burns
down, you may find your fire insurance does not apply if you did not disclose your
business use. Accidents by delivery persons may not be covered.
9. Taxes – for tax deduction rules consult IRS Publication 587 “Business Use of Your
Home” www.irs.gov. For you to be able to claim an office-in-home deduction, the
space must be used exclusively for your business.
Manufacturer’s Representative
Most companies that produce a product need salesmen. Some use staff employees but
many more hire manufacturers’ representatives. They are independent sales people who
work out of their home. Many carry more than one manufacturer’s products that are not in
competition with one another. In this case, they call on buyers for all of their lines.
Example:
A representative calling on furniture stores may carry a lamp line, a picture
line, and a decorative accessory line. The sales rep’s territory may be one state or may
include bordering states. As it is an independent business, the rep must cover all travel,
entertainment, and other expenses, which are deductible for tax purposes (with certain
limits). See IRS Publication 535 “Business Expenses” at www.irs.gov. Oftentimes a
home office can qualify as a business expense for tax deduction purposes as well.
Attend trade shows for industries in which you are interested to apply for a rep position.
Attend on the opening days when the company’s executives are in attendance. At the
show, pick up trade literature, which often lists territory openings.
Importing
You can start an importing business out of your home if you can import small products.
Scarves, jewelry, or watches would be a few examples.
There is extensive competition in any import line. You should not consider importing
unless you are a designer or at least a very creative person. You need to check retail stores
to see what is offered, and at what price, in your chosen product.
For resources try the following:
1. For above products, check the trade office in New York or Washington
2. . Internet
3. D.C. for China, India and Philippines. Ask for a list of manufacturers
for your product.
Select a high class name for your company. Include “Import” or “Importing” in the title.
Have high class stationery and business cards printed. You will look more professional if
you have the back of the card printed in Chinese.
Write the foreign sources you have obtained, indicate that you want to add to your existing
line and their company was highly recommended. Ask for photo-quotations on their
highest styled designs.
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Try to obtain photo-quotes from at least ten manufacturers from each country.
Select the designs you think would sell the best and order samples. They would ship by air
parcel post, UPS or FedEx, an invoice would be attached indicating “Samples” – no
commercial value” therefore you will not have to pay duty.
Your next step will be to place a small order. Indicate that the order is just for salesmen’s
samples and a stocking order will be placed later for the items which are most popular with
your many customers.
You will have a price advantage over many importers operating on a national basis with
high overhead.
The next suggested step is for you to call on the appropriate retailers in your area. Start
with just a double mark-up from your landed cost.
You will soon learn if your product selection is saleable. If you were well received then
place your next order for the best selling items.
If you are successful in your area, you could show at a jewelry show and post a sign “Some
Territories Open” to add sales representatives in other states.
Your next step would be to visit foreign trade shows and visit the factories from which you
are buying.
If your business in not successful, you will be out very little as you are home based and
could at least sell off your imports at cost.
Negotiating a Favorable Lease
Do not pay high rent for a high traffic location if location is not important or if most of
your business is over the phone. Remember that a website is also a location.
There may be more detail than you realize. See: “Legal Guide for Starting and Running a
Small Business” by Fred Steingold (Chapter 13 pages 229-248)
Advertising
Many new businesses waste money on newspaper, radio and TV spots. Better to use the
yellow pages and local free classified newspapers. Use well-designed business cards
which include your web address; ask satisfied customers to pass them on to friends and
business associates. See book section (No. 6)
Competition
The success of your business may depend on thoroughly knowing your competition.
1. List all of the competition in your trading area. For each, list their services and product
categories.
2. Call or visit your competition for their prices on goods and services that you will also
offer.
3. List advantages you will have over your competition.
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a.
Price
b.
Quality
c.
Service
d.
Location
4. Pull up and analyze your competitors’ websites.
Creating a Website
Eight out of ten Americans now spend as much time on-line as they do watching
television. No matter how small your business, you will appear larger and more
professional with a good website.
Buyers new to your area will check the web to find the business they want. You can
prepare a simple website yourself. Check out the following:
1. Adobe Dreamweaver
2. Microsoft FrontPage
3. Namo Web Editor
Be sure to check the websites of your competition as well as others, to get an idea of what
would be best for you. If you want to hire a web developer check the following:
1. www.Craigslist.org
2. www.Freelance.com
3. www.Guru.com
You can get bids from freelancers. Check book list (No. 3). For a class, check out:
“Website Design and Maintenance”
Winnetka Learning Center
7940 55th Avenue North
New Hope, MN 55428
Tel. 763.504.6980
Books
The books listed are available from the public library.
