Should I start a small business?

Yes, provided you know what you are getting into and provided you feel comfortable with your state of knowledge about the business you have chosen. You should also have a strong drive to succeed even when the hours get long and the decisions are difficult. All types of people make it in small business and all types fail. There is no personality type or educational level that qualifies or disqualifies anyone from succeeding in small business.Hundreds of thousands of people do it every year. It is an individual choice that should be made only after serious study, self-examination, and business advising. Your individual preparation is your key to success.

How do I start a small business?

Begin with a feasibility study that answers these three questions:

  1. What am I going to do?
  2. What will it take in money and skills to do it?
  3. What will it give me in terms of money and satisfaction?

Get business advising from a Small Business Development Center, S.C.O.R.E., or some other organization that regularly deals with business startups. Set out to learn all you can about your new business BEFORE you make the decision to start it. Learn about the market, your target customers, the competition, pricing practices, typical profit margins, sources of supply, and anything else that will help you fully understand the nature of your new business.If you can talk to business owners in similar businesses or work as an employee for a time in such a business, do so. Talk to suppliers who sell to your type business. Read trade publications and magazines dealing with your chosen business. Attend seminars that deal with subjects important to your business. If there are franchises doing what you plan to do, study them. Request information about them and talk to franchise owners.

When you have finished your research and feel comfortable that you are doing the right thing, prepare a business plan to outline in detail the start up of your new business. Gather together the money you need and get the equipment, people, and other things you need to start. When all this is in place, start. BUT NOT BEFORE! 

I want to start a small business, where do I begin?

First, make an appointment to receive business advising, free of charge, from one of our staff. Among other talents,
other talents, our advisors are adept at helping you write a business plan, the “roadmap” for your venture.

Does Navarro SBDC offer services to existing businesses, or are they just for startups?

A majority of SBDC services are geared specifically towards those challenges faced by existing businesses – management reorganization, expanding into Internet commerce, redesigning a business or marketing plan, financing an expansion, entering international markets… and many more.

Where in Texas should I call for information on permits and licenses?

Please see our Permits and Licenses tab below for a listing of agencies.

Do I need any special insurance?

Consider getting the following types of insurance.

  • General liability insurance
  • Personal property, fire, theft
  • Vehicle insurance
  • Business interruption insurance

Talk to an insurance agent about your needs. If you have employees you will need workers’ compensation insurance. You should carry a general business policy, which includes liability and other standard coverage. Your place of business, if you own it, should be insured; and if you rent, you still should have your own coverage, too. Don’t rely on the landlord’s insurance. Depending on your industry, you may need additional types of insurance (for example, food service requires product liability insurance). If you already have insurance coverage, start with your agent. Feel free to get quotes from several agencies, but be sure that you compare coverage as well as price.

Are there resources that will help me once I identify a need for employees?

There are both Federal and State resources to help you understand employment requirements. One is the Workforce Security website for the Department of Labor (go to (http://workforcesecurity.doleta.gov) which provides one-stop employment services and information on foreign labor. Another Department of Labor website has a Small Business Laws, Regulations and Technical Assistance Services – (go to https://www.dol.gov/. It offers help in finding qualified employees, a workforce tool kit, employer incentives, federal bonding information, policy information, and labor market guidance.

What do I need to know about safety and health matters?

Worker safety and health is guided by the Federal Occupational Safety and Health Administration (OSHA)

(go to http://www.osha.gov/index.html). Each state must interpret these Federal guidelines. Compliance involves proper use of safety equipment and worker training on safe procedures. Non-compliance can result in fines or, possibly, closure but preventing injuries or loss of life is the most important reason to understand the regulations.

Does the SBDC make business loans?

No- the SBDC can help you assemble the paperwork needed to apply for a business loan. They can help you prepare a business plan if you don’t already have one. When they have helped you develop the whole loan package then you are ready to approach a bank for a loan.

Is the SBDC the same as the SBA?

The SBDC is funded in part by the Small Business Administration (SBA). The two agencies work closely together to provide free business advising to businesses.

Does the SBDC charge for its business advising services?

There is no charge for SBDC business advising.

Where can I get money for a small business?

Three out of four new business startups use only money from the owner or owners. Some startups can borrow from banks, but it is difficult. You must have a good equity investment in the business (usually 30% or more) and you must have a sound business plan. The Small Business Administration will guarantee a bank loan for a new startup, but it also has requirements for equity and business plans.Personal and business credit cards can provide money for a business, but it comes at a high cost. It is recommended that credit cards be used sparingly and only for short term needs.

Relatives and friends often can provide money. Care is suggested, however, for mixing business with relations and friendships can be risky. It is best to keep these money relationships as business-like as possible and not depend heavily on the personal relationship to make the transaction. Ask: “Would this deal stand up with a non-relative or non-friend?”

Mortgaging personal assets and borrowing against cash value life insurance can also be sources of money.

Local and state government agencies sometimes have money available for new businesses, but it is not common and it is usually restricted to very special circumstances. Nevertheless, it might pay to check around. Business advisors and agencies involved in economic development usually know about these programs.

Can I get a grant?

Contrary to popular belief, grants of cash for business are virtually nonexistent. There are rare instances where a cash grant has been given for some highly specialized type of business or for some unusual situation, but for the great majority of business situations, there are no cash grants.There are many government grants designed to assist business, but these usually don’t go directly to the business. Instead, they go to agencies and organizations that perform some service for business or benefit business in some way. The Small Business Development Centers throughout the United States operate partly on a grant from the federal government.

The books and late-night television infomercials that tout government grants for business are usually exercises in cleverly misleading entrepreneurship. Read the fine print carefully and “buyer beware.”

How much money will I need to start?

You will need two pots of money. One pot will pay for the things you need just to get your new business started. The other pot is to pay your operating costs until your business reaches break-even – that point where you are taking in the same amount of money you are paying out.To estimate the first pot of money, make a list of all the things you will need to just get open. This might include equipment, tools, inventory, fixtures, lease costs, office supplies, vehicles, signs, pre-opening advertising, fees and permits, and everything else you can think of. Opposite each of these items, put an estimated cost. If you don’t know the cost, find out. If you have uncertainties, estimate on the high side. Add up the amounts and you have the size of this first pot.

The second pot of money, to be used for operating expenses, involves estimating your cash outflow for all the things you will have to pay for after you start your business. This might include such things as rent, utility bills, gas for vehicles, supply replacement, payroll, payroll taxes, advertising, insurance, bookkeeping or legal fees, etc. If you will estimate each of these items for one month, you can multiply the months’ totals by the number of months you think it will take you to reach cash break-even.

When you will reach cash break-even is a judgment call by you based on what you know about your business and like-type businesses. If you are going to err, err on the side of conservatism. It will be far better to have too big a pot of operating money than to run out of operating money.

The sum total of these two pots is the amount of money you will need to start your business. Do not start before you have this amount or know where it will be coming from. 

How long will it take to start a small business?

As long as it takes you to complete your feasibility study, prepare your business plan, gather together your money, buy what you need to buy, and arrange your business operation affairs. This could take a few weeks or many months. If you have difficulty with any of these items, the time to learn and solve problems must be added.Each individual entering this process brings his or her unique set of skills, knowledge, confidence, and time. If you already know a lot, have good skills, feel confident of what you are getting into, and have time to do this work, you can be up and running in short order. If, on the other hand, you lack basic business knowledge, need development of some of your skills, do not feel confident of what you are doing, and/or have limited time to do the research and planning, your time frame will be longer – months or even years.

It is critical that you not allow your enthusiasm or need to hurry to push you into business before you are ready. Premature starts are a common reason for small business failure. You will know when you are ready. It is a gut feel. Don’t go against this gut feeling. 

Where can I get help in starting a small business?

Go to the people who know about small business. This includes Small Business Development Centers. There are over 950 in the United States and their business advising services are free. S.C.O.R.E., which is staffed by retired business executives, is another free source of help. Colleges and universities often have specialists in small business and business topics. Private seminars, books and videos are readily available. Public libraries carry many books on small business.Some CPAs specialize in advising small businesses. The Small Business Administration has significant information available, as does the Internet. Type in “small business help” or “free business assistance” on any of the Internet search engines and you will get more information than you could ever read.

Some banks have small business specialists and are glad to help. Chambers of commerce, economic development associations, and other community agencies offer information and contacts. Most states have agencies devoted to assisting small businesses. Private consultants in small business and business topics are everywhere. Check your phone book.

Finally, people who have been in small business or are presently in small business are excellent sources of information. Some will gladly help you learn and gather information. 

What business should I choose?

Choose a business activity that you will enjoy doing. Look at your interests, hobbies, and aptitudes. Don’t pick one that has an uncertain market. There are a lot of small business startups that are doomed from the beginning because there simply are not enough customers wanting that product or service. If you look in the back of some magazines you will find many products and services being offered as potential businesses for which there is very little market potential.Avoid over-crowded areas of business. Many cities have far too many restaurants, retail stores, auto service centers, etc. for the population. The same is true in many smaller communities. One of the disadvantages of our free enterprise system is that too many businesses often start.

Study the businesses you think you might like. Satisfy yourself that they will fit your needs. There are so many alternatives available, you shouldn’t be too quick to choose. Understand that there are few inherently bad businesses or few that are inherently good. Just about any business can fail and any can succeed.

Be sure to do a quick feasibility study on any business you pick before making up your mind for certain. Remember, your choice needs to work for YOU, in YOUR situation, in YOUR location, in YOUR market, and given YOUR special set of circumstances. Your circumstance is unique. You should test it as a unique opportunity, unlike any other. 

What is a business plan and do I need one?

A business plan is an outline or road map for your new business. It tells what it is, where it is, how it will operate and whom it will serve. It includes information about your customers, your employees, and you. It explains something about the industry you will be a part of and briefly explains the market for your product or service. It expresses these things with both words and numbers.The numbers of a business plan are especially important, for they translate the anticipated activities of the business into the language common to all business. If your business plan will be viewed by bankers or other financial types, your income statements, balance sheets and cash flow statements will take center stage. You will use them to paint a picture of your businesses in the near term financial future.

Yes, you need one. You need one for your own use and you may need one for others: partners, investors, bankers, relatives, employees, etc. They are great tools for analysis and they help in communicating with others. Bankers usually insist on them when considering loan requests. Investors won’t work without them.

Business plans take many forms and can be brief or lengthy, informal or formal, optimistic or pessimistic, and typed or handwritten. The important thing is that one exists

If I can’t find a job, should I start a business?

Probably not. Making the decision to start a business solely because you can’t find a job is usually not a good idea. Self-employment might be an alternative, but starting a business – no.The differences between self-employment and business ownership are considerable. You don’t need to know near as much to work as a self-employed person as you do to successfully operate a small business. If your primary concern is making a living just for yourself, keep looking for a job or go the self-employed route. 

Can I operate a small business from my home?

