Starting a Business

Business Plan

Table of Contents
A. How to Start a Business...............................................................................
1. Is Entrepreneurship For You?......................................................................
2. 20 Questions before Starting......................................................................
3. 10 Steps to Starting a Business..................................................................
4. Understand Your Market..............................................................................
5. Business Data & Statistics...........................................................................
i.

General Business Statistics.........................................................................

ii. Consumer Statistics....................................................................................

iii.

Demographics...........................................................................................

iv.

Economic Indicators.................................................................................

v.

Employment Statistics................................................................................

vi.

Income Statistics......................................................................................

vii.

Money & Interest Rates...........................................................................

viii. Production & Sales Statistics.................................................................

ix.

Trade Statistics.........................................................................................

x. Statistics for Specific Industries...............................................................

6. Business Types.............................................................................................
i.

Green Businesses........................................................................................

ii. Startups & High Growth Businesses........................................................

iii.

Home-Based Businesses.........................................................................

iv.

Online Businesses....................................................................................

v.

Franchise Businesses..................................................................................

vi.

Buying Existing Businesses....................................................................

vii.

Self Employed & Independent Contractors..........................................

viii. Women-Owned Businesses.....................................................................

ix.

Veteran-Owned Businesses....................................................................

x. People with Disabilities..............................................................................

xi.

Young Entrepreneurs...............................................................................

xii.

Encore Entrepreneurs..............................................................................

xiii. Minority-Owned Businesses...................................................................

xiv.

Native Americans.....................................................................................

7. Find a Mentor or Counselor.......................................................................

i.

Finding a Business Mentor.........................................................................

ii. Women's Business Resources....................................................................

B.

Write Your Business Plan........................................................................

1. Executive Summary.....................................................................................
2

2. Company Description..................................................................................
3. Market Analysis...........................................................................................
4. Organization & Management.....................................................................
5. Service or Product Line..............................................................................
6. Marketing & Sales.......................................................................................
7. Funding Request..........................................................................................
8. Financial Projections...................................................................................
9. Appendix.......................................................................................................
10.

How to Make Your Business Plan Stand Out........................................

C. Choose Your Business Structure...............................................................

1. Sole Proprietorship.....................................................................................
2. Limited Liability Company..........................................................................
3. Cooperative..................................................................................................
4. Corporation...................................................................................................
5. Partnership...................................................................................................
6. S Corporation...............................................................................................
D.

Choose & Register Your Business..........................................................

1. Choose Your Business Name......................................................................

2. Register Your Business Name....................................................................
3. Register with State Agencies....................................................................
E. Choose Your Business Location & Equipment.........................................
1. Tips for Choosing Your Business Location...............................................
2. Basic Zoning Laws.......................................................................................
3. Home-Based Business Zoning Laws.........................................................
4. Leasing Commercial Space........................................................................
5. Buying Government Surplus......................................................................
6. Leasing Business Equipment.....................................................................
F.

Business Licenses & Permits.....................................................................

1. Federal Licenses & Permits.......................................................................

2. State Licenses & Permits...........................................................................
G.

Learn About Business Laws....................................................................

1. Advertising & Marketing Law....................................................................

2. Employment & Labor Law..........................................................................
3. Finance Law..................................................................................................
4. Intellectual Property Law...........................................................................
5. Online Business Law...................................................................................
i.

Collecting Sales Tax Online........................................................................

3

ii. International Online Sales.........................................................................

6. Privacy Law...................................................................................................
7. Environmental Regulations........................................................................
8. Regulation of Financial Contracts.............................................................
9. Workplace Safety & Health Law................................................................
10.

Foreign Workers, Immigration, and Employee Eligibility..................

11.

Contact a Government Agency...............................................................

H.

Business Financials..................................................................................

1. Estimating Startup Costs...........................................................................

2. Using Personal Finances............................................................................
3. Preparing Financial Statements...............................................................
4. Developing a Cash Flow Analysis..............................................................
5. Breakeven Analysis.....................................................................................
6. Borrowing Money for Your Business.........................................................
7. SBA Financial Assistance Eligibility........................................................103
8. Is Your Business Fiscally Fit?...................................................................105
I.

