Resources - Starting a Business...
Initial Issues, Starting a Business
Assembled by Brookings Area Chamber of Commerce
Not intended as a substitute for accounting,
legal or market analysis advice
Additional Resources
Contents
Points to Consider When Starting a Business
of Your Own
1. Be Prepared for a lot of hard work. Being in business
for yourself is a difficult job and never worry-free. You will need the
support of other family members.
2. Visit your library. Time spent there can result
in saved dollars from obtaining adequate information upon which to make
good decisions. Thoroughly research the industry you are entering.
3. Have experience in the line of business you plan to enter. If
you have not worked in the type of business you plan to own, consider
getting a job working for a successful firm of that type for three months
or more. Learn everything you can about operating that type of business.
4. Gain management experience. Having held a job where
you supervise people and were responsible for implementing changes and
making decisions including expenditures of moneys will be very helpful.
5. Prepare a business plan. Careful planning is essential.
Know where you want to go and how you plan to get there. The business
plan should be your most valuable investment. A well thought-out business
plan is a major key to the success of a business. (See Sample Business
Plan Format beginning on page 4 for help in knowing what
things to include.)
6. Know your Chamber of Commerce. It has information
on the community and existing businesses.
7. Know a commercial banker. They should be able to
provide you with some insight and advice based upon their experiences
with other business successes and failures. Additionally, they hold the
key to financial assistance with your business venture.
8. Consult with other professional experts. It is
highly important that you build your own “Board of Advisors” to
help you address critical business ownership concerns. In addition to
the banker mentioned above, this expert group should
also include a business attorney, business accountant, commercial
Realtor, commercial insurance agent, SCORE mentor, and SBDC consultant. Properly
using the specialized skills and knowledge of these professionals within
their area of expertise will save you money over the long run by helping
you avoid pitfalls and errors. Taking shortcuts could cost you your business
as well as put you in personal bankruptcy! Seek advice prior to taking
action!
9. Keep good business records. Good record keeping
is extremely important to the success of your business. You must keep
business and personal records separate.
Types of Business Organizations
Liability of the Business Owners
Sole Proprietorship The sole proprietor is personally
liable for the debts of the business, even if those debts exceed the
owner’s investment in the business. All of the owner’s assets
- both those used in the business and personal property such as a home
or automobile - can be attached by creditors and sold to pay business
debts. The sole proprietor may be able to minimize certain risks such
as property loss, personal injury or product liability by obtaining adequate
insurance.
Partnerships
In a general partnership,
each partner is personally liable for the full amount of the partnership’s
debts, even if the debts exceed his or her investment and even if the
partner did not personally consent to the debt. This is because unless
care is taken in the partnership agreement to limit a partner’s
authority, any partner may bind the partnership. The partner with more
personal assets thus risks losing more than a partner with fewer personal
assets. As with a sole proprietorship, many business risks can be lessened
by adequate insurance.
In a limited liability partnership, partners are not
personally liable for the wrongful acts or he omissions in the ordinary
course of business or other partners, for the misuse of money or property
of a non-partner by another partner, or for the debts or obligations
of the partnership, subject to certain exceptions.
In a limited partnership, so long as the statutory
formulated rules are met and the limited partner does not participate
in the management and control of the business, the limited partner generally
is not liable for the obligations of the limited partnership. Thus the
limited partner risks loss only up to the amount of his or her investment.
The general partner retains full liability as in any other partnership.
Corporation
The corporation is a separate legal entity,
and in most cases is the entity that is liable for the debts of the corporation.
The shareholders generally are exempt from personal liability for these
debts and risk loss only up to the amount of their investment in the
corporation. This is that case for both the C corporation and the S corporation.
It should be noted, however, that in a small, closely held or newly created
corporation without an established credit history, some or all of the
shareholders may be expected to personally guarantee repayment of certain
corporate debts as a condition of obtaining a loan or credit. Also, under
certain circumstances such as fraud or personal wrongdoing, shareholders
may be held personally liable for wrongful acts of the corporation.
Limited Liability Company
Liability of the owners of
a limited liability company is generally the same as for shareholders
of a corporation; that is, absent fraud or personal wrongdoing, they
generally are not held personally liable for the debts and obligations
of the business. They therefore risk loss only up to their investment.
As is the case for corporations, owners of small, closely held, or newly
organized limited liability companies may be required to give personal
guarantees of repayment to secure financing or credit.
