Starting a business is exciting. Some businesses began with a simple idea on the back of a napkin, in a garage, or an ah-ha moment in the middle of the night. We’ve heard about the cocktail napkin idea that later became Southwest Airlines and the garage-start stories that grew into Microsoft, Dell, Amazon and Apple.
No matter where your business inspiration developed, there are several practices to keep in mind when starting a business.
Develop a Business Plan
The Business Plan is the blueprint for success when starting a business.
The Small Business Administration (SBA) provides free resources and tools to help business owners develop their business plan.
The SBA provides two types of business plan templates. The Traditional Business Plan is very detailed, takes more time to write, and is comprehensive. Lenders and investors commonly request this plan. The traditional business plan format is a great option if you are detail-oriented, want a comprehensive plan, or plan to request financing from traditional funding sources.
The Lean Start-up format is high-level focus, fast to write, and contains the key elements. While it provides a blanket level of detail, some lenders and investors may require more information.
Despite each plan varying slightly, it is important to explain why and how your business will be a success. Know your mission statement and highlight your company leadership. Leverage your location and why it will work for you. Support growth statements with detailed financial projections against the industry and the market. Show your plan to promote and sell your goods, service or product.
The business plan is your time to show and tell investors and funders how your “back of napkin” idea will become the next Google or Disney.
Determine a Budget
How long can you go without making a significant amount of money? Surprisingly, some start-up business owners think since they are in control, they now can ‘budget’ a big salary or lease a new company car. That is a dangerous mindset and underscores the importance of creating a well thought-out business plan when starting a business. The most important question to ask oneself is are you able to live on a nominal salary for months, possibly years? Can you afford to take no salary during lean start-up months?
Your employees, vendors, and creditors get paid first. Consequently, you are the last person to get paid.
Identify Your Inner Circle
You are going to need expertise. Simply stated, when starting a business, it is crucial to ensure you know your talent and bring in those of others to guide you to success. Your inner circle of advisors should include a mix of long-term guidance, experts in the field, and emotional advisors.
“Business owners will benefit from legal advice from the start,” said Ric Selby, managing partner at Dworken & Bernstein, LPA. “Are you buying a business or Leasing space? You are likely hiring employees, which require compliance with state and federal laws. Companies may also have to fire an employee, which also requires expert guidance. That hour spent upfront for an attorney’s guidance is much better spent than if you had to call and say “I let an employee go last month and now I’m faced with a lawsuit.”
Dealing with vendors, landlords, banks, and employees all require an expert team of professionals that can help before you start a business.
Your inner circle should also include professionals such as an Accountant, Insurance Agent, Marketing and Sales advisors, IT and Technology experts, and a business Psychologist.
Starting a small business requires the understanding that there are liability issues everywhere. Trusted advisors will help you navigate contract law, employee/employer relations, insurance and liability issues, selling and promotion, technology infrastructure, online payment processing and fraud protection to name a few. Know that YOUR level of expertise does not mean you are an expert in everything.
“Doing these things first is so much easier than trying to ‘fix’ or correct missteps later,” Selby added.
Have contracts reviewed upfront before signing. A professional will help negotiate terms better, and likely “see” things you may not be able to –such as risk issues, duration, and terms of the contract especially when dealing with vendors.
“Contracts and contract law is complex. A contract determines how much personal liability you are signing into and how much risk you are willing to be able to take. You may be tying your own personal finances into the contract, or your house and all your assets. You need to understand what it is you are doing and understand those risks. You should not sign anything you have not had a professional review,” said Selby.
Also, an employment law attorney can serve as your HR backup. New businesses are not likely going to be large enough to have a dedicated HR professional to ensure employment law is followed. What happens when you have a difficult employee? Or the employee who filed a workers comp claim, wrongful treatment, or harassment? Your HR is the gatekeeper to keeping your business compliant with a multitude of risk factors including the Fair Labor Standards Act, discrimination, and disability laws.
Adopt the Right Business Structure
A company’s legal structure is a road map when determining the activities that it can undertake, such as raising capital, operating responsibilities for obligations of the business, and of most importance, the amount of taxes and how to report taxes to the IRS and local taxing authorities.
Before making a choice on the type of legal structure, business owners should first consider their needs and goals and understand the features of each business structure. Consulting with a tax advisor or an attorney will also help determine the structure.
The four main forms of business structures in the United States include sole proprietorship, partnership, limited liability company, and corporation.
There are advantages and disadvantages to both. Determining ahead of time what is the best structure for you and your company will mitigate decision-making differences and dispute-driven headaches down the road.
Let’s look at a partnership for example. You’ve decided to start a business with your best friend from college, or a neighbor, or a relative. You have had many gentlemen’s agreements over the years and now, you both are ready to put your aspiration–and relationship, on the line. Despite the best intention, quite often, partnerships run into trouble when some of the more difficult situations arise from questions that were not addressed when starting the business:
- Who will make the overall operating decisions?
- Which partner will control the financial decisions?
- If the partners can not agree, how will differences be resolved?
- And, what happens if one partner decides to leave the company or make a decision with outcomes that went the wrong way. Putting an operating agreement in place is crucial; while it sounds minute when things are going well, it is a recipe for disaster when troubles arise.
Some partners believe a 51/49% structure will alleviate issues. Selby said “Even if you have a 51/49, if you find yourself diametrically opposed, you’re going to discover the one who has the most compromise is very unhappy. And, at times, may leave the company. One of the things with 50/50 is that it forces consensus. If you don’t reach an agreement, the business will be paralyzed.”
Unquestionably, starting a business requires more than a great idea. Business compliance is complex and there are so many places you can get yourself into trouble. Knowing how to avoid issues that can hurt your business is your first step.
Learn more. Listen to Five Things You Should Do BEFORE Launching Your Startup on the Biz Chat Ohio podcast with Ric Selby of Dworken & Bernstein, LPA.
This blog is made possible by Lakeland Community College and the Ohio Small Business Development Center.
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