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Incorporating Your Business – The Ups And Downs Of The Process

The first question to a budding businessman or woman is why you should incorporate your business in the first place. Can you run a successful business without incorporating your business? Of course you can. The main reason for incorporating your business is to protect your personal assets against a business liability. If your business gets into a debt situation and only liquidating assets seems to be the way out, your personal assets will not be touched if you have incorporated your business.

You can rest assured that your home, car or personal assets will not be seized if your business has been incorporated. However, incorporating your business is not entirely a very happy scene. Why? Read on to learn about it.

Before we discuss the merits and demerits of incorporating your business, let us learn about the different types of corporations that your business could register as.

Types of Corporations

o General Corporation – this is the most common type of corporation. It consists of a number of stockholders and the corporation as a legal entity, is owned by them. The stockholders are protected from the creditors of the business. The stockholders are responsible only as far as the investment to the business.

o Close Corporation – this is similar to General Corporations except in the number of stockholders. In a close corporation, the number is limited to 50. The shares of the company are first sold among the existing stockholders and only then sold to new stockholders.

o S Corporation – this type of corporation is a slight modification of existing corporations. It includes a certain tax designation granted by IRS to existing corporations.

o LLC (Limited Liability Corporation) – this type of corporation seems to be a better form of corporation than a partnership or an S corporation. This is because it combines protection of personal assets and tax advantages without IRS restrictions

Reasons To Incorporate Your Business

If you are planning to start a small business, there are many reasons why you should incorporate your business.

The reasons, as stated by experts, are as follows:

 Reduce personal liability – if you run a sole proprietorship, all your personal assets are liable to risk in the case of any business debt. But if your business is incorporated, your personal assets and business remain two distinctly separate identities. Your personal assets will not be affected if your business incurs any debt.

 Save tax – corporations have to pay less tax than individuals. If you are incorporated, insurance, entertainment and travel all become tax deductible as business expenses.

 Enhance credibility – LLC or Inc after your company name puts you in good standing to potential customers and vendors. It legitimizes your business potential.

 Assurance of continuity – corporations indicate continuity beyond an individual or owner. The company does not shut down with the death of the owner.

 Investor friendly – corporations attract investors through stocks. Investors will buy stocks only if they see the company is incorporated.

 Quick transfer of ownership – corporations can switch owners only with sale of stocks.

 Share responsibility – no single partner decides on company rules and policies. Every partner takes up responsibility. This protects the company from putting into practice a decision that may be harmful to the organization.

Reasons For Not Incorporating Your Business

There are downsides of incorporating a business as well. They may be fewer in number but are not less significant. The reasons for not incorporating your business are the following:

 Incorporating a business requires a huge amount of paperwork and records than sole proprietorship. Also, each state has its own laws for incorporating businesses to ensure stability and strength. Your may not be ready to do all that.

 Costs of setting up a corporation are also high compared to the other business structures.

 If your profits are not very high, you will miss out on all the tax benefits of running a corporation.

With advantages and disadvantages of incorporating a business clearly stated, say you do want to incorporate your business. Now the next important question arises. Where do you want to incorporate your business? Your hometown is the best place to incorporate your business. However, it has merits and demerits to it.

Merits of incorporating your business in your hometown:

a. The simplest thing to do if you plan to run your business only in your state

b. Do away with filing annual reports of your company in more than one state

c. Costs involved are less if you incorporate your business in your own state

The best states to incorporate your business are known to be Delaware and Nevada.

Why do people choose Delaware for incorporating their business?

With more than 700,000 companies choosing Delaware as their legal home, it has rightfully earned the title “Incorporating Capital of the world”.

 Delaware General Corporation Law is the most advanced and the most flexible business statute in the continent

 The State Government is pro-business and friendly

 Costs to incorporate in Delaware is one of the lowest in the country

 The business Court of Chancery has authored most of the modern U.S. incorporation law

Why do people choose Nevada to incorporate their business?