Distribution
of Profits and Losses
Sole Proprietorship The sole proprietor receives all
the profits from the business, and takes all the losses, which may exceed
the proprietor’s investment in the business.
Partnership In the general partnership, the limited
liability partnership and the limited partnership, profits and losses
are passed through to the partners as specified in the partnership agreement.
Corporation In a C corporation, profits
and losses belong to the corporation. Profits may be distributed to shareholders
in the form of dividends, or they may be retained (within limits) by
the corporation. Except upon sale of stock or liquidation of the corporation,
losses by the corporation are not claimed by the individual shareholders.
In an S corporation, profits and losses flow through
to shareholders in proportion to their shareholdings.
Limited Liability Company Profits and losses of a
limited liability company generally are allocated among the members in
proportion to the value of their contributions. The articles of organization
of the board of governors, under circumstances specified in the statute,
may provide for a different allocation.
Business Plan
One of the first steps in a new venture is the development of a business
plan. The business plan describes the business: its product or service,
market, people and financing needs. A well-prepared business plan serves
several purposes:
- For the new business, it helps the owner determine the feasibility
and desirability of pursuing the steps necessary to start a business.
- For the company seeking financing, it is an important sales tool
for raising capital from outside investors.
- For an existing company, the business plan forms the basis of a more
detailed operational plan, and thus becomes an important management
tool for monitoring the growth of the firm and charting future directions.
This outline represents a generalized approach. Business plans always
should be tailored to the specific circumstances of the business and
should emphasize the strengths of the proposed venture and address the
potential problems and challenges to be faced. Business plans prepared
in connection with a loan application or for the purpose of obtaining
venture capital financing will emphasize financial data and characteristics
of the management team. The business plan should comply with the format
requirements of the lender or venture capitalist.
Several organizations offer help in preparing business plans, including
Small Business Development Centers, SCORE organizations, Small Business
Management programs and others (see the directories at the end of this
publication.)
Sample Business Plan Format
Summary
The summary should concisely describe the key
elements of the business plan. For the firm seeking capital, the summary
should convince the lender or venture capitalist that it is worthwhile
to review the plan in detail. The summary should briefly cover at least
the following items:
- Name of the business
- Business location and plan description
- Discussion of the product, market, and competition
- Expertise of the management team
- Summary of financial projections
- Amount of financial assistance requested (if applicable)
- Form of and purpose for the financial assistance (if applicable)
- Purpose for undertaking the project (if financial assistance is
sought)
- Business goals
The Company
This section provides background information
of the company. It contains a general description of the business, including
the product or service and may describe the historical development of
the business, legal structure, significant changes in ownership, organizational
structure, products or lines, acquisitions, subsidiaries and degree of
ownership, and the principals and their roles in the formation of the
company.
The Product or Service
This is a detailed description
of the product or service lines, including the relative importance of
each product or service to the company. Include sales projections if
possible. If available, include product evaluations, comparisons to competitor’s
products or product lines, competitive advantages over other producers,
and the elasticity or inelasticity of demand for this product (i.e.,
does demand respond to factors other than price?).
The Project
If financing is sought for a specific project,
describe the project, the purpose for which it is undertaken, its cost
and the amount, form and use of the financial assistance.
Management
Discuss the firm’s management. Provide
an organizational chart. Discuss key management and supervisory personnel
having special value to the organization. Describe their responsibilities
and provide resumes describing their skills and experience as they relate
to activities of the business. State their present salaries, including
other compensation such as stock options and bonuses. Discuss planned
staff additions. Describe other employees, including the number of employees
at year end, total payroll expenses for each of the previous five years
(break down by wages, benefits, etc.), method of compensation, and the
departmental or divisional breakdown of the work force.
Ownership
Provide names, addresses and business affiliations
of principal holders of the firm’s common stock and other equities.
Discuss the degree to which principal holders are involved in management.
Describe principal non-management owners. Provide the names of the board
of directors, areas of expertise, and the role of the board. Specify
the amount of stock currently authorized and issued.
Marketing Strategy/Market Analysis
Describe the industry
and the industry outlook. Identify the principal markets (commercial
/ industrial, consumer, government, international). Include industry
size currently as well as its anticipated size in the next ten years.
Explain the sources of your projections. Describe major characteristics
of the industry and the effects of major social, economic, technological
or regulatory trends of the industry.
