1. Do I have what it takes to own and manage a small business?

  2. Where can I get general information on starting a business in Texas?

  3. What is a Business Plan and why do I need one?

  4. What financing is available: from the SBA, banks and other sources?

  5. How should I structure my business: sole proprietor, corporation, etc?

  6. What is an EIN Number and do I need one?

  7. What is the Texas Franchise Tax and am I subject to it?

  8. How much should I pay for an existing business?

  9. Financial Ratios: what are they and what do they mean?

  10. Are my workers contractors or employees?

  11. What is a Patent, Copyright and Trademark and do I need one?

 

1.  Do I have what it takes to own and manage a small business?

You will be your most important asset so an objective appraisal of your particular strengths and weaknesses is an essential element in starting a business.

To determine if you have what it takes to success ask yourself some of the following questions and be brutally honest with your answers.

Am I a self-starter? How well do I get along with a variety of personalities? How good am I at making decisions? Do I have the physical and emotional stamina to run a business? How well do I plan and organize? Are my attitudes and drive strong enough to maintain motivation? How will the business affect my family?

When you have answered those questions, ask someone who knows you well and will provide honest replies to answer those questions about you - and then compare results. If the answers differ, re-consider your decision.

What do you need to succeed in small business?

There are four basic needs for success:

  • Sound management practices
  • Industry experience
  • Technical support
  • Planning ability

Few people start a business with all of these bases covered. Honestly assess your own experience and capabilities and then look for partners or key employees who can provide abilities that you don't have or in which you are not strong.

Would having a partner make it easier to be successful?

Having a business partner will not guarantee success. However, if you require additional management skills or star-up capital, engaging a partner may be your best decision. The ultimate success of a partnership depends upon the personality and character of the partners. Successful partnerships usually result when partners compliment each other so that a weakness in one is a strength in the other. If you decide to have a partner, make sure that each of you has a clear understanding, in writing, of the responsibilities and rights of each partner.

How much money do I need to get started?

One of the leading causes of business failure is insufficient start-up capital. After you have determined how much you need for equipment, stocks and facilities, make sure you have enough money set aside to cover your operating expenses (fixed and variable) for at least one year. Be sure to include sufficient funds to repay any loans you may have taken out and your salary as an owner. Successful businesses have started with less, but many more have failed for lack of sufficient start-up funds.

What financial information will I need?

You will need to have adequate records to be able to substantiate your income under federal and state laws, including income tax, sales tax and Social Security. You will need these same records to be able to secure a loan or to sell the business.

You need to have an understanding of :

  • A balance sheet:  which records your assets, liabilities and capital
  • A Profit and Loss statement:  which summarizes your earnings, your expenses and profit or loss
  • A Cash Flow statement:  which records the actual inflow and outflow of cash in the business.

Where can I get help?

There are many sources of help that are low cost:
The Small Business Administration has offices in every major city, the Service Corps of Retired Executives (SCORE) provides no cost counseling, as does the Small Business Development Centers and Business Information Centers. Check with Chambers of Commerce and trade associations. The internet has a n array of resources which are available from your home.
It is not a lack of resources that is usually the problem, it is more often a reluctance by the small business owner to seek the assistance that is widely and freely available.

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2. General Information on Staring a Business in Texas

Go to www.texasonline.com  and click on "Starting a Business"  This site will provide you with considerable information on the process of starting a business, permits and licenses required, where to go to obtain the necessary permits, how and where to register the name of your business, information on the collection of state taxes, labor and safety regulations, etc.

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3. What is a business plan and why do I need one?

A business plan is a written summary of what you hope to accomplish by being in business and how you plan to organize your resources to meet your goals. It is a vehicle to describe your business and your product or services and is a road map for operating your business and measuring progress along the way. The plan describes in writing, the market, the industry, customers and competitors, your products/services, your marketing plans and your operations along with sales and cash flow forecasts. The business plan is a document that should change as your business grows.

Why do I need one?

If you are seeking financing for your business, it is absolutely essential. The lending institution or prospective investor will want to see your plan in order to assess your financing proposal and to assess you as a business manager. If you are not seeking financing for your business, it is still essential since it serves as a guide for you in the management of the business and provides milestones to gauge your success along the way.

Do I really need a business plan?