Finance Your Business.............................................................................. 109

1. Loans........................................................................................................... 109
i.

SBA Loans................................................................................................... 109

ii. Business Loan Application Checklist......................................................111

iii.

SBA Loan Application Checklist...........................................................113

iv.

Acquiring Financing............................................................................... 115

2. Grants.......................................................................................................... 116
3. Venture Capital.......................................................................................... 116
4. Business USA Financing Tool...................................................................120
J.

Filing & Paying Taxes................................................................................ 120

1. Is It A Business or a Hobby?....................................................................121
2. Obtain Your Federal Business Tax ID......................................................122
3. Determine Your Federal Tax Obligations...............................................122
4. Determine Your State Tax Obligations...................................................123
5. Determine When the Tax Year Starts.....................................................124
K.

Hire & Retain Employees.......................................................................125

1. Hire Your First Employee..........................................................................125

2. Hire a Contractor or an Employee?.........................................................127
3. Pre-Employment Background Checks....................................................129
4. Required Employee Benefits....................................................................130
5. Optional Employee Benefits.....................................................................132
4

6. Writing Effective Job Descriptions..........................................................134

7. Employee Handbooks................................................................................ 135

A. How to Start a Business

1.
2.
3.
4.
5.
6.
7.

Is Entrepreneurship For You?

20 Questions Before Starting
10 Steps to Starting a Business
Understand Your Market
Business Data & Statistics
Business Types
Find a Mentor or Counselor

1. Is Entrepreneurship For You?

Starting your own business can be an exciting and rewarding experience. It can
offer numerous advantages such as being your own boss, setting your own
schedule and making a living doing something you enjoy. But, becoming a
successful entrepreneur requires thorough planning, creativity and hard work.
Consider whether you have the following characteristics and skills commonly
associated with successful entrepreneurs:

Comfortable with taking risks: Being your own boss also means youre
the one making tough decisions. Entrepreneurship involves uncertainty. Do
you avoid uncertainty in life at all costs? If yes, then entrepreneurship may
not be the best fit for you. Do you enjoy the thrill of taking calculated
risks? Then read on.

Independent: Entrepreneurs have to make a lot of decisions on their

own. If you find you can trust your instincts and youre not afraid of
rejection every now and then you could be on your way to being an
entrepreneur.

Persuasive: You may have the greatest idea in the world, but if you
cannot persuade customers, employees and potential lenders or partners,
you may find entrepreneurship to be challenging. If you enjoy public
speaking, engage new people with ease and find you make compelling
arguments grounded in facts, its likely youre poised to make your idea
succeed.

Able to negotiate: As a small business owner, you will need to negotiate

everything from leases to contract terms to rates. Polished negotiation
skills will help you save money and keep your business running smoothly.

Creative: Are you able to think of new ideas? Can you imagine new ways
to solve problems? Entrepreneurs must be able to think creatively. If you
have insights on how to take advantage of new opportunities,
entrepreneurship may be a good fit.
5

Supported by others: Before you start a business, its important to have

a strong support system in place. Youll be forced to make many important
decisions, especially in the first months of opening your business. If you do
not have a support network of people to help you, consider finding a
business mentor. A business mentor is someone who is experienced,
successful and willing to provide advice and guidance. Read the Steps to
Finding a Mentor article for help on finding and working with a mentor.

Still think you have what it takes to be an entrepreneur and start a new
business? Great! Now ask yourself these 20 questions to help ensure youve
thought about the right financial and business details.
2. 20 Questions before Starting
So youve got what it takes to be an entrepreneur? Now, ask yourself these 20
questions to make sure youre thinking about the right key business decisions:
i.

Why am I starting a business?

ii.

What kind of business do I want?

iii.

Who is my ideal customer?

iv.

