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There are several types of corporations. The main two are the S corporation and C corporation (S and C are subsections of the IRS Code). While there are several differences between the S and C corporations, there are two main ones.

The first is that C corporations are taxed twice: once when profits are realized, and a second time when those profits are passed on to the shareholders. The advantage of the S corporation is it does not pay a corporate tax at all; instead, its shareholders report profits and losses on their personal tax returns, and therefore, profits are taxed only once.

Another difference between the two has to do with size. For the most part, C corporations are large, publicly traded businesses. When you see a business whose shares are bought and sold on the New York Stock Exchange, that is a C corporation. In fact, the ability to freely sell shares is one of the main advantages of a C corporation. People who start businesses with an exit strategy of going public start C corporations. While most large businesses are C corporations, some small businesses choose this form of structure as well for one very good reason: C corporations can deduct 100 percent of the health insurance costs for its employees (including you).

The double-taxation whammy of the C corporation pushes many small business owners toward S corporations, which are, generally speaking, intended for and used by smaller businesses. There are certainly more pros than cons to starting your small business as an S corporation:

• S corporations offer limited personal liability.
• S corporations pay no corporate taxes. Again, profits and losses flow through to your individual tax return.
• A sole owner of an S corporation does not have to pay the FICA tax—Medicare and the self-employment tax, which are roughly 15 percent on the first $75,000 you earn.
• The bad news is that there are restrictions on S corporations: You can have no more than 75 shareholders,  and you cannot have any preferred stock.

Another sort of corporation is called the professional corporation. This type is for the professionally licensed small business owner only, and that professional can be the only shareholder. The type of professional who can take part in this plan varies by state, but usually includes lawyers, doctors, dentists, accountants, and psychologists. It is important to understand that this sort of corporation cannot normally shield you from a malpractice award.

Taken from : The Small Business Bible

As you now know, the problem with general partnerships and sole proprietorships is the personal liability that accompanies business debts and other liabilities; these entities do not shield you from legal responsibility. Not so for corporate entities. In fact, one of the main reasons to incorporate is to legally shield your personal assets from business debts. Consider our pizza parlor fiasco. If you had incorporated and one of your drivers had negligently killed someone, it would have been the business assets at risk. While still unpleasant, it sure beats having your personal assets at risk. Creditors are limited to the assets of the corporation only for payment and may not collect directly from the shareholders.

Taken from : The Small Business Bible

Whereas in a general partnership, all partners are equal (each can incur obligations on behalf of the partnership and each has unlimited liability for the debts of that partnership), in a limited partnership things are different. Usually, there is only one person running the show, the general partner. The other partners are called “limited partners,” who also have limited liability and limited input. They cannot incur obligations on behalf of the partnership and do not participate in its daily operations. A limited partner is essentially a passive investor.

A limited partner’s liability is limited to the amount of his or her financial contribution to the partnership, while the general partner has unlimited liability, to go along with his power. This structure allows the general partner the freedom to run the business unfettered and gives the limited partners limited liability if things go wrong. Another key benefit of the limited partnership, aside from the diminished liability of the limited partners and freedom of the general partner, is that it pays no income tax. Income and losses are attributed proportionally to each partner and accounted for on their individual tax returns. A limited partnership is often the structure of choice for real estate and stock investment groups.

Taken from : The Small Business Bible

A business partnership is a lot like a marriage. Because you will be spending an inordinate amount of time together, making decisions to- gether, making individual decisions that will affect the whole, and being together in both good times and bad, think very carefully about (1) whether you really want a partner, and if so (2) who fits the bill.

General Partnerships

Legally speaking, a general partnership is even more precarious than a sole proprietorship, if that is possible. Why? Because not only are the partners individually liable for the business debts, just as a sole proprietor is, but either partner can get the whole partnership into debt. When that happens, both partners are legally liable for the debt. So the danger is that your partner can make some dumb decisions, sign a bad contract or some such thing, get the partnership into debt, and you will be personally responsible for that debt.

Another thing to consider is the emotional aspect of having a partner. Do you want one? Can you share the power? One nice thing about being a sole proprietor is that you alone are the boss; you have no one to answer to except yourself. But having a partner means, well, you will have a partner. You will need to listen to your partner, respect her, defer to her judgment when necessary, and be willing to share responsibility for all decisions and actions. And remember, partnerships do not always work out—best friends who become partners do not always stay best friends.