Absolutely. A pilot does not fly a risky mission without a detailed, well-researched flight plan. Trying to operate a business without a well-researched business plan is no less a hazard for you and your family than flying a mission in a small plane. By committing your plans to paper, your overall ability to manage the business will improve. You will be able to concentrate your efforts on the deviations from plan before conditions become critical. You will also have time to look ahead and avoid problems before they arise.

How can I get help in preparing one?

SCORE has outlines available for you to follow and can walk you through them. Also, there are numerous business plan instructional web sites on the Internet. Search for Business Plans and you can find all the information you need to prepare one.

If I have to make a business plan to show to a bank, does SCORE have any completed samples?

No, but we can provide you with the outline to follow and suggestions on how to go about it. We will then review it with you when you have completed it prior to your presentation to a bank.

Will you help me write and complete my business plan?

We will take you through the steps outlining the procedures to prepare the plan. However, it is important that you put your own thoughts in detail on paper of how you plan to structure and operate your business. This will help you walk through your thoughts and ideas about your business. When you have completed your draft, we can then go over it with you to "fine tune" it if it is necessary.

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4. What Financing is available from the SBA, banks and other sources?

What is an SBA Loan?

The SBA no longer makes direct loans, but it does provide a guarantee of a major percentage of the loan to the lending bank. The amount of guarantee varies; presently it is around 75 percent.

Where do I get an SBA Loan? (An SBA guaranteed loan).

One should start out with the bank he intends to borrow from. Banks usually have all the necessary forms to originate a loan.

How can I get the Government to give me a loan without going through the bank?

There is a "Microloan Program" designed for smaller borrowings, from $100 to $25,000. These loans are available though local non-profit agencies, a list of which appears on the SBA web site at www.sba.gov/financing

Are there any SBA Grants?

No, there are no SBA grants.

Where do I get a grant to start my own Business?

As far as SCORE is aware there are no grant programs available to start a business.

There are various ways to seek start up financing through conventional loans from banks. Banks will need to look at a great deal of financial information about your business; operating statements, tax returns and many other financial documents. They will want heavy collateral in hard assets; about 1/3 of the amount requested. They might loan against inventory and receivables, but they are usually concerned that those assets will go first if the business runs into difficulties.

Although banks prefer to have hard assets as collateral (real estate, equipment, motor vehicles), they hope that the borrower will be able to take care of his obligations without the bank having to resort to taking possession of the collateral.

The bank will require having all your banking done at that bank.

Personal Loans:

Loans from relatives or friends are a source of financing. Many people are reluctant to approach a friend or relative, not wanting to risk the relationship. But if other alternatives are not available, by all means, talk to your friends. They might be glad to help, but they want some kind of an assurance that they will get their money back. It is good policy to be professional, have all agreements in writing with clearly defined perimeters, as to the term of the loan, the method of repayment and possibly an amount or interest paid for the money. Demonstrate why you need the money, how you will to repay it and what the interest rate, if any, would be paid for the borrowings. The more professional you can be, the more likely that the relationship can be preserved intact. But be prepared that your friends will develop a sudden interest in your business and offer unsolicited advice.

Lease Financing

A good way to obtain business equipment to find a company who will buy the equipment needed and lease it to you, with the provision that after a period of time, usually after the end of the lease period, they will sell it to you (or extend the lease for an other mutually agreed period). You will pay a premium, but you will have the means of production and can earn the money in profits to acquire the equipment.

The great advantage is that it is allowed to be "off of the balance sheet," and thus do not appear as a debt.

Owner Financing

One can use his/her personal funds to finance the business. In this case he/she can charge the business with reasonable interest.

Home Equity Loans

If you have a sizable equity in your home, you might borrow against the equity and use the proceeds to operate your business.

You must indicate on the loan application that you intend to use the money for financing your own business. Failing to do so could be considered misleading and might result in charges of fraud.

Factoring

The factor will buy your receivables at a discounted price and will collect the money on your behalf. It is a relatively expensive way of obtaining working capital, but it can be a good way to obtain funds for a growing business. Once they bought your invoices, theoretically collection is their problem, however most of them will demand that under certain circumstances they can charge back the invoice.

Venture Capital

Venture capital is the most expensive and demanding in conditions. One must be in a particular segment of the economy, able to show great earning capabilities and a relatively short period (around five years) of projected repay. Venture capitalists want to see a capable management team, and the promise that in a few years the company will be successful enough either to go public or be taken over by a larger company. They risk a lot and they want to be compensated for taking that risk.

