DIAGNOSING YOUR
BUSINESS REQUIREMENTS
You recognize the importance of careful deliberation when making strategic business decisions. You know that a hurried approach may result in serious consequences and potential legal exposure.
Yet how often have you devoted this same analytical time to review of your business goals regarding your anticipated or existing business operations? Whether you are contemplating creation of a new business, or simply want better control of your existing business, the use of a business plan, coupled with an effective business structure, strengthens your chance of growing a strong and thriving long-term business.
I. The
Business Plan
Your business plan should be the first step taken towards creation of any business endeavor. According to statistics published by the Small Business Administration, nine out of ten businesses close within their first year. A carefully created and annually maintained business plan ensures your business will not be one of those statistics.
What’s in a business plan? At a minimum, the plan should include:
A. A summary
of the business
The business summary encapsulates your vision of the business. At a minimum, it should address:
B. A “key executive” summary
The key executive summary is your chance to honestly assess and define the strengths you bring to the business. The identity of a start-up business is the identity of its key executives. This is not the time or place to be humble! At a minimum, include for yourself and any other key executives the following:
C. Market strategy
Your market strategy requires YOU to identify and then develop a comfort level with your ability to cover overhead, loans and salaries, INCLUDING YOURS. Your market strategy identifies and defines the methods you’ll use to secure and maintain your client base. Ideally, your market strategy will:
While sounding technical, much of this analysis can be secured, at no cost, through working with your local Small Business Administration office. You can locate the nearest office, as well as other valuable management information, at http://www.sbaonline.sba.gov/index.html. Be sure to ask about the SBA’s many business assistance programs, including SBA’s SCORE program. In SCORE, the SBA matches you with retired executive volunteers who can assist with your business formation and on-going management decisions. These SCORE volunteers can be an invaluable resource as you map out the elements of your new or ongoing business plan.
D. Major obstacle resolutions
As if getting your business up and running isn’t bad enough, here you need to identify and address your anticipated major obstacles. You may want to keep this section confidential and separate from your business plan, but its importance is critical. Sometimes major obstacles indicate that business formation is premature at this stage of your life or career. If you do elect to include it in the business plan, this section should identify not only your anticipated hurdles, but also resolutions to each. Sample elements may include how much capital you’ll require to fund:
Perhaps your major obstacle is more elemental, including your business experience (or lack thereof), or discomfort with sales and marketing. Perhaps the major obstacles are balancing lifestyle considerations. In other words, this section should identify any factor which represents a draw on your professional, educational, personal, or financial reserves.
E. Operations
Analysis
This analysis reviews your anticipated daily practice. Keep it basic – you’ll be amazed at the issues that arise in considering even the simplest factors. This includes:
This is a time
to brainstorm – ask yourself as many questions as possible, and then summarize
your answers. This analysis also
presents some easy due diligence – review professional resources like trade
or other business magazines to see what’s hot in day-to-day office management
resources.
F. Preliminary
Budget for Start-up Costs
To a large extent, this section encapsulates in spread sheet form the financial factors identified in the “obstacle” analysis above. This section of your business plan should include anticipated “up-front” costs of creating the business. It will identify the amount of capital required, and allow you to analyze how to raise that capital through personal investment or loans or partnership contributions.
G. Monthly
Cash-Flow Analysis
The monthly cash
flow analysis interprets, in spread sheet form, your monthly and annual anticipated
and categorized revenue resources as measured against expenditures. The goal
is to generate sufficient monthly revenue to cover expenses and compensation.
Whether this is
your original business plan, or a plan tackling an existing business, the
business plan forces you to evaluate your business goals and management
practices. Perhaps you will review it for strategic decision-making, or for
loan purposes, or for new partner solicitations. Regardless of its use, the
business plan often permits you to avoid costly errors in judgment. As such, your business plan may be
the most valuable strategic investment you make in the business.