What products or services will my business provide?

v.

Am I prepared to spend the time and money needed to get my business

started?

vi.

What differentiates my business idea and the products or services I will

provide from others in the market?

vii.

Where will my business be located?

viii.

How many employees will I need?

ix.

What types of suppliers do I need?

x.

How much money do I need to get started?

xi.

Will I need to get a loan?

xii.

How soon will it take before my products or services are available?

xiii.

How long do I have until I start making a profit?

xiv.

Who is my competition?

xv.

How will I price my product compared to my competition?

xvi.

How will I set up the legal structure of my business?

xvii.

What taxes do I need to pay?

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xviii.

What kind of insurance do I need?

xix.

How will I manage my business?

xx.

How will I advertise my business?

3. 10 Steps to Starting a Business

Starting a business involves planning, making key financial decisions and
completing a series of legal activities. These 10 easy steps can help you plan,
prepare and manage your business. Click on the links to.

Step 1: Write a Business Plan

Use these tools and resources to create a business plan. This written guide will
help you map out how you will start and run your business successfully.
Step 2: Get Business Assistance and Training
Take advantage of free training and counseling services, from preparing a
business plan and securing financing, to expanding or relocating a business.
Step 3: Choose a Business Location
Get advice on how to select a customer-friendly location and comply with zoning
laws.
Step 4: Finance Your Business
Find government backed loans, venture capital and research grants to help you
get started.
Step 5: Determine the Legal Structure of Your Business
Decide which form of ownership is best for you: sole proprietorship, partnership,
Limited Liability Company (LLC), corporation, S corporation, nonprofit or
cooperative.
Step 6: Register a Business Name ("Doing Business As")
Register your business name with your state government.
Learn which tax identification number you'll need to obtain from the IRS and your
state revenue agency.
Step 7: Register for State and Local Taxes
Register with your state to obtain a tax identification number, workers'
compensation, unemployment and disability insurance.
7

Step 8: Obtain Business Licenses and Permits

Get a list of federal, state and local licenses and permits required for your
business.
Step 9: Understand Employer Responsibilities
Learn the legal steps you need to take to hire employees.
Step 10: Find Local Assistance
Contact your local SBA office to about how SBA can help.

Startup Resources
There are a number of available programs to assist startups, micro businesses,
and underserved or disadvantaged groups. The following resources provide
information to help specialized audiences start their own businesses.

Environmentally-Friendly "Green" Business

Home-Based Business

Online Business

Self-Employment

Minority Owned Business

Veteran Owned Business

Woman Owned Business

You can save money when starting or expanding your business by using
government surplus. From commercial real estate and cars, to furniture,
computers and office equipment, find what you need for your business in one
place.
4. Understand Your Market
To run a successful business, you need to learn about your customers, your
competitors and your industry. Market research is the process of analyzing data
to help you understand which products and services are in demand, and how to
be competitive. Market research can also provide valuable insight to help you:

Reduce business risks

8

Spot current and upcoming problems in your industry

Identify sales opportunities

How to Conduct Market Research

Before you start your business, understand the basics of market research by
following these steps:
i.

Identify Official Government Sources of Market and Industry

Data

The government offers a wealth of data and information about businesses,

industries and economic conditions that can aid in conducting market research.
These sources provide valuable information about your customers and
competitors:

Economic Indicators

Employment Statistics

Income and Earnings

ii.

Identify Additional Sources of Analysis

Trade groups, business magazines, academic institutions and other third parties
gather and analyze research data about business trends. Use Internet and
database searches to find information related to your location and industry.
iii.

Understand the International Marketplace

Todays economy is a globalized marketplace, so its important to understand the

international factors that influence your business. These resources will help you
to research potential international markets for your products or services:

Market Research Guide for Exporters

Identifies resources for business owners seeking to sell their products
abroad.

Country Market Research

Reports on trade issues in countries across the globe.

BuyUSA.gov
Helps U.S. companies find new international business partners.

5. Business Data & Statistics

i.
ii.
iii.

