Victor Hugo wrote that, and its message inspires me daily. Now it’s your turn to take that dream of yours and turn it into a viable business.
Your new venture will need to be set up as a legal structure. Your business will be created under one of these basic forms: a sole proprietorship, a partnership, or a corporation. Please consider carefully your needs and financial backing before you select the structure with which to register your company. Most home-based businesses are sole proprietorships, but partnerships are not unheard of; full-out corporations are a little rarer. Your structural decision will impact many areas of your business, including how your taxes are filed. Partnerships and corporations will require contracts and legal fees, negotiations between the parties, and a division of responsibility.
There are numerous websites and books with information on starting a business and on which structure will work for your particular setup. By typing the keywords “small business” in your Web browser, you will find numerous sites to help you make this vital decision. One website that many of my friends have used is Nolo Press, at www.nolopress.com. Download Choosing a Structure for Your Small Business. There is a $10 charge, which buys you a wealth of information.
The Small Business Start-up Guide by Robert Sullivan is an excellent book for newbies in the work force. One of the many popular “Idiot” series books is The Complete Idiot’s Guide to Starting Your Own Business, by Ed Paulson, which I highly recommend.
Let’s take a look at these three structural choices: sole proprietor, partnership, or corporation.
Most small businesses choose this form in part because it is the easiest and least expensive. It’s a good way to get your feet wet and grow your company before you decide to take on a partner or fly your flag under a corporate logo. You are the only owner, and from a legal viewpoint and tax perspective there is no differentiation between you and the business. You will make all the decisions, bank all the profits, and accept all the congratulations.
On the flip side, you will incur all the debt, handle disgruntled customers, and dodge the “I-told-you-so’s” if your venture fails. All your personal assets are on the line if the business fails, and creditors can attack your home, car, and large investments if it goes to court. If you used your home as collateral for a business loan, it’s on the line.
As a sole proprietor, you may hire employees to work for you, which could involve taking on workman’s compensation and unemployment insurance. You may need to provide vehicle coverage for employees as well if they are using their car for business purposes, such as deliveries, pickup, etc.
I have always been a sole proprietor and have never had any problems. Yes, health insurance is expensive when you are flying solo, and you will need to get permits and licenses, but these are trivial compared to the regulations that exist for forming a partnership or corporation. I wanted the autonomy of being my own boss and setting things up the way I want them. I like having things orderly, and actually enjoyed the process of setting up my own shop and knowing I had crossed all the ts and dotted all the is.
I’ve outsourced work to other freelance artists before and found myself frustrated. Suddenly, the control I had over my business and what happened in “my name” was gone; the results were now in someone else’s hands. Many times, I received calls from a dissatisfied client, and I would have to make things right and take time away from my projects to correct the problem. What started out as a means to relieve myself from some of the pressure turned out to be more work.
The times that I’ve worked with another artist, however, did have their plus sides. There was someone to talk to, joke with, brainstorm with, and share expenses and workload with. But in the long run, I knew it would take a toll, as I have a certain way of doing things. Often you will find when working with someone else that your timetables don’t match. You may be someone who rises with the rooster and your partner may rise with the noon school bell. You’re organized—she prefers the “lived-in” look. You dress for meetings, while her attire can only be described as “casually ruffled.”
Of course, as a sole proprietor, you can have employees, but at least in the beginning, you’ll probably run the whole show yourself—until you get a firm grip on the ropes involved in running a new business. As a sole owner, you will answer the phones, file the invoices, pay the bills, handle the advertising and complaints, haggle over back orders of merchandise, attend business meetings alone, negotiate insurance, and smile for the customers.
You can also take a break when you feel like it, not when someone else is ready. You decide your work hours and how your business will be run, along with what customer service policy you believe is effective. Negotiation hassles are nonexistent, and there isn’t that uncomfortable feeling that you are doing more work than your partner.
To be honest, the biggest perk of working alone is the peace of mind it brings me over the fact that there is nothing “out there” not being taken care of. You can delegate responsibilities to someone else, but you always have to follow up (or you should). When my to-do list is checked off at the end of the day, I feel relaxed knowing things are in control and there are no loose ends dangling. But, that’s my personality. You may be different and require a partner to hold the template while you fill in the lines.
Just because a friend shares your enthusiasm for scrapbooking does not necessarily make her a good business partner choice. There are extremely important considerations when deciding who will share responsibility in your profit-producing enterprise.
The most important consideration is financial. If you have a partner, you and she will share the financial burden of the business. You will both be accountable for supporting the business during hard times, and paying the IRS at tax times. The other considerations have to do with how well your personalities and styles complement each other. How would your personalities get along during long work hours? Do you thrive on challenges and obstacles while your friend tends to buckle? Is one of you a “people” person, or do you both tend to be shy and avoid confrontations? If you are terrific with numbers and bookkeeping and your new partner thrives on interacting with customers, then it’s a good match. However, if neither of you has any business acumen when it comes to numbers and your exploding garage is an indication of your organizational skills, then reconsider your pairing. Being able to rattle off the names of the top sticker manufacturers is not enough to set up shop.