 No corporate income tax on corporate shares

 No franchise tax and no personal income tax

 Minimum annual fees

 Stockholders are not made public and directors need not necessarily be stockholders

 Stockholders and directors may not reside in Nevada or need not be U.S. citizens

You have quit your job, as your head is full of entrepreneurial ideas. You want to start a business. Apart from choosing the market and the product, the first thing that you need to think about is incorporating your business. What is incorporating a business? What are the advantages and disadvantages of incorporating your business? Is incorporating your business area specific? All such questions have been dealt with in this article.

Once the skeleton of your business is ready and the launch pad is set, the only thing left to do is to incorporate your business. That is, if you want to incorporate your business. Incorporating your business means your business name will become a Limited company or a LLC company, Inc. etc.

Business Plans – Your Roadway To Success

Experts say that a strong business plan is one sure step in the direction of success. So, what is a business plan in the first place? It is defined as a document that outlines the functional and financial objectives of a business. It also contains details of the budget involved and the goals to be achieved.

Everything on earth is tending to become compact. Gone are those days when a sea beach was described in a thousand words. Today, a similar description is possible with a powerful visual and a string of strong adjectives in only a few words. A mobile phone today is slightly bigger than your thumb. Similarly, a business plan is no longer a document of a hundred pages. Nobody wants to know your business. They want to know your views, your goals, your objectives and your plan of action.

How Well Can A Business Plan Be Implemented?

o Simplicity of a business plan – is it understood by one and all? Are its views and objectives clear?

o Specificity of a business plan – are the contents measurable? Are all the activities dated (initiation to completion)? Are all the actions distributed among personnel clearly?

o Real nature of a business plan – are the objectives and targets real? Are the goals set within a specified time achievable?

o Totality of a business plan – is the plan complete? Does it have all the necessary elements to outline your business goals?

A business plan has multiple uses. It can be used to start a new business enterprise, take a loan or to find good investors. There are many other reasons for which you need a business plan. You should first find out why you need a business plan.

Why Do You Need A Business Plan?

o Outline objectives and set goals to achieve them

o Prepare regular business review outlines

o Start a new business enterprise

o Decide on a value on a business for sale and legal issues

o Outline agreements between business partners

If business plans are conceived for different purposes, there must be different business plans for different kinds of ventures. Business plans are also known as growth plans, internal plans, investment plans and so on and so forth.

If your business plan is for internal study and revision, there is no need of background details of your organization because you are already aware of them. You need to add that only if your business plans are meant for banks and other institutions.

What Are The Different Types Of Business Plans?

- The most basic of business plans are the start-up plans that clearly outline the steps for a new business venture. They include details of service provided or product offered, market value of the same, implementation strategies, market and financial analysis. The basic structure consists of a summary of the company, ending with details of financial transactions and expectations for the first year.

- An operational business plan contains details of dates, deadlines and milestones. It is often referred to as an internal business plan.

- A strategic business plan aims at higher levels of target and does not deal much with dates and deadlines. This business plan is more of future and growth oriented and focuses less on facts of the company.

- A growth or expansion business plan focuses more on one or more subset of the business. There are variations of this kind of business plan. If it is meant for a new investment, it will obviously include the background of the company.

- A feasibility business plan is your entire business in bulleted form. It includes the summary, the mission and the vision of the company, the USP of the business enterprise, expected financial outcomes etc. The main purpose of this business plan is to test whether this business is worth a venture at all.

The Seven Points Of Business Plans

Business plans usually cover the following 7 points. Of course, they will vary in detail, depending on the purpose of the business plan.

- Mission Statement – your business plan must explain clearly why you want to start a particular kind of business in the first place. It doesn’t have to be long, but it needs to convey the message clearly.

- Business Description – this is the place where you talk about your business. What is it that you are trying to sell or provide? What is the USP of your business?

- Goals in view – here, you describe both your short term and long term goals. Short term goals may include your plan to acquire office space, provide a proper business name, apply for a business license etc. Long term goals include answers to where you see your business ten years down the line, opening new stores etc.

- Prospective Customers – who is your target audience? Why will they need your service or product? How well do you understand their needs?