General Business Statistics

Consumer Statistics
Demographics
9

iv.
Economic Indicators
v.
Employment Statistics
vi.
Income Statistics
vii.
Money & Interest Rates
viii.
Production & Sales Statistics
ix.
Trade Statistics
x.
Statistics for Specific Industries
i.
General Business Statistics
As a business owner, you will need a solid understanding of your market and
current economic conditions to plan for business growth and success. The
following resources provide statistics on a variety of U.S. industries and business
conditions.

North American Industry Classification System (NAICS Codes)

Provides the standard used by Federal statistical agencies in classifying business

establishments for the purpose of collecting, analyzing and publishing statistical
data related to the U.S. business economy. Information includes definition of
each industry and background material.

Fed Stats

Offers a full range of official statistical information produced by more than 100
agencies. Site provides data and trend information on topics such as economic
and population trends, crime, education, health care, aviation safety, energy use,
farm production and more.

Statistical Abstract of the United States

Presents an authoritative and comprehensive summary of statistics on the social,

political and economic conditions in the United States.

Statistics of U.S. Businesses

Features a collection of data files created from U.S. Census County Business
Patterns, an annual series that provides subnational economic data by industry.
ii.
Consumer Statistics
Every business needs customers to be successful. The more you know about
your potential customers and your consumer market, the better equipped you'll
be to market your products and services effectively. This list of resources can
help you find more information on the topics that are essential to business
success.

Consumer Credit Data

10

Provides consumer credit data provided by the Federal Reserve Statistical

Release.
Consumer Fraud and Identity Theft
Discloses consumer fraud and identity theft complaints received by the Federal
Trade Commission, and U.S. and Canadian federal, state and non-governmental
organizations.

Consumer Product-Related Statistics

Reports statistics related to children's products, child poisonings, carbon

monoxide poisonings and other products.

Inflation and Consumer Statistics

Lists indexes offered by the Bureau of Labor Statistics that measure different
aspects of inflation.
iii.
Demographics
Demographics are the characteristics of a human population. This information is
often used by small business owners to conduct research into where
opportunities exist within their market and in developing appropriate business
and marketing strategies to target customers. Use the statistical resources
below to help you find out more about the U.S. population and uncover
information that can be used in your business research efforts.
American Fact Finder

Provides access to a wealth of population, housing, economic and

geographic data from the U.S. Census Bureau.

State and County Quick Facts

Provides frequently requested Census Bureau information at the national,

state, county and city levels.

Current Population Statistics

Shares information gathered in a monthly survey of about 50,000

households conducted by the Bureau of the Census for the Bureau of
Labor Statistics (BLS).

Labor Demographics

Makes data that has been collected by BLS available for specific
demographic categories including sex, age, race and ethnic origin.

Social Security Fact Sheets for Demographic Groups

11

Offers fact sheets for all demographic groups including women and young
people.

U.S. Census Bureau Quick Facts

Gives access to facts about people, business and geography.

iv.
Economic Indicators
A variety of economic indicators can affect your business, from unemployment
rates and number of loans granted to small businesses to current interest rates.
These resources cover major economic indicators and other statistical data on
the U.S. economy and can be useful to your business research and planning
initiatives.

Beige Book: Current Economic Conditions

Provides information on current economic conditions in a report published eight

times a year. Each Federal Reserve Bank gathers anecdotal information on
current economic conditions in its District through reports from Bank and Branch
directors and interviews with key business contacts, economists, market experts
and other sources.

Bureau of Economic Analysis

Gives access to national, international, regional and industry economic accounts

data.

Consumer Price Index

Offers data on changes in the prices paid by urban consumers for a

representative basket of goods and services. Data is produced monthly by The
Consumer Price Indexes (CPI) program.

Economic Census

Profiles American business every five years, from the national to the local level.

Economic Indicators

Provides links for timely access to the daily releases of key economic indicators
from the Bureau of Economic Analysis and the U.S. Census Bureau.

