For many people, an important part of living the American
Dream involves having the chance to take a stab at being
one's own boss ... by picking up on an idea and turning it
into a profitable reality. And now, when a lot of folks are
actively seeking career changes (by choice or
necessity), it may just be the ideal time to test
those entrepreneurial waters.
Unfortunately, the statistics regarding annual new business
start-ups and failures can be alarming. It seems that
roughly eight of every ten new ventures fail
within five years ... but there's no reason why yours can't
be one of the 20% that survive and prosper! To help insure
that'll happen, however, it's a good idea to study some of
the available literature on the subject, and to consult
with as many professionals as possible.
No business activity should, for example, be undertaken
without the advice of lawyers and accountants, and a smart
entrepreneur will also enlist the aid of the nearest field
office of the Small Business Administration (SBA), the only
federal government agency specifically set up to assist the
potential (or practicing) small-business person.
First of all, you need to establish a business plan that
outlines [a] your objectives, [b] your potential market,
[c] your plan for reaching that market, and [d]
your method of operating the business. Before you take even
the first step toward locating financial backers,
you should have those items thought out ... and the answers
presented in writing. After all, no investor can be
expected to take an interest in sponsoring your venture if
you haven't shown enough interest in it yourself
to set down a detailed plan of action.
However, once you've established your course—and
assuming that you yourself don't have the capital necessary
to implement your program—the next step is to locate
financing. Your first stop should be the office of the
nearest commercial banker. You see, although you might not
succeed at getting a business loan from that institution,
banking personnel—who generally have a wealth of
contacts in the community—may be able to both advise
you of and point you toward potential private
investors in your area.
There's yet another advantage to be gained by seeking help
at a bank: Once you've been turned down by at least one
commercial lender, you see, you can contact the Small
Business Administration for assistance in locating funds.
In fact, the SBA itself can guarantee loans up to
$500,000, at an interest rate not more than 2-3/4% over
prime. Since the money involved is still bank money,
though, it's wise to keep in mind that most lending
institutions will expect you to produce $1.50 worth of
collateral for every $1.00 you seek to borrow.
Commercial finance institutions, smallbusiness investment
companies, and business development corporations are other
possible sources of loans. Friends and family members can
also be helpful sometimes ... but—in such a
case—it is necessary to be sure the loan is made in
an appropriately professional manner, complete with a
signed contract detailing the amount borrowed, the fixed
rate of interest, and an outlined schedule of
FORMING A FIRM
Legally speaking, there are several ways to organize a new
business. Most folks begin with a "sole proprietorship",
which is the least complicated form. The owner is the
business in this instance, so all of the enterprise's
liabilities are assumed by the individual. Although there's
no need to have a lot of contracts or other legal documents
drawn up for a sole proprietorship arrangement, the
assistance of a good lawyer is still recommended. He or she
will see you through the process of obtaining all the
necessary permits and help you outline your tax
Then again, you may find it necessary (or advantageous) to
take a partner when you set up your new venture. A
general partnership represents a relationship
between two (or more) individuals who have joined together
to carry on a trade or business for profit. Each partner is
fully liable for the firm's obligations—unless the
partnership agreement specifically restricts those
liabilities and meets certain other legal
requirements for a limited partnership —
and each partner's share of the profits or losses
is reported on his or her individual tax return. One
primary disadvantage inherent in establishing a partnership
is that—when you do—you're legally responsible
not only for your business actions but often for the
actions of each of your partners, as well!
Corporations are the "robots" of the business world. Each
is a legal entity that's separate from the principal
participants involved. It's therefore liable for its own
debts and taxes, and it's also given the freedom to
distribute profits as it sees fit. A corporation is headed
by a board of directors, whose job it is to guide policy.
The actual owners of corporations are listed as
stockholders, and one "partner" can sell his or her shares
of stock in the company without necessarily dissolving the
business. However, because incorporation is such a detailed
and expensive process, most small-time entrepreneurs avoid
it until such time as their businesses really "take off and
Small enterprises also have the option of forming a
corporation under a governmental "Subchapter S"
designation. In this case, the shareholders of the
corporation elect to be taxed individually for
their proportionate share of profits and losses. To qualify
for this classification, a company must have fewer than ten
shareholders, be a totally domestic operation, offer only
one class, of stock, and consist of shareholders who are
all United States citizens and residents.
Be sure to enlist the aid of a competent and experienced
insurance broker when you begin to put together your new
venture-for-profit. Insurance is a complicated business and
is becoming more so each day. Some types will likely be
required by law, while other kinds can be considered smart
investments ... since they can protect your personal assets
and those of your business.
To cover areas of physical loss, you'll need
policies protecting your enterprise against fire,
lightning, wind, flood, vandalism, riots, robbery or
burglary, casualty, and damage resulting from use and
occupancy ... plus "extended coverage" protection to guard
against explosions, smoke damage, or bad storms. If you
lease a site, rather than own a building outright, be
certain that the agreement spells out which insurance
obligations are yours as tenant, and which are the
responsibility of the owner.
The "family" of policies that relate to personal injury
claims includes public liability, worker's
compensation, employer's liability, and product liability.
