Larry E Vaughn

Business Plans January 8, 2008

An entrepreneur is someone who accepts challenge and takes action to pursue an opportunity. When we talk about Business Plans for the entrepreneur we must also mention that an entrepreneur is a person willing to risk failure in order to achieve success. Business Planning is hard work. It requires a lot of research. Taking a business to market is 80% planning and 20% action.

For those of you who have dealt with Business Plans in the corporate environment, you undoubtedly worked on a component of the corporation’s overall Business Plan, with those with expertise in their areas also inputting information. It is easy to feel that the budgeting process didn’t really create any value.

The entrepreneur’s Business Plan, however, is an entirely different animal. It is going to expose the very heart of your business, and has to be as detailed in all of its elements as you can make it. You need to explore and analyze everything that is a part of, or can affect your business. It is a lot of work, but is one of the distinguishing factors in the realm of who makes it and who doesn’t make it. In fact, the Small Business Administration statistics prove that 90% of the businesses that succeed take six to ten months to research their business idea.

Business Plans scare most people looking at entrepreneurship for the first time. Often times it is a person who has been in the corporate environment for a long time, is now in transition, and yearns for an improved quality of life. Oh, yes, did I mention that this person is usually out of work? There’s no steady stream of income each month to take care of the household expenses. So, how can a person afford to take six to ten months to research a business!? The answer, of course, is that people who write goals succeed over those who don’t, and businesses that determine their goals, and problems, succeed over those who don’t. So, Business Planning is essential to the long-term wellbeing of your business venture. Statistically, those who fail to plan, plan to fail. Profitability is no accident. It takes a plan.

There are lots of reasons for preparing Business Plans, and lots of uses for Business Plans. One of the main purposes of a Business Plan is for the raising of debt or equity funding to finance your business. In order to get funding, either from a lender or investor, you will have to research a number of components of the Business Plan, and detail the assumptions you have made based on the research.

When you are a startup, it’s essential that your data is factual and your presumptions about the future are realistic. You don’t have past performance figures for your business and you can’t predict what may happen in the future because market dynamics change so quickly. Because of this, you will have to make assumptions for your business based on what you can learn about the performance of the industry you are entering, and industry projections for the future.

You will find that you are trying to estimate sales and prospective revenues, profit and loss, and cash flow when you develop your Business Plan. New businesses are very prone to having cash flow problems. In fact, this is the most common case of business failure in the first two years of business. Even if you are not a cash intensive business, cash flow is an area where you can run into problems.

There are a lot of expenses in the first two years of your business you won’t run into as frequently after your startup phase. Launching your business is a great example. What is it going to cost to get your venture operational? Lease and equipment costs, marketing research, initial advertising and marketing costs. All kinds of variables will be one-time expenses that you may not incur again for quite a long time, if ever.

Your business, seemingly, is always longer getting started than you initially believed. Customers are slower paying than you had anticipated. It’s also common to find that vendors will demand payment up front because your business has no credit history. These things may seem a little obvious, but they are the types of problems you may not think about if you don’t go through the Business Planning process.

There are three primary Business Plan styles: the Summary Business Plan, the Full Business Plan, and the Operational Business Plan. All Business Plans should provide information on how the business is going to run, marketing plan, financing plans, what type of legal entity it will be, risk assessment, and a Pro forma.

Summary Business Plan

The Summary Business Plan is a 10-15 page overview of how your business will be structured, and how it will compete in the market place. You might think of this plan as being your business’ calling card. It is a great tool for business networking, and letting the business community know about your startup business, even before you get it started.

The plan will include condensed information in several component areas:
1. Marketing Plan
2. Financing Plan
3. Pro forma
4. Legal Structure
5. Risk Assessment
6. Appendices

Keep in mind that this Summary Plan is similar to a resume. Its purpose is to acquaint the reader with the new business, not to solicit funding. Nor should it give any details that you consider privileged or confidential. What you want to achieve is awareness in the business community that you are going to be providing a service. It is a great tool, for example, to hand out to other business people attending a Chamber of Commerce meeting.

The Summary Plan is an excellent tool to use in business networking. Think for a moment about the number of commercial bankers in your market area. Now think about small business attorneys, accounts, and commercial insurance agents. As I mentioned in the article on Business Networking, you need to connect with these people early on in your research stage, because they are often the mostly tightly and broadly networked people in your community.