If you’ve found the perfect partner and you are both scribbling names for the new business on napkins and leftover paper borders, then great. Now, sit down and ask the tough questions:
What do both of you see as your mission statement? What goals do you have for the business?
Who will invest what?
Which responsibilities will each of you have? Write them down. Purchasing? Bookkeeping? Marketing?
Will one of you be the primary decision-maker, or will everything require a “huddle”?
How and when will profits be divided?
How will you buy each other out in the future?
How will vacation time be divided up? Who works what hours?
This is not a time to worry about treading on someone’s feelings. These things must be hammered out ahead of time, and it will give you a good indication of just how compatible you and your partner are. If the new business buddy happens to be your spouse, take a good hard look at how you handle the family finances and long periods of time together. Many marriages have ended up in boxing arenas when they chiseled LLC next to Mr. and Mrs. (An LLC encompasses aspects of both a partnership and a corporation—I’ll explain below.)
Sit down with a lawyer and have a contract drawn up! Do not settle for a piece of lined legal paper with your two names dutifully jotted at the bottom and a date as the only record of your business expectations and liabilities. That sweet face exploding with enthusiasm for your new venture could turn into the biggest frown you’ve ever seen when things founder or the newness wears off. Get it in writing! Cover your bases and know that if things don’t work out the way you had hoped, the legal system can straighten it out.
A partnership still has unlimited liability, and each partner could be held liable for all the debts the business accrues. You could lose your assets based on a bad decision your partner made.
You might create a limited partnership where one partner (the general partner) has unlimited liability, while the limited partner is only liable for as much as she has invested in the business, much like an investor, while the general partner runs the business.
My biggest piece of advice when considering a partner is equal division of workload and responsibility—unless your partner is coming onboard as an investor only. Nothing sours a relationship faster than one person doing all the worrying, work, and upkeep. How are your family responsibilities? If one of you has five small children and the other is an empty-nester, odds are the nest-free person will carry more of a workload. Once you’ve heard “I have to take Little Elmer to swimming practice” for the ninth time, you may feel the niggling irritation of a one-sided work shift. And please remember, when dealing with family members, it gets tricky. Favors are suddenly cashed in, and because you are good old Uncle Ralph, surely you can cover for Cousin Ray while he takes up his buddy’s offer on that once-in-a-lifetime fishing trip to Montana. In short, know who you are forming a business marriage with. Forget the manners and hit the tough questions now!
A corporation is a legal entity. It protects you from lawsuits against your personal assets. If you’re considering opening a retail store, a corporation would be a good choice. Other high-voltage careers such as event planner, importer, or product designer would also benefit from this structural umbrella.
Forming a corporation is more complex and requires an attorney, and it does require maintenance. There are contracts and legal fees. Corporations are taxed on their own income, and the company shareholders pay tax again on their salaries and dividends. You form a Board of Directors and file reports. In short, you are running a professional business, and there will be legal repercussions if you do not adhere to the articles.
If you’ve decided to run a home-based business, an S Corporation might be desirable. This structure is geared toward small businesses, and an S Corporation does not pay taxes on its income. Income and expenses are divided among shareholders, who report them on their income tax returns. The liability in an S Corporaton is limited; however, there are reporting standards and heavy bookkeeping requirements. It does offer the small business owner some wonderful coverage and options, but it may be something you could grow into if not needed for your initial growth period. Most small businesses do not need shareholders, directors, and the hassles of keeping meeting minutes and corporate records.
Limited Liability Companies, or LLCs, are the new kids on the block, and they’re receiving lots of playtime offers. Since LLCs avoid double taxation and still offer limited liability, they have many business owners touting their benefits.
Each state has its own LLC regulations to which you must adhere. Check with your state department of revenue, or look up some websites dealing with LLCs. The one I found the most informative and thorough is Business Filings Incorporated, at www.bizfilings.com.
An LLC will require you to set up Articles of Organization and file them with the state, along with filing fees, initial franchise taxes, and other fees. As a legal requirement, you do not need an attorney to file the Articles of Organization, but make sure you understand the requirements set forth by your particular state.
Choose the name of your LLC carefully, says Business Filings Incorporated. It is very important that your name portray the image you want for your new company. Legally, the name you select must not be “deceptively similar” to any existing company, and it must be “distinguishable on the record” for your state.
For example, if an LLC named Flower LLC exists in your state, you probably would not be allowed to name your business Flour Limited Liability Company. You should always have a follow-up name in case the one you want is taken. Most states require that you show your business is a limited liability company by using the acronym LLC, or the actual words, as part of your business name.
The IRS does allow one-member LLCs to qualify for pass-through tax treatment; however, taxation of one-person LLCs at the state level may be different.
While the S Corporation’s special tax status eliminates double taxation, it lacks the flexibility of an LLC in allocating income to the owners, according to Business Filings Incorporated. An LLC may offer several classes of membership interests while an S corporation may have one class of stock. Any number of individuals or entities may own interests in an LLC. However, ownership interest in an S corporation is limited to no more than seventy-five shareholders, who must be individuals (either U.S. citizens or permanent resident aliens). Also, S corporations cannot be owned by C corporations, other S corporations, many trusts, LLC partnerships, or nonresident aliens. LLCs are allowed to own subsidiaries without restriction.