The chances are you can, but you had better check with your local zoning authority to be sure. Many types of small businesses can be run from the home. With improving technology in communications and computers, many small business owners choose to avoid the expense of a separate business location.Thought should be given to your neighbors in making this decision. If your business activity will bother them or be objected to because of noise, odors, parking, or other issues, perhaps you should not do it.

Your personal home situation should also be seriously considered. Can you effectively allocate your time between personal and business matters? Will family members object?

Home based businesses are becoming increasingly popular. For many new business startups, they are a good idea. 

Should I buy a franchised business to start?

You should consider it. There are some definite advantages to starting out with a franchised business. Of course, there are all different kinds of franchises. Some are good and some are not. Some offer fair value for what you pay and others are rip-offs.Usually, the advice is to seriously consider a franchise if you are not very knowledgeable about business and don’t have any experience. A franchise can often get you off to a running start. The franchisor has done some of the market study and other startup work for you. Depending on the franchise, you might be able to buy a turnkey business that will train you and put you in a good position to succeed.

It is smart to consider both a franchise and a startup on your own without the franchise. The franchise will cost you, but you will receive some benefits. Evaluate whether the benefits are worth the costs to you. Also remember that a franchise is often an on-going relationship that is not always easy to break. You are not totally independent and can not always do as you please. The franchisor usually has something to say about how you operate your business.

Research is key. Investigate any franchise thoroughly. Talk with other franchisees. Study the franchise agreement and understand what it says. Get legal or business advising advice. Look hard before you leap, but look. With something like 40 percent of present day retailing done through the franchise method, there must be something very good about it. 

Should I buy an existing business to start?

A good idea if you can make it fit. The advantage of buying an existing business is that it is already established in the market. It has customers and is carrying on business. You avoid the hassle and expense of starting from scratch. The trick is making it fit your desires and capabilities. Is it the kind of business you want? Can you afford it? Can you operate it?Businesses that are offered for sale are offered for all kinds of reasons. Often the business is in less than good condition. That’s okay if you know it and the price reflects it – and you can fix it. Sometimes the owner is just tired of it and wants to retire. Knowing the real reasons for the sale helps in your evaluation.

Sound financial and business analysis is a key to buying an existing business. The business analysis is to determine if you want to buy it. The financial analysis is to determine how much you should pay for it. It may be a good business, but it costs too much. It may be cheap in price, but a failing business.

Should I incorporate my new business?

You should definitely consider it. Incorporation gives you certain liability protection that you can’t get if unincorporated. It also can make it easier to borrow money because the business is a separate legal entity with its own assets and liabilities. It is independent of you, the owner, and has a life separate and apart from yours. It makes the business easier to sell and offers tax flexibility because of the two taxing entities (your and the corporation).Incorporating does cost more and requires some ongoing added expenses for separate tax returns, but these expenses are not large.

What is a sole proprietorship?

A sole proprietorship is an individual carrying a business activity without incorporating and without a partner. The business and the owner are one in the same. There is no legal distinction between them. The debts and obligations of the business are the debts and obligations of the owner. What is owned by the business is owned by the owner. If the business is sued, it is really the owner who is being sued. If judgments are awarded against the business, they are awarded against the owner. The life of the business is tied to the life of the owner. If the owner dies, the business dies. Approximately 70% of all businesses in the United States are operated as sole proprietorships. They are easy and inexpensive to set up. 

What happens if a corporation and a sole proprietorship have the same name?

If both parties have properly registered their names, then either the parties need to work it out and come to some agreement – or the courts will decide in a lawsuit. Working it out between the parties with compromises is a much better alternative. Issues like who was using the name first often become important in court decisions.

Must I file an assumed name certificate if I am only going to use the name I incorporated under?

No. When you incorporate with the Secretary of State in your state of incorporation, you may do business anywhere in the state without the need for any further filing.

Why file an assumed name certificate?

Many states, including Texas, require businesses to file assumed name certificates if they are not incorporated. Even without this requirement, filing is a good business practice. It informs the public about the existence of the business and is often required by banks before they will open business checking accounts or grant business loans.While this filing gives the business no state protection against other businesses or imparts any rights, it is an accepted business practice that gives your business legitimacy and credibility. 

Can I use my own name as my business name?

Yes. Many people do.

What should I do if the name I want to use is already being used by someone else?

Pick another name or some variation of the name that will not conflict.

How different does my business name have to be?

It should be different enough to avoid confusion with other businesses. The reason you use a business name is to help customers identify you. If your name is similar to others, this identification is made difficult. Customers may hear or read your costly ads, but trade with a competitor because they are confused by the similarity of the names.Picking a name that is similar to one already in use might trigger disputes or lawsuits. This benefits no one. Avoid trouble by picking a name that is unique and different enough not to be confused. 

What if I plan to do business in multiple countries?

If you are not incorporated, you need to file an assumed name certificate in each country you plan to do business. If incorporated, file an assumed name certificate in the country of the corporation’s registered office. If the registered office is different from your principal place of business, you should file a certificate in both countries. 

Should I form a partnership?

A partnership is a form of business organization used by two or more people who want to go into business, but do not want to form a corporation. Instead, they choose to operate like two sole proprietorships joined together in a partnership.Often, this form of business organization is chosen by people who already have a personal or business relationship – as opposed to two or more people who don’t know one another. Because of this pre-existing relationship, they often do not define the activities and responsibilities of each partner. They deal with this only in general terms, such as, “We will split the profits down the middle and we will each do half of the work.”

This casual approach can lead to trouble. If one of the partners functions in a way unacceptable to the other partner(s), disputes can arise that are argued with “he said that” and “I said this” statements. With no written point of reference, these disputes are difficult to resolve.

To reduce this potential problem, a written partnership agreement laying out the duties and responsibilities of each partner is recommended.

What is a Subchapter S Corporation?

This is a modification of a regular C corporation to permit taxes of the corporation to be treated in the same way as a sole proprietorship. It is a tax election. With this “Sub – S” election, profits are not taxed at the corporation level. Instead, profits flow through to the owners (shareholders) who include them on their personal tax returns. Without this election, the corporation pays taxes on its profits. 

Which form of business organization should I pick?

Pick the one best suited to your individual and business needs. No one form is best for everyone. Most small businesses start as sole proprietorships and stay that way. Some start with that form and change to corporations or sub-s corporations later. Groups of owners sometimes choose the corporate form and sometimes prefer partnerships.The best advice is to learn about each form – the advantages and disadvantages – and match your personal situation to those alternatives for the best fit. 

Where do I get a tax number?

A federal tax identification number is obtained from the IRS. Call them (consult your local directory or the Internet) and request the forms needed to apply. This number is for a business what a social security number is for an individual.

Do I need any permits?

Most small businesses do not need special permits. However, many do. To find out if you need one or more, consult local and state authorities having jurisdiction over your area of business and ask. People in your trade or industry can often tell you. SBDCs often know.While not technically a permit, every business should be registered. A corporation is registered with a state agency via papers of incorporation and a sole proprietorship and partnership usually register with a local county courthouse by way of an “assumed name certificate.” 

How should I pick a name for my new business?

Business names are very individual and often personal. A good name is usually considered both descriptive of what the business does and consistent with the public image the business wants to project. “Bubba’s Savings and Loan Association” or “The First Capital Paint and Body Shop” are not real good names. They are confused by sending mixed signals.It is often suggested that a name be chosen by selecting three or four alternatives and testing these on friends, relatives and potential customers. Note the reactions and listen to the feedback. If you want to project a highly personal image, use your name in the business title. If you want a more formal, “business-like” image, don’t use your name. 

What is a market analysis?

It is an organized study of customers and competition. It can be quite simple and include just a few facts about the population, an approximate count of people who fit your customer profile, and information about existing businesses now serving these customers. It can also be extensive and include all sorts of data about economic trends and conditions, demographics, psychographics, industry characteristics, pricing, demand trends, etc.Any new business startup should do some type of market analysis. The more the better. It does not have to be expensive or sophisticated. It should, however, be thorough enough to provide an understanding of the nature and extent of local customers likely to trade with your business. A common mistake is to assume a market when no market exists – or such a small market exists that sustaining a business based on that market is impossible.

What is a feasibility study?

This is a preliminary business plan used to answer the question, “Should I do that?” It includes facts and projections that outline what will happen IF something is done. It does all this before the fact. It allows a businessperson to look at probable results before anything is done to produce those results.These studies can be brief or lengthy. They should fit the subject. A feasibility study to answer the question, “Should I buy or lease that piece of equipment?” is less involved than one aimed at answering, “Should I build a new restaurant?” On the question, “Should I start a new business,” the work should be extensive.

What is equity?

Equity has two different, but related meanings. On the one hand it is the term applied to the money the owner puts into the business – money that is not borrowed or is borrowed from relatives without any requirement to pay it back.Equity also means the same as “net worth,” which is the difference between the assets and liabilities of a business. It is the portion of the assets that the owner would get after all the liabilities were paid.

Equity is one of two sources of capital (money) for a business. The other is debt. Equity comes from the owner and debt comes from others, usually banks or other financing agencies. 

What is capital?

To operate any type of business activity, you need things. These things are different from business to business, but usually include equipment, tools, office equipment, vehicles, computers, etc. These assets are purchased with money. This money is usually referred to as capital.Capital initially comes from two places: the owner and others. Capital that comes from the owner is termed equity. Capital that is gotten from banks or other lenders is called debt. The total equity and debt of a business makes up its total capital at the start of a business. As the business operates and makes profits, the portion of these profits that is kept in the business adds to the capital. This addition of retained profits is called “retained earnings.”

Should I Borrow?

Yes, provided you can handle the debt and provided the borrowing will benefit your business.Handling the debt means that you will be able to repay the principal and interest without undue hardship on you or your business. Benefiting your business means the benefits of the debt are greater than the costs.

In considering the benefits to the business, think about the money that can be earned with the borrowed funds. If the earnings attributable to the debt exceed the interest on the debt, this argues for debt. Also think about ownership control. By using debt, the owner’s control is not diluted as it is when money is raised by selling equity.

Finally, in considering debt, remember that there is a relationship between debt and equity that is important. While what is an acceptable relationship varies, most banks and other lenders require a dollar of equity for every one to three dollars of debt. If you seek to borrow $1,000, for example, you had better have from $333 to $1,000 of equity. 

What financial statements do I need?

There are three statements that are almost always required for borrowing or for most other types of business dealings. These are the balance sheet, income statement, and cash flow statement.For a new business startup, these statements are projections of future expectations. For existing businesses, they are historical statements AND projections of future expectations.

Other statements might be required, depending upon the lender or the objective of the business. Most everything, however, can be obtained from these three basic statements. 

What is a balance sheet?

