A sole proprietorship is exactly as it sounds. You are the sole owner of your business and you make all the decisions. You also accept absolutely all of the risk. For certain businesses, sole proprietorship is the only way to go. Most service businesses begin this way with the business owner providing the service, whether it is web design work, personal coaching, freelance writing, pool cleaning, landscaping, etc.
Sole proprietorship is easy because you do not have to file any paperwork to establish your business as such. In fact, the IRS will assume that if there is only one owner of the business, you are a sole proprietor.
Because this is one of the easiest ways to begin a business, more than half of all businesses started in the United States begin as a sole proprietorship. From there, they can change to take on a partner or two. They can also decide to incorporate, or they can become a Limited Liability Corporation. These will be discussed next.
As a sole proprietor, you keep track of all your business expenses and revenues. Filing your tax return is simply a matter of filling out a Schedule C, "Profit or Loss from Business," or a Schedule C-EZ, "Net Profit from Business" for your personal 1040 tax return and putting all of your business financial information on one of those two forms. Both forms actually become part of your individual tax return. The net profit or loss of your business will then be transferred to the first page of your individual 1040 tax return page and you will have to pay personal income taxes on that amount.
As a sole proprietor, you are responsible for all of your Self-employment tax, which includes paying 12.4% of your net income for Social Security and 2.9% of your net income for Medicare. Be sure to use a tax preparer or a computer program to help you with this at the end of the year.
When you really begin to make money, you will likely need to pay estimated taxes either quarterly or monthly. TurboTax is an excellent tool for help in this regard. So is hiring a CPA who specializes in small businesses.
A husband wife team can be considered a sole proprietor only in a community property state. If your state is not a community property state, a husband and wife team will likely have to establish their business as a partnership. It is a good idea to know the laws of business for your specific state.
Wendell is planning to go forward with his nursery and garden center business. Because he and his wife live in a community property state, operating as a sole proprietor looks like a pretty good idea to him. There may come a time when he could be interested in taking on additional partners, but right now, Wendell intends to start his business with just himself and his wife as the main partners of the business. Because Wendell is enrolled in a business start-up course at the nearby community college, he is still keeping his options open, but right now sole proprietorship looks like the business model he intends to use.
Partnerships are similar to a sole proprietorship where all the risk is on the shoulders of the individuals who start the business. And the benefits of the business are split according to your agreement.
It is good to know that there are two kinds of partnership agreements, a general partner and a limited partner. A General Partner is the one who actively runs the business and carries the bulk of the financial responsibility of the business. The general partner is usually the one to whom any creditor will go to get their money, even if your limited partner is the one who made the deal or the agreement.
Be very careful who you choose as a business partner. As a general partner, you will be responsible for not only your own actions, but also the actions of your limited partners.
A Limited Partner is one who does not necessarily take an active role in the running of the business. Their liability is limited to their initial and all subsequent investments into the business.
For the IRS, if there is more than one owner to a business (except husband wife community property state exceptions), you will be considered a partnership.
Be sure to have both individuals sign a contract or business agreement.
This is so very important. Even if you intend to go into business with your brother, or your best friend, business issues can change your relationship with your partner, and it is always a good idea to have a binding agreement should you have to hire an attorney for any purpose in the future.
The tax differences are that as a partnership each partner will be required to file an IRS Form 1065, "Partnership Returns." These are forms that show the income, deductions, and other tax related business information. You will be required to submit the name and address of your partner(s) and each of the partners' share of the taxable income from your business. Finally, the return must be signed by the general partner.
As a small business owner, incorporating offers you the very best protection against loss of any personal money or property you may own personally. Incorporating your business means that you are establishing your business as a separate legal entity from you and your personal assets. You are protected from being sued for the actions of your business and putting your home and retirement fund at risk.
Legal advice generally counsels sole proprietors or partnerships to incorporate if their business is particularly risky, or they face a strong possibility of being sued. By paying attention to the news, legal suits are myriad and if you own a pet grooming business and accidentally sheer off one of Fluffy's puffs, you could, technically, be putting yourself at risk for suit. I have heard of more ridiculous and frivolous suits putting perfectly good business out of business.
Corporations are designated as either C or S corporations. A C corporation is the typical large business structure like Honeywell, Target, Qwest. An S corporation is specifically designed for a small business. A typical S-corporation must meet the following criteria.
As a corporation you will have a board of directors and meet the following conditions:
· You must be incorporated under the laws of one of the United States states or territories.
· All shareholders must agree to the S corporation election of members.
· Your corporation may only have one class of stock (common or preferred). A C corporation may have both classes of stock.
· Your corporation must have fewer than 75 shareholders.
· All shareholders must be U.S. residents and a human entity.
