Start-Up

INFORMATION FOR
SMALL BUSINESS OWNERS
©2003, Paychex, Inc.
This information is furnished with the understanding
that the publisher is not engaged in rendering legal,
accounting, or other professional service.
If legal advice or other expert service is required, the
service of a competent professional should be sought.
Start-Up
INFORMATION FOR
SMALL BUSINESS OWNERS

Whether you’re involved in a new business

venture or thinking about starting a business
of your own, this guide may help you along
the road.

This booklet describes some of the initial

decisions and plans an entrepreneur must
make. It also gives an overview of federal
tax registrations and licenses, insurance
needs, and other related matters. For more
detailed information regarding these topics,
contact federal and state agencies, the Small
Business Administration (SBA), or local small
business chapters.
I want to start a company
and make it grow.
What do I do next?
You’ve made the decision to start your own
business. Carefully analyze the reasons and note
what you hope to accomplish for yourself. Meet
with others who have chosen to be entrepreneurs
and compare notes. Make a list and analyze your
personal characteristics and personality traits. Ask
yourself some questions: Are you a hard worker by
nature? Are you highly motivated to achieve? Are
you independent? Do you want to be your own
boss? Weigh any differences, between your personal
traits and notes you’ve gathered, that may factor into
your overall objective.

Risks and Rewards

Try to determine exactly what you hope to
accomplish by starting a business. List what you
consider to be reasonable rewards. Think about all
forms of rewards, not only financial. Try to assess
the risks involved and whether these are consistent
with the resources you have available and your
current position in life. Discuss the possibility of
starting a business with your spouse, family, and
close friends. Be sure they understand what is
involved and be sure you have their full support.
Begin to think about
what your business
might be, the products
or services that you
will offer, and the
market you will serve.
Finally, try to think of
ways the risks might
be reduced while still
leaving a reward level
that satisfies your
objectives. By now you
should have a pretty
good idea whether
entrepreneurship is
really for you.

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 What follows is a likely and reasonable sequence
of events that you can use as a guide in making your
plans for your new business.

The Big Idea

Selecting the product and/or service that will
be the basis of your business and determining the
particular market that you want to be in are by far
the most important decisions you will make. Try to
identify a distinctive competence that will give you
some competitive advantage by analyzing your own
special skills and the skills of your associates. How
might these skills give you an edge over your com-
petitors? Alternately, analyze the market you are
trying to address in an attempt to identify the skills
needed to have a competitive edge in that market.
Distinguish your offer by concentrating on narrow
product and market niches where your company can
be very good. Try to differentiate your offering in
ways that provide meaningful benefits to your cus-
tomers and avoid situations where price is the only
thing that differentiates you from your competitors.
Be innovative. Remember, it is not necessary to be
good at everything; however, it is crucial to be very
good at something.

Product/Market Matrix
In selecting your initial product or service and
the market you expect to address, it may be helpful
to construct a product/market matrix. Certain types
of products and markets seem to offer better oppor-
tunities for start-up companies. In general, it is
not desirable to attempt to enter a well-established,
known market with a product already being offered
or to try to enter an entirely new, unknown market
with a dramatically new, unproven product. There
is a wide range of situations between these extremes
that provides better prospects for success for a
business with limited resources.

Forms of Business
New ventures can be sole proprietorships,
partnerships, or corporations. This is a complex
question, so you should seek counsel from a skilled
corporate attorney and tax accountant. In the long
term, most businesses incorporate. While there are

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some disadvantages, most of the time the advantages
of incorporation outweigh the drawbacks.

Business Plans
In general, the purpose of a business plan is to
guide you like a road map to help you manage your
business, or as a selling tool for raising capital or
borrowing money.
Most entrepreneurs make their business plans far
too long, often hundreds of pages. A business plan
should not be any longer than 30 to 40 pages, as it
is more likely to be read and will invariably serve
you better. Do not be tempted to delegate the initial
preparation of the plan to a lawyer, accountant, or
outside consultant. The only person who should
prepare the business plan for a new venture is the
entrepreneur, not a surrogate.

Accountants, Bankers, and Lawyers

All three of these groups of outside professionals
will be very important to your venture. Most entre-
preneurs, however, have very little experience in
dealing with them. Some advice in picking these
professionals is to shop a bit before you choose. Be
certain that the personality and operating style of
the organization you are considering complements
your own and that you are personally comfortable
with the individual who is assigned to manage
your account. Also, it’s a very good idea to talk
with others whose opinions you respect and who
have used the accountant, banker, or lawyer you
are considering.

