Starting a New Business
Starting a business begins with planning. However, once the plan is in place, the plan must be executed. Below are the ten steps you will need to execute to transform your business idea into an operating business.
#1. Write a Business Plan
A well written business plan is the roadmap for the business. If you are going to need investors or bank loans to execute your business plan, your investors or lenders are going to want to read your business plan, and this means that your business plan will need to be very polished. If you are self-financing, you still need a business plan, but the plan can be more utilitarian and less formal.
There is not one correct way to write a business plan, but there are elements that should exist in every business plan, including:
A. The Cover Sheet;
B. The Statement of Business Purpose (Executive Summary);
C. A Table of Contents;
D. Substantive Document, which include:
i. Description of Business;
iv. Operating Procedures;
vi. Business Insurance.
2. Financial Data:
i. Loan Applications;
ii. Capital Equipment and Supply List;
iii. Balance Sheet;
iv. Breakeven Analysis;
v. Profit and Loss Statements;
vi. Three-year Summary;
vii. Detail by Month, First Year;
viii. Detail by Quarters, Second and Third Year;
ix. Assumptions Upon which Projections were Based; and
x. Pro-forma Cash Flow.
3. Supporting documents:
i. Tax returns and financial statements of owners for last three years;
ii. Copy of franchise documents for franchise businesses;
iii. Copy of proposed lease or purchase agreement for building space;
iv. Copy of licenses and other legal documents;
v. Copy of resumes of all owners; and
vi. Copies of letters of intent from vendors.
#2. Get Advice and Counsel
Seek the advice and counsel of those whose professional lives are dedicated to helping people like you start businesses. You are on the website of just such a person right now. Call San Diego Corporate Law for a consultation to discuss your business goals. A good attorney can also point you toward other professionals, such as accountants and business coaches who can also help you get started.
Another incredible and free resource is offered through SCORE. SCORE’s volunteer counselors, comprised of active and retired business men and women, provide clients with free and confidential business counseling conducted at the client’s place of business, at one of SCORE’s many counseling centers located in San Diego County, by telephone, or via email. SCORE also hosts reasonably priced workshops on numerous topics designed specifically to educate both prospective and active business owners.
#3. CHOOSE A LEGAL STRUCTURE
The legal structure you choose for running your business will make a significant impact on your personal liability for business debts and legal judgments against your business, as well as determine how your business is taxed. Deciding what form of business entity to establish can be complicated, and the advice and analysis of a good business attorney and accountant are critical.
The most common business entities used when starting a business are:
• Sole Proprietorships
The form of business determines which income tax return form you have to file, which in turn dictates which of the five types of business taxes you will have to pay. The five basic types of business taxes are:
• Income Tax
• Self-employment Tax
• Employer Taxes
• Excise Tax
• Franchise Tax
Keep in mind that once the best type of business entity for your business is selected, it can take ten weeks or more for the California Secretary of State to certify founding documents. Plan for this delay by filing your documents early, or be prepared to pay expedited filing fees to have your business entity formed on short notice.
#4. ARRANGE FOR TAXES AND TAX ID NUMBERS
All businesses are required to pay federal, state, and in some cases, local taxes. Most businesses will need to register with the U.S. Internal Revenue Service (IRS) and state and local revenue agencies in order to receive a tax ID number or permit.
An employer’s identification number (EIN), also known as a federal tax identification number (TIN) is used to identify a business to the IRS. All businesses other than sole proprietors are required to apply for and obtain an EIN, although it is good practice for a sole proprietor to obtain an EIN to avoid using the sole proprietor’s social security number on business tax forms. EIN numbers may be obtained from the IRS website, by calling the IRS, or submitting Form SS-4 to the IRS.
The State of California’s Employment Development Department (EDD) requires that all businesses apply for and obtain a state tax identification number during the first fiscal quarter in which the business pays wages in excess of $100.00. A state tax identification number may be obtained from the EDD through submission of Form DE-1.
If a business sells products retail or enters into certain types of taxable leases, the business must apply for and obtain a seller’s permit in order to collect and remit sales taxes to the State of California. A seller’s permit may be obtained from the State of California’s Board of Equalization (BOE) through submission of Form SPA-400.
#5. Finance the Business
Most businesses are financed in one of three ways: (1) capitalization through investment by the founders; (2) capitalization through loans underwritten by the United States Small Business Administration (SBA), private bank loans, loans from non-banking institutions, or loans from individuals; and/or (3) capitalization through the sale of equity securities.
If the promoters of a business have the financial resources to capitalize a new business, this is the best capitalization method. The promoters will retain 100% ownership of the business and will not have to service debt making principle and interest payments while the business may not yet be running profitably.
If the promoters of a business lack the financial resources to capitalize a new business, seeking loans is the next best method of capitalization. While the business will likely have to begin servicing the debt by making loan payments, the founders will retain 100% ownership of the business. A potential negative to borrowing money is that the founders will likely have to secure the loans with collateral or personal guarantees for the loans to be approved.
Should the promoters of a business not wish to borrow money for capitalization but instead sell equity securities, the promoters may have to give up a significant percentage of ownership to the investors. The sale of such securities must also be registered or exempted from registration under federal securities law and be qualified or exempted from qualification under state securities laws. Depending upon the value of the securities being offered for sale and the relationships between the promoters and investors, this may be a simple and inexpensive process or a complicated and expensive process.
ALWAYS CONSULT AN ATTORNEY BEFORE OFFERING OR SELLING SECURITIES.