To learn more about the similarities and differences between S corporations and LLCs, go to www.bizfilings.com. For advice regarding which entity is best for your particular situation, it would be best to consult an attorney or accountant.
If you will be operating as a sole proprietor or general partnership, you must register your business trade name with the Department of Revenue in your state. You can contact your Chamber of Commerce or Small Business Development for further information based on your state’s regulations.
Once you’ve created a name for your business, simply go to your Department of Revenue or appropriate federal office and register it. The form is simple, usually a page, and the fee is nominal—as little as $8 in some states. It takes about thirty minutes, and you become an official business owner.
Typically there will be a search for a similar name, so always have a second name in the bullpen just in case the one you’ve selected has been taken. Even after you’ve registered your trade name, it is possible another business in a different state or industry will register for the same name. Having yours registered will give you some protection in the case of a competitor trying to use your name. It is a good idea to do a domain search to see if anyone is using your preferred name on a website. You can do a quick and free search at www.InstantDomainSearch.com. You may or may not want to use your same business name on your website, but it’s a smart business practice, not only for branding purposes, but also to eliminate numerous needs for business cards, filings, etc. It’s also less confusing. For instance, I have Wonderland Productions, but it is my umbrella company under which I fly several flags. I will admit, it can be confusing to let my clients know why I have several businesses under this one umbrella company. It’s your decision, but I would check out your preferred domain name ahead of time and lock it down.
Ask when you register if there is a time period to renew your trade name. It may lapse after a period of years and be up for grabs.
In Colorado, if you need to search for trade names for a corporation, limited liability company, limited liability partnership, or limited liability limited partnership, you must contact the Colorado Secretary of State. You will have to check with your state Department of Revenue to find out whom you need to contact.
Registration of a Trade Name with the Department of Revenue does not guarantee exclusive rights to that name. You will require an attorney to register your trademark with the US Office of Patent and Trademark Registry. A trademark would be a good idea for any business you may run internationally, such as a website or store. Consult an attorney specializing in intellectual property law.
Before you register your name, read the section in this chapter called “It’s All in the Name!” carefully. The selection of a name involves more than just a cute play on words or honoring your family lineage by naming the business with the family name.
You will need business insurance for your new venture. If you are operating out of your home, your homeowner’s policy may include all the coverage you require, but it is likely you will have to purchase business owner’s insurance. If you’re offering crops (meetings where people gather to work on their projects together) and workshops from your home, you may need additional liability insurance in case of an injury to a customer. Check with your insurance agent and make sure you are explicit about all of the activities you will be offering, including outdoor parking.
Like a comprehensive homeowner’s policy, a business owner’s policy protects against economic losses caused by damage to the owner’s property and against legal liability for others for bodily injury and property damage involving the business.
A business owner’s policy covers the same kind of protection from perils that the typical homeowner’s policy does, but it does so for the business property.
Example: A large tree limb falls on your home, wrecking a portion of your roof and the rooms below (cost to repair = $30,000) and damaging a personal computer system that was exclusively used in your home business (cost to repair = $2,000).
In this example, if you had only a homeowner’s policy, you would either get only $30,000 (for the wrecked rooms and roof), or nothing at all, if your policy voided coverage if a business is conducted in the house. The full $32,000 worth of costs would be covered if you had a business coverage rider to your homeowner’s policy, or if you had both a homeowner’s and a business owner’s policy.
In addition to this coverage, you can receive coverage, at extra cost, for income loss as a result of the business’s property damage. A sprinkler system going off in a scrapbooking retail store could ruin the specialty papers and other merchandise, resulting in a loss of business.
This is probably the most important part of the business owner’s policy—certainly so if you have business visitors in your home. It will cover injuries to your customers, whether they were injured in the “personal” or in the “business” portion of your home.
Another type of coverage that you can add to a business owner’s policy for extra protection is for product liability. If your business includes the selling of a product, you may be sued if someone is injured using the product. This can happen even if you just distributed the product, and had nothing to do with its design or manufacture. Depending on how potentially dangerous the product is, who the user will be, and in what part of the country it will likely be sold or used, the cost for this additional coverage could be reasonable or extremely expensive.
If you are planning to take part in a trade show or expo or any event on an outside property, check to see what liability insurance is carried by that particular venue and what, if any, additional coverage you may need to acquire.
If you use your car in connection with your business, it’s important that you find out if your policy will cover business-related accidents. Consider the devastating effect that a large judgment could have on your personal and business finances; you don’t want to find out after the fact that you weren’t covered. If your policy does not cover business travel, you usually can get coverage by way of a policy rider for a reasonable amount.
If you have employees who drive your car on business, you should have what is known as “non-owned” coverage. This coverage pays for injury to people and property damage caused by the employee.
Naming your business is important stuff. Your name, your DBA (doing business as), will decide a lot of things for you now and down the road.
The temptation here is to go for clever and cutesy. If you can think of a clever name that clearly describes the product you are selling, that’s great! If, however, it isn’t clear exactly what you do offer, then you have a problem.