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How Much Money Is Enough?
The question of how much capital to try to raise
is always perplexing for someone planning a new
business. By projecting cash flow you can get a
pretty good idea of what you will need for the
business you have in mind.
If you expect to raise less capital than you think
you need, either develop a different plan based on
the lesser amount or start the business and put effort
toward raising more later. A desirable situation is to
raise more than you think you need. If this occurs,
take the money and run with it, increase the price
of the stock you are trying to sell and raise only the
amount of money you think you need, or redo your
business plan to develop a more aggressive program
that will utilize the capital you can raise. A danger
of raising more capital than you need is that it takes
the pressure off management to run a lean, tight,
efficient operation.

Where to Look for Start-Up Capital

The entrepreneur seeking start-up capital for a
new venture has a number of alternate sources to
consider: financing the company with personal sav-
ings, refinancing a home, cashing in on a retirement
fund, or borrowing from relatives or close friends.
Under certain circumstances, these sources might
be supplemented by a bank loan, even though most
banks do not get overly excited about lending
money to a new business without assets or a history
of profitable operations. If your capital requirements
exceed your personal resources, an alternative is to
sell stock to a small group of
individual venture investors
using an approach called
private placement. Still
more sophisticated sources
of capital are a formal
venture capital fund or
corporate venture investor.
Some entrepreneurs have
raised initial start-up capital
by going public – that is,
selling stock in small dollar
amounts to as many
investors as they can find.

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Though most financial experts advise entrepreneurs
not to go public too early, much depends on your
particular circumstances.
In addition to all of these recommendations,
you should not overlook federal, state, and/or local
governments as a viable financial source. There are
a multitude of programs at all levels that may be
available to your business. Anyone who has started
a new business relying entirely on personal finances
will in most cases find the prospect of having out-
side investors appealing. Outside investors allow
greater access to more capital, reducing your own
financial risk substantially.

Outside Investors
A relationship with an investor is similar to a rela-
tionship with a bank. An equity investment from an
investor is a liability that must be paid back just like
a bank loan. However, the investor’s expectations are
different. An investor in a risky start-up expects sub-
stantial appreciation of capital, say five to ten times,
over a five-year period. If your business cannot
provide the potential for this type of appreciation,
do not sell stock to outside investors.
Additionally, venture investors want eventual
liquidity, the ability to sell their stock and realize
the gain. This usually means either going public
or merging. Unless your company has considerable
potential for growth and you are willing to either go
public or merge, you should be careful about taking
on outside investors.

Where You Can Get Help

Today there are countless resources to draw from
when starting a business. The best place to begin is
other entrepreneurs with whom you can test your
ideas and get some reactions to your plan for start-
ing a business. You will be surprised how often a
person who has started a successful business will be
willing to spend time with you.
Another alternative is a course in entrepreneur-
ship. These courses are taught in over 500 colleges
and universities in the United States. Most require
the preparation of a business plan as a term paper,
and you will almost surely get a critique from the
course instructor and other students.

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 The Small Business Administration has a number
of programs available to help someone starting a
business. Small Business Development Centers
(there are about 600 throughout the country)
offer an assortment of programs, individual advice,
and publications at no charge. Finally, there are
countless books, magazines, audio and video tapes,
and information on the Internet specifically intended
to help people starting their own businesses.

Details, Details, Details

Licenses and Permits
There are two general reasons government
requires licenses and permits:
1. Raise money by levying a tax on doing
business.
2. Protect public health and safety and maintain
building aesthetics.
Other reasons licenses and permits may be
required:
1. Location of your business.
2. Amount of money spent on remodeling to meet
building codes.
3. Zoning.
Laws and ordinances are frequently amended, so
check with the appropriate government agencies to
determine if licensing and permits are required
and/or the types of licenses and permits required.