#6. Choose a Business Location
When determining where to house your business, the three most important factors are:
How the ideal location for your business is determined depends on the type of business you are starting and the type of customers you are trying to attract.
For example, if your business will depend heavily on pedestrian or drive-by traffic, you will want to seek popular retail locations such as a downtown area or a mall. While it may seem counterintuitive, some retail businesses often benefit from placing their stores in close proximity to their competitors. Clothing stores in a shopping mall environment is a perfect example of this theory. While the customers you attract to your store might also visit your competitors, the customers attracted to the stores of your competitors will also visit your store.
If customers typically seek your type of business, make sure the location you choose is close to major roads or public transportation. You will want to make it easy for your customers to get from where they are located to where you are located.
If your customers do not typically come to you, other location factors may be more important than customer access. Online businesses may be more profitable if run from home or an industrial space rather than a more expensive retail space. Manufacturers not only need industrial space, but also close proximity to ports, railheads, or other forms of transportation.
Before signing any lease, check with the local zoning authority to make sure your business operation is authorized to operate in the location you have selected. Also consider the restrictions that may be placed on signage by city ordinances or zoning policies.
An attorney should review any real property lease before signing.
#7. Obtain Licenses, Permits, and DBA Filings
Depending upon your business, licensing at the federal, state, and/or local level may be required. Regulations vary by industry, state, and municipality. Non-compliance can lead to expensive fines.
Federal Licenses and Permits
If your industry is regulated by a federal agency, federal licensing may be required. The industries of agriculture, alcoholic beverage production, aviation, firearms, explosives, fishing and wildlife, mining, energy, broadcasting, and transportation are examples of industries regulated by the federal government.
State Licenses and Permits
Industries not regulated by federal agencies may instead be regulated by state or local agencies. The sale of alcoholic beverages or tobacco are regulated by the State of California, as are industries such as legal services, accountancy, medicine, dentistry, and nursing.
Municipal Licenses and Permits
The County of San Diego does not require permits for most businesses, but cities incorporated in San Diego County do require business licenses, sometimes called business tax permits. These licenses may be obtained by contacting the cities in which the business will operate.
Certain types of businesses may need to obtain special permission from the County of San Diego or the incorporated cities within San Diego in order to operate legally.
Fictitious Business Name Statements (DBAs)
If the legal name of a business is different from the name or names under which the business will operate, the business must file a fictitious business name statement, also commonly referred to as a DBA (doing business as). In San Diego County, fictitious business name statements are filed with the County of San Diego and must be published in an approved newspaper for four consecutive weeks.
#8. Hire Employees
If your business requires help, you will need to hire workers. As soon as you place an advertisement announcing that you are hiring, you need to be concerned about federal and state employment laws.
Placing the wrong text in an employment advertisement, asking the wrong question during an interview, or making a hiring decision based on improper hiring criteria may have severe consequences. The counsel of an attorney or human resources professional should be consulted before beginning the hiring process.
Employee Eligibility Verification (Form I-9)
Federal law requires employers to verify an employee’s eligibility to work in the United States. Within three days of hire, employers must complete an Employment Eligibility Verification Form, commonly referred to as an I-9 form. This requires you to examine acceptable forms of documentation supplied by the employee to confirm the employee’s citizenship or eligibility to work in the U.S. Employers can only request documentation specified on the I-9 form. Employers who ask for other types of documentation not listed on the I-9 form may be subject to discrimination lawsuits.
Register with the State of California New Hire Reporting Program
The Personal Responsibility and Work Opportunity Reconciliation Act of 1996 requires all employers to report newly hired and re-hired employees to a state directory within twenty days of their hire or rehire date.
The IRS requires that records of employment taxes be retained by an employer for at least four years. Every employee must provide an employer with a signed withholding exemption certificate (Form W-4) on or before the date of employment. The employer must then submit Form W-4 to the IRS. On an annual basis, employers must report to the federal government wages paid and taxes withheld for each employee. This report is filed using Form W-2 Wage and Tax Statement. Employers must complete a W-2 Form for each employee to whom they pay a salary, wage or other compensation. Employers must send Copy A of Form W-2 to the Social Security Administration (SSA) by the last day of February (or last day of March if you file electronically) to report the wages and taxes of your employees for the previous calendar year. Additionally, employers should send copies of Form W-2 to their employees by January 31 of the year following the reporting period. In California, the EDD requires the withholding and remittance of state income tax for employees.
Workers’ Comp, Unemployment, and Disability Insurance
Businesses with employees are required to carry Workers’ Compensation Insurance coverage through a commercial carrier, on a self-insured basis, or through the State of California’s Workers’ Compensation Insurance program. Businesses with employees are also required to pay unemployment insurance taxes. If your business is required to pay these taxes, you must register your business with the EDD. California also requires employers to provide partial wage replacement insurance coverage to their eligible employees for non-work related sickness or injury.
Employers are required by California and federal laws to prominently display certain posters in the workplace that inform employees of their rights and employer responsibilities under labor laws. These posters are available for free from federal and state labor agencies.
#9. Protect Intellectual Property
When a business transitions from the organizational phase to the operational phase, it is a good idea to review the intellectual property of the business and seek out the necessary protections. The name of the business and the names, packaging designs, and other identifying devices may be registered as trademarks with the United States Patent and Trademark Office. Advertising and website content should be registered with the United States Copyright Office, and the trade secrets of the business should be identified and have protections put in place.
#10. Where to Start
Contact San Diego Corporate Law for a consultation, to discuss your current business situation, and to receive personalized suggestions for your business situation.