Issue # 47 - September/October 1977
Yes, you can be your own boss . . . more easily than you may think. According to Bernard Kamoroff, a California CPA, "All it really requires is a good idea, some hard work, and a little knowledge."
And "a little knowledge"-actually a great deal of knowledge-is what Bernard's book, Small-Time Operator, is all about. Mr. Kamoroff has nine solid years of experience as a tax accountant and financial advisor for started-from-scratch businesses, and he's done an amazing and praiseworthy job of boiling those nine years down into a complete and very useful technical manual for the beginning small entrepreneur.
The passages that follow will give you a good idea of the kind of practical instructions you'll find in Small-Time Operator. As you'll see, there is a lot to striking out on your own . . . but the rewards of such a venture can be well worth all the difficulties.
Don't, then, let yourself be too easily discouraged! "Other people-many others-now run their own small businesses," Bernard Kamoroff points out, "and you can too."
FINANCING: HOW MUCH DO YOU NEED?
How much money you need depends a lot on the type of business you're starting and the type of person you are. If you're willing to work hard, to make a few sacrifices, to live on beans for a while, you can start a successful business for little or no investment.
Every service business I know was begun with almost no money. I started my accounting practice with a $30 adding machine and 500 business cards. My friend Joe Campbell started Resistance Repair with $300 worth of test equipment. Another friend's computer programming service was begun with $10 in supplies. Self-employed carpenters, mechanics, and repair people often start with their box of tools, period.
If you set up a crafts business, you'll need-besides your tools-raw materials to make your product. But you don't have to stock a large supply of inventory, and if you hunt around you can always find good deals on remnants and close-out materials. All of the craft business owners I've interviewed started their businesses with less than $500 initial investment.
A retail store requires a good stock of inventory, which often costs at least a few thousand dollars. Kipple Antiques had an initial investment of $1,400. Lara Stonebraker's tiny coffee shop has a coffee and accessory inventory of over $10,000. A retail business can save on initial inventory costs by taking goods on consignment-as in a custom dress shop-or by having only samples on hand and taking orders for the goods.
Right at the start, let me warn you not to expect sure-fire sources of loan money from this chapter of the book. It offers some guidelines, a few ideas to track down; but it also gives an honest, though not cheery, appraisal of the money situation. And the money situation is not good.
If your friends have no money to lend and the relatives are not going to help, you have two other possible sources of loan money: the "private sector" (e.g., banks) and the "public sector" (Uncle Sam).
PRIVATE SECTOR FINANCING
Last year I attended a conference on the subject of financing new small business ventures. The panelists included the vicepresidents of the largest bank in the world and one of the largest banks in California. Both men had the same discouraging comment: Loans are hard to get. The banks are less willing than ever to take chances on new and untested businesses and new and untested entrepreneurs. Bankers, it seems, forget quickly how they managed to get rich in the first place: by taking chances on ventures just like yours.
But the door is not completely closed. Banks still make some small business loans, and a bank just may make one to you. Banks generally will lend up to 50% of the required starting capital if they can be convinced that your business has a good potential for success, that you are competent and reliable, and that you have a good plan for repayment of the loan.
NOT ALL BANKS ARE ALIKE
Put on your Sunday Best (or borrow your brother-in-law's), screw up your courage, and visit several local banks. Mornings early in the week are the best time ("Friday afternoon financing" is rarely, if ever, available). A young and progressive bank is more likely to be interested in you and your needs than staid old First Conservative, Est. 1833. The physical appearance of the bank and the character of the bank's advertising may give you some indication of its progressiveness.
When you meet a banker, sell yourself. Openly discuss your plans and difficulties with him. Come well prepared. Bring a personal resume which should include your general and educational background and your prior experience. Bring a personal financial statement and a statement projecting income and expenses of your business for the first six months or year.
If you've done business with or obtained a loan from a particular bank, that bank is a good place to start. When a bank knows you, knows something of your willingness and capability to repay a loan, it will be more willing to give serious consideration to your ideas. If you have collateral, security to give the bank in exchange for a loan, you are yet another step closer to cash-in-hand. If you own your own home (if there is a mortgage on your home, you still "own" it) and are willing to mortgage it further, a bank is very likely to loan you money on it.
But stop! Are you ready to risk your home or other valuables on your new business venture? When you borrow money for your business, you are personally liable to pay it back. If the business fails, you will be required to repay the loan from your personal funds. In taking out a loan, you're making a big personal commitment. Be sure you're not getting yourself in over your head.
Banks, when granting loans, will usually require you to take out property and liability insurance on your business and a personal life insurance policy naming the bank as beneficiary.