STEP TWO: CHOOSING THE RIGHT BUSINESS ENTITY
In creating the business plan, you’ve drafted a description of your business vision. Your next step is choosing the legal structure best suited to bring that vision to life in terms of formation, management flexibility, business continuity, liability protection, and tax impact. There are various business forms recognized in each state, including:
Each has certain elements which
make it attractive for some uses, and not attractive for others. Only you can
determine which format best suits your business vision.
A. Sole Proprietorship (Individuals)
1. Formation
A sole proprietorship
is equal to you starting your business without any formal business structure. There
is no separate legal entity formed. Thus a sole proprietorship offers no
liability protection and is not recommended for ANY business owner.
On the other hand, start-up costs are minimal as there are no formation requirements. Instead the sole proprietor typically segregates a portion of his or her personal assets and dedicates them to a specific business purpose. In many states, a sole proprietor who does business under a fictitious name (i.e., John Doe, d/b/a Thunderbird Clinic), must register the name with the Secretary of State’s office. Failure to do so constitutes a misdemeanor. This requirement currently exists for the State of Missouri but not for Kansas. However its still recommended that you record fictitious names, if applicable, in whatever state you do business in.
2. Management
A sole proprietor has total flexibility in managing and controlling the business and is thus free to make business decisions without any formal restraints.
3. Limited Liability
The personal liability of the sole proprietor is unlimited. If you receive a judgment against the business, that judgment can attach business assets as well as personal assets. In addition, liability for debts incurred in the business is not limited to the amount of capital set aside for the business. Finally, existing liabilities of the sole proprietor will not be extinguished upon the dissolution or sale of the sole proprietorship business.
4. Transferability of Interest and
Continuity of Life
A sole proprietor may sell or transfer any portion of his or her business interest at will.
5. Continuity of Life
The death, withdrawal, or bankruptcy of a sole proprietor will terminate the business.
6.
Taxation
The income of
the business is treated as personal income of the sole proprietor, who is taxed
at the higher IRS “self-employment” rate.
B. General Partnerships
1. Formation
Under common law,
partnerships were not separate legal entities and had to be legally identified
through the listing of each partner’s name. However, most states have now enacted statutes that permit
partnerships to sue or be sued in their own names. A general partnership is typically
formed by means of a formal agreement (i.e. partnership agreement) between the
parties and does not require any filing with the State. Although a general partnership can
be formed without any formal documentation, for definition and clarity of
rights and duties this agreement should always be in writing, preferably
drafted by an attorney.
2. Management
The management
of a general partnership is according to the terms of the partnership
agreement. Absent a provision to
the contrary, the partnership is controlled through the vote of all general
partners. All the partners are agents of the partnership for the purpose of
carrying on its business, and the conduct of each partner may legally bind the
other partners. Profits and losses of the partnership are to be shared equally,
unless the partnership agreement provides otherwise. Thus the general
partnership form can be cumbersome relative to day-to-day management responsibilities
and substantial exposure to partners unless otherwise limited by the
partnership agreement.
3. Limited Liability
Unless a limited liability partnership (LLP) application is filed with the secretary of state, general partners are jointly and severally liable for all partnership liabilities. This means that a judgment against the partnership may be collected against one partner, or all partners. Both the business assets as well as the personal assets of the general partners are subject to the claims of creditors. A registered limited liability partnership (LLP) is a general partnership, which by satisfying certain statutory requirements, limits the liability of the general partners similar to that of a limited liability company (LLC). In contrast to an LLC, however, the LLP allows for voluntary disassociation.
4. Transferability of Interest
Absent an agreement to the contrary, a general partner is required to obtain the consent of all of the other partners prior to the transfer of a partnership interest and the grant to the transferee of all of the rights to which the transferor-partner had been entitled.
5. Continuity of Life
Unless otherwise provided in the partnership agreement, the death, withdrawal, or bankruptcy of a partner in a general partnership will result in the dissolution of the partnership.
6. Taxation
The business
taxes of the partnership, including income and expenses, are allocated to each
partner according to the partnership agreement or, lacking an agreement,
pro-rata to the partners’ respective partnership interests. The partner’s income tax is
treated at the higher “self employment” rate.