Limited Liability Company. This is one of the best opportunities for a small business. It is a hybrid between a corporation and a sole proprietorship (or partnership) because it is organized under state laws so that any need for protection for the business is treated in the same way a corporation would be treated.
Another advantage to becoming an LLC is that in terms of taxes and revenue, they are treated exactly the same way a sole proprietorship or a partnership is treated when it comes to filing federal tax forms.
A Limited Liability Company protects all your business interests as long as you do not co-sign ANYTHING with a personal guarantee. If you do, then you are still legally responsible.
For example: If you were to establish your company as an LLC, then borrow money to start up your business, and you end up going out of business, then you owe nothing to your creditors personally. If, however, you must co-sign a loan from your bank in order to fund your business and your business fails, you are still personally responsible for the amount of that co-signed loan for your business. This is important to know because few banks will give a brand new business a loan as an LLC if they have little in the way of business assets. They are protecting their interests.
After talking with his instructor at his business startup class, Wendell decides that he will do the extra work involved to protect his personal assets from any problems from the business. He decides that a limited liability company will be his best option. His business instructor mentioned that if someone were to slip in a puddle of water at his garden center, they could sue both Wendell and his wife, taking all of their personal assets. If Wendell establishes himself as an LLC, then if someone sues his business, his insurance will be liable, but personally, Wendell's assets will be protected.
Business license requirements are usually handled by your local government. Contact your town, city, or county clerk and apply for a general business license. You will need to give the type and structure of your business, a Federal Tax ID number, your business name, mailing address for your business, location of the business operations and records, owners and partners, and the nature of your business. This business license must be posted in a visible place in your store.
Some businesses will require a permit to operate their store in a particular location. Most local governments have zoning requirements that allow commercial or noncommercial use of that property.
Wendell is considering using his personal property as his place of business because he wants his customers to see what they can do with the plants by walking through his extensive established gardens. He contacts his county clerk and discovers that he is actually in a commercial zoning area because of the rural nature of his community. This makes it easy for Wendell to continue his plans for his garden center. Had the zoning been different, Wendell would have had to apply for a zoning permit in order to conduct business from his personal residential property. He also discovers that he does have to apply for a sign permit, which he does.
Most people would never think of canceling their auto, health, or home insurance and yet forget to consider just how much they are putting into their business. Be sure to get both liability and coverage for your business to cover loss due to fire, flood, or other act of nature, and get liability insurance in case someone is injured at your place of business. See your insurance agent for professional advice.
This is a pretty complete checklist to use for your business planning purposes. Every business is different and you may not need to use all of the items on the list, but it will at least give you an idea of the types of things you need to consider for your business.
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Determine the kind of business you want to start.
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Learn about the industry of your business.
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Do a Market Analysis, as in depth as possible, for your business.
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Who is your competition, and how will you differ?
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Learn about the "business" end of your business.
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Are there any trade associations you can join?
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What is the name of your business?
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Is your name already trademarked? Hire a trademark specialist to help you with this.
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Design, or have someone design a logo for your business.
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Do you intend to have a web presence? If so, continue:
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Register a domain name.
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Set up a website.
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Start writing your Business Plan
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Will you be a sole proprietor, partnership, or corporation?
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Where will the money come from? Will you need financing?
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What is your marketing strategy?
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What are your startup costs and necessary supplies?
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Budget
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Business bank accountWant to learn more? Take an online course in Retail Mastery.
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Accounting and bookkeeping system – will you do this or hire someone?
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Payroll issues
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Business license
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Federal Tax ID Number (call the IRS at 1-800-829-4933)
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Find a location
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Sign the lease
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Begin any remodeling that needs to be done
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Signs
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Telephone
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Credit card machine and contract
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Business stationery: business cards, letterhead, brochures
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Computer, cash register, office supplies
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Establish vendor relationships
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Order merchandise
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Write a SOP (Standard Operating Procedure) for your business.
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Write an employee manual that lists all duties and expectations.
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Set a date for opening.
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Get press releases out, advertising, invite everyone you know.
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Have your grand opening.
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Open for business.
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Evaluate your business, the plan, etc. on a regular basis.
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Evaluate your marketing strategy.
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Establish relationships with anyone around you.
Location, Location, Location
Location can Make or Break youJust a word on location; your business will either thrive or die because of your location. Just picking the busiest corner of the city is not always the best way to make a location decision. It might be the busiest corner, but traffic is bad, parking is impossible, and because itis so busy, most people do not see your beautiful and appealing sign because they are too focused on the guy behind them who just about rear-ended them at the red light.
Location can be determined by asking yourself the following questions:-
Do I like this area, and would I like to spend time here?
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Do I like it at night as well as during the daytime?
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Are the people in this area likely to be my sort of customers?
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Are there other attractions nearby that will bring in my customers?
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How available are the stores in this area?
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How long have they been available?