OTHER POSSIBLE LOAN SOURCES
If you own a life insurance policy and have been making payments for at least a few years, you can probably borrow on the "cash value" of your policy. Most long-term life insurance policies acquire a cash value within a few years. That is, the policy is worth money to you. If you were to cash in your policy, you would receive that money . . . sort of a refund. As long as you keep the policy, you cannot get the money, but you can borrow as much as your cash value from the insurance company. The insurance policy remains effective during the loan. Interest rates on insurance policy loans are substantially lower than bank interest rates. The rates usually run from five to eight percent, depending on when you first purchased your policy and what state you live in. Your own insurance agent can give you all the details.
The company that sells you your equipment may also "loan" you money in the form of credit. Most manufacturers have financing plans allowing you to buy your equipment on the installment basis. Commercial finance companies also offer short-term loans for purchase of equipment and inventory.
From Small-Tnme Operator How to Start Your Own, Small Business. Keep Your Books, Pay Your Taxes. & Stay Out o' ' ._.., - L. Bernard Kamoroff. CPA. Copyright ~ 1976, 7977 by-the author, and repented with the permission of Bell Springs Publishing Company. Laytonvllle, California Available in paperback cc . _6 95 from any good bookstore or from Mother's Bookshelf.
Your wholesalers or suppliers may also extend short-term credit. But if you're new to the world of business you may have difficulty proving your credit worthiness. You'll probably have to operate C.O.D. with your suppliers until you're a little better established.
PUBLIC SECTOR FINANCING
I blow hot and cold on government agencies and on the reliability and consistency of government policy. Too much is dependent on politics and the whims of whoever is in power this year.
With that little bit of warning, you may want to investigate, and you may even get your money from, the United State. Small Business Administration (the "SBA"). The SBA has a variety of loan programs for new and expanding businesses. The program most applicable to new business ventures is the one they call "Economic Opportunity Loans". These loans are available to people who have been unsuccessful in obtaining financing through the private sector. In other words, first the bank has to turn you down . . . then the government may step in. To get an SBA loan, you'll have to convince them that you have the ability to operate a business successfully and that the loan can be repaid from the earnings of your business.
The typical successful SBA loan applicant-from what I can tell from my personal observations-is an aggressive male between the ages of 25 and 35. He's full of confidence and comes to his interview with sales, cash, and profit forecasts for the first twelve months of operation. He's done a market analysis of his future business location and its prospects for growth. No matter that his projections and analyses are based on hope and little more: the mere fact that he's gathered and prepared the information, that he's studied the SBA literature and can talk their language, seems to impress these people.
The SBA will make loans for up to eighty percent of your starting capital (as opposed to a fifty percent bank maximum). You'll be expected to have some of your own capital invested in your business. The maximum SBA loan is $50,000; the loans usually have a five- to eightyear payback period. SBA interest rates, which are adjusted quarterly, are lower than regular bank rates; the typical SBA rate is 10-1/2%.
There are two major drawbacks to SBA loans. First, it may take several months to approve and process one. Second, there is a severe shortage of funds. The SBA had only $144 million to lend in 1975, down from $240 million in 1974; and only about twenty-five percent of the available loan funds go to new businesses. The bulk of the money is lent to existing and expanding small businesses.
SBA loans also come with strings attached. The agency has a set of operating guidelines you must follow, which limits your freedom and flexibility somewhat. The SBA will periodically audit your books, which can be both a help and a nuisance.
A more common form of SBA involvement is their "Loan Guarantee Plan". Under this plan, a bank loans you money and SBA "guarantees" 90% of the loan. This Loan Guarantee Plan is not quite as desirable as the direct SBA loan because you will have to pay regular bank interest rates, which are very high these days.
The SBA has a few other loan programs, for expanding businesses, for handicapped people, for minorities. There are over one hundred SBA field offices in the country. Contact the one closest to you, or write Small Business Administration, Washington, D.C. 20416.
A one person business or a business operated by a husband and wife is known as a "sole proprietorship". There are over 12-1/2 million small businesses in this country, and most of them are sole proprietorships. This form of business has flourished over the years because of the opportunities it offers to be boss, run the business, make the decisions, and keep the profits. A sole proprietorship is the easiest form of business to start up, and-despite all the regulations-is the least regulated of all businesses.
You, the owner of the business, the sole proprietor, are your own man (or woman). You make or break your business, which may sound singularly appealing to those of you instilled with the entrepreneurial, pioneering spirit. But you have sole responsibility as well as sole control. You and your sole proprietorship are one and the same in the eyes of the law. Any debts or obligations of the business are the personal responsibility of the owner. Damages from any lawsuits brought against the business can be exacted from the personal assets of the owner. You should be fully aware of these legal aspects of the sole proprietorship. If you get your business into legal trouble or too far into debt, not only could you lose your business, you could lose your shirt.