This plan is an overview. You are using it to introduce your business. You want the reader to understand who you are, what you’re planning to do, when you are starting, and your Business Plans for the future. You will have some Pro Forma numbers but they will be extremely condensed. You don’t need to reveal details. You always need to have half a dozen copies of this plan in your briefcase in order to take advantage of every networking opportunity.

This is the document you give to bankers before you need a loan. The first time you meet with commercial lenders in your area should not be when you need money. Banks deal with your potential clients, and when they know about your Business Plans they can often give you assistance. Just as you would with your resume in a networking meeting, ask the recipient to critique your Summary Plan and give you any suggestions they might have to improve it. Also be sure to ask whom else you might want to contact to research it further.

Your summary Business Plan is similar to a resume in a couple of other significant ways. Like your resume, it will should contain carefully structured high impact statements, crafted to engage the reader. Additionally, when going to a business-networking meeting, you want to target the recipient by revising your Business Plan as necessary to and encourage them to read on and, when appropriate, request your complete Business Plan

The Full Business Plan

The full Business Plan is going to be a lot more detailed, containing detailed information, and may run 50-70 pages in length. It is going to address projected sales and expenses in a much more detailed fashion projected over time. You will detail Cost of Sales broken down into material, labor &overhead. Financial information typically makes up one third to one half of the pages in a full business plan.

This is the Business Plan that is going to force you to understand what is going to cost you money, where you are going to get your revenue, and market projections. It is the one that is going to make you find out how much your liability insurance is going to cost every month, how much your advertising expense is going to be, and how often you will need to order office supplies.

This is the document you will absolutely need to be thorough and accurate when you need to acquire financing or when you solicit someone to invest in your business. Because this document has a lot of detailed information about your business, you have a right to expect confidentiality from those to whom you submit it. Include a “Non-Disclosure Agreement” or “Confidentiality Agreement” as the cover page for this plan, and if you have any reservation about giving it to someone, you probably don’t want to do business with him or her anyway.

Operational Business Plan

The Operational Business Plan in not intended for external audiences. It is a planning device for the operation of your business, and may be 100 pages or more. If you are going to have a business with just yourself involved, don’t have any plans to franchise, go public or open multiple offices, you may not have this form of a Business Plan.

This plan details operational issues, production processes, sample charts, how you prepare proposals for customers, pricing data strategies, flow diagrams, work charts, maybe how the telephone is supposed to be answered. If you ever want to go public or franchise the business or prepare an ISO report, this is your training guide. If you have to replicate your business, you will have already done the homework.

You may look at the Operational Business Plan as a road map, or training manual to run your business day to day. You can use it as an evaluation and planning tool, forcing you to continually critique your effectiveness. A regular periodic review of the Operational Plan helps you discover how you may be able to tweak your effectiveness and efficiency to further your goals.

Research

In preparing your Business Plans you are going to be required make a number of assumptions based on research. Make certain that you detail where you got the data for the assumptions, and append them to your document for quick reference. Pricing models, exchange rate, interest rates, projected customer benefits, interviews and focus groups are all extremely important tools to helping you make your assumptions. Be sure you can find this research data when you need to refresh your memory or justify your assumptions to a potential lender or investor.

There are a large number of excellent resources on the web to gather information. Association websites are excellent tools for researching an industry, as are sites like Small business Administration. Be sure to check these resources to start your research into each component of your Business Plans.

Business Networking January 8, 2008

As I have stated in my Entrepreneurial webinars, business networking is as important to the success of your business as career networking is to those who plan to succeed in their careers. In a time when the average job is lasting less than four years, there will be a lot of changes in who is a key player in the businesses who are potential clients for you, and who they have relationships with that could be of value to you.

One of the basic purposes of networking is expanding who knows you in order to connect to people in your new contacts’ circle of influence. In other words, tapping into the networks of others. This principle has been around for ages in the direct sales profession, and manifests itself each time a sales person asks for names of others who could use the service or product you have just purchased.

Networking is a tried and proven means for connecting with people to create opportunities. Throughout history people have relied on one another to better themselves in all aspects of life. From getting that first job and generating business opportunities, to receiving personal advice, the benefits of networking are limitless. By networking you will facilitate opportunities for others and help them achieve their goals, and in return, they will support you. The individual who holds the correct answers or knows the right people just might be one contact away from you.