Conversely though, there is plenty to be said for having a partner. The first benefit is significant, namely, a partner gives you someone to work with, to share ideas and brainstorm with, to bounce ideas off. Also, a partner shares the workload. One bad thing about working alone is that there are too many hats to wear: CEO, head of sales, marketing director, and too often, receptionist and secretary. Partners help alleviate that. Finally, a business partner is someone who should share the financial commitments of the business, and that should be a relief.

So consider carefully these pros and cons of having a partner, and then, if you decide that the benefits outweigh the burdens, find someone with whom you could work well. Even if you get along swimmingly, be sure to check out your potential partner’s background, credit history, and so on. Get some references and call. This is a very important decision, so act accordingly.

Finally, if you do decide to go the partnership route, you are strongly advised to get a partnership agreement, preferably drafted by an attorney. This agreement should spell out who contributed what, who will do what, and if the partnership ends, who will get what. It is really a very important document.

Taken from : The Small Business Bible

As you begin to put the foundation for your small business in place, you need to quickly decide the legal form your business will take. You have four options: It can be a sole proprietorship, a partnership, a limited  liability company (LLC), or some type of corporation. This chapter should help you make that important decision. However, as each business form has different legal and financial ramifications, and although you  can theoretically make a choice based on your supposition about what is right for your business, it is best to do so in conjunction with your lawyer and accountant.

SOLE PROPRIETORSHIP

A sole proprietorship is the cheapest and easiest form of business you can start. All you need to do is name  the business, get a business license from your city or county, publish a fictitious business name statement in a local newspaper, open a checking account, open your doors, and you are, quite literally, in business. It should cost about $100 to start a sole proprietorship.

While the good news about sole proprietorships is that they are inexpensive and easy to create, the bad news is not insignificant. The main problem is that, legally speaking, you and the business are one and the same. If something goes wrong down at the shop, you are personally on the hook. Say, for instance, that you open a pizza parlor as a sole proprietor and that one day one of your delivery boys is drunk and kills a pedestrian while the boy is attempting to deliver a pizza. Because he was drunk, your insurance will not cover him. Because he worked for you and was trying to perform a work-related duty, your business will be liable for his actions. And because your business is a sole proprietorship, you personally, and your personal assets (cars, home, retirement, and so on) could be tapped to pay the damages from the resulting lawsuit.  Obviously, therefore, starting a business as a sole proprietor is probably not a good idea, legally speaking.*

Aside from putting yourself in legal and financial jeopardy by starting your business as a sole proprietorship, another problem with this form of business is that it often means you will be working alone. It is not called a sole proprietorship for nothing. You will have no partners around to work with or bounce ideas off. Maybe a partnership is the way to go then, you say? Let’s see.

Taken from : The Small Business Bible

Conclude with your proposed exit strategy, which may be a sale of the business or eventual retirement.

Appendix

This section will contain:
• Substantiation documentation and articles of interest
• Names and contact information of your references
• Name of present bank
• Names of your lawyer and accountant
• Personal net worth statement
• Letters of intent (possible orders, letters of support)
• Insurance coverage (policies, type, and amount of coverage)

THE BOTTOM LINE

Writing is re-writing. Your business plan is no different, so write it and re-write it. It is a healthy process that will enable you to have a much better understanding of your business, what it will take to succeed, and what risks to expect. Although it will be a lot of work, it should be worth it. Either you will get funded, or, at a minimum, you will have learned a great deal about how to make your business fly. Either way, you win.

Taken from : The Small Business Bible

Café Coffee
Projected Profit and Loss Statement

Projected Income, Fiscal Year 1 $187,900

Projected Expenses
Cost of Goods Sold          $76,300
Labor                                $33,700
Bank fees                          $ 250
Equipment                        $4,900
Insurance                          $2,800
Marketing                         $6,200
Postage/FedEx                  $1,200
Phone                                $2,400
Printing                             $1,900
Supplies                            $7,200
Taxes                                $6,800

Projected Total Expenses  $143,650

Projected Net Profit     $44,250

The balance sheet of the business is a snapshot of the venture on a given date. It should include a projection of assets and liabilities.

The cash flow statement shows how much cash your business will need, and when and where it will come from. For example, how much inventory will be required and what will that cost every month? The cash flow statement is important because it forces you to realistically look at the bottom line and see if you are going to make enough money (i.e., enough “cash flow”) to handle your debts.