Economic Report of the President

Gives an overview of the nation's economic progress using text and extensive
data appendices, written by the Chairman of the Council of Economic Advisors.

12

FRED - Federal Reserve Economic Data

Provides an informative database of more than 13,000 U.S. economic time

series.

Major Economic Indicators

Reports consumer price index, producer price index, real earnings and other
economic indicators.

Producer Price Indexes

Documents the average change over time in the selling prices received by
domestic producers for their output, measured by the Producer Price Index (PPI)
program.

Reports on the U.S. Economy

Provides broad and targeted economic data, analyses and forecasts for use by
Government agencies, businesses and others.

U.S. Economic Indicators, 1998 - Present

Gives access to monthly Economic Indicators from January 1998 forward from the
browse page. Documents are available as ASCII text and Adobe Portable
Document Format (PDF).

Economic Issues Discussed by the White House

Provides access to the White House plan for improving our economy.
v.
Employment Statistics
The amount of money the public has for spending will vary by employment rates.
The more that people are employed, the more money they will have to buy
products and services. As a business owner, you'll need to understand how
current economic indicators affect your business, especially employment rates.
The resources listed here will provide you with useful statistics on U.S.
employment in order to follow trends.

Bureau of Labor Statistics Portal

Offers employment statistics from the U.S. Bureau of Labor Statistics.

Current Labor Statistics

Provides current labor statistics from the Monthly Labor Review, a journal of fact,
analysis and research from the U.S. Bureau of Labor Statistics.

13

Detailed Labor Statistics (Data Sets)

Supplies databases, tables and calculators to use for different employment

subjects.

Employment Projections

Gives a glimpse into the future by providing information about the labor market
for the Nation as a whole for the next 10 years.

Employment and Unemployment Statistics

Overviews different subject areas of employment statistics.

Equal Employment Opportunity Statistics

Lists employment statistics from the Equal Employment Opportunity Commission

(EEOC).

Labor Force Statistics from the Current Population Survey

Lists labor force statistics taken from the current population on a monthly basis.

Occupational Outlook Handbook

Details different occupations along with their statistics.

Social Security Facts and Figures

Provides statistics on Social Security benefits.

State Labor Statistics

Gathers labor statistics in the U.S. by state.

Wage Data

Documents wage data by area and occupation.

Women in the Labor Force

Offers labor statistics from the Women's Bureau under the U.S. Bureau of Labor
Statistics.
vi.
Income Statistics
Your review of national statistics on income and earnings will help ensure that
you pay rates that are fair based on the marketplace. The resources below will
provide you with current statistics on income and earnings of people in the
United States.
14

Earnings by Occupation and Education

Reports earnings by state, education, occupation and gender compiled by the

U.S. Census Bureau.

Income Data (U.S. Census)

Shares income statistics from several major household surveys and programs
from the U.S. Census Bureau.

Income Statistics in Brief

Offers databases, tables and calculators by subject from the Bureau of Labor
Statistics.

National Compensation Survey

Provides comprehensive measures of wages, employment cost trends and

benefit incidence and detailed plan provisions, tabulated by the National
Compensation Survey (NCS).

Poverty Data (U.S. Census)

Gives poverty data from several major household surveys and programs.

Real Earnings

Reports average hourly salary per month.

Survey of Income and Program Participation (SIPP)

Provides detailed information on cash and noncash income as well as data on

taxes, assets, liabilities and participation in government transfer programs.

Usual Weekly Earnings of Wage and Salary Workers

Gives reports on the usual weekly earnings of wage and salary workers.
vii.
Money & Interest Rates
Financial factors affect every business. For example, variations in interest rates
and exchange rates can either add or remove some of the profits that your
business makes, and some of the purchase power that consumers have. Explore
the resources listed below to find current information and statistics about
exchange rates, interest rates and general stock measures.

Daily Foreign Exchange Rates

Provides information about the foreign exchange rates from the Federal Reserve.