For example, a company called CreamIt: is it a cream pie business, cosmetics, a pie-throwing party service, or a dairy? Answer: a dairy. By all means be clever—people remember clever logos and names—but make sure it’s immediately apparent what your business is offering.
If you are considering putting your name on the business, such as Wendy’s Memory Savers, that’s fine. It denotes a smaller, friendly shop with the owner’s full attention. Lawyers and accountants often use their names as they are cashing in on their reputations and (hopefully) good name in the industry. There is one hitch to using your name, however. If you were to decide to sell the business later and it is closely tied to you, the new buyer may be hesitant. Is Wendy’s still Wendy’s without Wendy? Can you sell your customer base if you’re out of the picture? What about handing the business down to your children? Will they want it to remain Wendy’s, or want to change it to Memory Savers, Dude? Having your name instead of a generic one may also make it easier for your business to be accessible to legal attachments, such as personal liens or tax problems, which is a decidedly negative aspect. Think it over carefully.
Another thing to consider when choosing a name is the impression it gives. Do you want fun and playful or sophisticated and sharp? Pictures, Paste, and Press-ons is a cute scrapbook business name; it could go either way. Polly’s Purty Pictures is obviously tongue-in-cheek and cutesy. Preserving Perfect Posterity creates an image of class and nostalgia.
When creating a logo, the name is very important in how it will translate in print and graphic images. The name may be so lengthy that it’s cumbersome on a letterhead, store sign, or vehicle lettering. If you’re using a graphic, could the person looking at it tell what your business is without the name next to it?
A word of caution: if someone else has the name you’ve been dreaming of for eight months, don’t try to hang on to it by altering it slightly. In the long run, it will only add to confusion with customers and animosity from the original owner. Be original—you’re in a creative field!
You will need to decide whether you will be separating your business banking from your personal banking (which I highly recommend). Many small-time home-based businesses simply keep their personal checking and add the letters DBA (doing business as) and their new business name after their personal name on their checks. This way, the checking account acts as a commercial account without obtaining two separate entities. The downside to this is the obvious: Keeping your personal expenditures separate from your business transactions is tricky, and many banks, when looking over your records, will frown on having to separate the two in order to make a loan decision. The IRS will also have a hard time deciding if this is a viable business or a hobby.
For the sake of accurate bookkeeping, open a separate business account. It is very important for corporations and LLCs to keep the finances of the business separate from those of the owners. To open a business bank account, most banks require information on the company, such as the formation date and type of business, and the names and addresses of its owners. Some banks require corporations to provide a resolution from the board of directors or members/managers in order to authorize the opening of a business bank account.
Your bank will need to see your registration form and a resale permit (more about permits in this chapter) in order to open your account and print up your checks—another reason for doing a trade name search. You wouldn’t want to put your business name on your checks and find out when you go to register that the name has been taken.
Good recordkeeping is a must for any business. Whether you do the books with a store-bought ledger, use a computer spreadsheet, or hand over everything to an accountant, you must maintain accurate daily records. Outside entities such as the IRS and bank loan officers will want to see your profit and loss statement (also called P & L) and monthly ledgers. Complete record-keeping charts are located in Chapter 13, “Contracts, Forms, and Checklists.”
If you’re comfortable with a computer and spreadsheet software, small business accounting packages such as QuickBooks or Peachtree Accounting make it a snap to do your bookkeeping. There is also tax preparation software (don’t you just love computer technology?) to allow you to handle all your tax accounting needs. Another boon to computerized bookkeeping is the ability to do your books, download the information to a disk, and take it to your accountant for professional monthly, quarterly, and annual statements.
Resist the “throw the receipts in a shoebox and do it later” mindset. You won’t remember everything, and once it all piles up, it can be overwhelming. Set aside a time at the end of each day to update daily transactions. You will be paying Uncle Sam quarterly anyway, so save yourself some aspirin and do your books regularly. The one-write system, in which you make account entries as part of your check-writing, is a popular form of accounting for small businesses.
If your structure is a corporation or you have employees, having an accountant would be a good idea. Spend your time bringing in revenue, not researching forms and tax breaks, when you get into this area.
Whether you do your own books or hire an accountant, you will need to decide your business year. For most small businesses, the business year is the same as the calendar year, January 1 through December 31. This simplifies your taxes as a sole proprietor, as you’ll be paying taxes based on a calendar year anyway.
The other type of accounting ruler would be a fiscal year. The fiscal year may begin any time at any month and end the previous day of the following year—for example, April 15, 2004, through April 14, 2005.
Two methods of accounting are the cash method, where income is dictated by when the check arrives and expenses are recorded when paid, and the accrual method. The accrual method, mainly used when inventory is involved, is based on income being recorded when an invoice is sent out and expenses recorded when the bill arrives. Receivables are money owed to you but not yet received, and payables are money you owe others but have not yet paid. These are listed as assets and liabilities on your monthly balance sheets; www.bizfilings.com has extensive information in this area.
A profit and loss statement (or P & L) gives an overview of your income and expenses over a given accounting period. The nice thing about a P & L is that it lets you see at a glance how your business is faring. It will not only give you a month’s-end, bird’s-eye view, but the year-to-date as well. The year-to-date shows you at a glance whether you are making a profit, what your expenses are running, and other pertinent figures for your business for that running year.