When it comes to business networking, you never know whom those you already know have in their circle of influence. The more diverse your business network, the more likely you are to make overlapping linkages between groups of other business people. The more linkages you can make between groups of people, the stronger your business network will be. It takes time and energy, but it is an effort that will pay you back many times over.

Keep in mind that networking is about being genuine and authentic in your relationships, building trust and always keeping an eye out for a way to help others. Strive to become known as a powerful resource for others, so people remember to turn to you for suggestions, ideas, and names of other people. Be ready to state what you are looking for when someone asks, “How may I help you?” Knowing your objective, and how others can help you, makes the relationship reciprocal, and rewarding for both parties.

Knowing your purpose is important in business networking. In my entrepreneurial webinars I discuss a networking practice for new entries into small business to connect with those most tightly networked individuals in every community; commercial bankers, small business attorneys, accountants, commercial insurance agents and professional business to business sales persons. These individuals depend on continually expanding their circle of influence to grow their own effectiveness and business success.

How do you get started? Make a list of all these professionals in your market area, and begin scheduling meetings with each of these people to introduce yourself to them, to ask them to critique your Summary Business Plan, and to get their suggestions on who you should meet to get your business started off on the right foot. Then, meet with these referrals and get some more names. Follow through quickly and efficiently on referrals you are given. When people give you referrals, your actions are a reflection on them. Respect and honor that and your referrals will grow.

You’ll be surprised how much excellent quality feedback you will get from each of these face-to-face meetings and inevitable call backs with invitations to attend a meeting with them. Over time you will get invitations to club meetings, Chamber of Commerce meetings, service club meetings, and other group meetings where you will have the opportunity to introduce yourself to a number of new acquaintances. Remember to get business cards and follow up in the next couple of days to schedule a face-to-face meeting to discuss your Summary Business Plan.

Using the Internet

Technology is revolutionizing the way business is being done, and business networking is no exception. If you own a home computer, have a telephone and access to the web, you can build a successful business eNetwork. The pool of resources available for that initial eNetworking connection has grown exponentially. Online business networking combines the old proven practices with technology to create a means for connections to happen that literally would not have been possible without online accessibility. Online business eNetworking transcends the normal issues of time, distance and space giving people access to wholly new possibilities.

The Internet is an excellent vehicle for networking via bulletin board and chat room communities. Many of these communities allow business professionals to connect on a regular basis, exchange information and ideas, and get to know one another a little better. In addition, staying in touch via the Internet has no equal. The web is a great tool for staying in touch with people with whom you’ve already established a connection.

However, it may not be the best tool for you to make those initial connections to prospects. Nothing beats good old-fashioned face-to-face networking to start the process of building a relationship of trust. Granted, you may do some business with people that you’ve met on the web, but, for the most part, people typically do “repeat” business with people they know and trust. Most repetitive referral relationships start through personal contact and then the ongoing connections that generate repeat business can occur via the web.

Surf the web to discover the businesses in your geographic location. Read the information posted on their website to discover their market segments, how they compete in the local market, and who the main contacts are in the company. Then, make it a point to meet a decision maker in each of those companies. And, don’t be concerned that these individuals are from an entirely different industry than you expect to be marketing to.

Just as in building your personal network, building your business network means striving to meet those who may have contacts that aren’t easily available to you. When it comes to networking, not having a lot in common with someone you would like to meet means that person may be able to connect you to a whole circle of business people that you might not otherwise have access to. The only thing these business contacts should have in common with you is that they, like you, should be really good at what they do. Create a strong business network with these principles in mind, and you’ll help your business grow quickly and become successful.

Marketing Research for Entrepreneurs January 8, 2008

Market research is essential to making sure your business gets off to a good start, and has a reasonable chance to survive the critical startup woes. Market research is essentially the process of collecting, organizing, maintaining, and analyzing data that enables you to make good decisions about the market segments to which you should market, the services and or products to market, and what would motivate your prospects to make a purchase. Market research also involves the documentation of data collected and its preservation for future use.

Analysis of your market includes finding out what groups of potential customers there are, which are the segments you want to serve, what their needs are, what product or service offering would be of interest to them, what your competitors are doing, what pricing you should use, and how you should distribute your offering to your target markets.