- Competition Analysis – this helps you rank your business venture in the market. Who are your competitors? If their focus area is too competitive, try for a niche market that is comparatively less competitive.

- Financial Considerations – be realistic and optimistic about your finances. Make sure to spend only that much with which you are sure to receive returns. Or else, go in for a small business loan till your business can take care of its own expenses.

- Marketing – sell your ideas before you sell your products. Advertise your products everywhere you can think of. Don’t miss out on both offline and online publicity. If you get a chance, exhibit your product or service at local communities and organizations.

Do’s And Don’ts Of Business Plans

Your business plan should:

a) Set concrete goals and deadlines

b) Distribute work among people and departments and set deadlines to achieve the goals

c) Maintain a steady ratio of implementation to strategy to 10:1

d) Provide a platform for regular review and discussion

Your business plan should not:

a) Display your knowledge about your field of expertise

b) Be too lengthy – people lose interest easily

Not all businessmen and women are good planners. It has often been seen that a business fails because of the lack of a good business plan. That is one of the cardinal mistakes for an entrepreneur.

Business Plan Mistakes

Experts have identified some common mistakes regarding business plans. They are:

- No business plan – many business ventures begin without any plan. Plans are written out in a rush only if the clients or banks or investors ask for the same. It is often seen as unnecessary because the business is more important. Imagine the condition of a house without a plan. You will get lost midway in heaps of concrete and steel. Similarly, you will get lost in ideas and desire to implement them.

- Cash is more important than profits – business is not the same as profits. Cash is the main player. Only if you have cash to spend in the beginning, will you get profits at the end of the day.

- Ideas don’t sell – your business sells because of hard work, perseverance, cash and a lot of common sense. Your idea does not have to brand new. Old wine is better than new ones. Why? People trust age and experience.

- Fear factor – a business plan is as necessary and as routine as making a travel plan. You don’t need to be Einstein to chalk out a business plan. You just need to think straight and pen your thoughts.

- Specificity wins – focus on tangible results, instead of trying to be the best. Results matter and they tell you everything.

- Fit all business plans – your business plan should work for bankers and investors as well as internal review and corrections. Don’t make individual business plans for individual purposes. Rather, concentrate on your business.

- Everything cannot be important – you can have only a few priorities. 20 priorities are vague and they clearly show lack of strategy and of goals.

A business plan is the first step of starting a business. It is neither easy nor difficult. What is a business plan about? How do you implement a business plan? What do you include in a business plan? What are the ‘must have’s’ and ‘have not’s’ of business plans?

Whether it is travel, study, cooking or any other activity involving a process, planning is usually the first step. The same holds true for business. Business plans are probably more important than the business itself. For example, the plan for a house is more important than the house itself, though it is the house that people remember and not the plan. But the house wouldn’t stand without the plan, would it?

Buying A Business – The Basics

Buying a business in today’s economic climate requires that you, the buyer, be on the ball, with regard to business basics. This economic climate, as far as businesses are concerned, is a sellers market.

With the corporate downsizing, economic downturn and other factors, there are a lot of very knowledgeable buyers out there looking for one of the very few good business to buy. This means that you, as a buyer have a lot of competition. Consequently, you need to be well prepared. Professional business buyers, report that it takes anywhere from 3 months to 3 years to find the right business. So, if anything, what can be done to speed this looking process and at the end finally get a good business?

The decision – the first step is deciding to buy a business. Once you have made this decision and you are definite and firm about the fact that you are definitely buying a business, the process has started.

The second step is to decide what kind of business. This is really really important. What are the criteria for this business you are looking to buy? Do not make a wish list or what would be nice. Make a list of what is important. For example, if your standard of living requires $100,000 income, do not compromise by looking at businesses that make only $50,000.

That is unless you consider yourself a knowledgeable business manager and marketing person who knows that any business they buy will double in income and sales. That kind of buyer can buy a business that makes no profit and probably should.

Other criteria include; is it something you can handle? What kind of work are you willing to do? If you like sales and do not like running a factory, buy a distribution company, or sales organizations, and do not buy a manufacturing firm, unless you have a partner that likes running a production line.