A cash flow statement is basically a comparison of money coming in and money going out. You can take a look at your projected cash flow and see if your business is on track or in trouble with upcoming bills.
And finally, a balance sheet lays out in black and white your businesses assets and liabilities. This report will show you, and anyone you may be approaching for a loan, exactly what your business is worth.
These methods of tracking your business’s day-to-day activity are vital. They will tell you now if you are on target with what you projected your income and outflow to be; whether you are paying too much for inventory or have too much inventory and are not pricing it effectively; and if you have a problem that needs to be addressed now! Sample ledgers and spreadsheets are found in Chapter 13.
Save receipts, check stubs, and deposit slips even after you’ve recorded them. They are important as backup for the IRS or a possible return of merchandise. Accurate records of car mileage, gas, oil, and car maintenance are all important come tax time. These are used as deductions, and the depreciation of the vehicle can be determined as well.
If you use the same phone line for your home and business, keep a phone log.
Have a petty cash log available for small cash purchases pertaining to your business.
Travel expenses, including lodging, food, and transportation, should be jotted down. Tradeshow booths or attendance can be expensive. Log all information pertaining to how much you paid for booths or tickets at scrapbooking tradeshows, expos, or lectures. Keep track of your travel and food expenses during the time you were in operation at these events. If you had to rent AV equipment, extension cords, draping, signage, and so on, put it all down.
A log of fixed assets such as cars, office equipment, cameras, etc., will all need to be documented to determine depreciation. The importance of maintaining accurate inventory records should be self-evident.
If you’re a retailer with daily receipts, you should clear the cash register daily and keep track of taxable sales in order to pay sales tax based on city and state regulations. Make your deposits daily or weekly so that revenue does not sit around.
Now, on a monthly basis, record your revenue accrued and expenses, and create a profit and loss statement. Balance your checkbook and update your cash flow projections and balance sheet.
If all this sounds daunting, then by all means, use an accountant or computerized accounting system. You enter each transaction one time, and the software will automatically create individual logs and records.
One final word on bookkeeping is a point-of-sale (POS) system. This is an automated method to manage inventory by tracking your product supply and feeding it into your cash register. This system is truly amazing. All your inventory purchases are entered based on a database. When you make a sale, it decreases the inventory account, and when you make a merchandise purchase, it increases it. You are notified of depleted merchandise and that it’s time to order. At a glance, you can also see what’s not moving and may need to hit the clearance bin.
“Check that a local manufacturer is bar-coded for your POS system,” states Penny McDaniel of Legacies LLC. “Look for a POS system tailored to scrapbooking stores.”
Microsoft has a comprehensive system called the Microsoft Business Solutions Retail Management System. It is a POS solution designed primarily to meet the needs of medium-sized retailers. The product includes a customer tracking solution, provides inventory management tools, and has comprehensive reporting tools, among other features. Check out reviews of the industry’s top POS systems at www.softwareadvice.com/retail/.
Other websites for POS systems are www.systemID.com, an inventory management program, and asset management at www.made2manage.com.
According to Business Filings Incorporated, most state and local governments require businesses operating in their area to obtain licenses or permits. In some instances, the federal government may also require you to obtain a license or permit.
There are two types of licenses: general and specific. A general business license, similar to a use tax, is assessed annually for the privilege of operating a business in the jurisdiction. A special license is one that is issued to a business that will provide products or services that require regulation. Special licenses are issued to professionals such as doctors, lawyers, barbers, and others who have met a certain level of training or education.
A sales tax license is a must. According to Penny McDaniel, former owner of Legacies LLC, “No one would work with me without a tax ID number; not wholesalers, catalogues—no one. It was difficult to research start-up costs without a tax ID. Product manufacturers wouldn’t work with me. Trade shows and select vendors also wanted proof that I was a serious businessperson. Some manufacturers wanted to see a picture of the store and a copy of a lease agreement.” While Penny has changed business hats and is working in a new arena, her advice is greatly appreciated and valued.
Check with your state or government office to see which licenses and permits are required for your business. Ask them for forms and information that your type of business may require. Your property may be subject to an inspection before a license or permit is granted.
Your home-based business may require a zoning permit. Zoning ordinances, which regulate how property can be used, are a common type of ordinance. If you comply with this ordinance, a permit will be granted for you to operate your business. For more about zoning see the Zoning section of Chapter 4, “The Home-Based Scrapbooking Business.”
Another important permit is a resale permit. If your state collects sales tax, you’ll need one of these and can acquire one at your Department of Revenue. You must have it to do business. This permit will also exempt the sales tax on retail materials that you buy to create products such as albums, which you then go on to sell. When a retailer or wholesaler sells you specialty papers, stickers, etc., you do not pay tax. You charge your customers the deferred tax when they purchase your products, the custom-made albums. These taxes are then filed quarterly or annually with Uncle Sam.
If you’re running a home-based business, you may or may not want to bother with credit cards. Let’s face it, however—it has become a “plastic” world. If you will be selling products, you may want to consider accepting credit cards; it could impact your sales.