There's only one way to avoid the unlimited personal liability of the sole proprietor, and that is to incorporate your business. Generally speaking, the debts, obligations, and legal liability of a corporation are limited to the assets of the business and are not the personal responsibility of the owner(s).
The owner of a sole proprietorship cannot hire himself as an employee. This is a point of law often misunderstood by new business people. You may withdraw from the business (i.e., pay yourself) as much or as little money as you want, but this "draw" is not a wage, you do not pay payroll taxes on it, and you cannot deduct the withdrawal as a business expense. The profit of your business, which is computed without regard to your personal draws, is your "wage" and must be included on your personal income tax return. If your business made a $10,000 profit last year, you personally owe taxes on $10,000. Even if you only withdrew $5,000 from the business, you still must pay taxes on $10,000. And if you withdrew $15,000, you still pay taxes only on $10,000. The sole proprietorship itself does not file income tax returns or pay income taxes.
LICENSES AND PERMITS
When you open a new business, every government agency that can claim jurisdiction over you wants to get into the act. There are forms to file, permits and licenses to obtain, regulations and restrictions to understand and to heed. And, always, there are fees to pay.
Most business licenses and permits are required and administered by local governments: the city if you live within city limits, possibly the county. Some businesses must also have state and federal licenses. This chapter will describe the different types of licenses and permits typically required by states and municipalities and those currently required by the federal government. Regulations, however, vary from city to city and state to state, and they're changing and multiplying all the time . . . now more than ever. You should make it your responsibility to contact state and local government agencies (anonymously if you prefer) to learn the most recent requirements and restrictions.
FICTITIOUS NAME STATEMENT
When a business goes by any name other than the owner's real name, the business is being operated under a "fictitious name". "Country Comfort Carpentry", "A-1 Market", "Mad Creek Inn" are all examples of fictitious names. People doing business under such a name are required to file a "Fictitious Name Statement" with the county in which they do business. The county will charge a filing fee, usually $10 to $25. Filing a Fictitious Name Statement prevents any other business in the county from using the same name.
In addition to filing for the name, you'll be required to publish the Fictitious Name Statement in a newspaper "of general circulation" in the area, the theory being that the public has a right to know with whom they are doing business. The county clerk can provide you with a list of acceptable "general circulation" newspapers. Publication costs can be relatively low-$15 to $30-if your county has one of those newspapers that specialize in running legal notices (and little else). If not, small-time newspapers almost always charge less than large circulation dailies.
You'll be required to renew your fictitious name periodically, usually once every five years. In most states, you don't have to publish renewals in the newspaper. It's important for you to remember the renewal date, because the county won't remind you. If you forget to renew, someone else can step in and file for your business name, and you won't be able to use it anymore. There are some worthless people in this world who make a living "stealing" fictitious names and then selling them back to the negligent businesses that originally owned them.
Corporations, unless operating under a name other than the official name of the corporation, don't need to file a Fictitious Name Statement.
For the specific "fictitious name" requirements for your locality, contact the county clerk's office, usually located in the county administration building at the county seat.
LOCAL BUSINESS LICENSES
Just about every business in the country must get a local business license, which is merely a permit to do business locally. "Local" may refer to either the municipal or the county level, and sometimes to both. Local business licenses can cost anywhere from ten dollars to as much as $100 and must be renewed annually or bi-annually. Businesses operating under a fictitious name will usually not be able to get the local license until they have filed the Fictitious Name Statement. Contact city hall or the county clerk for specifics.
OTHER LOCAL PERMITS
Your business may be required to conform to local zoning laws, building codes, health requirements, or fire and police regulations. Restaurants, night clubs, taverns, groceries, child-care homes, bazaars, and shopping centers in particular are likely to be subject to these additional regulations. I suggest that you contact your local government before you open your doors. You may find the regulations so demanding that you can't afford to meet them. If you don't get the proper permits or meet the building requirements, the police can and will shut you down.
STATE OCCUPATIONAL LICENSES
States have traditionally licensed doctors, lawyers, CPA's, contractors, and a few other professionals. Recently, however, demand for consumer protection has brought about state licensing of dozens of additional occupations. Auto mechanics, stereo and TV repairmen, marriage counselors, plumbers, even dry cleaners, to name a few, are often licensed. Occupational licenses are usually issued for one- or two-year periods and, as always, for a fee. Some of the occupational licenses require the licensee to pass a test; some have education and experience requirements. Contact the state agency administering consumer affairs to inquire about possible licensing of your business. State offices are always located at the state capital and usually in the larger cities around the state.