I have people call me to inquire about buying a body shop that have no automotive experience at all. You can buy an auto repair shop, muffler shop, brake shop or lube store, and learn the business, with no experience to start. You probably should not buy a salvage yard body shop, or scrap yard with out being raised in the business. If you are a salesman you can buy almost any business.

All manufacturing, distribution or retail sales require good personal sales skills. If you are poor at communication skills or English is a second language, consider buying a liquor store, gas station or hamburger stand, just a few of the businesses that do not require, personal selling, or do they?

About you – There are some things you need to prepare for the brokers when they start coming to you with possible businesses. You need to make sure that you have your down payment sorted out. Expected down payments are anywhere from 25% to 100% of the selling price. So make sure you know what you want to spend and then make sure you have the down payment easily available.

Then you need to get your financing options determined. You can get yourself pre-qualified for a business loan or an SBA loan if the business you are buying is required by you to show a profit on the books. SBA loans are only available to businesses that have shown a 5-year profit on their tax returns. If you are looking at businesses that are heavily unrecorded income, you must have cash or seller financing.

Being your own broker – You should determine who is going to make your offer. A broker, or yourself? If it is you then you should locate the necessary offer forms and study them carefully. Determine what must be in your offer so that you can put in an offer, the instant you find a business that meet your requirements. This is an important step, as putting in an offer tends to lock out other buyers while you look over the business. Make sure you have contingencies in your offer, which means you have lots of “get out of the deal” clause.

I would like to suggest, for the less experienced buyer to hire as a consultant the sharpest attorney or business broker you can find and pay him for his time to watch your rear end, in negotiations and in reviewing the companies you are considering buying. In real estate we call this a buyers agent, except with businesses the listing agent will not always co-operate in splitting the commission. This means you need to be willing to pay your agent an hourly fee for helping you. Let me give you a real example.

David and his father were looking for a business to buy. They were interested in a Scrap yard that I was selling. I asked their buying agent to bring them over so I could interview them and to explain this business to them. In 3 minutes it was clear that they should not even consider this business. We spent the balance of the meeting talking about the businesses they had looked at and the pros and cons of each. I gave them my honest suggestions about each from their description. They thanked me and left.

Two months later David calls and asked if he could come talk to me. He told me about an FSBO “For Sale by Owner,” who would never pay any agent a commission unless he got his price + the commission. That of course doesn’t make sense to a buyer. David told me about the deal and I gave him my honest opinion about it. David asked what my time was worth and gave me a check for an hour’s time.

Two months again passed and David called and said, “I need to see you today.” He proceeded to tell me about a Car Wash Soap manufacturing company that was suppose to be making $500,000 profit per year. The asking price was $2 Million. David wanted several things from me. He wanted my opinion of the business, he wanted me to help get the price down to a more reasonable amount and he wanted me to verify the income. It took me 30 hours of reviewing the books and talking to the seller to determine that the business was making only $350,000 per year including what was not on the books. The books were made complicated, intentionally so that no one could understand what was going on.

I related my findings and told David he had to do his own negotiations but I would coach him every step of the way. David paid my fee and I didn’t hear from David for one year. When he called, I asked what happened to the car wash soap business. He filled me in on the story.

He bought the business for more than I suggested because he saw where he could improve the business instantly. The profit turned out not to be $500,000 as the seller guaranteed, but exactly $350,000 as I had determined. David took over sales and marketing and within 1 year had the company profit up to the $500,000 he was promised.

David now had found a related business that had been listed with an agent who did not understand the business he was marketing and could not sell it. David was now talking to the seller directly. The seller wanted $550,000. David wanted me to negotiate, on a consulting fee bases with the seller to get the price down.

I instructed David that I would appraise the business, and convince the seller that my appraisal was accurate, but David had to do the negotiations. The seller would never talk to me about the inside details if he was negotiating with me directly. This time I spent 5 hours with the seller, not the books, to determine the business was worth $350,000. The seller would not take the price, but felt I had done an excellent appraisal. I suggested to David to wait 60 days and open discussions again. I also told him the seller would eventually take the $350,000.