Retail and Internet stores will definitely need to set up a merchant account to process credit card payments. You can look up companies offering this service by typing “merchant account” into any search engine. Compare fees and services and get the best company geared to your type of business. Fees can vary, so shop carefully. Most fees are roughly 2 to 5 percent and are withdrawn from the customer’s payment.
PayPal is a juggernaut in the merchant account arena. Most say, “If it’s good enough for eBay, it’s good enough for me!” The only downside is that your customer must have a PayPal account to use it and they may, or may not want to sign up. Please visit www.Paypal.com to see an overview of their services.
Credit card purchases can require the card be manually swiped through a machine or entered into special computer software, which provides much faster verification–than card-swipe machines. The payment is then deposited into your bank account, usually within forty-eight hours, minus the credit card processing fee.
There are new smartphone apps and attachments that allow you to swipe credit cards right through your phone. PayPal has added one of these attachments, as has Square and others. It is a boon for trade shows or places where you need a portable credit card service.
Finding financing for a business can be tricky. Many new entrepreneurs use their savings, credit cards, or loans from family, or they split expenses with a partner. When these ideas are not viable, they usually turn to a bank.
Bank financing is difficult for a new business because start-ups have such a high failure rate, and home-based businesses are always considered unsatisfactory unless you have enough collateral to obtain a secured loan rather than an unsecured loan. You might look at a home equity loan or try selling something of value, such as property, a car, etc. Dipping into a 401(k) retirement fund or taking a loan on your life insurance are other options.
“My business plan was the reason I was able to get funding,” Penny McDaniel of Legacies LLC told me. “It was also interesting that I was turned down three times by banks when I put my project before a man. A female loan officer finally approved me.” This is not the first time I’ve heard of this when pitching an idea that reaches more of a female audience to a bank. Men, due to their lack of interaction with certain markets, don’t grasp the impact or appeal. Gentlemen, please put the shotgun down! I confess to knowing nothing about NASCAR and would not understand its appeal whatsoever!
If your credit is good, or you’ve run a different business in the past and can show a track record for revenue and a solid customer base, you might qualify for a personal loan. If you need a vehicle for your business, you may get a little farther finding financing for that. The car or van will act as its own collateral, and at least you can check that one off your “cash needed” list.
Specific types of bank loans, in addition to consumer loans and mortgages, are:
Working capital lines of credit for the ongoing cash needs of the business
Credit cards: higher interest, unsecured revolving credit
Short-term commercial loans for one to three years
Longer-term commercial loans: generally secured by real estate or other main assets
Equipment leasing for assets you don’t want to buy outright
Letters of credit for businesses engaged in international trade
The Small Business Administration (SBA) is a source you could go to for money. In most cases, the SBA does not do the lending, rather it works with banks and Small Business Investment Companies (SBICs) to guarantee a loan. The SBA has a microloan program that was developed to increase the availability of very small loans to prospective small business owners. The average loan amount is $10,000, with amounts ranging from $100 to $25,000. Once again, the loan is not made directly; instead, you are put in touch with nonprofit intermediaries who make the financial decision and disperse funds.
Most venture capitalists are looking for a high rate of return on investment (ROI), and a speedy one at that. A small start-up business would not be worth their while. Their main interests lay in high-tech businesses or ones with a proven track record or high-impact market. You may find a venture capitalist who is impressed with your credentials or past experience. These are often called “angel” investors, and they may be in a position to see your dream and want to back you. You can find venture capitalists on the Internet by typing in “venture capital,” but again, this is probably the last avenue available to a small home-based or retail business.
For any of the above loan ideas, have a well-prepared business plan ready, and a lot of enthusiasm. Enthusiasm for your project can go a long way.
If you have employees or if you choose a form of business other than a sole proprietorship, have a Keogh plan, or need to withhold income tax, then you will need to contact the IRS to request an Employer Identification Number (EIN). An EIN identifies your business for tax purposes in the same way your social security number identifies you. If you are a sole proprietor, you may simply use your social security number on tax forms and registration materials.
Use Form SS-4 to file for an EIN. These forms are available in post offices, in public libraries, online, or can be obtained by contacting the IRS. If you are a corporation or a partnership, you must file for an EIN and pay quarterly employment taxes using Form 8109. Go to www.federal-ein-application.com to file a speedy application for your EIN number.
You will receive federal tax deposit coupons when you apply for your EIN. Use “IRS Publication 505: Estimated Tax Payments and the Estimated Tax Worksheet” on Form 10490-ES to figure out how much you’re likely to pay.
According to Business Filings Incorporated, physically putting a business plan together requires you to translate your thoughts about how you’re going to run your business (and how it will perform) into a format that is dictated, in large part, by the business you’re in and the expectations of your audience. While most business plans share a similar structure and contain similar information about a business, your business plan will be distinguished by those characteristics that are unique to your business. Just as each person’s résumé differs because it reflects the particular life experiences of that individual, each business plan will differ. But the format makes it instantly recognizable as a business plan. There is a list of business plan essentials in Chapter 13.
The following are the key issues you need to examine before you can actually start to write your plan:
Audience: Whom are you writing for? If you are writing for third parties outside your business, their needs and expectations will govern the type of information and level of detail in your plan. Your neighborhood banker is going to be far more concerned with the financial performance of your business than with the salary structure you plan for your employees.