The objective of your research should be to answer some very specific questions of prime importance to your business success. These might include topics such as:

1. What groups of potential customers have specific needs you might be able to fill;
2. How might those needs be met for each group or target market;
3. What would make the product or service appeal to each of the target markets;
4. How much would the customer be willing to pay;
5. Who are the competitors in your marketing area;
6. What would motivate the customer to buy from you rather than the competitor(s);
7. How the product should be branded to be most identifiable.

Surveys and Interviews

Marketing & Advertising mentor Jay Conrad Levinson, author of the Gorilla Marketing books says the least expensive marketing technique is to create a questionnaire and mail or e-mail it to members of your target market. Explain that that the more you know about their needs, the better you’ll be able to provide service to them. He also suggests checking for online discussion forums in your field of business, and conducting research among the participants. You can also surf the web for businesses such as yours to take advantage of their market research. One of the ways I have found this type research to be very productive is to connect with your prospects by telephone, mail or e-mail to set up an appointment with them to conduct a face-to-face interview. You will typically get a better understanding of their requirements, challenges they face in getting the service in a manner that meets their needs, and you have an opportunity to create a personal relationship prior to making your product or service offering. The key to making this work is to select members of local industry to be “experts” whose opinions are valuable. And, promise them a copy of that final report when the study is complete.

Focus Groups

Excellent low cost tools for gathering information during your initial market research, focus groups are a somewhat informal technique that can help you assess needs and feelings both before you start your business and on a periodic basis thereafter. In a focus group, you bring together from six to nine users of the service or product you plan to offer to discuss issues and concerns about the features and benefits desired. The group session typically lasts about two hours and is run by a well-prepared facilitator who maintains the group’s focus, and guides the conversation to gain particular information on predetermined issues. Focus groups often bring out spontaneous reactions and ideas that supplement the sought after intelligence, and result in expanding your knowledge about the topic being researched. Having a facilitator to run the session permits you to sit on the sidelines and more closely observe body language and group dynamics. Since there often are major differences between what people say and what they do, direct observation and videotaping of the session always needs to be done. The videotaped session should be periodically reviewed to supplement the value received.

Thoroughly planning the questions to be addressed in your focus group sessions will ensure that you gather valid comments to reveal firm guidelines for organizing your marketing strategy, as well as helping you understand the competitive landscape in your industry. Determine what you want to get out of a the session, test your questions to ensure you get the feedback you need, and have a facilitator keep the group on topic.

Effective use of focus groups can help you determine your customers’ opinions of the level of service they are currently receiving from your competitors, marketing issues on service or product acceptance, needs that are not being met or could be better met. You will discover the strengths and weaknesses of your competitors during the session and will be able to use the information to identify the special niche in the market place for your business.

Customer Panel

Another inexpensive measurement tool you should use after you have your business in operation is the customer panel. It differs from the focus group in that a representative group of current or previous users are brought together to critique your service or product offering. A customer panel will open your eyes and give you very valuable information to help you improve your service or product. Hearing and seeing your customer express their opinions in an open forum is even more powerful than gathering comments from customers in a formal feedback report.

There are outstanding resources on the web to help you do preliminary and detailed research into your industry. Knowthis.com has an excellent grouping of links to articles on a number of topics, as does gorilla.com, about.com, and a seemingly endless list of others. Through the generous contributions of a number of users I have posted an entire page of links to help you find good resources for conducting research on my Business Research page.

Business Licenses and Permits January 8, 2008

Most states and many cities and/or counties impose licenses and permits on a wide variety of businesses, and it is very likely your business will require more than one license or permit. Failing to get all required permits right from the beginning is one of the most common mistakes new entrepreneurs make. This mistake can be costly, in delays and penalties.

Contact your town or city offices to inquire about getting a business license. You may find that your city has a licensing department that will provide the necessary application form(s) required, and specifying the costs of licenses for different types of business. When you file your license application, the city planning or zoning department will review the application to make sure your area is zoned for the purpose you want to use it for and that there are enough parking spaces to meet the city codes.

Some license and permit types you may need for your business include sign, fire inspection, health department, air and water pollution control permits, and licenses from city, county and maybe even the state. You will also need a federal license in some cases, as well as a sales tax license if you collect taxes on sales.

