Starting a Small Business

So many issues come to mind when thinking about starting a small business: “What form should the business be in?”, “Will I have partners?”, “How will I market?”, and so on. We’ll address these issues in a systematic manner, but first we should take a step back and think about what a business is. A business, in the general sense, is a for-profit organization providing goods or services. A business is going to have a value proposition, a target market, processes that develop value, ways to generate revenue, and a strategy to survive in the competitive marketplace. At the initial stages, we want to focus on the business model conceptually before moving on the how that model will be implemented or executed.

Value Proposition

Starting a small business first means to come up with the answer to:
•    Who is my target market?
•    What service/good am I offering them?
•    How does my offering add value to the market? (Benefits)
•    What is my response to existing competition – why would people buy from me?

This should not seem like either a daunting task, or simply an academic exercise. The answers to these questions will help define your strategy for marketing and revenue generation.

Business Plan

The answers to the previously listed questions can help you create your business plan. Why do you need a business plan? The answer is both for people within the business, and people outside the business. For outsiders, the business plan gives a summary of the objectives, history, and strategy of the business. This is important for investors, partners and any credit suppliers. Internally, the business plan is important because it forces discipline and focus in defining a vision for the company. Ultimately, business is about planning and execution. The reason this is important is that entrepreneurship requires personal characteristics of focus, fortitude, and conviction to succeed; the plan can help you stay the course. The plan creation forces you to consider, deeply, how you intend to generate and sustain the business.

There is no “right answer” when it comes to a business plan, and that can make some people feel uneasy. Below is a sample template that you can use to get started though (based on the SBA template):

Statement of business purpose and executive summary
Table of Contents
Description of business
Marketing (target segment, means to reach market)
Distribution and Partnerships
Competition Analysis
Operating Procedure
Personnel
Insurance

Financial data
Loans and Capital
Capital Equipment List
Balance Sheet
Break-even Analysis
Profit/Loss statements
Historical Summary
Assumptions

Supporting and Legal Documents
Tax Return/financial summary of business partners
Rental or Real Estate Contracts
Business License and Structure
Resumes of Partners
Supplier Data
Personal Skills Need to Succeed at Business

The entrepreneurial mindset is elusive, and there is no agreement as to what traits will lead to success in business. However, there are some characteristics which appear again and again when business analysts talk about success in business.

These are:
•    Focus – doing one thing and perfecting it. Doing it better and cheaper than others
•    Fortitude – continuing to work in the face of adversity
•    Accepting Responsibility – owning the business and owning resolution of problems
•    Learning from mistakes – continuous improvement
•    Internal motivation – being motivated by internal factors (not by quick successes which may not appear)

Starting a small business is easy. Being successful in business is more difficult; like any other difficult human endeavor. The reason why so much emphasis is given to planning and personal characteristics is because of these difficulties. A very common question people who are starting a business are asked is:, “Why do you want to start a business?” I think that the underlying question is, “Are you internally motivated to succeed at your business?”

Structure of the Business
After resolving the “what and why” of business formation, the next question is “how?” This is where the structure of the business comes in. There are five common forms of business in the United States.
•    Sole Proprietorships
•    Partnerships
•    Limited Liability Companies (LLC)
•    S Corporations
•    C Corporations

The factors that you should use to decide which type of business you need are the type of liability you are able to accept, the taxation implications, and finally, your recordkeeping sophistication. Each of the business structures are possible to create by yourself, but if you find that you get lost in paperwork, you may need to hire a professional to get started with a corporation or LLC.

Sole Properitership
A sole proprietorship is the most common and simple form of business. Simply put, the owner is the business; the business profits and losses are considered personal, and business liability is personal liability. This type of business is the quickest to start, and the business lifetime will end at the end of the person’s lifetime.

Partnership
A partnership business consists of two or more people working jointly; each contributing some skills, capital, labor, etc… to contribute to the running of the business. The share of the partnership does not have to be even, and the distribution of profits is reported on the personal 1040.

LLC
An LLC (C stands for company, not corporation) is a blend of partnership and corporation. It offers liability protection to partners in the company. An LLC is a pass-through entity for taxation, though optionally it can be treated as a corporation via form IRS 8832. An LLC is considered less complex than a corporation in terms of recordkeeping.

C Corporation
A corporation is like a fictitious person. It is an entity which handles the affairs of the business. Ownership of the entity is via shareholders, who receive a share of profits. The entity is also taxed separately than the shareholders (who are also taxed). Corporate structure is on a state-by-state basis.

S Corporation
A subchapter S corporation is a variation of the corporate entity where the profit/loss of the corporation is passed through to the shareholders. S corporations are legal entities and generally allow for limited liability for shareholders.
Registering a Business
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