Often referred to as the basic business financial statement, the balance sheet shows three things about a business: assets, liabilities, and owner’s equity. Assets are things that are owned by the business. Liabilities are things that are owed to others. Owner’s equity is the difference between assets and liabilities.Owner’s equity can be thought of in this way: if the business were to liquidate all the assets and pay off all the liabilities, what is left would be owner’s equity. The owner would have a right to keep this equity. This is a little theoretical, however, because in liquidating assets one doesn’t always get the same amount as shown on the balance sheet. The listing of assets on the balance sheet is customarily done at cost or adjusted cost. Inventory, a common asset, would be recorded at cost value even though it may be sold for more or less than cost in a liquidation. A building, another common asset, might have appreciated in value, but this added value would not be recognized on the balance sheet.

It is important to know the rules used in recording assets and liabilities and in constructing a balance sheet. It is also important to understand the proper and improper uses of this statement. If you don’t know these things, either learn them or hire someone who can advise you.

What is an income statement?

An income statement (often called profit and loss statement or P & L) is the score card for business. It shows the revenue, expenses and profit or loss. It shows these things for some period of time, usually a month or a year. An income statement is usually titled: “Income Statement for X Business for the period January 1 to December 31, YYYY.”A very simple form of income statement could have just a few lines: Total revenue, total expense, profit before tax, taxes, and net profit. A more complex statement could show revenue by category (from store sales, from mail order sales, from leasing, etc.) and expenses by type (rent, utilities, wages, etc.). 

What is a cash flow statement?

The simplest form of cash flow statement is a listing of cash coming into the business and cash going out. Think of a personal checkbook register. You record cash that you deposit into your bank account and you record each check that you write. You don’t record anything else – just cash you get and cash you pay out.With business cash flow, the same simple rule applies. If it is either cash received or cash paid, it is listed. If it is not cash, it is not listed. Selling something on account and not getting the money is not a cash flow statement transaction. If something is purchased, but no cash is paid, it is not recorded on the cash flow until the cash is actually paid out.

A cash flow statement is different from an income statement (profit and loss statement) that is kept on the accrual basis of accounting. Accrual accounting, which is used with most businesses, recognizes sales when they are made even if the cash is collected at a later time; and it recognizes expenses when incurred even if the cash is paid 30 or 60 days later. The accrual basis income statement, then, is no substitute for a cash flow statement.

Furthermore, there is spending in business that is not immediately reflected on the income statement. When inventory is purchased, there is no entry on the income statement even if cash is paid for the purchase. When equipment is bought with cash, only a part of that purchase is usually reflected in the current income statement. The rest is shown on future statements by way of depreciation expense.

These types of transactions would show up on a cash flow statement, but NOT on an income statement.

Why are financial projections necessary?

Financial projections are estimates of future business activities. By estimating the future, you have a target to shoot at. You have a frame of reference, even if the projection is not highly accurate. It is always easier to make business decisions if those decisions are pointed at some target or objective.Financial projections are sometimes required for you to communicate with others. If you seek a business loan, for example, your bank will want to see what your expectations are about your future business activities. This is one way they determine your chances of repaying the loan.

The chief value of financial projections for a business owner is not so much the attempt to predict the future with accuracy as it is a plan to set a target or goal to work toward. 

What kind of profits can I expect?

There are three kinds of profit: gross profit, profit from operations, and net profit. The last, net profit, is what we usually refer to when we talk about business profit. Net profit is what is left after all costs and expenses are paid and after all interest and taxes are settled.Most business net profit falls in the two percent to six percent range. This means that for every dollar of sales, from two cents to six cents will be earned in net profit. Clearly, many businesses do not do as well as this and some do much better. Net profits higher than fifteen percent of sales are unusual.

To learn the profits that you can expect, look at your industry figures. Like kind businesses usually experience net profits within a range. This range can be learned from industry trade associations. While this will not necessarily dictate what you can expect to earn, it will give you some insight. 

What financial records do I have to keep?

You should have written records showing money coming into your business and money going out.With each transaction, you should record the source or destination of the money as well as the date.The manner you use to record this information is not as important as just doing it. You can use simple bookkeeping forms available at stationery stores or you can use accounting programs on computers. You can do it yourself or you can hire someone to do it for you. The two important considerations are these: do you understand it and can summary financial statements be prepared from these records?

To give you the best information for your use in controlling the business; and to satisfy the tax collectors, bank loan officers, and others looking at your business records, you should ensure that your financial records are kept according to the rules of the game. These rules are called “generally accepted accounting principles.” If you don’t know these rules, either learn them or hire someone who knows them.

A common method used by small business owners who are not well trained in this area is to hire a CPA or other accounting specialist to help them set up their recording system. Once established, recording daily transactions can be accomplished by almost anyone. A specialist is again used to prepare periodic summary financial statements and to file taxes. 

What do I do if I don’t know anything about business finance?

Learn! There is no good way around the requirement that you learn something about business finance. If you try to run a business without this basic knowledge, you will be greatly reducing your chances of sustained success.You can hire others to do this for you or you can get outside experts to advise you, but in the final analysis, you are making the decisions. You are making the financial decisions. If you continue to make financial decisions without a good knowledge of finance, chances are good that many of these decisions will be poor.Poor financial decisions sooner or later lead to business failure.

How much do I need to know about accounting and bookkeeping?

Since numbers constitute the language of business, the more you know about this language, the better you will understand your business and the better will be your decisions. As a minimum, you should understand your bookkeeping system. This means you should understand how your money is spent and how much money you have coming in.You should also be able to read and understand the two basic summary financial statements: balance sheet and income statement.

Successful small business owners usually say that the two most important skills for “making it” in business are marketing and financial skills. Those who study business failure say that lack of understanding of one’s financial situation is a frequent cause of failure. 

Should I hire a CPA?

You can get accounting advice from different sources. A Certified Public Accountant is probably the most competent to give you advice on a wide variety of business topics. Others, such as public accountants, bookkeepers, and specialists who focus on small business record keeping, can also be useful. CPAs are usually the most expensive, but may still be the best value because of their breadth of knowledge and their ability to assist you with all aspects of your business finance, accounting and tax.Many small businesses can function with advice and assistance from bookkeepers on most routine matters. They get tax advice from professional tax preparers. A CPA is only used for more complex finance or tax questions.

If you choose not to incur the expense of a CPA for most of your financial and tax consulting, you should at least establish a contact with one so you can get advice and answers to complicated questions when you need them. It is a false economy to save money and get poor advice. 

Will a bank loan money to a small business?

Yes, provided you can satisfy their requirements and provide the information they need.Their requirements are best understood by remembering that banks are private businesses that exist only if they make a profit. The majority of their profits comes from loan activity. When banks do not make loans that are sound, their profitability suffers and they get into trouble with bank regulatory agencies. Unsound loans are those to businesses with poor liquidity, poor cash flow, insufficient collateral, excessive debt and poor management.

Businesses with only one or two of these problems may still be able to borrow if they are exceptionally strong in the other areas. For example, a business with excessive debt may be able to borrow if it has exceptional cash flow or exceptional liquidity. Cash flow is the quantity of money flowing into the business in excess of the amount flowing out. Liquidity is the amount of assets it has that can easily be converted into cash.

Banks use a cash flow ratio to measure the adequacy of cash flow to service debt. If you divide the earnings before interest and taxes by the interest paid on the loan, you will get this ratio. While an acceptable ratio varies with industry and business, it is seldom less than 1.2 to 1. A business with a consistent and dependable cash flow would quality with this low ratio of $1.20 of earnings before interest and taxes for every $1.00 of interest expense. For most businesses, this ratio would be much higher.

Liquidity is usually measured by what is called a current ratio. This is the relationship between all current assets and all current liabilities. A ratio of 2 to 1 means that there are $2 of assets for every $1 of liabilities. Banks will disagree on what is a satisfactory current ratio and different businesses will produce different satisfactory current ratios. As is perhaps obvious, not only is the ratio itself important, but the type and quality of the assets and liabilities is significant to this measure.

If, for example, the assets are difficult to convert to cash and most of the liabilities are due within a short time, even a high current ratio might not be good enough. Conversely, highly liquid assets coupled with liabilities with long maturation might make a low current ratio acceptable.

Collateral and debt, two other important factors in determining the banks willingness to make a loan, are measured in ways you should understand.

Collateral is viewed by banks differently than it is viewed by you. They look upon collateral as worth less than you do. This “discounting” of your collateral occurs because they must view your collateral in terms of liquidation value in usually distressed circumstances. From experience, they know that real estate will liquidate out at only 75% of value and equipment will bring only 50%. Accounts receivable might be worth from 35% to 80% of face value and inventory can range from 20% to 50% of cost value. In placing value on your collateral for loan purposes, you must think like the banker.

Debt is usually measured by the bank in relation to the equity of the business. If your debt AFTER the loan will be more than two to three times your equity, chances are you will fail on this measure. Sometimes, you might fail with a one-to-one ratio. For some businesses, having a dollar of debt for every dollar of equity is too much.

The final part of your business that will be closely scrutinized by the bank is your management skill. If they don’t think you can plan, organize and control your business, you won’t pass muster.

How can the government help me with financing?

The federal government can help you in two primary ways. These are bank participation loans and loan guarantees.A bank participation loan is where one or more entities combine with a bank to make the loan.Private lenders, government agencies, financing groups, non-profit organizations or others may combine forces with a bank in such a way that the bank holds all or most of the collateral from the borrower, but puts up only a portion of the money. Furthermore, the priority of payment in the event of loan default usually favors the bank. It gets its money back before the other “subordinated” participants get theirs.

Loan guarantees exist to make it possible for businesses not qualified for bank borrowing to obtain bank loans. The government guarantees such a loan and stands ready to repay the bank if the borrower can’t.

The Small Business Administration (SBA) is the primary U.S. government agency offering loan guarantees to banks. Their so-called 7a program is widely used for all types of business borrowing.

Their 504 loan program is an example of a participation loan. With 504, a bank puts up only about half the cash, but gets all of the collateral and has first priority in the event of default.

To learn about these government loans, contact your local bank or the Small Business Administration.

How can I get equity financing?

Equity financing means getting a business partner. This partner puts money in the business in exchange for a share of ownership. For small businesses, the most common form of equity financing is with relatives or friends. They agree to put risk money (no guarantee of repayment) into the business and become part owners to share in the profits.”Angels” and other private investors also provide equity financing, but usually not for small businesses. These investors are particular about the investments they choose and usually want businesses that promise fast growth and high profits. Once in a while a private investor can be found that is willing to invest in ordinary small businesses (not fast growth or high profit), but they are difficult to locate. To search for one of these, it is best to “put out the word” in your local community that you are looking for an investor. You can tell banks, chambers of commerce, industrial development groups, and others interested in business development. Maybe an investor will turn up.

Investment bankers and other organized companies and groups who invest in business are for the big boys or for small companies that are involved in high technology, medical innovations, or other areas with high potential.

With any type of equity financing, you must remember that the cost is a surrender of some of your ownership interest. 

How can I get a bank loan?