Describe major customers -- names, locations, products or services
sold to each, percentage of annual sales volume for each customer over
previous five years, duration and condition of contracts in place.
Describe the market and its major segments. Describe principal market
participants and their performance. Identify the firm’s target
market. For each customer, include the requirements of each and the current
ways of filling these requirements. Also include information on the buying
habits of the customers and the impact on the customer of using the product
or service.
Describe the companies with which the business competes and how the
business compares with these competitive companies. This is a more detailed
narrative than that contained in the description of the product or service,
above.
Describe prospective customers and their reaction to the firm, and
any of the firm’s products or services they have seen or tested.
Describe the firm’s marketing strategy, including overall strategy;
pricing policy; method of selling, distributing and servicing the product;
geographic penetration, field / product support, advertising, public
relations and promotion; and priorities among these activities.
Describe how the firm will identify prospective customers and how and
in what order the firm will contact the relevant decision-makers. Also,
describe the sales effort the firm will have (e.g., sales channels and
terms, number of salespersons, number of sales contacts, anticipated
time, initial order size) and estimated sales and market share.
Technology
Describe the technical status of your product
(i.e., idea stage, development stage, prototypes stage, etc.) and the
relevant activities, milestones, and other steps necessary to bring the
product into production. Discuss the firm’s patent or copyright
position. Include how much is patented and how much can be patented (i.e.,
how comprehensive and effective the patents or copyrights will be). Include
a list of patents , copyrights, licenses or statements of proprietary
interest in the product line.
Describe new technologies that may become partial in the next five
years which may affect the product. Also describe new products the firm
plans to develop to meet changing market needs.
Describe regulatory or approval requirements and status, and discuss
any other technical and legal considerations that may be relevant to
the technological development of the product. Include a discussion of
research and development efforts and future plans and development.
Production/Operating Plan
Explain how the firm will
perform production or deliver its service. Describe capacity and status
in terms of physical facilities: are they owned or leased; size and location;
sale volume and unit capacity; expansion capabilities; capital equipment.
Include a facilities plan and description of planned capital improvements
and a timetable for those improvements.
Describe suppliers including name and location of principal suppliers;
length of lead time required; usual terms of purchase; amounts, duration
and conditions of contracts; and subcontractors. Also describe the current
and planned labor supply, including number of employees; unionization;
stability (seasonal or cyclical); and fringe benefits (insurance, profit
sharing, pension, etc.).
Provide a profile of key patents and describe technologies and skills
required to develop and manufacture the products. Provide a cost breakdown
for material, labor, and manufacturing overheads for each product, plus
cost vs. volume curves for each product. Provide block and workflow diagrams
of the manufacturing process where appropriate, and provide a schedule
of work for the next one or two years. Describe your firm’s production
or operations advantages. Discuss whether they will continue.
Financial/Administrative
Provide name and address of
key advisors, including auditor, legal counsel, and banker.
Describe financial controls including the cost system and budgets used.
Describe cash requirements, now and over the next five years, and how
funds will be used. Specify amounts to be raised from debt and from equity.
Discuss plans to “go public.” Relate this to future value
and liquidity of investments.
Provide financial statements and projections for the five years. These
should include profit and loss or income statements by month at least
until break-even and then by quarter; balance sheets as of the end of
each year; cash flow projections; capital budgets for equipment and other
capital acquisitions; include key assumptions you have made in your pro
formas and how these assumptions reflect industry performance.
If financing is sought, most lenders and venture capitalists will require
a funding request indicating the desired financing, capitalization, use
of funds, and future financing; a financial statement for the past three
years; current financial statements; monthly cash flow financial projections
including the proposed financing for two years, and projected balance
sheets, income statement, and statement of changes in financial position
for two years including the proposed financing.
General Employment Issues
Many laws affecting the worker / employment relationship will require
the business owner to first determine whether an individual who performs
services for the business is an “employee” for purposes of
the particular law. The relationship between business and individual
may be that of:
- A common law employee
- A statutory employee
- An independent contractor
If the relationship is that of employer-common law employee, the business
by law must obtain workers’ compensation coverage, withhold FICA
tax and pay federal and state unemployment taxes. Fair labor standards
laws, occupational safety and health requirements and a variety of other
federal and state laws also may apply.
If the relationship is that of employer-statutory employee, the business
does not withhold federal income tax. The employer should consult with
an attorney or other competent tax advisor with respect to withholding
Social Security and Medicare taxes.