I again didn’t hear from David, this time for 6 months. When David called I asked for his report on what happened. The seller called him after one month and sold the business to him for my appraised amount, just as predicted. What did David want this time? Two guys wanted to buy the business and David wanted me to justify a price of $500,000? I did my updated analysis and got paid. I will not find out what happened until David calls me with my next assignment.

Get the word out – Now that you have got all of your preliminary work done you are ready to go looking for businesses. You are ready to look for businesses for sale. Go on to the Internet and look at sites that have businesses for sale. Look in the classified section of your county newspapers and look at what is for sale. Contact business brokers and tell them what you are looking for in detail. Call on broker listings and FSBO (For Sale by Owners.) When you find something interesting you move through the steps with a broker, accountant or attorney or without a broker, accountant or attorney.

Find out what financial records they have. This will eliminate 75% of the businesses. The records are false because of cash sales and/or cash payroll. A lot of auto repair shops pay their mechanics a base salary on the books and the balance in cash. This is crazy and illegal. They have cash sales, which are illegal, and not reported and then they give this money to the employees illegally. Have fun figuring out the profit on these businesses. Some businesses do not want to give you any financials. They do not even want to lie to you about the numbers; they just do not give them to you. You need financials even to just see what the operating expenses are.

Cash income — The problem with cash income, besides being illegal is it is unconfirmed. Jack bought a body shop doing $60,000 sales on the books. The seller showed Jack records that proved to Jack, an experienced body shop owner that the business was really doing $125,00 month in sales. After escrow closed Jack was given the production records for the last 5 years by the general manager that stayed with the company. The business was doing $60,000. Exactly what was on the books! There was no cash. The seller reported every dime. I hate to say it but if someone were willing to lie to the government and their business broker, why would they tell you the truth?

Find out what the seller wants – the next key step is to ensure that you find out exactly what the seller wants. You have already stated what you wanted when you got the word out. Now, you need to make sure you understand what the seller wants. Make sure you get full information on this from the broker or seller. On this step, you are basically finding out what the seller wants for his or her business exactly. That includes, down payment, seller carry back terms, time he is willing to train you to run the business, and what he is including in the price. Inventory can be included or extra. Leased equipment basically has you as the buyer assuming the debt, where financing on owned equipment is paid off in escrow or the price is lowered because you are assuming the debt. With all of this information, you can begin your negotiations.

Negotiate – Ok, now you know what the seller wants and you know what you want. On this step, the objective is to get the two wants to match up and agree with each other, so that the deal can take place. What you are trying to do at this stage is decide if you are going to go ahead with the deal or if you are going to continue talking with the broker and the seller until what they want is closer to what you want. The key here is keeping the conversation going (negotiate). As long as the conversation is going, it is much more likely to result in the deal taking place. So keep the conversation going!

Almost the final action – after the negotiations and an agreement has been reached, there is one final action that is vital. Your offer is in, but you are not done yet! Due diligence is required. Here you must get documentation on the financial figures you have been given. You want to verify that what you have been told is indeed the case. Get Profit and loss statements, business tax returns and other important documents. If you have been told that a body shop has a contract with the local city to service all their vehicles, or some such story, ask for and see the contract and verify that a valid contract does indeed exist. Part of this final action is ensuring that you have the advise of a competent professional as well.

Escrow – Never buy an asset sale purchase without an escrow. We have already established that the sellers may be lying to you about any number of things, but they may have debts that they do not even know about. The escrow will do a “bulk sale notice” that gives creditors of the business a chance to file their claims, and if they do not the buyer cannot be held liable. The escrow also makes sure that the payroll taxes; sales taxes; federal and state income taxes are paid in full. The IRS has come into companies and assessed for many years of unpaid taxes. As the buyer you would get stuck with this bill, if you didn’t do an escrow.

Conclusion – Following the above steps will see you through most of the pitfalls in buying a business.