Start by determining how much you want and what it will be used for. Then assemble the information that the bank will want. Briefly stated, the bank wants to know three things: What is your business about; why do you need the money; and how will you pay it back.Explaining what your business is about involves writing down what your business does, where it does it, and who it serves. Data about your market and customers is essential. If you are an existing business, the banker will want to see historical financial information in the form of income statements and balance sheets. If you are a new startup, you won’t have a history, but you will be asked to provide projections of future business activity and results.

Telling why you need the money requires some detail, not just a generalization such as, “I need more working capital.” If the money is to be used for working capital, a listing of specific items of working capital is necessary. If the money is to be used to buy equipment or real estate, detail about these should be gathered.

Convincing the banker that you can repay the loan is the most important part of your preparation. If the bank cannot see clearly the loan repayment, it will not make the loan. If the repayment will come from the profits of the business, the projected profits must be set forth and they must be convincing. If collateral is to be an important aspect of the loan (and it usually is), its value in the eyes of the bank must be sufficient. If management and technical skill are important in operating the business so it will meet its profit projections, these skills must be present and evident.

This information is usually assembled and presented in a written business plan. The form of the plan is not as important as the content. If the bank sees the information it desires and can understand it, the form is not important. There are many planning guides available to help with the content and form. Check your major bookstores, libraries, Small Business Development Centers, S.C.O.R.E. chapters, or the Internet.

DO NOT approach a bank until you have completed this preparation or until it is far enough along that you can speak intelligently about your needs and repayment ability. You can hurt your credibility with the bank if you go in unprepared. They will start to question your business abilities. 

Will the SBA (Small Business Administration) loan money to me?

Except in isolated and special situations, the SBA does not make direct loans. Its loan activity is in the form of participating loans and loan guarantees. You must deal with a bank to reach the SBA. You can think of the SBA as a level above your bank that is providing incentives to your bank to make it easier for you to get debt financing. The bank plays a major role in evaluating your loan application and in administering the loan. The bank’s agreement is necessary before the SBA will get involved.

Can I get an SBA loan to refinance present debt?

Yes. Debt refinancing is allowed under the SBA programs. It is not the preferred form of SBA involvement, but it will be supported if the refinancing has a beneficial business consequence. Refinancing just to get out of a jam is usually not favored. 

How do I keep track of my money?

In two ways. Know what is happening now with your money and know what is likely to happen in the future.To keep track of what is happening now is a matter of recording money coming in and money going out. If you are a small sole proprietorship business, it is important that you keep your personal money and your business money separated. When you mix the two, you soon will not know what is happening. You can use a business bookkeeping book from any stationary store or you can get an inexpensive computer program.

To know what the future of your cash holds involves looking ahead a few months to what is likely to happen with your revenue and expenses. This involves projecting your sales and expenses. A spreadsheet (paper or computer) is the best tool for doing this. List the items of cash coming in and cash going out down the left side of the spreadsheet and make each column a week or month. If you have some history of operations, start with that and estimate the future. If you don’t have a history, study like kind businesses.

Keeping track of your business money is very much like keeping track of your personal money. If you apply good personal money management practices to your business, you will be okay. 

What are some of the ways I can finance my business?

There are a number of places to get money for your business. They are listed in their order of use:

  • Your own resources – cash, savings, personal assets
  • Relatives and friends
  • Suppliers and vendors
  • Credit cards
  • Banks (with and without government guarantees)
  • Leasing contracts
  • Receivables financing
  • Fixed asset financing and mortgages
  • Private investors (venture capitalists)

Approximately 75% of small business startups get their money from their own resources and relatives and friends. Some get additional help from suppliers and vendors as well as the use of personal credit cards. Only about one in four use borrowed money from banks and other lenders. Leasing, while technically not borrowing, is used to acquire equipment and other assets without heavy outlays of money.

Borrowing against accounts receivables and fixed assets is used by established businesses and private investors sometimes assist in high growth and high profit situations. 

What do I do if I run out of money?

First, don’t panic. Running out of money or nearly running out of money is common in business. The more notice you have that you will run out of money, the easier it is to do something about it. Time is an asset that allows you to work the problem.However, if you do find yourself suddenly out of money for whatever reason, shift into a cash conservation mode. Stop all spending and speed up revenue generating activities. Even essential spending can be stopped for a time until you assess your situation. It is better to give notice to those expecting to be paid that you can’t pay them right now than to run completely out and for sure not be able to pay them anything. With what little cash you have or can muster quickly from increased sales activities, you can parcel it out to those making the most noise or controlling some critical aspect of your operation.

While you hold on to whatever cash you can gather, lay out a plan. Your plan should be in two parts. Part one is to get you past your immediate cash problem. Part two is more long range and seeks to identify the causes for running out of money so those causes can be treated.

Creditors are usually more understanding of your difficulty if you communicate with them and let them know what you are doing to get them their money. If you tell them nothing and let them find out about your problem through the grapevine, your ability to deal with them is reduced. Generally, people respect those who face a problem head on and say what they are doing to fix it.

No matter how bad your cash problem may be, it is made worse by trying to hide it or run from it.

Can I get special treatment as a minority or woman owned business?

Yes, but perhaps not as much as you may think. There are special programs and preferences for these groups, but they are not as significant as believed by the general public.In loan applications, these groups still have to meet all the requirements and provide the same type of information as anyone. In government contracting, they still have to compete and they have to perform. In business advising and other assistance programs, they are often singled out for special attention, but receive no concessions or waiving of requirements.

Most of the laws and regulations seek to protect these groups from discrimination rather than offering them special privileges. The commonly held belief that there is money available to these groups that is not available to others is largely untrue. 

What if I borrow money and can’t pay it back?

You will be shot at sunrise! No, only kidding.Failure to live up to the terms of your borrowing agreement is a problem, but not a fatal problem. Usually what happens is that some new arrangement is worked out between you and the lender that allows you to catch up. It is not uncommon for business events to cause payment difficulties. If the borrower is open and honest with the lender and is willing to agree to some workout arrangement, this difficulty can be handled.

This said, however, it is important to remember that the lender has every right NOT to cooperate with your workout efforts and force you to abide by the strict terms of your loan agreement. Before signing any agreement, therefore, be as certain as you can that you can make timely payments. A good business practice is to have a backup fund to protect you in such situations or to keep your debt low in relation to your cash generating capabilities.

Too much debt won’t necessarily get you shot at sunrise, but it might make you wish you had been. 

Can I get a loan with bad credit?

Probably not. A bad credit history is interpreted by most lenders as an indication of poor money management capabilities. You may not be a bad money manager, but they will think that nevertheless. Your credit report or “credit score” is one of the acid tests you must pass.About the only time a bad credit history will be overlooked is if other aspects of the loan request are especially strong. If, for example, you are pledging some CD’s in the amount of the loan, you will probably be able to borrow even with a bad credit history.

Advice given to small business owners with bad credit is to try to go without borrowing. If they must borrow, make their application as strong as possible to lessen the impact of the bad credit. Offering to pay higher interest, giving more collateral, and things such as these will sometimes sway the lender -–but don’t count on it. 

Can I get a loan if I have taken bankruptcy in the past?

Probably not. Although filing bankruptcy is not the stigma it once was, it is still viewed as a large red flag to lenders. Most will not even talk to you with a bankruptcy on your record. They usually don’t care to hear the reasons. If it is there, it is a big problem and usually a disqualifying circumstance.Think of the poor loan officer who approves a loan to someone who has a bankruptcy and that loan goes bad. There is simply too much risk for the loan officer. 

Can I sell stock to the public?

Yes, if your business fits the criteria of successful public stock offerings. The great majority of small businesses do not. They do not for a large number of reasons. To find out if your business qualifies, an investment banker is the specialist to see.Public stock offerings are expensive and require expert guidance. They are not “do-it-yourself” projects.

A limited sale of stock to a limited number of public shareholders is possible and less expensive, but expert guidance and advice is necessary here also. An investment banker is again the person to talk to. 

Can I get money from a venture capitalist?

It isn’t likely. Venture capitalists finance a very small fraction of businesses. They are extremely particular about who they invest in and they are quite demanding. Their minimum requirements are such that most small businesses are excluded from consideration.They usually look for business prospects with unusually high growth potential and/or unusually large profit prospects. They demand high rates of return on their money (25% to 50% minimums) and they require significant input into the operation of the business.

There are a number of venture capital firms throughout the United States and they will usually review proposals that meet their minimum requirements. Of the proposals reviewed, only a small fraction will be picked.

Notwithstanding this negativism, for a small number of businesses, venture capitalists can be an important source of money.

What is an investment banker?

An investment banker is not a banker in the usual meaning of the term. An investment banker is a specialist who deals as an intermediary between a business who desires to sell stocks or bonds to the public and investors who want to buy these items from new or existing companies.Investment bankers guide a business through the preparation process in getting ready to sell securities and deal with the investing public in getting them ready to buy. Often, the investment banker acquires an ownership position in the securities, at least temporarily. They make their money from fees and from the spread between what the public pays and what the business receives for the stocks or bonds.

Should I buy a franchise?

Read these questions and answers, do your research and you will have your answer!

How should I research a franchise?

Begin with the information provided by the franchiser. Get everything they will give you. Study it.Question it. Compare it. Contact other franchisees that presently have that franchise and ask them pointed questions about their experiences with the franchiser. If possible, contact past franchisees to learn why they no longer work with the franchiser.Take your information and analysis to advisors and confer with them about what you have learned. ACPA, lawyer, Small Business Development Center advisor, SCORE volunteer, banker, or anyone else whose business judgment you trust, can be a valuable sounding board for you.

Look for information about the industry and the specific business from sources other than the franchiser. Trade magazines, suppliers of the business, libraries, Small Business Development Centers, and other research aids can help you get a more objective look at the franchise opportunity. Compare what you learn from these sources with what you are being told by the franchiser. Evaluate the promotional literature from the franchiser against this non-promotional, more objective data.

Compare the prospective purchase of this franchise against alternative ways of getting into this type of business. Would it be better or worse to start this business without the aid of the franchise? Would it pay you to buy a similar business that is not franchise connected?

In the later stages of your research, study and thoroughly understand the franchise agreement that you will sign if you decide to proceed. It will control your relationship with the franchiser. What benefits, rights and obligations does it dictate for you? Can you live with its provisions even if the relationship with the franchiser does not always go smoothly? Here is a good place to pay for a review by a lawyer or aCPA.

Above all, control your enthusiasm to hurry and get started. Take your time. Study and learn before you decide. Most of the unhappy franchisees got that way by not thoroughly understanding the franchise relationship before they signed on the dotted line.

What is a Uniform Franchise Offering Circular (UFOC)?