Planning horizon: How far out into the future will your plan extend?
Type of business: Your business’s classification as a service provider, product producer or seller, or mixed provider of products and services will have a huge impact on the type of information in your plan.
Sources of information: What information is available to you in creating a business plan? How can you reduce the time and effort required to analyze your idea?
Reasonable assumptions: How can you set yourself up for success by taking a realistic look at internal and external conditions of your business, so as to make reasonable predictions about the future?
After you’ve considered the purpose of your plan and done some background preparation, it’s time to implement the actual elements you’ll include in a business plan. These do not have to be created in the order shown, although most financial loan officers are accustomed to seeing them in this format:
Cover page and table of contents: They identify your business and make it easy for the reader to find and examine particular documents.
Executive summary: This is arguably the single most important part of your document. It provides a high-level overview of the entire plan that emphasizes the factors that you believe will lead to success.
Business background: This is the section that provides company-specific information describing the business organization, history, and the product or service the business will provide.
Marketing plan: This presents an analysis of the market conditions that the business faces, sets forth the marketing strategy that the business will follow, and provides a detailed schedule of marketing activities to support sales. Include competitors in your area and how your business will offer more than they do.
Action plans: This is where you detail how operational and management issues will be resolved, including contingency planning.
Financial projections: This is another extremely important section. Your projections (and historical financial information, if you have it) demonstrate how the business can be expected to do financially if the business plan’s assumptions are sound.
Appendix: This is the place to present supporting documents, statistical analyses, product marketing materials, résumés of key employees, etc.
A business plan may seem daunting, but it is totally necessary and will point out the areas where you are weak. You may need to do more research on manufacturers or your competition. Perhaps your management team could be stronger in a given area.
If you are planning to open a retail establishment, a carefully documented business plan is an absolute must. You will need to forecast your income with a cash flow chart and break-even analysis, so your research into your business is vital.
One very good book available is the Business Planning Guide by David H. Bangs, Jr. This is one of the most comprehensive books I’ve seen on the subject of business planning, complete with sample business plans and existing business overviews. Go to www.bizfilings.com for in-depth online help with detailed information on each portion of the business plan.
There is a business-plan checklist in Chapter 13.
I realize this chapter has been lengthy and your head is probably spinning. The bottom line is: Your business will require good record-keeping, a head for budgeting and planning, good organizational and people skills, and a desire to keep the government happy. Too many businesses have been shut down due to owners ignoring tax regulations or thinking they could cheat the government.
Take your time figuring out start-up costs. Don’t think, “Oh, well, if I run out of money, Aunt Sarah has always loaned me money in the past.” This is a business venture now, not a hobby, and it should be treated as such. Figure out the cost of everything you will need in order to open the doors of your business. These are your one-time start-up expenses. Now determine how much you think it will cost to run your business on a monthly basis, including employee payroll, inventory, overhead, vehicle expenses, advertising, etc. These are your operational costs and are different from start-up costs. Start-up is what it costs to get your doors open; operational expenses are what it costs you to perform each day.
Finally add in a slush fund, the amount of buffer you’ve set aside in case of unexpected expenses. This is called a contingency fund, and it is vital. Do not open your business on your last dime. This is why so many businesses fail. You should ideally have enough set aside to run your business for one year.
Cash-flow analysis is so important. It shows how much money is coming in and how much is going out. It will tell you if perhaps you’re extending too much credit to customers and are unable to pay the monthly bills. Or that you are ordering too much inventory when sales and revenue don’t warrant it.
Your break-even analysis is your projection of when you believe the business will have generated enough income to pay for the operating expenses—exactly when you expect to break even. Any additional revenue would be profit. FYI: Profit is the goal here!
Your balance sheet and profit-and-loss sheets will tell you at a glance how you’re doing. Are you in the red or the black? Are you where you thought you would be based on your business plan projections, or ahead or behind? Some businesses are seasonal and will need to hit it hard in their strong months to coast through their slower ones. These two sheets will let you know if you’re generating enough to make it.
Our final financial concern is the world of taxes. Wait! Come back! It’s not that bad, and the IRS really is a friendly place once you’ve visited their domain. They’ve gone to a lot of trouble to make their forms user-friendly and put out buckets of literature to hold your hand and walk you through their regulations and requirements. Once you’ve set up good record-keeping, the rest is a snap. So, hoist up your bootstraps and let’s wade on!
This is an area many new entrepreneurs took for granted when working for someone else. Your former employer took care of these headaches for you. He withheld federal, state, and perhaps city taxes from your paycheck, as well as social security and Medicare (FICA). He also paid unemployment taxes (FUTA) and reported them dutifully on a W-2 form.
As a self-employed person, whether you are a sole proprietor or in a partnership, you will pay income tax on your net profit, and you will have to pay self-employment tax to cover social security and Medicare. Check with your local governments about specific taxes. Though state and local taxes vary, they generally use your federal tax return to determine your income or loss for a given year.
A state sales tax must be paid based on the sales of supplies and materials charged to the client. You can go to www.irs.ustreas.gov to get an overview of what the federal government requires.