Going Public

It is a complex, and massive undertaking. The company has to be of a certain size to be even considered, earning at least one million dollars in after tax profits, steady profitability, excellent growth potential a great need for funding that other sources can not provide. It is an extremely difficult process demanding an enormous amount of money and effort and places extra demands on the management that they do not have to cope with as a private firm.

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5. How should I structure my business: sole proprietor, corporation, etc?    

Sole Proprietorship

  • It is easy to form.
  • You are in full charge regarding all decision-makings.
  • Offers the most flexibility.
  • Simpler taxes.
  • Less bureaucratic restrictions.

BUT:

  • Has unlimited liability.
  • The business is vulnerable to critical events.
  • Difficult to raise capital and financing.
  • Depends on the singular ability of the owner.
  • Less professional in appearance.

Partnership

  • Association of two or more persons to carry on a business.
  • Co-ownership of assets.
  • The need for a Written Articles of Partnership.
  • Mutual agency: share of management and profits.
  • Easy to form.
  • Direct rewards, combined efforts.
  • Easier to attract capital.
  • Flexible.

BUT:

  • Unlimited liability of at least one of the partners.
  • Instability, dependence on the other partner.
  • Dependent on the judgement of the partners as an agent.
  • Difficult to dissolve.

Corporations

  • A distinct legal entity existing on its own.
  • Better image, suggest more professionalism.
  • Offers limited liability.
  • Lower tax rate.
  • Easier to sell stocks.

BUT:

  • Activities limited by the charter.
  • Extensive government regulations.
  • Double taxation.
  • More complicated to form, could require legal assistance.
  • Strict regulations of modes of operation.

"S" Corporation

The S Corporation is a corporation, for which an election has been made with the Internal Revenue Service for the income to pass through and be taxed directly to the stockholders on a pro-rata basis, avoiding double taxation on profits and dividends. It allows the stockholders to offset business losses against their personal income according to certain IRS regulations.

  • The S Corporation must have seventy-five or fewer shareholders.
  • The corporation can have only one class of stock.
  • All shareholders must consent to the election.
  • Can not have alien, non-resident shareholders.
  • The corporation can not own more than 80% of an other corporation.
  • At least 75% of the receipts must be generated by business.

Limited Liability Companies

It is a combination between corporation and partnership.Has the limited liability advantages of a corporation, but operates with the flexibility and tax obligations of a partnership, a corporation or a sole proprietorship.

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6. What is an (EIN) number?

An Employer Identification Number (EIN) is a nine-digit number that the IRS assigns in the following format: 00-0000000. The IRS uses the number to identify taxpayers who are required to file various business tax returns. EIN's are used by employers, sole proprietors, corporations, partnerships, nonprofit associations, trusts, estates of decedents, government agencies, certain individuals, and other business entities.

Is an employer ID number the same as a tax ID number?

Yes, an employer identification number, or EIN, is also known as a taxpayer identification number, or TIN.

As a sole proprietor, do I need an employer identification number (EIN)?

A sole proprietorship that has no employees and files no excise or pension tax returns is the only business that does not need an employer identification number. In this instance, the sole proprietor uses his or her social security number as the taxpayer identification number.

A sole proprietor would need to obtain an EIN only if either of the following apply: (1) you pay wages to one or more employees or (2) you file pension or excise tax returns.

Does a small company need a tax ID number?

Yes. The only exception, as noted above, is if you are a sole proprietor who has no employees and who files no excise or pension plan tax.

How to Apply for an EIN

Use Form SS-4 to apply for an EIN either by mail or by telephone. The SS-4 form can be downloaded from the IRS web site at www.irs.gov Texas residents can get an EIN within minutes by calling the Tele-TIN phone number in Austin Texas at 512-460-7843, or you can send the completed Form SS-4 to your local IRS Service Center Attn: Entity Control Austin Texas 73301 to get your EIN by mail. You will need a completed Form SS-4 to apply for an EIN by either method.

Application by Tele-TIN:

Follow the steps below:

1. Complete Form SS-4. For Texas residents, call the Tele-TIN phone number at 512-460-7843. For other states call the number listed under WHERE TO APPLY FOR AN EIN in the SS-4 instructions.

2. Write the EIN the IRS representative gives you in the upper right-hand corner of Form SS-4, above the phrase "Official Use Only". Sign and date the Form SS-4. Then either:

a. Mail it within 24 hours to the Tele-TIN Unit at the service center address for your state. In Texas the address is the IRS Service Center, Entity Control, Austin, Texas 73301or

b. FAX it to the IRS within 24 hours with a cover sheet identifying your Form SS-4 as a Tele-TIN submission. The fax number is (512) 460-8000.