1. “A Guide to Starting a Business in Minnesota” - *available without charge from
Minnesota Department of Employment and Economic Development, Small
Business Assistance office.
1st National Bank Building
332 Minnesota Street Suite E-200
St. Paul, MN 55101-1351
Tel 651.556.8425
E-mail: deed.mnsbao@state.mn.us
Website: http://www.positivelyminnesota.com/
1. “Complete Idiots Guide to Starting Your Own Business” by Edward Paulson (Includes
CD with over 100 Documents and Agreements).
2. * “The Small Business Bible” by Steven Strauss
3. * “Legal Guide for Starting and Running a Small Business” by Fred S. Steingold
4. “Tax Savvy for Small Business” by Fredrick W. Daily.
5. “Marketing without Advertising: Easy Ways to Build a Business your Customers will
Love and Recommend” by Michael Phillips and Sally Rasberry.
6. “Buying Your Own Business” by Russell Robb.
7. “Mergers and Acquisitions from A to Z” by Andrew Sherman.
8. “How to Start a Business in Minnesota” by Enterprise Press 199 Forms and worksheets,
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CD ROM.
9. “The Women’s Small Business Start-Up Kit” by Peri Pakroo
10.
“Financial Management” by Jae Shim
11.
“Ultimate Start Up Directory” by James Stephenson
Web-sites for many specialized businesses.
1. “Small Business Survival” by Arthur Anderson
2. “How to Form Your Own Partnership” by Edward Haman
3. “Marketing without Advertising” by Nolo Press
4. “The SBA Loan Book” by C. Green
5. “Small Business Financing” by Alice Magos
6. “Keeping The Books” by Linda Pinson
7. “Small Store Survival” by Arthur Anderson
Books for Specialized Businesses by Entrepreneur Magazine Press 800.274.6229 – for
further selection
1. “Start Your Own Clothing Store” by J. Miller
2. “Start Your Own Lawn Care Business” by E. Sandlin
3. “Start Your Own Hair Salon & Spa”
4. “Start Your Own Cleaning Service”
5. “Start Your Own Crafts Business”
6. “Start Your Own Coin-Operated Laundry”
7. “Start Your Own Vending Business”
8. How to Start a Home-Based Mail Order Business” by G. Fiumara
Anyone starting a business in Minnesota needs to get the book “A Guide to Starting a
Business in Minnesota” from the Minnesota Department of Employment and Economic
Development (DEED). The book is updated yearly and available at no charge or on-line.
See book list.
Important Sections are as follows:
1. License Requirements
2. Bonding
3. Patents
4. Trademarks
5. Copyrights
6. Trade secret protection
7. Business plan formats
8. State and federal grants
9. Small business administration loans
10.
Insurance
11.
Employment agreements
12.
Labor standards
13.
Minimum wage requirements
14.
Overtime pay requirements
15.
Record keeping requirements
16.
Deductions from wages
17.
Rest breaks and leave time
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18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
35.
36.
37.
38.
39.
Employee testing and background checks
Time off to vote
Child labor standards
Immigration law compliance
Workplace safety
Workman’s compensation insurance
Group health insurance
Check list for hiring an employee
Business taxes
Tax I.D. number
Business income tax
Sales and use tax
Income tax withholding
Unemployment tax
Resource directory
Accounting principles
Income forecasting techniques
FICA tax
Federal tax requirements
State of Minnesota tax requirements
Specialized legal research and assistance
Management assistance for minority businesses
Special Services
Central Minneapolis Library
Small Business Consultants
No charge
2nd and 4th Tuesday of Month
10:30 – 1:30
2nd Floor
Room N 201 – One on one consultations on all aspects of small business.
Consultants are retired business entrepreneurs.
Room N 202 Attorneys available to answer small business legal questions.
Women Venture
2324 University Avenue Suite 200
St. Paul, MN
Tel 651.646.3808
Classes on starting a small business
Minneapolis Star & Tribune
Check Business section – Small Business Calendar for educational events
Web Site Design and maintenance
Winnetka Learning Center
7940 55th Avenue North New Hope
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Tel 763.504.6980
Small Business Development Centers:
For free counseling – contact nearest locations: www.sba.gov.sbdc
Online Women’s Business Center:
www.sba.gov/content/womens-business-centers
MBDA – Minority Business Development Agency
Small Business Sites:
www.nase.org
www.sba.gov
www.microsoft.com/smallbusiness
www.mrallbiz.com
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