This is the document supplied by the franchiser to prospective franchisees that describes in detail the franchise
offering. It should be the focal point of the initial review of the franchise. In the law, itsupercedes and overrules anything that is printed or said by other franchise literature and the sales persons representing the franchiser. In other words, if the sales person tells you one thing and theUFOC tells you something different, the UFOC rules.It is important to understand that the UFOC can be a legal protection for the franchiser. It is often used to defend against claims by unhappy franchisees that they were not informed or did not understand some aspect of the franchise agreement. If it was disclosed in the UFOC, most courts and judges have ruled that the franchisee was informed and should have known.

The potential danger for the franchisee is his or her lack of understanding of certain legal or technical wording in a UFOC. Lawyers are used to draft UFOCs and lawyers sometimes have a way of phrasing things in a way that makes them difficult to understand by the non-lawyer.

For this reason, it is a good idea to get legal help in understanding and interpreting UFOCs if you don’t feel comfortable with them.

Should I use a lawyer when considering a franchise?

Yes. Definitely yes. You may not need to consult with one early on in your investigation and review of a franchise offering, but you should definitely use one before you sign a franchise contract. The legal fee will be money well spent.

Should I use a CPA when considering a franchise?

If you are not comfortable with business numbers and business details, a CPA can be a valuable advisor. Since you will probably have need for the services of a CPA after you buy a franchise, you might as well establish that relationship before you sign up.

Are all franchises pretty much alike?

NO! They are not. They are as different as night and day. Some are large, well known and well established in the market. Others are small, unknown and not at all established in the market. As a matter of fact, most are the latter.While most franchise offerings tout the advantages of franchising, such as a tested business concept and established market position, most do not enjoy these advantages. It may be true of a few large, established franchises, but it is not true of most franchises.

It is dangerous to generalize about franchises. Some are good. Some are bad. Some make business success easier, but some make it more difficult. Some will give you good support in your efforts to establish a business and some will give you little or no support. Some are fairly valued and some are rip-offs. Some will rush to your aid if you have problems, but many will dump you.

How can you generalize about something as diverse as this?

Why are some franchises so expensive and some so inexpensive?

The quick answer is, “you get what you pay for.” Franchises that cost a lot of money usually give you more. They have tested business methods and more certain success formulas. They are recognized in the market and are in demand. People know them and want to do business with them. Often you can put one up and the people will come “just because they are there.” They have been pre-sold to consumers by the extensive advertising, prior business, and delivery of sound values.Inexpensive franchises usually offer less of these features. They are unknown in the market and not well tested. Often the franchiser company wants to open franchises in order to establish a position in the market. It does not yet have a recognized business or trade name and hopes to grow these with franchises. It does not yet have well tested business methods, but hopes you, as a franchisee, will help develop these methods. It does not have the capital to start multiple business locations and hopes to use your capital, and that of other franchisees, to build a chain of businesses.

Because of the economics of franchises, most franchisees buy the less expensive offerings. They are all that they can afford. What this means is that most franchisees are NOT getting what is offered by the higher priced franchises; namely, solid business systems and well established market positions. As a result, more caution, research and study is suggested. Failure rates are low with the high priced, well-established franchises. They are much higher with the low priced, un-established franchises.

Can I sell a franchise if I decide to get out of it?

Sometimes you can and sometimes you cannot without considerable difficulty. Read carefully theUniform Franchise Offering Circular and the franchise agreement for the details of how you can sell.Some agreements require that you sell the business back to the franchiser at a price favorable to it. Some require approval of the franchiser – approval that has various strings attached to it. Some place heavy penalties on you if you sell. Few will allow you to sell it as easily as you would a non-franchised business you might own.

Why is franchising so popular?

You will get different opinions about this, but the opinion of this writer is that franchising is popular for two main reasons: it works and it is heavily promoted.There is no question that as a method of getting into business, franchising works. If it didn’t, you would not see a franchise on every corner and in every industry. You would not have hundreds of thousands of them offering everything from food to cleaning to real estate services.

The second reason for the popularity of franchising is the heavy promotional selling that exists. Look at any business magazine, trade publication, late-night television, and other places and you will see an endless array of franchise offerings. It is difficult to find a business that is not being offered as a franchise.Just about anything you want to do in business can be started as a franchise – often for little money.

Selling franchises has become a business for many. They are not as interested in selling a product or service to the consumer as they are in selling a franchise to YOU. That is how they make their profit. The more they sell, the more profit they make.

The more unscrupulous franchise businesses will even do what is called “churning” franchises.This is the practice of doing things that encourage the turnover of franchises so they can be resold. If the franchise is the “product” and the profit is made by selling the “product,” the more times you can sell it, the better. If a franchise that has already been sold can be resold, that is another sale. Some franchise companies engage in this practice to enhance their profits.

Which franchises should I avoid?

A general answer to this is to avoid those that do not strictly fit your purposes and capabilities after thorough research by you and your advisors. A more specific answer might be to avoid or be weary of those franchises that exhibit the following characteristics:

  • They seem more interested in selling you a franchise than in learning whether or not you are likely to be successful in operating the franchise.
  • They do not want you to talk with existing franchisees.
  • They will not give you much information about their franchise.
  • They require money from you before they will give you information.
  • They will not give you general sales and earnings histories of their franchisees.
  • There seems to be no established market demand for the product or service offered by the franchise.
  • They do not seem to be respectful of you or your rights as a potential business “partner.”

Do I always have to operate a franchise as the franchiser tells me?

Not always. It depends on the franchise. Some will require you to conform to fairly rigid operating rules. Others will give you a lot of latitude to operate the franchise as you see fit. The Uniform Franchise Offering Circular and the franchise agreement that you will sign will outline how closely you will have to follow their direction.

How do I find out what franchises are available?

Look in business magazines and other business publications. Check the library and Internet under “franchises.” Visit your local bookstore chain and ask about books and magazines on franchising. Watch for franchise trade shows and fairs. Talk with your local Small Business Development Center.

How do I know which franchise is best for me?

Start by writing down what you want from a franchise and what capabilities you have in terms of money and skills. Make special note of the kinds of business activities you think you would enjoy doing.Then look for franchise offerings that match your objectives. When you find one, get all the information you can about that franchise and that type of business. Study it. If it continues to fit your objectives, research it further. If not, discard it and go find another.

Put your final list of a few possible franchises to the severe test of in-depth scrutiny by you, your CPA, a lawyer, possibly your banker, and any other business advisor whose judgment you trust.

Take your time and be thorough. Don’t get carried away with enthusiasm. Don’t be pressured by sales literature or a sales person. Build a good level of confidence before signing anything or paying any money.

Will a franchise teach me how to run that business?

Sometimes yes and sometimes no. The degree and extent to which you will get training from the franchising company will be detailed in the Uniform Franchise Offering Circular and the franchise agreement. Read them carefully to find the answer to this question.Most franchises will offer some training. Often it is minimal and confined to procedural matters such as how to keep records and how to report and pay fees. If it is a franchise where your operations will be highly controlled by the franchiser, your training may be more extensive. If, on the other hand, it is a franchise where you can do pretty much as you please, your training may be just a couple of days.

Often, this training is NOT in such things as business management, marketing, finance, accounting, or other basic business matters vital to the successful operations of a business.

Is it better to buy a franchise or start a business from scratch?

The answer to this is one of those “it depends” answers. It is a question that is often asked by those interested in getting into a business for the first time. The problem with giving an answer is that it truly does depend on you.It depends on how much you know about business in general and how much about a particular business that interests you. It depends on how much you are willing to pay someone for an established business method or established market position. It depends on how willing you are to enter into a long-term contract with many, detailed provisions. It depends on how well you could start this business without the help of a franchise. It depends on what you want out of this business. It depends on what you plan to do with the business down the road. And the “it depends” list goes on. I suppose the real answer to this question is that there is no generalized answer that fits everyone.

If I buy a franchise, am I really an independent business?

This is a very good question. In a way you are, but in many ways you are not. Of course, different franchises provide different degrees of independence, but to generalize, you are not as independent as a non-franchised business.The cost of this lesser independence may well be worth it to you and may even be desired by you, but it is less independence nevertheless.

The franchise agreement will give you a good indication of how independent you will be. If you are required to sell only certain products or services, advertise in certain ways, set certain specified prices, conduct your business according to prescribed operating manuals, and otherwise carry on your business affairs according to someone else, you can hardly classify yourself as an independent business.

Indeed, some franchise owners have less independence than do hired managers who have no ownership or contractual ties.

Does a franchise offering have to give me earnings estimates for a typical franchise?

No, they are not required to give you this information. Many do not and will not, even when asked.Some will not provide this information because it would not help their sales effort in convincing you to buy a franchise. Others will not give it because they want to avoid the potential liability of being sued if a particular franchise does not measure up to their estimates.

When this information is provided, it is often watered down with qualifications that speak to the legal issues or it is so general as to be of limited use.

Some advisors, including this writer, will tell you to be weary if earnings estimates are not provided.

Do I always have to pay a royalty on my sales to the franchiser?

No. Royalties are not always required. The franchise agreement will tell you what money you will have to pay to the franchiser. Royalties should not be thought of as necessarily good or bad. Usually, they are paid because ongoing service and support is provided to you. They are payment for services or payment for market position. It seems only fair that if a franchise company has spent years establishing a solid position in the market, that you should pay something to come in and gain advantage from this.

Nevertheless, royalties are an added cost of doing business and can impact your profits. In doing financial projections, you should notice the impact of the royalty fees and ask yourself, “Is it worth it?” Since a royalty fee is usually paid on gross sales, it must be paid whether or not you make a profit and whether or not you can afford to pay your other expenses.

Do I always have to buy my supplies and inventory from the franchiser?

No. Many franchise contracts do not require this. Some give you the option of either buying from the franchiser or buying from another source. If it is required, it will be specified in the franchise agreement that you sign.

What do I do if I have a serious dispute with the franchiser?

The best advice is to work it out without litigation. You may not get your way, but if you take it to court, your chances of winning will decline. Unfortunately, this is true even when you are in the right and have most of the facts on your side.Using lawyers and the courts to resolve disputes should be a choice of last resort. It will probably cost you even if you win. Your chances of winning are hampered by a few simple facts about franchise disputes. These facts are:

  • Most franchise agreements require you to sue in the home state of the franchiser.
  • Some agreements require you to pay all attorneys fees – yours and theirs.
  • The franchise agreement is usually slanted in favor of the franchiser. Think of whose lawyers drafted the agreement in the first place.
  • Case law in franchise matters does not favor the franchisee.
  • Disclosures in the Uniform Franchise Offering Circular, which you are presumed to have read and understood before you signed the franchise agreement, protect the franchiser from many attacks.
  • The franchisers usually have more money for legal fees than do you.
  • The lawyers for the franchiser are accustomed to these disputes. Your lawyer may have limited or no experience in franchise law.

If a franchiser tells me something, but does not put that in the franchise agreement, what should I do?

Ask that it be put in the agreement. If it isn’t, it has no legal effect.

Why is the franchise agreement so important?