Application by Mail:

Complete Form SS-4 at least 4 to 5 weeks before you need an EIN. Sign and date the SS-4. Mail it to the IRS Service Center address for your state. In Texas, the address is: IRS Service Center, Attn: Entity Control, Austin, Texas 73301. The IRS Service Center will send your EIN by mail within 4 weeks.

Additional Information

Publication 1635, Understanding Your EIN

Form W-9, Request for Taxpayer Identification Number and Certification

General Instructions for Forms 1099, 1098, 5498, and W-2G

http://www.irs.gov/tax_edu/faq/faq-kw100.html

http://www.irs.gov/tax_edu/faq/index.html

http://www.irs.gov/tax_edu/faq/index.html

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7. What is the Texas Franchise Tax and am I subject to it?      

What is the Texas Franchise Tax?

The Texas franchise tax is a privilege tax assessed against corporations, including banking corporations and limited liability companies, that are chartered in Texas, and against non-Texas corporations that have a Certificate of Authority to do business in Texas or that do business in Texas without a Certificate of Authority.

Who has to report Texas Franchise Tax?

The franchise tax is imposed on each corporation that is chartered in Texas or has a Certificate of Authority to do business in Texas. Non-Texas corporations doing business in Texas without a Certificate of Authority are also liable for Texas franchise tax. See Franchise Tax Rule 3.546 for a list of some activities considered to be "doing business in Texas". The term "corporation" also includes a bank, a limited liability company, an S corporation, a state limited banking association, a savings and loan association, a professional limited liability company, and a professional corporation. However, professional associations and limited liability partnerships are not liable for the franchise tax.

Where do I go for help with my Texas Franchise Tax report?

The Comptroller's office maintains a toll-free number to answer your franchise tax questions. Call them at 1-800-252-1381, visit the field office nearest you, or email to tax.help@cpa.state.tx.us. Also, you can write to Comptroller of Public Accounts, 111 E 17th Street, Austin, Texas, 78774.

Additional Information

The Comptroller's office will answer your franchise tax questions at 1-800-252-1381

http://window.state.tx.us/taxinfo/franfaq.html
http://www.texas.gov

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8.  How much should I pay for an existing Business?

How much should I pay for the business?

Remember that a business is worth only whatever someone is willing to pay for it. Generally, you should start the valuation process by estimating the net positive cash flow for the next 3 to 5 years, after subtracting an appropriate salary for yourself. Then determine the appropriate multiple of earnings to use to arrive at a fair valuation. Most small businesses sell for a price in the range of 2-5 times earnings before interest and tax expenses are deducted. Always keep in mind that a business buyer is really buying a stream of earnings; without an earnings stream, the business essentially has no value.

How can I get a seller of a business to show me his books?

Ask him! If he is really interested in selling, he will show you his books. In reviewing the books, you should carefully consider all information presented during a detailed due diligence process. Keep in mind that most businesses have some negative features that the seller is reluctant to talk about and these will only come out as you begin analyzing the business (due diligence). If you approach the purchase of a business with a good healthy dose of "prove it to me", it will be difficult for you to get burned.

How can I find out what my competitors are making in profits and how successful they are?

It will be difficult to find out exactly what the competition's profits are. However, talking to prospective customers and competitor's employees will give you some information on how successful they are. Talking to competitive businesses that are located in a different area than where you are or will locate often produces more information because your business will not be a threat to them. Industry trade associations or your accounting firm can refer you to companies in your industry and market that may be willing to share information with you.

Where can I get information regarding my competition?

You can get a wide base of information at the library in publications such as Robert Morris Associates and Dun and Bradstreet. The business section librarian can help. Major accounting firms also publish operating numbers for various industries, your accountant may be able to help you get to the right accounting firm. The library should also have a list of all trade associations catalogued and they print operating statistics. Talking to competitor's former employees, customers and suppliers can also help.

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9. Financial Ratios - What are they and what do they mean?

Financial ratios are items taken from your profit and loss statement, balance sheet and cash flow statement and combined in various ways (ratios) with the objective of measuring the financial health of your business. Properly calculated and measured at various points in time, financial ratios can indicate whether your business (and which part of your business) is improving, deteriorating or remaining constant. Thus, financial ratios are a good means to measure the growing success of your business and to gain insight into how effectively you are managing your business.