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Federal Registrations and Licenses
There are two tax registrations at the federal level
you should know:
1. An employer identification number (EIN), also
known as a federal tax identification number,
is used to identity a business entity. Generally,
businesses need an EIN and must file Form
SS-4 to obtain their number.
• Form SS-4 can be obtained online
(www.irs.gov/business/small) or through your
local IRS office, Social Security Administration
office, or from a Paychex sales representative.
Apply Online: From the above Web site,
link to the online application. Once you have
completed all necessary fields, preliminary
validation is performed, and an EIN will be
issued after the successful submission of the
completed Form SS-4.
Apply by Mail: Send the completed Form SS-4
to your local IRS service center. Processing
time may take four to five weeks.
Apply by Telephone: To save time, complete
your Form SS-4 and then call toll-free
1-800-829-4933 (weekdays, 8:00 a.m.-5:30
p.m. Eastern Time). You will receive your
EIN immediately.
Apply Through Your State Office: A number of
states allow businesses to apply for an EIN
from their state office. Visit your state’s Web
site for more information.
• All returns or documents filed with the IRS
must be accompanied by taxpayer identifica-
tion number or social security number (EIN
or SSN). The EIN or SSN must also be on
any returns or documents filed (Form 1099)
that report: dividends, royalties, interest, and
amounts you paid in the course of your
business for certain types of payments that
total $600 or more a year.
• If you have not received your EIN by the time
your first tax deposit is due, a deposit must be
made to the IRS, not an authorized bank.

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 • If you have not received your EIN by the time
a tax return must be filed, write “Applied For”
and the date you filed in the space where your
EIN should go on your return. Be sure to file
on time.
2. Electing to become an S corporation from a
regular corporation.
• Shareholders must sign and file Form 2553
(Election by a Small Business Corporation)
with the IRS.
• The company must be a domestic corporation
organized under federal or state law; have
only one class of stock; and have no more
than 35 shareholders. Shareholders must
be individuals, estates, and certain trusts;
partnerships and corporations are excluded
from holding shareholder status. Shareholders
with non-alien status are restricted from
shareholder status.

State Requirements
Because each state has its own licensing and
permit requirements, it is a good idea to check
with your state agency before proceeding. State
agencies often offer free or inexpensive publications
designed specifically to answer questions on state
requirements for your business. New Business
Kits, customized for each state, are also available
through Paychex.

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Insurance Needs
Perhaps one of the most important aspects of your
business is a well-planned insurance program. Find
an insurance agent that specializes in your particular
type of business, and spend time with the agent
reviewing the different types of insurance coverage
and the concerns of your particular insurance needs.
Purchase the coverage that will match the needs you
have defined. Remember: more does not necessarily
mean better.

Types of Insurance Available

Property
A great majority of property insurance for small
business is written in one of three different forms:
Basic Form covers losses due to fire, lightning,
explosion, windstorm or hail, smoke, aircraft or
vehicles (does not cover a loss or damage caused
by a company-owned vehicle), riot, vandalism,
sprinkler leaks, sinkholes, or volcanoes.
Broad Form covers everything that is covered
in Basic Form with some additional protection,
including breakage of glass that is part of a
building or structure, falling objects, weight of
snow or ice and water damage.
Special Form covers all risk of physical loss
except where the policy specifically excludes or
limits the loss. This provides the most coverage.
Liability
General liability provides protection against perils,
including injuries incurred by your customers or
guests. However, general liability insurance does not
cover punitive damages, instances of intentional
injury to a customer by an employee, or injuries
caused by products that are defective or by motor
vehicles, or an employer’s liability in the instance
of a worker who is injured on the job.
Product
Product liability insurance is necessary if your
business manufactures, distributes, or sells a product
that could cause injury to a person.

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Vehicle
If you intend to have your employees drive
business-owned or employee-owned vehicles, you
should carry vehicle insurance. Vehicle insurance
will provide protection against any damages or
injuries caused by the employee.
Workers’ Compensation
Workers’ compensation provides coverage to
employees injured on the job. All businesses with
employees are required to carry some form of work-
ers’ compensation in order to protect the employer
against punitive damages. The amount of money
that can be recovered by an employee is limited,
recovering only for medical treatment and lost
wages. However, in some serious cases, an employee
may be rewarded for future earnings if impaired by
the injury.
• Each state has its own laws that provide
guidelines for employers to follow within that
respective state.
• Insurance rates are determined by the state in
which your business resides, what type of work
your employees are required to do, and the
company’s safety record.
• Workers’ compensation does not cover
independent contractors. However, if you label
an employee incorrectly as an independent con-
tractor and that person incurs an injury while
performing work for your company, you may
have to pay to cover medical bills and lost wages
that ordinarily would have been covered by
workers’ compensation.
Disability
Disability is used to offset lost wages if an
employee cannot work due to an off-the-job illness
or injury. This type of insurance also varies from
state to state.
Business Interruption
If your business is destroyed by fire, earthquake,
or tornado and you are covered by business
interruption insurance, your lost income and any
expenses incurred to keep your business going
during rebuilding or repairing are covered.