Certain businesses and professions like barbers, contractors and most businesses serving food, require a state license. There are state agencies to deal with each of these types of businesses, and each will have a licensing procedure. Businesses providing investment advice or dealing with firearms are highly regulated and will also need a federal license. If you’re considering this type business, it’s best to consult an attorney.

If you’re planning to start a business in your home, investigate zoning ordinances especially carefully. Many residential neighborhoods have strict zoning regulations preventing business use of the home. Even so, it’s possible to get a variance or conditional-use permit, and in many areas, communities are becoming more supportive of home-based businesses. Some home businesses require a general business license, a home occupancy license and a specialty license.

The permits, registrations and licenses required vary greatly according to locality and the nature of your business. Chances are, you need a business license from your municipality. Virtually all cities and counties require that all businesses obtain a business license, strictly for the purpose of raising money for the city or county rather than to regulate the businesses’ conduct, much like the manner in which restaurants are supervised for sanitary conditions.

If you’re structuring your company as a sole proprietorship or a partnership, you have the option of choosing a business name, or dba (“doing business as”), for your business. This is also known as a fictitious business name. If you want to operate your business under a name other than your own (for instance, Carl Derringer doing business as “The Sign Shoppe”), you may be required by the county, city or state to register your fictitious name.

If your community doesn’t have a formal licensing procedure, file a “DBA” document with your Town Hall, and take a copy with you so you can get a copy for your file with a date stamp on it. You can find links to the website of virtually every regulatory agency in North America at the Council on Licensure, Enforcement and Regulation‘s Web site.

The Partnership Agreement January 8, 2008

An unincorporated organization with two or more members is generally classified as a partnership for federal tax purposes if its members carry on a trade, business, financial operation, or venture and divide its profits. However, a joint undertaking merely to share expenses is not a partnership. For example, co-ownership of property maintained and rented or leased is not a partnership unless the co-owners provide services to the tenants.

If your business will be owned and operated by several individuals, you should take a look at structuring your business as a partnership. Partnerships can be organized as a general partnership or a limited partnership. In a general partnership, the partners manage the company and assume responsibility for the partnership’s debts and other obligations. A limited partnership has both general and limited partners. The general partners own and operate the business and assume liability for the partnership, while the limited partners serve only as investors, and have no control over the company and are not subject to the same liabilities as the general partners.

One of the major advantages of a partnership is the tax treatment it enjoys. A partnership doesn’t pay tax on its income but passes through any profits or losses to the individual partners. At tax time, each partner indicates his or her share of partnership income, deductions and tax credits. In addition, each partner is required to report profits from the partnership on his or her individual tax return.

Personal liability is a major concern if you use a general partnership to structure your business. Similar to a sole proprietorship, general partners are personally liable for the partnership’s obligations and debt. In addition, each general partner can act on behalf of the partnership, take out loans and make business decisions that will affect and be binding on all the partners (if the general partnership agreement permits). Keep in mind that partnerships are more expensive to establish than sole proprietorships because they require more extensive legal and accounting services.

An essential protection you should provide yourself when entering into a partnership is a Partnership Agreement. This Agreement is much like a pre-nuptial agreement in a marriage. And, breaking up a partnership is often as traumatic and costly as breaking up a marriage. Although I am not an expert in these areas, and the following information in not intended to be used as a legal instrument, here are some guidelines for structuring your Partnership Agreement.

1. NAME AND BUSINESS
2. TERM (The partnership shall begin on ___and end . . . )
3. CAPITAL The capital of the partnership shall be . . .
4. PROFIT AND LOSS
5. SALARIES AND DRAWINGS
6. INTEREST ON CAPITAL
7. MANAGEMENT DUTIES AND RESTRICTIONS.
8. BANKING
9. BOOKS
10. VOLUNTARY TERMINATION OF PARTNERSHIP
11. DEATH
12. ARBITRATION

Business Entities January 8, 2008

One of the big decisions we must make when starting our business is which form of business best fits our needs. The simplest business structure is the sole proprietorship, which usually involves just one individual who owns and operates the business. A big plus in the sole-proprietorship is that you have complete control of your business-you make all the decisions. If we intend to include others in our business, perhaps a partnership or some type of corporation would be the best fit.