The IRS has a great guide called the Tax Guide for Small Business (Form 334) that will help you with your Schedule C or Schedule C-EZ if you are a sole proprietor. You will need to attach one of these forms to Form 1040. The tax guide just mentioned will help you determine your tax year, accounting, cost of goods sold, gross profit, and business expenses.
Schedule A lists personal deductions and must also be filled out. If you were a subcontractor for another business, you will be issued Form 1099-MISC at the end of the year.
You will send in quarterly income tax and must estimate what you feel you will earn in one year. Always err on the side of generosity here, or you’ll owe Uncle Sam come April 15. The IRS has a helpful publication for this as well (I told you they were user-friendly!) called Form 505, Estimated Tax Payments. These quarterly payments are due April 15, June 15, September 15, and January 15. Form 1040-ES has an estimated Tax Worksheet to help you figure how much you might expect to pay.
If you are working from your home, you are able to claim certain things as deductions on your Income Tax Self-Employed Forms. These include:
Rent. The area of your home used exclusively for your business. You cannot deduct mortgage or rent paid on the entire house—only the portions used only for business purposes. For instance, if you use the basement only for scrapbook workshops, crops, or business inventory, you may deduct that portion of the house payment. An example would be: If you live in a 2,500-square-foot home and your basement area used for your work is 800 square feet, you may use that percentage of your house payment as a deduction. Figure out what percentage 800 square feet of 2,500 is (it’s 32 percent) and use that percentage rate as your guide. You would use the same method to determine your utility deductions. Form 8829, Expenses for Business Use of Your Home, is there to help you with your calculations.
Professional Fees. Accountants, lawyers, money paid for special classes, a professional’s advisory fees, a photographer’s service, etc., are deductible. A merchant account will charge you fees as will an answering service. If you order forms online for an LLC or domain searches, factor those in.
Advertising and Promotional Costs. Car lettering, Yellow Pages ads, flyers, newspaper ads, business cards, trade show expenses, brochures, etc. For Internet expenses you will need to factor in expenses for a graphic artist, web host, e-commerce costs for your shopping cart, etc.
Capital Investments. Your vehicle, depreciable scrapbook equipment (cutting machines, etc.), and so on are deductible for their depreciation value for that year on your tax forms.
Utilities. The percentage of heat, gas, lights, water, etc., used in your home exclusively for your business areas can be deducted. Use the same method you used in figuring rent or mortgage deductions.
Banking. The expense for checks, bank service charges, bad debts, collection costs, etc. used for your business.
Office Expenses. Telephone, supplies, computer, printer, fax, copier, desk, etc. can be deducted once, in the year they were purchased. This would include in-home rack displays for your scrapbooking merchandise, work tables, etc. Ask your accountant about depreciation of expensive office equipment.
Insurance. Your business-related insurance fees are deductible.
These are expenses that vary with the amount of work you do:
Supplies and Materials. All scrapbook supplies, office stationary, invoices, etc. are deductible.
Hired Helpers. Keep track of hours and payments for anyone you use on a freelance basis for your business.
Mileage. Keep records of your miles, gas, and maintenance expenses. If your car is used for both personal and business needs, claim only the amount used for business purposes.
Clothing. Any clothes purchased as your professional wardrobe for your business can be deducted. Be careful with this area and don’t abuse it. These calculations should be for business-related purposes only.
If you’ve reached the point where you would like to hire employees for your home-based business or you are opening a retail outlet, you will take on the joy of added tax responsibilities.
Withholding FIT. Your employees will fill out a W-4 Form that claims the number of withholding allowances. Use IRS Publication 15 or Circular E to determine the appropriate amount of federal income tax to withhold.
Withholding FICA. You will withhold social security and Medicare taxes from your employees’ paychecks. The percentage to withhold is 6.2 percent for social security for wages up to $65,400 and 1.45 percent for Medicare.
FUTA Tax is your unemployment tax. You will pay 6.2 percent of your employee’s first $7,000 in earnings. This tax return is filed once a year using Form 940, or 940-EZ. This is different from your other filings, as the form is due January 31. Your state will have unemployment tax, and you’ll receive credit from the federal government for the state payment.
Form 941 has to do with employee compensation and taxes withheld along with your employer’s share of FICA. Use Form 941, Employer’s Quarterly Federal Tax Return.
Form W-2 sums up an employee’s income and withholding for one year. Your employees must receive copies of these forms no later than January 31. In addition, you must attach the form(s) to Form W-3 and happily send it along to the Social Security Administration. You can go to www.tax.gov for friendly tutorial videos on how to figure withholding tax.
If you’ve set your business up as a corporation instead of a sole proprietorship, you will have additional tax responsibilities. Form 1120 is required for corporate income taxes on net profits. Corporate tax rates can range from 15 percent to 30 percent of the business’s profits. Corporations also pay for employees’ social security and Medicare tax.
We deserve a reward after this chapter: you for reading and absorbing all the information, and me for writing it! Grab a cold soda, rub your eyes, and let’s take a look at the area of the scrapbooking industry into which you will be tossing your template. We’ll start with the home-based business.