An independent contractor is himself or herself a sole proprietor of
a business, and not an employee.
The question of whether a worker is an independent contractor or an
employee may be determined by common law rules (definitions fashioned
by the courts based on specific cases) or by statute. A person may be
an employee for certain purposes but not for others.
Common Law Employees
Under common law rules, courts
balance a number of factors to determine whether an employer-employee
relationship exists. The employer’s
right to control the manner and means of performing the work is the most
important factor distinguishing an employer-employee relationship. It
does not matter that the employer gives the employee substantial discretion
and freedom to act, so long as the employer has the legal right to control
the method and result of the service.
Other factors examined by the courts in determining whether an employment
relationship exists include:
- Mode of Payment Workers who are paid on a regular
basis, (e.g., hourly or bi-weekly) are more likely to be considered
employees than are persons who are paid a fixed amount for a specific
service. Withholding for taxes and providing fringe benefits such as
medical insurance are considered typical of an employer-employee relationship.
- Materials and tools A person who furnishes his or
her own material and tools in connection with providing the service
is less likely to be considered an employee than is a person who uses
tools and materials furnished by the hiring entity.
- Control of the premises An employer-employee relationship
is more likely to be found where the hiring entity owns or controls
the premises where the work is performed. Premises controlled by the
service provider or by a third person are considered more characteristic
of an independent contractor relationship.
- Right of discharge The ability of the hiring entity
to discharge the worker and the conditions under which the worker may
be discharged also are factors examined in determining whether an employment
relationship exists.
It is important to note, however, that none of the above factors, standing
alone, will determine whether an employment relationship exists. The
most important factor is the hiring entity’s right to control the
manner and means of the work. Doubtful situations generally are resolved
by examining the facts of the specific case in light of all relevant
factors.
If an employment relationship exists, the legal requirements placed
on employers will apply regardless of what the parties call the worker,
regardless of how payments are measured or made, and regardless of whether
the person works part time of full time, unless a statutory exception
applies to the situation.
Statutory Employees
Even if a worker is not an employee
under common law rules, he or she may be considered an employee for certain
statutory purposes, such as FICA (Social Security and Medicare) tax,
federal and state unemployment compensation taxes, workers’ compensation,
fair labor standards act compliance, occupational safety health requirements,
and other statutory programs. Likewise, a federal or state statute may
exempt certain employers or employees from its application.
Because both federal and state statutes define employees covered by
their respective laws, both sources must be consulted before concluding
a legal requirement is not applicable to a specific situation. Special
rules apply to certain occupations, such as salespeople, and to special
situations such as family owned businesses that employ family members.
The definition of “employee” often involves a legal determination.
For this reason, particularly before concluding an individual is not
an employee, it is important in doubtful cases to consult an attorney
or other competent professional tax advisor.
Independent Contractors
Persons who follow an independent
trade, business or profession in which they offer their services to the
general public, usually are considered independent contractors and not
employees. Examples are self-employed lawyers, accountants, doctors,
contractors and consultants. However, whether such persons are employees
or independent contractors depends on the law and the facts applicable
to each case.
In general, the individual will be considered an independent contractor
if the business entity obtains the person’s services has the legal
right to control the result of the work but does not have the legal right
to control the manner and means of accomplishing the result.
Independent contractors offer their services to the public through
the exercise of an independent business enterprise. An independent contractor
is responsible for making his or her own estimated tax payments and paying
Social Security tax. The business that is obtaining the independent contractor’s
services generally is not required to obtain workers’ compensation
insurance, withhold taxes or pay employment taxes on behalf of the independent
contractor. Independent contractors generally do not receive benefits
such as paid holidays, health insurance, or sick pay from the business
the obtains their services.
Licenses, Permits and Approvals
If your business will hire employees or pay Federal Excise Tax, a Federal
Employer’s Identification Number (EIN) must be obtained from the:
Internal Revenue Service
Oxbow II Building,
Suite 104
2500 West 49th Street
Sioux Falls ,
SD 57105
(605) 330-4365 or (800) 829-1040
If your business desires Trade Name Registration, it can be obtained
through the appropriate county office:
Brookings County Register of Deeds
Court House,
314 6th Avenue
Brookings , SD 57006
(605)
692-2724
If your business will have a location in South Dakota or sell, rent,
or lease any product or service in South Dakota, a State Tax License
must be obtained for each business location from the (This office also
oversees the collection of municipal, use, fuel, excise, and other taxes.)