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New Employee Hiring
Obtaining certain information from each new
employee hired is required. New employees must
provide you with their social security number (SSN),
a completed Form W-4 (Employee’s Withholding
Allowance Certificate), and a Form I-9 (Employment
Eligibility Verification), completed by both you and
the employee.
Employers are required by law to report informa-
tion about any new employee to their appropriate
state agency within 20 days of the employee’s date
of hire. State agencies use new-hire reports to locate
parents and enforce child support payment orders.
As part of our payroll service, Paychex handles all
of the new-hire requirements by reporting all of a
business’s new employees to the correct agency
when they are hired.

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Payroll Tax Returns
Employment-Related Forms and Records
Keep all employment-related forms and records
for at least four years. They should be available for
IRS review if requested. Records should include:

Federal
• Form 940, Employer’s Annual Federal
Unemployment (FUTA) Return
• Form 940EZ, Employer’s Annual Federal
Unemployment (FUTA) Return
• Form 941, Quarterly Tax Return
• Attendance records
• Accident reports and injury claims (workers’
compensation)
• ERISA retirement and pension records
• FMLA records
• Form I-9, Employment Eligibility Verification
• Personnel file records, including W-4s

State-Specific
• State Return
• State Unemployment Insurance

Local
• If required in your area

Income Tax Withholding Records

• Names, addresses, and social security numbers
of each employee.
• Total amount and state of each wage payment,
and payment time period.
• Each wage payment withholding amount.
• Each payment amount withheld and the exact
date it was collected. If taxable amount is less
than total payment, reason must be given.
• Alien employee documentation, international
employment documentation, and documenta-
tion regarding employment in U.S. possessions
and territories.
• If no income tax is withheld from payments
for non-cash compensation made to retail
commission salespeople, the following
information is needed: date and fair market
value of each payment.

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 • Form W-4, Withholding Allowance Certificate,
for each employee.
• Agreements that may exist between you and the
employee on Form W-4 regarding additional
amounts of tax withheld on a voluntary basis.
• Statements provided by employees regarding the
reporting of tips in their work.
• Employee requests to have tax withheld based
on their cumulative wages and any notice if the
request is revoked.
• Forms W-5 for employees eligible for the Earned
Income Credit who elect to receive payment in
advance.

Social Security and Medicare Employee Tax

Must include:
• Each wage payment amount that was subject to
social security tax.
• Each wage payment amount that was subject to
Medicare tax.
• If the total wage payment is not the same as the
taxable amounts, a reason must be provided.

Federal Unemployment Tax Records

Must include:
• Total amount paid to each employee during
a calendar year.
• Amount paid
into state unem-
ployment fund.
• Amount of tax
and any other
information
required must
be shown on
the employment
tax return.
• A reason must be
given if the amount
of compensation
that is subject to
unemployment
tax differs from the
total compensation.

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It’s Your Decision
When the chips are on the table and the go-ahead
decision must be made, you’ll be on your own.
Many entrepreneurs describe this as the loneliest
experience of their entire life and the most difficult
decision they ever had to make.
One thing that always seems to come as a surprise
to a new entrepreneur is the number of decisions
that must be made and questions that must be
answered before the business even gets underway.
Making this situation especially difficult is the fact
that there is rarely any scientific basis for making
these decisions. There are no formulas that will help,
no equations you can apply. There are no steadfast
“right” or “wrong” answers to these questions. The
best that can be hoped for is an answer that works.
Moreover, you will never know whether a different
decision or different answer would have been
better or worse. Almost every important decision is
subjective, and in the final analysis, almost every
important decision is based upon the entrepreneur’s
personal experience and intuitive judgment.
There are many frightening stories about the high
percentage of new business failures, and the statistics
are undoubtedly true. However, there are things you
can do that will greatly improve the odds. Get all the
help you can from every source you can identify.
Much of the advice and suggestions you receive will
be contradictory, but nonetheless, it can still help in
many ways. It will give
you more self-confidence
and help you avoid some
of the mistakes others
have made.
In the final analysis,
you must trust yourself
that you have done the
best research and found
the best advice you could,
and that you were firmly
realistic about your capa-
bilities and your resources.
Now it is time to go for it.

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 Paychex, Inc. is a
leading national provider
of payroll, human resources,
and benefits outsourcing solutions
for small- to medium-sized businesses.

1-800-322-7292
www.paychex.com

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