SALES TAX AND SELLER'S PERMITS
Unless you live in Alaska, Delaware, Montana, New Hampshire, or Oregon, you'll be required to collect sales tax from your customers and remit the tax to the state. In other words, our state governments have turned us business people into unpaid (and often unwilling) tax collectors. Every state's sales tax laws are a bit different: Many states exempt food, labor, and shipping charges from sales tax; some states want only a report of your taxable sales; others want a breakdown of all sales, taxable or not. Depending on the dollar volume of your business, you'll have to prepare either monthly or quarterly sales tax returns on which you report your sales and pay the taxes collected.
Every state which collects a sales tax issues "seller's permits" (or "resale permits"), and every business which sells goods must have one. Some states will also require a security deposit from you before issuing you a seller's permit, which is' the state's way of guaranteeing that you'll collect and remit sales tax when you sell your goods to your customers. States will sometimes allow you to put your security deposit into a special interest-bearing bank account. When you apply for your seller's permit, the state will give you a full set of sales tax rules and procedures. Service businesses which do not sell parts or inventory are usually not required to obtain a seller's permit.
Besides registering you as a seller, a seller's permit gives you the right to buy goods for resale-both finished products and raw materialswithout paying sales tax to your supplier. Only goods which will be resold in the normal course of business can be purchased in this manner. You may not use your seller's permit to make tax-free purchases of office supplies, tools and equipment, or goods to be used for personal, nonbusiness purposes.
Businesses dealing in wholesale goods and raw materials must also obtain a seller's permit, allowing them to sell their resale goods to another business without charging sales tax. The wholesale business will often be required to keep a detailed record, by customer, of the taxexempt sales. States usually provide wholesalers with a special form for this purpose.
OTHER STATE REGULATIONS
In addition to occupational licenses and sales tax laws, some states have various other requirements for small businesses. Some of these state laws parallel or expand upon federal laws, particularly Federal Trade Commission regulations (discussed later). Here is a brief summary of some state laws. You're going to have to do some telephoning-try your state's Secretary of State office or Attorney General office for starters-to get answers.
Truckers and taxi cab operators must often register with the Public Utilities Commission. Businesses operating factories or other potential air and water polluting equipment must often meet state Air and Water Resources Commission requirements. Employers may be subject to state wage and hour laws and occupational safety and health laws administered by the state Department of Labor or Department of Industrial Relations. States often have laws regulating finance charges imposed on customers.
FEDERAL IDENTIFICATION NUMBERS
Your business will be required to identify itself on tax forms and licenses by either of two numbers: your Social Security number or a Federal Employer Identification Number.. A Social Security number is all the identification you'll need until you hire employees; then you'll have to get the Federal Employer Identification Number. To obtain a Social Security number, fill out Form #SS-5 at a Social Security or Internal Revenue Service office. An Employer Identification Number is obtained by filing another IRS form, #SS-4. There is no fee charged for either number.
If you do file for and receive a Federal Employer Identification Number, the IRS will automatically send you quarterly and year-end payroll tax returns, which you must fill out and return even if you have no employees. So don't apply for an Employer ID Number until you become an employer.
FEDERAL PERMITS AND REGULATIONS
Federal "watch dog" agencies and the rules and regulations generated by these agencies are growing at a tremendous rate. The "U.S. Government" section of the San Francisco telephone book lists over twenty-four major agencies and departments which in some way regulate or oversee business activity. Most of this government intervention is aimed at large corporations, but some small businesses are also subject to federal licensing and regulation.
The federal government licenses all businesses engaged in interstate commerce, common-carrier transportation, radio and television station construction, manufacture of drugs, preparation of meat products, and investment counseling. You should contact the Federal Trade Commission, Sixth Street and Pennsylvania Avenue N.W., Washington, D.C. 20580 for specific licensing requirements.
Some employers are subject to the minimum wage and equalopportunity employment laws which come under the Department of Labor's Fair Labor Standards Act.
FEDERAL TRADE COMMISSION REGULATIONS
Small businesses which guarantee merchandise, sell by mail, sell or manufacture clothes or fabrics, or sell or manu. facture packaged or labeled goods are subject to Federal Trade Commission regulations. For information, write the Federal Trade Commission, Washington, D.C. 20580.
Before you open your doors, you should thoroughly invested gate the insurance needs of your business. Insurance replace: a large, uncertain loss with a small but certain cost: the in. surance premium.
I'm partial to independent agents because they're not tied t( one company and can piece together the best insurance pack age to fit your needs and your pocketbook. I suggest you picl an agent who'll devote time to your individual problems, an( who'll at no extra cost survey your entire situation and rec ornmend alternative methods of insurance, pointing out the advantages and disadvantages of each.