It is the governing document in your understanding with the franchiser. If something is not referred to in this agreement, it has little or no effect in law. This written agreement is presumed by the law to have been entered into by willing parties in possession of the necessary facts and knowledge to make sound business decisions. The law presumes this even if you did not have the facts or knowledge and even if you made a bad decision.Statements made by the sales person and information communicated to you in sales and promotional literature are negated and superceded by this franchise agreement. If the sales person looks you straight in the eye and tells you something is white when the agreement says it is black, the law and the courts will consider it black. That’s simply the way it is.

Can I sue the franchiser if I am unhappy with the way my franchise goes?

You can sue anybody at any time you wish. All you need is money, time, facts that are on your side, a franchise agreement that supports your case, and a willingness to deal with the uncertainties of litigation.

Who should I contact to learn about a particular franchise?

Talk to everybody who knows something about that franchise. This includes present franchise owners, past owners, the franchise company representatives, professional advisors such as CPAs and lawyers, Small Business Development Centers, SCORE volunteers, suppliers and manufacturers who supply that franchise, employees who work or have worked in that franchise, and anybody else you think might have information.

Can an SBDC help me with a franchise?

Yes. Small Business Development Centers can help you in many ways. It can help you organize your research effort. It can help you find answers to some of your questions. The SBDC Research Network in New York can help dig out facts for you. Required financing can be prepared for with the use of SBDC’s and the SBA loan guarantee programs. Bank and SBA financing sometimes favors franchise businesses.

Will a franchise give me marketing strength and significant support?

Even though most franchises will tell you “yes,” the preponderance of numbers says “no.”Of all the thousands of franchises being offered for sale in this country, only a small percentage will give you marketing strength and significant support. These are the big ones we all know about and see every day as we drive down the street.

The thousands that we do not see or know about, except in an advertisement seeking to sell the franchise,do not give marketing strength or significant support. They may claim to or they may hope to someday, but now do not.

Will a franchise give me a proven business system?

If you mean by “proven business system” a system that has been tested and proven in the market many times over and has shown the capability to produce profits more often than not – the answer is often NO. The large, well-known franchises do provide this. They have proven business systems.For the others, they range from partially proven to not-at-all proven. For new franchise offerings, the business system has only just been put together, to say nothing of tested or proven. Often, you may be part of the test if you join the franchise.

What is the most common complaint of franchisees?

Lack of support from the franchiser. Sometimes this complaint of poor support is because the training to run the franchise is not what the franchisee thought it would be. Other times it is because in times of difficulty, the franchiser is not there to help solve problems.

Can I get financing from the franchiser to help me start?

Usually not. Seldom do franchise companies offer this. They are looking to you to provide this money. If you need help, they expect you to borrow it or raise it on your own.Sometimes a franchiser will provide some financial help by way of short-term credit on inventory purposes or partial deferral in the payment of franchise or royalty fees.

One of the reasons they want you is that you provide an additional source of capital for them.They are not there to provide capital for you.

Do I have a better chance of success with a franchise?

There is a division of opinion about this. Most of what you read and all franchise companies will suggest that the answer is definitely yes. Even the U.S. government, the Small Business Administration, and the U.S. Commerce Department will say yes.However, some research questions this belief. This research questions the validity of statistics that support a yes answer.

Some of these statistics come from the franchise industry itself and use reporting practices that distort results. At least one study has shown the opposite to be true: non-franchised businesses showed a higher success rate than like-kind franchise businesses.

The reason many would argue for a yes answer is that when we think of a franchise, we think of the large, well established franchises. We do not think of the many small, startup franchises with no real market position or business method. If you were to focus on these, which comprise the great majority of franchises, it is easier to understand why there are many franchise failures.

One study of a few years ago compared the franchise companies listed by Entrepreneur Magazine at two periods of time five years apart. This study showed that 70 percent of the franchise companies listed in the earlier report were not shown in the latter report five years later. Where did they go? Where did all the franchise units go that were sold by this 70%?

Will I need more or less capital to start a franchise than to start a non-franchise business?

Not a great deal is known about this, but some studies have shown that it costs more for the franchise.This sounds reasonable since in addition to paying for the usual startup costs of a business, the franchisee must also pay a franchise fee and other costs associated with evaluating and purchasing the franchise.

If a franchise will cost more to start, can I expect to earn more?

With some, yes, but with others, no. The large established franchise businesses will probably offer you better earnings than you could realize on your own without the franchise. On the other hand, one study of 7,270 businesses showed the non-franchise businesses earning much more than the franchised businesses.In order to earn more with a franchise, the higher costs of belonging to the franchise group must be more than offset by the market or operating advantages offered by the franchise association.

Are there any good Internet sites on franchising?

Yes, try Franchise Times, a franchise publication that deals with the interests of franchisees and potential franchisees. It has many good features including the 200 top-rated franchises. You can also try Be the Boss, a great site for people interested in franchise possibilities.

What insurance do I need for my business?

To answer this, let’s first think about what insurance is. It is part of risk management. The risks in business, as in life, are always present. They are managed by avoidance and by monetary coverage if they can’t be avoided. You can cover the money part of this management either by having money available to cover risk or by paying others to help you with money if you have a loss. This paying of others is what we usually call “insurance.” However, the concept of insurance also covers what some call “self-insurance.” This is when you do not buy an insurance policy from others, but cover any losses out of your own money.In non-business matters, we all self-insure to some extent. The deductible on your automobile insurance is self-insurance. You pay that first $500 or $1000 of loss. Your insurance policy pays the rest. Your hospitalization insurance has an element of self-insurance built into it, for you usually have to pay part of the medical bill. Your insurance only pays 80% or some other portion of it. To buy 100% medical coverage is very expensive – more expensive than most of us choose to pay.

What insurance you choose to buy for your business and what risks you decide to self-insure are business decisions you have to make. Usually these decisions are made on the basis of cost, probability, and severity. The cost of the insurance you buy is important because it is money out of your pocket that could be used for other business purposes. The probability of suffering a loss is important because some risks are highly probable and others are infrequent or not likely to occur. Finally, the severity of the loss if it does occur is important because some losses are so severe that they can wipe you out, such as a major fire or a legal judgment for a large amount of money.

In business, there are many types of risks. For most risks, outside insurance can be purchased. You can buy insurance against losses from fire, theft, natural disasters, loss of profits, lawsuits, mechanical failures, death, injury, hospitalization, and the list goes on. Which of these you decide to cover with insurance and which you choose to cover with self-insurance depends on an analysis of your business. Each type of coverage has a different cost. Some are cheap, such as liability insurance, and some are expensive, such as loss of profits.

An approach used by many small business owners is to assess the various risks in the business and then consult with an insurance broker on the costs of the various coverages. The owner can pick those coverages most appropriate for his business and can buy within the confines of his budget. Clearly,many small businesses can’t afford to buy much insurance.

As for what insurance your business MUST have, that also depends on the business. Unless some regulatory agency, lending bank, or landlord requires you to carry some form of insurance, you don’t have to have any. Many small businesses operate with little or no insurance coverage. They are essentially self-insured. If they have a loss, they either cover it out of their own funds, borrow what they need, or they fail as a business. It should be clear to you that there is no easy answer to this question.

How much will insurance cost?

The best way to determine this is to consult with a business insurance broker. Discuss your needs and obtain quotes for the various types of coverages you want. Remember, insurance rates are competitive. Not all insurance companies charge the same. It will pay you to shop

Do I legally have to have any insurance?

Not unless you have a loan, lease agreement, property rental agreement, equipment time-purchase plan, or some other contract that specifies that you must carry insurance as part of the contract.Sometimes state or federal governmental agencies might require you to carry some form of insurance coverage, such as Workers’ Compensation Insurance. 

Should I have a lot of insurance or as little as possible?

Since insurance is a business expense, you should have as little as possible given the risk probabilities and risk severity associated with your business. Questions to ask yourself are these:

  • If this (risk of loss) happened, how would I handle it?
  • How likely is it that I could suffer this loss?
  • How bad a loss would it be?
  • How much money do I have for insurance?

Experienced business owners in your line of activity and business advisors can sometimes help you decide. 

Do I need liability insurance?

Most advisors will tell you to carry some liability insurance. It is relatively inexpensive and can protect you from a variety of risks. Nevertheless, many small businesses operate without it. Businesses that are likely to cause injury to others – or are likely to be sued by others usually carry this type of insurance. 

What is self-insurance?

Self-insurance means you make some provision to cover losses from a risk. It does not mean that you simply go without insurance and make no provision to cover losses should they occur.Some self-insurance involves a fund or reserve of money for losses. Many small businesses will self-insure against medical costs of employees by paying into a company fund and using this fund to pay medical expenses.

Other forms of self-insurance provide for general business savings to cover losses. 

If I operate my business from home, will my homeowners’ insurance cover me?

Probably not. Business operations are usually excluded from homeowners’ coverage and can actually negate some coverages. It is best to check with your insurance carrier to be sure. 

What is Workers’ Compensation Insurance?

This is a type of insurance that comes into play when an employee is injured on the job or when performing official business duties. Usually, this insurance pays money to the injured party instead of you being sued for damages.In some jurisdiction, this type of insurance is required. Even if not required, it is usually considered a wise insurance purchase. 

Should I have a general insurance agent?

Probably yes. A general insurance agent can be a valuable advisor to a small business. Risk management is an on-going concern to a business owner. Having a knowledgeable specialist available to answer questions and provide advice is a good idea.

How do I know I am not paying too much for my insurance?

By shopping and comparing prices. Insurance costs are not uniform. As with most other things you can buy, it is possible to get a bargain and it is possible to get ripped off.Because the terms of insurance policies are not identical, it is important to see that you are comparing apples with apples. A less expensive policy with different provisions may not be a bargain. A more expensive policy with more benefits may not be a rip-off. You must read the fine print.

This is where a trusted insurance agent is valuable. He or she can help you understand the language and provisions of insurance policies and help you protect yourself from overpayment. 

Should I have a lawyer review any insurance contract?

You can if you want to bear the expense of a legal review. Sometimes this is smart and sometimes it is a waste of money. Often a review by your insurance agent is enough to help you understand. However you gain an understanding of your insurance contracts, you should know what they say and what you are buying.If you can’t interpret them by yourself, by all means get some help – legal or otherwise. 

Should I buy “loss of profits” insurance?

You probably can’t afford it. It can be expensive and difficult to collect on. Like other categories of insurance, you can look into it and decide based on its cost, probability and severity. Most small businesses do not carry it. 

Should I have high deductibles on my property insurance?

High deductibles lower your insurance premiums. In effect, you are assuming some of the risk of loss yourself. If you can afford to handle the loss represented by the deductible, and if the probability of occurrence is low, a high deductible is probably a good choice.Automobile collision insurance is a good example. A $500 deductible policy will cost more than one with $1000 or $1500 deductible. If you have few accidents and you can afford to handle the first $1000 or $1500 of loss, having a $500 deductible policy and paying the higher premiums year after year is usually a waste of money.