And there are still other types of protection that could be
important, depending on the nature of your business. These
include life insurance . .. automobile insurance ... and
policies that cover health and accidents, business
interruption, income continuance, and the bonding of
Licenses, permits, and other legal matters are very real
(and often annoying) aspects of small-business ownership.
Again, a good attorney will be most helpful in assisting
you as you slice your way through all the necessary red
Most businesses require a federal identification number, a
state retail sales license (if the enterprise involves
selling), a city occupational license, and (perhaps) even a
county merchant's license. Permits are generally
issued on an annual basis, require accompanying fees, and
often involve some kind of written application.
The government will—on request—issue you an
employer identification number ... which you'll be
expected to use on all business returns, documents, and
statements made in connection with the enterprise. However,
the individual owner's social security number will still be
required on income tax returns, self-employment schedules,
and declarations of estimated tax.
If you operate your new venture under any name but your
own, you'll need to register it with a local government
agency. This regulation is known as the AKA/DBA law
(meaning "also known as . . ." or "doing business as . .
."). Some areas may require you to publish the registration
in the classified section of your local newspaper.
Certain kinds of businesses require special permits. For
example, any restaurant (or a shop that sells food) will
have to obtain a permit from the county health department.
(This also means opening yourself up to on-the-spot,
unannounced inspections of your premises by county
officials.) Hairdressers, auto repair shops, exterminators,
real estate firms, and insurance agencies are examples of
other businesses that usually require special occupational
licensing from the state. Federal licensing, on
the other hand, is generally required only for gun dealers,
security and investment brokers, television and radio
stations, and pharmaceutical firms.
Whenever you sell a product directly to the public, you
have to charge sales tax. (Certain items are
exempt, but these will vary from state to state.) Nowadays,
many states require that you post a bond—or pay an
advance deposit—against future sales tax when you
apply for a permit. In exchange, you'll be issued the
permit and a "resale number", which will
effectively legitimize your retail operation.
Another legislative "headache" that must be dealt with
concerns the myriad zoning regulations found in most
communities. If you're operating a quiet business out of
your home, of course, it's unlikely that you'll encounter
any hassles from the zoning board. However, if your
operation is clearly a retail or manufacturing enterprise,
you should be well aware of the limitations imposed on you
by local ordinances. (Be especially aware of these
restrictions when you shop for a piece of property with the
intention of establishing a business on it.)
There are many tax advantages to owning your own business.
But before you begin operating as an independent, remember
that you cannot deduct expenses that you haven't
kept track of. Therefore, you must make record-keeping an
automatic part of your day-to-day existence. If you're
operating a sole proprietorship, the tax form that applies
to you is Schedule C-1040, and it's available from the
Internal Revenue Service upon request.
This form will detail a number of the deductions that you
can take. For example, you should be able to claim some of
the expense of maintaining your car if you use your vehicle
to conduct business activities.
Furthermore, you could receive a tax credit for hiring help
that meets federal "minority" or "handicapped" status. And
if you join professional groups or trade organizations
relevant to your work, you can deduct those membership
fees, as well as the travel expenses to and from the
groups' conventions or conferences. Working from your home
sometimes allows you to claim a certain percentage of your
household costs as business expense, too.
The greatest idea in the world will fizzle out fast if
people don't know about it, so a vitally important
part of your business will be getting word of your goods or
services to the market you hope to reach.
One of the best means of promotion-particularly if the
business you're establishing is service
—oriented—is a listing in your local telephone
company's Yellow Pages under an appropriate heading. Find
out what the charges are and when the directory goes to
press ... then be sure to submit your information
well in advance of that date.
If you're operating a retail outlet, you'll find that a
large window sign can be an easy and inexpensive way to
announce the forth-coming business. Likewise, a simple
handbill or flyer that can be posted on community bulletin
boards (in the coin laundry or supermarket, for example)
will also help make your offerings known to the general
In addition, nowadays most communities have a weekly
"shopper" newspaper that serves as an inexpensive way to
advertise services or wares (and if your area doesn't have
one, starting such a publication would be a good
business for you to consider). A few lines in
that—and/or in the classified section of your "real"
newspaper—will always be a good advertising bet.
As your business and profits grow, you may be able to
expand your promotional efforts to include large display
ads in newspapers and magazines, radio and television
messages, or a direct mail campaign.
YOU'RE ON YOUR OWN!
If and when you do decide to break away and try to succeed
as a self-employed person, you'll quickly find yourself
getting the kind of education that's not to be found in
books. This article is meant to serve only as a general
overview. It's certainly not intended to replace the
excellent advice to be had from bankers, lawyers,
accountants, and others who make a business of businesses.
Do keep in mind, as you plan, that it's a rare venture that
creates substantial profits during its first few
years. As you make financial projections, see that you have
enough capital on hand to maintain you and your family
until your company gets a fair crack at achieving success.
Given enough planning and persistence, however, you'll more
than likely find that you are able to make your
American Dream come true.
EDITOR'S NOTE: For a specific example of a
small-business beginning, see the article on page 76.