The tax aspects of a sole proprietorship are especially appealing because income and expenses from the business are reported on your personal income tax return (Form 1040) at the end of the calendar year. Your profits and losses are first recorded on a tax form called Schedule C, which is filed along with your 1040. Then the “bottom-line amount” from Schedule C is transferred to your personal tax return as profit or loss on your normal income. This is especially attractive because business losses you suffer may offset earned income and reduce the amount of tax owed. As a sole proprietor, you must also file a Schedule SE with Form 1040 to calculate how much self-employment tax you owe.

In addition to paying annual self-employment taxes, you will be required to also make quarterly estimated tax payments on your income. Currently, self-employed individuals with net earnings of $400 or more must make estimated tax payments to cover their tax liability. If your prior year’s adjusted gross income is less than $150,000, your estimated tax payments will be at least 90 percent of your current year’s tax liability or 100 percent of the prior year’s liability, whichever is less. The federal government permits you to pay estimated taxes in four equal amounts throughout the year on the 15th of April, June, September and January. With a sole proprietorship, your business earnings are taxed only once, unlike other business structures.

Those are all pluses for sole proprietorship. But. There are a few disadvantages to consider, too, before deciding which structure is right for you. Selecting the sole proprietorship business structure means your personal assets are at risk to cover your company’s liabilities. As a result, your assets could be seized to satisfy a business debt or legal claim filed against you.

Raising money for a sole proprietorship can also be difficult. You will find that banks and other financing sources are reluctant to make business loans to sole proprietorships, in general, and startups in particular. In most cases, you’ll have to depend on your own financing sources, such as savings, home equity or family loans until you have a proven track record to demonstrate to a potential investor or lending officer.

Partnerships

If your business will be owned and operated by several individuals, you should investigate whether a partnership is right for you. Partnerships are more expensive to establish than sole proprietorships due to more extensive legal and accounting services, but they come in two varieties: general partnerships and limited partnerships. In a general partnership, the partners manage the company and assume responsibility for the partnership’s debts and other obligations. A limited partnership has both general and limited partners.

The general partners own and operate the business and assume liability for the partnership, while the limited partners serve only as investors only and are not subject to the same liabilities as the general partners. Limited partnerships usually are not the best choice for a new business because of the required filings and administrative complexities. If you have two or more partners who want to be actively involved, a general partnership would be much easier to form. One of the major advantages of a partnership is the tax treatment it enjoys. A partnership doesn’t pay tax on its income but “passes through” any profits or losses to the individual partners. At tax time, each partner files a Schedule K-1 form, which indicates his or her share of partnership income, deductions and tax credits, and report profits from the partnership on his or her individual tax return.

Even though the partnership pays no income tax, it must compute its income and report it on a separate informational return, Form 1065. Similar to a sole proprietorship, general partners are personally liable for the partnership’s obligations and debt, so if personal liability is a major concern in your business, you may be better off selecting some form of corporate entity.

Limited Liability Company

The Limited Liability Company (LLC) has been around since 1977, bringing together some of the best features of partnerships and the corporation, offering what is arguably the best setting for tax purposes. LLCs were created to provide small business owners with the liability protection that corporations enjoy without the double taxation. Profit and loss passes through to the owners and reported on their personal tax returns, just as in a partnership or sole proprietorship. Like partnerships, LLCs do not have perpetual life, in that the company dissolves when a member dies, quits or retires. And, some states require a partnership to dissolve after 30 or 40 years.

These considerations have often led small businesses to incorporate as an S Corporation. Today however, the LLC offers small-business owners another option. For example, there’s no limitation on the number of shareholders an LLC can have, unlike an S corporation, which has a limit of 75. In addition, every member or owner of the LLC is allowed a full participatory role in the business’s operation. To set up an LLC, you simply file Articles of Organization with the Secretary of State in the state where you intend to do business. Some states also require you to file an Operating Agreement, which is similar to a partnership agreement.

LLCs also have disadvantages. Since LLCs are created first at the state level, legislation in each state dictates the abilities and limitations of the LLC. If you decide on an LLC structure, be sure to obtain the services of an experienced accountant or small business attorney who is familiar with the various rules and regulations of LLCs. If you plan to operate in several states, you must determine how each of those states will treat an LLC formed in another state. Another excellent resource is the Internet. Simply go to your state’s website, find the Secretary of State’s office, and do a search for “Business” or “Companies” until you find the links to Corporations or LLCs. You can learn a lot very quickly about these entities in your state from these websites.