How is a small business defined and what is the certification process?

For the purpose of SBA procurement assistance, a business generally is considered small if it is a business entity organized for profit, located in the United States, and which operates primarily within the United States or which makes a significant contribution to the U.S. economy through payment of taxes or use of American products, materials or labor. The business entity must further qualify under the criteria set forth in the SBA Small Business Size Standards Regulation, Title 13, Part 121 of the Code of Federal Regulations. In making a detailed definition, the SBA may use a number of criteria, including the number of employees, annual receipts, affiliates, or other applicable factors. For information on specific industry classifications (manufacturing, construction, services, transportation, refined petroleum products and research development, development and testing) and refinements of the general definition of a small business, contact your local SBDC.

What is Federal Business Opportunities (FBO)?

The Federal Acquisition Regulation (FAR) small business/simplified acquisition threshold is $150,000. Every effort is exerted to award contracts under $150,000 to small business, as long as adequate price competition exists. All Federal government procurements over $25,000 are now required to be posted on the Federal Business Opportunities (FBO) website, beta.sam.gov. Contact the Government Contracting SBDC for more information.

How do I find out who in the government purchases my product or service?

Check the Federal Procurement Data System, www.fpds.gov, to see who has purchased your products or services in
the past most often. Procurement Forecasts on each agency’s website are also helpful. The Federal Business Opportunities (FBO) website, beta.sam.gov, also shows current and recent procurements for all sorts of items. The Center for Government Contracting SBDC has other databases which can also assist. Contact the Government Contracting SBDC for more information.

What is an IFB, RFP or RFQ and what is the difference?

Although these terms (spans) are still used, two of them now have different meanings than they did in the past. IFB now refers to Sealed Bidding and RFP now refers to Negotiated Procurement. RFQ still refers to requesting oral or written prices on small purchases. Contact the Government Contracting SBDC for more information.

What is a DUNS number, why do I need it, and how do I get one?

DUNS stands for Data Universal Numbering System and is used by the government to identify each contractor and their location(s). The number is also required to register with the Central Contractor Register (CCR) that is used by the government’s Electronic Commerce/Electronic Data Interchange (EC/EDI) system. If you do not have a DUNS number, the government has an arrangement with Dun and Bradstreet (D&B) to provide one at no cost. You can contact D&B at 800-333-0505. Employees from D&B may try to sell you products or services during your call. Under no circumstances are you obligated to buy these to get a DUNS number. Some clients have paid up to $500 for things they did not need. A DUNS number is free! Contact the Government Contracting SBDC for more information.

What is the 8(a) Program?

The 8(a) program name is from Section 8(a) of the Small Business Act. The Act, as amended by Congress, created the 8(a) program so that the U.S. Small Business Administration (SBA) could help small companies owned and operated by socially and economically disadvantaged persons develop their businesses.One of the business development tools of the 8(a) program is the award of Federal contracts. Under the program, SBA acts as a prime contractor and enters into contracts with other Federal Government Departments and agencies. In its role as a prime contractor, SBA awards subcontractors for their performance by certified companies.

SBA also has another set-aside program, the HUBZONE Program, for some small businesses in high-unemployment areas. Contact the Government Contracting SBDC for more information.

What about abandoning a contract?

If a contractor abandons a contract or fails to perform satisfactorily, the contracting officer may terminate the contract for default and charge the contractor the excess reprocurement costs ( i.e., the difference between the original contract price and the ultimate cost to the government). Contact the Government Contracting SBDC for more information.

What is the SBIR program?

The Small Business Innovation Research (SBIR) program is a highly competitive three-phase award system which provides qualified small business concerns with opportunities to propose innovative ideas that meet the specific research and development needs of the Federal Government. Contact the Government Contracting SBDC for more information.

Are there any special procurement programs and preferences for women-owned businesses?

The Federal Acquisition Streamlining Act of 1994 establishes a 5 percent government-wide goal for contract awards to small, women-owned businesses. The Small Business Administration (SBA) is determined both to establish aggressive goals and to develop meaningful initiatives in cooperation with other SBAprogram areas and other agencies to ensure that these new goals are achieved.In February 2011, SBA inaugurated the Women-Owned Small Business Contracting Assistance Program (WOSB). Many NAICS codes where women are “substantially underrepresented” are eligible for set-asides and other assistance. See www.sba.gov/wosb or contact the Government Contracting SBDC for more information.

What is the System for Award Management (SAM)?

The System for Award Management (SAM) is combining eight federal procurement systems and the Catalog for Domestic Assistance (CFDA) into one database. SAM simplifies the entire procurement system. Instead of registering on the old CCR website for CCR and ORCA, all will be done on SAM. For further information, go to www.sam.gov.

What are the benefits of SAM?

The overarching benefits of SAM include streamlined and integrated processes, elimination of data redundancies, and reduced costs while providing improved capability. With SAM, one user ID and password will provide access to all the capabilities associated with registering to do business with the government, representing or self-certifying as a small business, and viewing business opportunities (the last to be added later). Also, representations and certifications now on ORCA will be available on SAM. 

How do I get a list of FSCs and PSCs?

These lists are available through the Government Contracting SBDC.

Why do I need so many different numbers?

Each of these numbers serves a separate purpose for DoD contracting.The CAGE Code (Commercial And Government Entity Code) is required because it is being used by current and legacy DoD Automated Information Systems to identify contractors doing business with the Department of Defense.

The DUNS (Data Universal Numbering System) is the identification number specifically selected for CCRbecause of its wide acceptance and recognition in the commercial marketplace. Both codes are used to validate CCR registration applications prior to completing the registration process.

The TIN (Taxpayer Identification Number) is required to facilitate electronic funds transfer and to comply with the Debt Collection Improvement Act, and for certain IRS 1099 income tax reporting requirements. (NOTE: Only certain finance and accounting personnel will have access to this privileged information. It will not be available to anyone else). For sole proprietorships, the TIN is either the owner’s Social Security Number, or EIN assigned to the business by IRS).

The TPIN (Trading Partner Identification Number) is similar to the personalized identification number (PIN) used to access private bank accounts. It is assigned after the CAGE and DUNS have been validated and the CCR registration is complete.

How secure is my information on the web?

The most sensitive information is bank account EFT information. This data is only releasable to the appropriate DoD finance community. Much of the information is not available for public query. For the releasability of a specific data element refer to the matrix. Vendor information that is not releasable to the public is protected and viewable only by those government users with a login and a password. Your entire vendor profile is only viewable if you provide your DUNS and TPIN

Where to Start? How do I get started doing business with GSA?

The best way to learn more about the General Services Administration’s (GSA) many contracting activities is to visit a Small Business Development Center — GSA’s “front door” to contracting opportunities. The center serving your area will help you become acquainted with GSA’s programs and requirements and point you to the contracting offices that buy the types of products or services you provide.Business advisors at the Small Business Development Centers can help you:

  • Find out if your product or service is purchased by GSA.
  • Get on GSA’s centralized or regional bidder’s mailing lists.
  • Learn about supply and service opportunities with GSA.
  • Obtain copies of Federal standards and specifications.
  • Receive bid abstracts on contract awards.
  • Obtain publications about Government procurements.

Businesses in the United States are recognizing more and more the reality that they function in a market that includes the entire world. No longer is competition limited to businesses nearby, in the neighboring state or across America. Today, competition comes from China, Indonesia, Argentina, Australia, and Poland. Goods made in these and other far-off countries are easily obtained by American consumers.

Likewise, consumers in these same countries desire American goods and services. U.S. businesses that take advantage of this worldwide demand enjoy advantages far beyond what is possible by selling only to domestic customers. Our globe has evolved into one trading unit with goods and services originating everywhere and shipped to customers living everywhere. The next time you purchase an article of clothing, a toy, or a household item, notice the country of origin stamped or printed on that item.

To assist U.S. small businesses in obtaining the benefits of international trade, the Small Business Administration and the Small Business Development Centers offer many aids.

Small Business Administration Office of International Trade

The programs of this office are targeted toward businesses specializing in international trade and range from technical and managerial assistance to financial help. These programs are administered through the SBA’s district offices. The following services and programs for exporters are available through the district offices:

  • Legal Assistance
  • Export Working Capital Program
  • International Trade Loan Program
  • Small Business Investment Company (SBIC) Financing
  • EXIMBANK-SBA Joint Guaranty Program

Call (800) 827-5722 for more information or contact the International SBDC.

U.S. Department of Commerce International Trade Administration (ITA)

ITA is the primary organization within the Department of Commerce that provides specialized information and business advising to businesses involved in international trade. The ITA assists American exporters inlocating, gaining access to and developing foreign markets and furnishes information on foreign markets open to U.S. products and services.

ITA’s operations are decentralized. To obtain services, contact one of the offices of the U.S. Commercial Service. Each office can provide information about:

  • Trade opportunities abroad
  • Tax advantages of exporting
  • International trade exhibitions
  • Foreign markets for U.S. products and services
  • Export documentation requirements
  • Market research
  • Export seminars and conferences
  • Many other services

The U.S. Commercial Service is one of the lead agencies providing export services through U.S. Export Assistance Centers (USEAC). USEACs are federal export assistance offices which streamline export marketing and finance assistance by integrating in one location the services of the U.S. Commercial Service, EXIMBANK, theSBA, and the U.S. Agency for International Development (AID). There are twelve USEACs:

Atlanta – (404) 657-1900

Baltimore – (410) 962-4539

Chicago – (312) 353-8040

Cleveland – (216) 522-4750

Dallas – (214) 767-0542

Denver – (303) 844-6622

Long Beach – (310) 980-4550

Miami – (305) 526-7425

New York – (212) 264-0635

Philadelphia – (215) 597-6101

Seattle – (206) 553-5615

St. Louis – (314) 425-3302

Although entering the arena of international trade may seem intimidating at first, the extensive assistance that is available makes the transition much easier.

What legal matters do I need to consider?

First, decide of the legal form of business organization you want to use. For most businesses, this will be a sole proprietorship, corporation, or partnership. There are also other less used forms such asS corporations, limited liability companies, and limited partnerships.To insure that you are operating a legal business, check with your local and state authorities to notify them of the nature of your business and learn if there are any permits needed. Most small businesses do not need a special permit, but some do. Your local city or county zoning board can help steer you in the right direction.

For tax laws, contact an office of the Internal Revenue Service for booklets and guides. The IRS will give you a free “New Business Kit”. Their Publication 334 also has a lot of useful information about small business tax matters.

Some businesses require special authorization from state agencies before they can conduct business. Certain health facilities, transportation businesses, businesses dealing in dangerous chemicals, food processors, and others must check with the appropriate state agency for permission to do business.

If you will be employing others in your business, the state Employment Commission can advise you of laws pertaining to the hiring, employment and pay of workers. There are also Federal laws in this area, but the state agency can advise you of these also.