For example, lenders like to evaluate the "loan loss risk" by using several sets of ratios: ratios of assets to liabilities, and ratios of lender-investor dollars to owner-investor dollars. Recognize that ratios are indicators and that only you can tell the full story about your business.

The three major categories of ratios are 1. liquidity 2. profitability 3. efficiency. Each category has several ratios. An example is a Quick Ratio: A measure of a company's ability to meet its short-term financial obligations with its liquid assets. To determine the quick ratio, the company's liquid current assets (cash, accounts receivable, marketable securities) is divided by its current liabilities. The quick ratio is similar to the current ratio, but does not include inventory as a current asset. In general, a healthy company should have a quick ratio of at least 1.0.

Additional Information

For a fuller description of the kinds of ratios and what they measure, we suggest that you utilize the following sources:

http://www.onlinewbc.gov/DOCS/Finance/fs_ratio1.html
http://www.sba.gov/

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10.  Are my workers contractors or employees?

This important question has significant financial implications to small business owners. IRS Publication 15-A states "The general rule is that an individual is an independent contractor if you, the payer, have the right to control or direct only the result of the work and not the means and methods of accomplishing the result." Based upon decided cases, the consideration of whether a worker is an employee or a contractor falls into three main categories: do you control the worker's behavior, do you control his financial situation and the relationship between you and your worker.

Do you control the worker's behavior?  Do you tell the worker when to report for work, what his hours are, what equipment to use in the performance of his work, who will help him with his work, where to get supplies, then the worker is likely an employee. If, however, you set the task the time by which it is to be completed, but leave to the worker how it is to be done, then the worker is likely a contractor.

Does the worker have a significant financial interest in the work? If the worker has a significant financial investment in work, is not reimbursed for all of his expenses, and has the opportunity to incur a profit or loss on the work, then the worker is likely a contractor.

What is the relationship between the parties? If the worker receives benefits, such as pension, insurance, paid vacation leave then you are likely an employee. If you do not receive these benefits you could be either an employee or a contractor. A written contract between you and your worker can explicitly state the intentions of both parties.

The issue of whether a worker is an independent contractor or an employee has significant implications for you, the business owner, and your worker. Do not leave the issue in doubt. Contact a Certified Public Accountant or an attorney who is familiar with the issues to ensure that you are acting correctly and consistent with your intentions with respect to your workers.

Additional Information:

IRS Publications 1799 and 15-A and Information for small businesses available at www.irs.gov.

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11. What is a Patent, Copyright and Trademark and do I need one?

What is a Patent?

Patents protect intellectual properties, such as inventions, designs and a wide range of creations. Patents need to be applied for in the country one intends to use it, within a year of the first commercial use of the product.

What is a Copyright?

Copyright is a protection of books, magazines, software, music, movies, recordings and artwork. Concepts, ideas, titles, names and brands are not protected by copyright.

Copyright protection automatically extends to any appropriate material, whether it was applied for or not. However the small fee of ($20) is well worth the cost to register the copyright and increase the legal protection from infringement.

The copyright notice should be highly visible and contain the word (or symbol): "COPYRIGHT", ( © ), the year it was first issued to the public.

What is a Trademark?

Unlike copyrights and patents, trademarks affect all businesses. When you sell a product or service using a brand name, you are using that brand name as a trademark. A trademark or service mark may consist of letters, words, graphics, or any combination of these elements.

You have automatically some protection for your trademark if you were the first person to use that trademark in commerce, even if you did not register your trademark.

However you should hire an attorney who is experienced in trademark issues and have him make trademark search and file for registering you trademark. The registration will not necessarily give you protection nationwide, let alone internationally, but at least you are going to be protected regionally.

How do I apply for a Patent or a Copyright?

Copyright forms are readily available at Federal Centers or can be ordered from the COPYRIGHT OFFICE, Library of Congress, Washington D.C. 20559.

Applying for a patent is more complicated and a patent attorney's services should be sought. Their names are listed either in the telephone book or at the "Attorney's Referral Service".

Trademarks are protected by the Federal Government; again an attorney's services should be procured.

Will SCORE help me to get a Patent?

As a general rule, no. The procedures require the participation of an attorney, however SCORE might be able to help you find a qualified attorney.

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Frequently Asked Questions