Formation and Small Business Start Ups

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The formation or business start up can be an exciting and adventurous time.  There are three ways to form a business and each have advantages and disadvantages:

·         You can build a business from scratch – for those with a strong entrepreneurial spirit that have a vision and are ready to lean and adapt quickly.

·         Purchase an existing business (in whole or part) – already established business with most of the kinks worked out.

·         Purchase a franchise business – the franchisor owns the rights to the business concept, and you get the right to use their business, concept, systems and brands.

When forming a business, the first step is to develop a business team.  The better the team, the more powerful the business will become.  Communication between you and the team members and the team members to each other is essential, so choose your team carefully.  Most small businesses use family members with no real business experience as their team.  This leads to disaster for most small, start up businesses.  Instead below is a list of recommended team members:

·         Lawyers – good legal advice is essential from the beginning.  A good lawyer will assist in preparing the legal agreements, including the nondisclosure agreement, letter of intent, and the formal offer.  The lawyer selected should also offer advice and educate you about your legal obligations and fiduciary responsibilities.

·         Advertising agencies – generally small agencies are best for small businesses.  They can help set up your company brand and ensure your message is consistent.

·         Accountants – set up your accounting systems and help you understand what the numbers mean.  A successful company knows where their cash is coming from and has control over where the cash is going.   Your accountant can also provide information regarding tax implications for decisions and projects.

·         Bankers – a banker selected should be the person who will know you and your business.  Generally, banks have the same rules and regulations.  It is critical that you have someone who understands you and your business should you need outside funding.

·         Mentors and/or Board of Directors – whenever possible these should be seasoned investors and business people who can intelligently offer advice and objectivity.  The use of family and friends instead of experienced business persons can lead to costly mistakes.  Often family and friends mean well but either provide only a “yes” man mentality instead of objective advice or they provide advice based on limited knowledge that is generally incorrect for your situation.

When starting a business, there are several tax and non-tax factors to consider.  There is no one type fits all entity selection.  Choosing the right entity depends on you, your goals, your family requirements and the type of business you are starting.  Your lawyer and accountant can assist in making a determination as to what type of entity would best meet your needs.  The most common types of business entities are:

·         Sole proprietorship

·         General or limited partnership

·         C corporation

·         S corporation

·         Limited liability company (LLC)

·         Limited liability partnership (LLP)

When forming or starting up a business, development of a business plan is essential.  A well-developed business plan should provide adequate information about your business in a concise format.  This information should:

·         Provide information to assist with obtaining financing (whether from loans or equity investments).

·         Provide measurement goals against which future performance will be evaluated to ensure the business is on track.

·         Assist both management and employees with identifying critical goals and implementation tasks.

·         Communicate the business culture to employees, customers and suppliers.

Another major decision facing start up businesses is whether to hire employees or use independent contractors (contract labors).   Using contract labor avoids the hassle and expense encountered with hiring employees.  However, there are rules and regulations for identifying who can and cannot be classed as contract labor.  Your accountant can assist with determining whether you can class a person as an independent contractor or if they must be classed as an employee.

DL Long, Certified Public Accountant, PC can provide assistance in forming your new business.  We have experience in working with start up and small to mid-size businesses.  If you are interested in learning more, we offer a free consultation for first time visits.