In addition, almost everything that you will be doing in your business has a legal implication. Leases, contracts, credit, banking, equipment ownership, real estate – all have legal aspects which should be understood. Establishing and maintaining a relationship with a lawyer is a good business practice. When you need a lawyer to review one of these matters, you will have that specialist available. It is far better to use lawyers to keep you out of legal trouble than to wait to use them after you are in trouble. 

Should I hire a lawyer?

As with any specialist, a lawyer is valuable if you need one and a waste of money if you don’t need one. As a business owner, you will undoubtedly need the services of a lawyer now and then. If you will need one frequently, it might be more cost efficient to hire one on a retainer. If, however, you will only need one infrequently, you might locate one and establish a relationship where you can get and pay for what you want when you need it.In using lawyers, it is important to keep in mind that lawyers work with the law. They are usually not business people and often do not understand business issues. They should not be used for business advice unless they have clear competence to offer that kind of advice.

Since lawyers are expensive, especially for small businesses, they are usually hired with care and consideration to their expense compared with their benefit. If the business owner understands the law in certain areas, a lawyer is usually not needed. An example might be contracts. If the business owner is familiar with contracts and contract law, the expense of a lawyer to draft a simple contract is probably not needed. On the other hand, if the business owner is uncertain, the review of the draft contract by a lawyer will be money well spent. Once a contract is signed by you, it is usually too late to fix problems. The law assumes that you have read and understand a contract before you sign it. 

What do I do to set up a legal business?

For most businesses, this is easy. Simply decide of the form of business organization you want to use (such as sole proprietorship or corporation) and register your business accordingly. A sole proprietorship is registered at your local county courthouse and a corporation is registered with your state. If you need anyspecial permits or authorization to conduct your business, obtain these from the issuing agencies.Then get your tax information from the IRS and employment law information from the State Employment Commission.

Good advice is to use a business advisor, such as an SBDC or S.C.O.R.E. chapter, or a lawyer or accountant to guide you along. 

Do I need a lawyer to incorporate my business?

No. You can do it yourself with the help of a guide book from most large book stores or with the assistance of an accountant, SBDC, or other business specialist. The state agency that issues charters of incorporation can also help you with the forms and procedures. Nevertheless, many use lawyers because the cost is usually small and the help they offer can be beneficial.

Should I use a lawyer to draw up a contract or a lease?

Yes, if you do not feel confident of what you are agreeing to or if you want a legal review of the terms and conditions. The time for the lawyer is BEFORE you sign it, not after.Some contracts and leases are drafted in terms not easily understood by lay people. Words often have a different meaning in the law than in common usage. A lawyer can alert you to these differences. A lawyer can also help you understand the exact nature of what you are agreeing to. You may think you are agreeing to one thing, but the language of the contract or lease may mean something different. Sadly, some legal instruments are purposefully drafted to confuse or mislead the reader. 

What are the legal forms of business organization?

The most common are sole proprietorship, corporation, partnership, S-corporation, limited liability business, and limited partnership. 

What form of business organization should I pick?

Choose the type of business organization that best suits the needs of you and your business. There is no one best form for all businesses. The most common types of business forms are listed here. Investigate each before making your decision.

  • Proprietorship — has a single person as its owner and is the easiest form of business to start. The business owner is solely responsible for the business debts, there is no limited liability, and profits are taxed at the owner’s tax rate.
  • Partnership — an enterprise that has two or more people as owners. They receive tax benefits similar to those of a sole proprietorship. A partnership brings the business more capital and talents than one person alone can usually provide and the responsibilities of running the business are shared. The partners have unlimited liability, meaning all partners bear the responsibility for loss and, like the sole proprietorship, could lose personal as well as business assets if the business fails. Partnerships have a limited life – the partnership automatically ends if one partner dies or leaves the business.
  • Corporation — an “artificial entity” that can sue and be sued, own and sell property, and engage in business activities outlined in its charter. Stockholders in a corporation have limited liability — only the company loses when losses are realized and personal assets of owners (stockholders) are protected. Corporate directors are responsible for all activities of the corporation and officers are employed to run the corporation. Approval to form a corporation must be obtained from the Secretary of State in the state in which the corporation is formed.

Do I need any permits?

To find out if your business needs a license or permit to operate in your area, call your local authorities.The Texas Department of Commerce in Austin at 1-800-888-0511 provides information concerning specific permits or licenses for Texas. 

Where do I get a tax number?

Federal Tax ID Numbers are issued by the Internal Revenue Service. Call the IRS, 1-800-829-3676 and ask for the Business Tax Kit and/or other tax publications.If you have employees, you must get an Employer’s Identification Number issued by the Texas Workforce Commission. Contact the TWC at 512-463-2731 or visit your local office of the TWC. Ask for the forms needed to obtain your employer’s identification number.

Sales Tax Number are issued by the Comptroller of Public Accounts, Austin, TX. Call 1-800-252-5555 to order an application form, or ask for the field office located closest to you.

Why do I need a Federal Tax ID number?

For a number of reasons. Your Federal ID number is like a social security number for your business. It is a unique identifier for your business and is required or desired for a wide variety of business purposes. It helps to make your business legitimate in the eyes of the government and others with whom you do business. You will find it troublesome to conduct business without one.

What regulations apply to my business?

There is no quick or easy answer to this. As a business owner, the responsibility is yours to understand the regulations that apply to you. Fortunately, there is ample help for you to find out. Start by learning the details of your business and the industry in which it operates. An SBDC can help you, as can SCORE. Those knowledgeable about a specific business or industry come to know about the regulations that apply. Past and current business owners or managers are good sources of information, as are suppliers who operate within the industry.On the Internet, look at www.business.gov, which is the site for the U.S. Business Advisor. This is a resource offering access to information from dozens of government agencies and departments. It gives plain language guidance about federal regulations and compliance issues.

Often, direct contact with the governmental agency or department concerned is advised because they are current with information and are usually set up to offer quick assistance to small businesses asking for information. Many have prepared packets of information they will send to you free

How will my business profits be taxed?

Business profits are taxed in one of two basic ways: either to you directly or to a corporation you have formed to operate your business.They are taxed directly to you if you operate as a sole proprietor, a partnership, or an S-corporation. They are not taxed directly to you if you have a C-corporation. The C-corporation is considered by the tax laws as a separate person and is taxed under special rules that apply to C-corporations. The profits made by a C-corporation are not included in your personal income tax return. Only the money you receive from the corporation in the form of salaries and dividends are taxed to you personally. 

What can I expense in my business to save taxes?

You can expense most any money that you spend in the operation of your business that is not spent for inventory or equipment that has a life longer than one year. You can also expense depreciation of equipment with useful lives of more than one year as well as losses from inventory spoilage or obsolescence.The above quick answer is a generalization and oversimplification, for the tax laws relating to business expenses are complex. IRS Publication 334, the Tax Booklet for Small Business, is a good source of information about what is permitted in the way of business expense.

Different businesses and different industries have different rules relating to expenses. What is allowed for some businesses are not allowed for others. It is important that you understand the rules for your particular business. CPA’s, tax lawyers, the IRS, and other advisors are good sources of information on this subject. 

Should I use a C.P.A. to do my taxes?

Yes, if your taxes are complicated and you need that level of expertise. No, if your tax return is simple and straight forward. You can either do it yourself by following the IRS guide that comes with your tax form or by using a commercial tax preparer such as H & R Block. If in doubt, show your information to a commercial tax preparer and ask if they are competent to handle it.

Can I prepare my own tax returns?

Probably yes. Many small business owners are unnecessarily intimidated by a tax return. If you take the form one line at a time and follow the IRS directions, it is easier than you may think. Simple logic will tell you that if a commercial tax preparer will do it for you for only a few dollars, it can’t be too difficult.A residual benefit of doing your own taxes is what you learn about your business and the tax codes. This knowledge is useful in your decision making throughout the year. 

Can I hire my children or relatives and get a tax deduction?

Yes. This is a common practice of small family owned businesses. As long as the child or relative isperforming some needed service for the business and is paid approximately what a non-relative would be paid for the same work, it is allowed.

Can I buy a new car in my business and get a tax deduction?

Yes, provided the car is used in the business. If it is used exclusively in your business, you can deduct all of its cost and operating expenses. If it is used partly for business and part for pleasure, you can allocate the business portion and claim a percentage of its cost and expenses. There are some restrictions on luxury cars, so check the rules before you buy. 

If I operate my business from my home, what can I deduct from my taxes?

You can deduct all regular expenses associated with your business. This is no different from operating your business from a location outside your home.In addition, under certain circumstances you can also deduct a portion of your home expenses – that portion that relates to business use. There are some strict rules for this and you should know what they are before attempting to take any deduction for home office or home business use expense. Consult IRS Publication 334, the IRS, a CPA, a tax lawyer, or some other source familiar with these rules.

Do I need any permits? Where should I call for information on permits and licenses in Texas?

Most small businesses do not need special permits. However, many do. To find out if you need one or more, consult local and state authorities having jurisdiction over your area of business (see list of agencies, below.) People in your trade or industry can often tell you. SBDCs often know.

While not technically a permit, every business should be registered. A corporation is registered with a state agency via papers of incorporation and a sole proprietorship and partnership usually register with a local county courthouse by way of an “assumed name certificate.”

To incorporate, you need to file Articles of Incorporation with the Incorporation Office of the Secretary of State.

Corporations Section
Secretary of State

P.O. Box 13697
Austin, TX 78711-3697

For information on businesses and occupations that require state permits:

Texas Department of Economic Development

P.O. Box 12428
Austin, TX 78711
(512) 936-0100 or (800) 888-0511

For information on all state and city regulatory agencies:

Texas Department of Licensing and Regulation

P.O. Box 12157
Austin, TX 78711
(512) 463-6599 or (800) 803-9202

Registering your business name in Texas:

Navarro SBDC

Contact us

Sales & Use Tax Permit:

Texas State Comptroller’s Office

PO Box 13528, Capitol Station
Austin, Texas 78711-3528
(512) 463-4600 or (800) 252-5555

Workers’ Compensation Information:

Texas Department of Insurance, Division of Workers’ Compensation (TDI-DWC)

P.O. Box 149104
Austin, TX 78714-9104
(512) 804-4000 or (800) 372-7713

Insurance Issues:

Texas Department of Insurance

P.O. Box 149104
Austin, TX 78714-9104
(512) 463-6169

Unemployment Tax:

Texas Workforce Commission

P.O. Box 149037
Austin, TX 78714-9037
(512) 463-2699 or (800) 832-9394 and choose option 1

Food and Inspection Permits:

Restaurant/Bar Inspection District
City of Dallas

7901 Goforth Road
Dallas, TX 75238
(214) 670-8083

Texas Department of State Health Services

P.O. Box 149347
Austin, TX 78714-9347
(512) 458-7111