SD Department of Revenue
1505 10th Avenue
SE, Suite 1
Watertown , SD 57201-5300
(605)
882-5188
800-829-9188
If your business will be incorporated, a Certificate of Incorporation
must be obtained from
Secretary of State
Capitol Building ,
Suite B-05
500 East Capitol Avenue
Pierre ,
SD 57501
(605) 773-4845
Many types of businesses are also required to have an additional special
local license/permit (i.e. food, liquor, taxi, pawn shop, contractor,
vending, kennel, etc.) Check with the following offices if your business
will be
Within the city limits:
Brookings Department of Finance
City Hall,
311 3rd Avenue
Brookings , SD 57006
(605)
692-6281
Outside the city limits:
Brookings County Auditor
Court
House, 314 6th Avenue
Brookings ,
SD 57006
(605) 692-5327
If food products are to be prepared and served, an inspection must
be completed. For a Food License, contact:
South Dakota Department of Health
445 East
Capitol
Pierre , SD 57501-3185
(605)
773-3737
You must determine if the type of business you are planning is permitted
in the zoning code at the location you have chosen, including a business
out of your own home. (For zoning concerns be sure to allow ample lead
time, which could be up to several months.) Check with the following
office if your business will be located:
Within City Limits:
Brookings Zoning Office
City Hall, 311 3rd
Avenue
Brookings , SD 57006
(605)
692-6629
Outside City Limits:
Brookings County Assessor
Court
House, 314 6th Avenue
Brookings ,
SD 57006
(605) 692-4214
Your business location may need to be inspected and approved for public
safety and adherence to structural, electrical, plumbing, fire, and other
codes. Contact the following offices prior to beginning any remodeling
or site alterations:
Within City Limits:
Brookings Zoning Office
City Hall, 311 3rd
Avenue
Brookings , SD 57006
(605)
692-6629
Outside City Limits:
Brookings County Assessor
Court
House, 314 6th Avenue
Brookings ,
SD 57006
(605) 692-4214
Information Sources
The U.S. Small Business Administration has programs and information
to assist small businesses. One of their programs, the Service Corps
Of Retired Executives (SCORE), is a group of retired business professionals
who voluntarily offer advisory services to small business owners.
Small Business Administration
First Financial
Center, Suite 200
110 South Phillips Avenue
Sioux Falls ,
SD 57102
(605) 330-4231
The SD Small Business Development Center (SBDC) is another SBA program.
It offers management guidance with business expansion or start-up projects
or problem resolutions.
SD Small Business Development Center
124 1st
Ave., NW, PO Box 1207
Watertown ,
SD 57201
Phone: (605) 882-5115 Fax: (605) 882-5049
The Brookings Area Chamber of Commerce acts is an advocate for business,
maintains community information and demographic data, and executes a
broad spectrum of community development programs.
Brookings Area Chamber of Commerce
PO Box 431
Brookings ,
SD 57006
Phone: (605) 692-6125 Fax: (605) 697-8109
Email:
chamber@brookings.net
The Governor’s Office of Economic Development provides a South
Dakota Business Start-Up Kit.
Governor’s Office of Economic Development
711
East Wells Avenue
Pierre , SD 57501-3369
Phone:
(800) 872-6190
The Brookings Area Economic Development Corporation assists in manufacturing
location efforts by providing information on industrial sites, community
demographics and financial incentive options.
Brookings Economic Development Corp.
Al Heuton,
Executive Director
PO Box 431
2308 Sixth
Street
Brookings , SD 57006
Phone:
(605) 697-8105
Fax: (605) 697-8109
Email: bedc@brookings.net
The Brookings Public Library has an extensive and diverse collection
of books, periodicals, video and audio tapes containing information helpful
to people involved in a business venture.
Brookings Public Library
515 3rd Street
Brookings ,
SD 57006
Phone: (605) 692-9407
The Brookings City Engineering Department has
traffic count information available.
Brookings City Engineering
311
3rd Street
Brookings , SD 57006
Phone:
(605) 692-6629
The One-Stop Career Center of South Dakota office has employer/employee
information available.
One Stop Career Center
1310 Main Avenue South
Brookings ,
SD 57006
(605) 688-4350
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