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What percentage of stores are empty? For how long?
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What other retail businesses are there?
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Is there adequate parking?
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Are there zoning restrictions that might restrict hours, signage, sidewalk selling, etc. that could affect my success?
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Is the space easily visible?
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What is security like?
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What other location options are there?
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How much remodeling will I have to do to make my space fit my vision?
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Is the space size adequate for my retail space as well as my storage space?
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Will I have trouble filling the space?
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How long is the lease?
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What are the renewal terms?
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What other expenses will I have to pay in addition to rent? How often?
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Will I have to buy a specific kind of sign? Is it out of my budget?
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If my remodeling and renovations make the space more appealing will I get a reduction in my rent?
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Will I have to return the space to the original condition when I leave?
Know Your Target CustomersWho are they? This question is going to come up time and time again. That is because your customers will determine whether or not you will remain in business. You need to know who they are so that you can communicate with them, provide the merchandise and services that they need, and give them value for their money.
Ask yourself the following questions:
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How many younger, middle-aged, or older customers will I expect to see?
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How many of these customers will be price driven?
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How many of these customers are looking for quality?
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How many of these customers are looking for additional service?
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Do these customers have specific needs?
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How will I know what they need?
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How will I continue to gather demographic information?
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Is my environment pleasing to my target customer?
If you have a direct competitor, it is always good to go on a "spying" mission and evaluate your competitor's customers. You will be able to see who they really are, and whether or not they fit your expected demographics. You will see what they buy, how much they buy, and you might even gather information about how often they shop. All of this is critical information for you and your new business.
As a small business owner, you really do need to discover who your most valuable target customer base will be and target that customer base. If your product is not appealing to teens from 14 – 18, then it does not pay to try to target that segment of the population. Really. No matter now much money you put into it, you are not going to change the mind of an entire segment of the population.
Focus, instead, on the people who want what you offer, and find a way to make it even better.DemographicsIn addition to locating your target customers, it is a good idea to evaluate the demographics of your customers. Some business owners purchase demographic data, and if this will be a determining factor in your business you will want to consider this. Other businesses can figure out their demographics by evaluating customers of their competitors.
Demographic information includes:
· Age range
· Sex
· Married
· Kids
· Geographic location
· Own/rent
· Income levels
Wendell is a good judge of his potential customers and he has compiled a demographic sheet for most of his customers:
· Age 25 – 65
· Mostly female
· Married with children
· Live within a 20 mile radius of his center.
· Own their homes
· Income levels ranging from $35,000 - $105,000
Wendell also knows that he can continue compiling his demographic data once he opens his store and provides discount coupons for that information. Recent information he gathered off the internet is that most people are willing to give all of their demographic data for a coupon that is worth two dollars.ConvenienceEvery customer has a story about how far away they have traveled to purchase something. People might be willing to travel a great distance for something, they will do so much less frequently. In order for your business to be successful, you first need to get your customers to come in, THEN you need to keep them coming back. If you establish your store too far away from your potential customers, you will end up losing business.
CommunityThere can be need to evaluate the community if you are just starting a business and you have the option of opening in one of several areas. Two women started a pie-baking company and initially worked out of a 700 square foot shop behind a used car lot because that was all they could afford. Initially they took to standing in the doorway and waving customers in because they were virtually invisible. They did a good enough business, however, that they decided to expand.
They moved to a very large shop in the downtown area. What they did not realize is that their pies were too expensive for the foot traffic and there was no convenient parking for their other customers. Because they had only evaluated the location based on precisely that, they forgot to look at how convenient it would be for their current customers and that their new target audience did not value their product.
Other community concerns can be if you are choosing where to set up shop, evaluate the area for safety, for good schools, for good health care, etc. All of these can give you attributes to your shop in terms of both customers and future employees. If you set up shop in a tough part of town and you cater to families, you will likely not succeed. Envision your customer coming into your shop as you look at different locations. By knowing your customer you will be able to do this more easily.Space and Cost
This seems like a no-brainer, but too often new business owners think that if they just get a really large space, they will eventually fill it. The problem with this logic is that they will be paying far more than they really need to pay, and in the time it takes to build their business to justify the square footage, they could easily renegotiate a lease or find a new location. A very large,empty looking store is not attractive or appealing. It always looks as though you are going out of business.
Now the converse is true. I recently went to a used book store that had simply run out of room. The only room in the store was the four square feet at the door, and that was so that you could open the door. Customers had to turn sideways to go down the "aisles" searching for books. I really believe that the fire marshal would not appreciate that. However, as a customer, I was very uncomfortable, and I wanted to leave the moment I entered the store.Try to find a good balance of space for the money. Sometimes extra room can be walled off for storage, for classes, or for an office. Beware the space that you are not allowed to renovate and is large enough for the New York Knicks basketball practice session. -