Full Corporation

Using the corporate structure is more complex and expensive than most other business structures. A corporation is an independent legal entity, separate from its owners, and as such, it requires compliance with more regulations and tax requirements than any other entity.

The biggest benefit the corporation offers is the liability protection provided the owner(s). A corporation’s debt is not considered that of its owners, so you’re not putting your personal assets at risk. A corporation also can retain some of its profits, without the owner(s) paying tax on them, and can also sell stock to raise money. The corporate structure, however, comes with a number of downsides, including higher costs.

Corporations are formed under the laws of each state with their own set of regulations. Because a corporation must follow more complex rules and regulations than a partnership or sole proprietorship, it requires more accounting and tax preparation services. For these reasons you’ll probably need the assistance of an attorney to guide you through the maze. I have also found it a good practice to have an accountant to help with timely tax filing and reporting.

Another drawback of standard corporations is that owners of the corporation pay a double tax on the business’s earnings. Not only are corporations subject to corporate income tax at both the federal and state levels, but any earnings distributed to shareholders in the form of dividends are taxed at individual tax rates on their personal income tax returns.

To avoid double taxation, you can pay the money out as salaries to yourself and other corporate shareholders. A corporation is not required to pay tax on earnings paid out as reasonable compensation, and it can deduct the payments as a business expense. The IRS, however, has strict limits on what it believes to be reasonable compensation, and varying the amount of compensation each year to reflect what would have otherwise been profit for the corporation can amount to waving a yellow flag in the face of the IRS.

It is possible to file for incorporation without the help of an attorney, saving $500-$1,000 in start up costs, but the process is likely to take some time to accomplish, and there is also the risk that you might miss some small but important detail in your state’s law. Generally, you must prepare a certificate or articles of incorporation with the proposed name of the corporation, the purpose of the corporation, the names and addresses of the parties incorporating, and the location of the principal office of the corporation.

The corporation will also need a set of bylaws that describe in greater detail than the articles how the corporation will run, including the responsibilities of the shareholders, directors and officers. You also need to state when annual stockholder meetings will be held; and other details important to running the company. When your articles of incorporation are accepted, the secretary of state’s office will send you a certificate of incorporation.

Once you’re incorporated, be sure to follow the rules of incorporation required by state law, and to follow your own articles and bylaws. If you don’t conduct business according to these strict rules, a court can pierce the Corporate Veil of Protection, and hold you and the other owners personally liable for the business’s debts. Be sure to keep accurate financial records for the corporation, showing a separation between the corporation’s income and expenses and that of the owner(s).

The corporation should also issue stock to its shareholders, hold annual meetings to elect officers and directors, and file annual reports. Be sure to keep minutes of these annual meetings, and any interim meetings of the Board of Directors, and get them typed and entered into the official records of the corporation.

S Corporation

The IRS subchapter S corporation is more attractive to small-business owners than a standard corporation because of some appealing tax benefits while still providing the liability protection of a standard corporation. With an S Corporation, income and losses are passed through to the shareholders and reported on their individual tax returns. As a result, there’s just one level of federal tax to pay.

Owners of S corporations who don’t carry inventory can use the cash method of accounting, which is much simpler than the accrual method. Under this method, income is taxable when received and expenses are deductible when paid. Tax law changes brought about by the Small Business Job Protection Act of 1996 have made S corporations even more attractive for small-business owners. In the past, S corporations were limited to 35 shareholders of common stock, but in 1996 the new law increased the number of shareholders to 75, making it possible to have more investors and thus attract more capital.

S corporations do come with some downsides. For example, they’re subject to many of the same requirements corporations must follow, which in my experience means higher legal and tax service costs. These corporations also must file articles of incorporation, hold directors and shareholders meetings, keep corporate minutes, and allow shareholders to vote on major corporate decisions. These costs, legal and accounting expenses are similar to those of a standard corporation.

Even after you settle on a business structure, remember that the laws that make one type of business organization favorable are always subject to change. Reassess your form of business from time to time to make sure you’re using the one that provides the most benefits, and in all cases, get outside advice from a specialist about the ideal form to take.

I recommend your Secretary of State’s website, and Entrepreneur.com’s Tax Center as excellent resources for preliminary research into these complex topics. You may also visit the Internal Revenue Service website to download information on this topic. Download forms 17, 334, and 583.