The financial section of your business plan will also analyze the use of any loan proceeds you are seeking, including the amount of the loan and the term. Finally, disclose your financial situation and how much you will personally be contributing to the venture.

Taken from : The Small Business Bible

Use your previous analyses to explain how much it will cost to get your business up and running, and how much it will cost to keep it going. Explain how much money you are asking for and how it will be spent. The basis of this section are several financial spreadsheets— balance sheets, profit and loss statements, and cash-flow projections. Here again you will be making financial assumptions, which can make or break your business. If you do not understand financial planning, you need either to learn it or to hire a professional to help you. It is that important.

This financial analysis is often the most difficult part of a business plan for small businesspeople. It is easy  to wax poetic about your great idea and how it will make the gang rich, but actually putting real numbers to those projections is hard work. Even so, you have to do it, crunch some realistic numbers to go along with your realistic plan.

Start with an income and expense statement. It is what it sounds like— a projection of income and expenses. It includes an opening balance sheet, detailed income projections, operating expenses, and a financial forecast for the next year of operation and for the following two years. It also includes a cash flow forecast of inflow and outflow on a monthly basis for the next year.

Where do you get this information? The usual suspects: competitors, suppliers, trade associations, chambers of commerce, web sites, and trade publications.

Next, you will need to include a profit and loss statement. This is a summary of your projected business transactions over a period of time. It explains the difference between your income and expenses.

Taken from : The Small Business Bible

When making a business plan, avoid out-of-the-blue numbers. And make no mistake about it; you will be tempted to throw in some unrealistic numbers. Why? Because one reason for creating a business plan is to  get funding, and one way to get funding is to show your potential for explosive growth, so you may be tempted to crank up the numbers.

But it is a mistake to do so, for two reasons. First, sophisticated investors and lenders can see through phony numbers—exposing you as a novice—and novices with bad numbers do not get funded. Second, even if your business plan is for your eyes only, inflated numbers can lead only to unrealistic expectations, which can lead to business failure when you run out of money before you thought you would.

So you have been warned. It is much wiser to deal in reality, especially when making assumptions about your sales. Figure out how much you can expect to sell in the next few years. Even though you will be making some assumptions, when doing so, err on the side of caution. Be conservative. If you sell more, great; if not, at least your plan served its purpose and warned you. Your honest sales forecast will contain:

• Monthly forecast for the coming year, both in dollars and units sold
• Annual forecast for the following two-to-four years, both in dollars and units sold
• The assumptions upon which you base your forecast

Where do you get this information? Time for more research! Analyze potential competitors. Consider their sales, traffic patterns, hours of operation, busy periods, prices, quality of their goods and services, and so forth. If possible, talk to customers and sales staff. Estimate as specifically as possible what they make in a given month. Your sales forecast can be based upon the average monthly sales of a similar-sized business operating in a similar market. Second, tap your trade associations and magazines to get an idea about what a typical business in your new industry can expect to make.

Estimate your sales, but estimate conservatively. Yours is not an established business, but a new startup. It is highly unlikely that your sales will be as robust as an established competitor for at least a few years.

Finally, include your sales strategy (sales objectives, target customers, sales tools, sales support), distribution plan (direct to public, wholesale, retail), and pricing structure (markups, margins, breakeven point).

Taken from : The Small Business Bible

This section is where all of your background research done to date analyzing your ideas and so forth–can be  inserted. The information you received from trade associations and magazines, web sites and books, and interviews and meetings can be used here. Discuss macroeconomic trends and other relevant economic indicators.

Competition

Include all pertinent information about your competition, including the length of time they have been in business, where they are located, and their average annual sales. How will you beat the competition? Will you offer a better location, greater convenience, better prices, later hours, better quality, better service, or what? Analyze:

• What they do right and wrong.
• How customers’ needs are and are not being met by your competitors.
• How you will lure their customers away.

Marketing Strategy
How will you position your goods or services in the market? Are you going to cater to an upscale clientele, other businesses, or whom? What will your pricing strategy be? How will you promote your business? What sort of advertising and marketing do you propose? These are the sorts of questions you must answer. Also, if you have contacts or contracts already with clients, mention them here as well.

Taken from : The Small Business Bible