15

Daily Interest Rates

Offers weekly release of special interest rates. This information is posted on

Mondays and updated daily.

Money Statistics in Brief

Gives statistics and historical data from the Federal Reserve.

Money Stock Measures

Lists current stock measures, which are updated every Thursday.

viii. Production & Sales Statistics
The production and sale of goods in the United States can be an indicator for
several factors that impact your business, such as a rise or decline in retail
spending, demand for products or services, or supply costs. Visit the resources
below for statistics regarding the production and sale of goods in the United
States.

Annual Survey of Manufacturers (ASM)

Provides sample estimates of statistics for all manufacturing establishments with

at least one paid employee.

Manufacturing, Mining and Construction Statistics

Offers a single source for manufacturing, mining and construction statistics

provided by the U.S. Census Bureau.

Quarterly Financial Reports

Shares quarterly financial reports (QFRs) for manufacturing, mining and trade
corporations.

National Production Output:

o

Gross Domestic Product

Nonresidential fixed investment

Residential investment

Personal saving rate

Corporate profits

Personal consumer expenditures

16

National patterns of research and development resources

Federal funds for research and development

Production Sales, Orders and Inventories:

o

Building permits, housing starts, and housing completions

Manufacturers' shipments, inventories, orders

Advanced monthly sales for retail and food services

Manufacturing and trade inventories and sales

Industrial production and capacity utilization

Quarterly services survey

Retail e-commerce sales

Productivity and Costs

Provides measures of labor productivity and costs through two U.S. Bureau of
Labor Statistics' programs, the Major Sector Productivity program and the
Industry Productivity Program.

Retail and Wholesale Trade Surveys

Details monthly, quarterly and annual retail and wholesale trade surveys.
ix.
Trade Statistics
Trade statistics are often indicators of sales performance, such as export sales,
national and international demand, alternative markets, and the role
competitors play. On this page you will find statistics on U.S. trade and exports.

Balance of Payments

Quarterly and annual estimates of international transactions.

Data on Top 5000 U.S. Importers

Lists the top 5000 importers, alphabetically, based on entered value each fiscal
year.

Foreign Trade Statistics

17

One-stop shop for U.S. export and import statistics and issues regulations
governing the reporting of all export shipments from the United States.

International Economic Trends (Annual)

Provides an annual summary of international trends including comparative

economic performance tables.

International Economic Trends (Monthly)

Offers monthly international trends data including comparative economic

performance tables.

U.S. International Trade in Goods and Services

Has the latest news and reports for international trade in goods and services.

U.S.A. Trade Online

Access to current and cumulative U.S. export and import data.

x.
Statistics for Specific Industries
A great deal of data about specific industries is collected by federal government
agencies. This information can be valuable when developing your business plan,
refining your business strategy and managing your business over time.
For information on the standards used to classify industries and businesses, visit
the North American Industry Classification System (NAICS Codes) website.
Select the topic of interest below to jump to that section on this page.

Agriculture

Banking

Energy

Environment

Health and Safety

Housing

Transportation

Agriculture

Agriculture Economic Research Service

18

Covers the economics of food, farming, natural resources and rural America.

Food Sector Prices and Expenditures

Provides long-run baseline projections for the agricultural sector through 2005
that incorporate provisions of the Federal Agriculture Improvement and Reform
Act of 1996 (1996 Farm Act).

National Agricultural Statistics

Provides timely, accurate and useful statistics in service to U.S. agriculture from
the National Agricultural Statistics Service.
Banking

Bank Statistical Releases and Historical Data

Offers information collected by the Federal Reserve Board.

Credit Union Data

Provides information from the National Credit Union Association.

Data on Individual U.S. Banks

Enables you to search for information on specific banks, their branches and the
industry.

FDIC Quarterly Banking Profile

Provides a comprehensive summary of financial results for all institutions insured

by the Federal Deposit Insurance Corporation (FDIC). This report card on industry
status and performance includes written analyses, graphs and statistical tables.

FDIC Statistics on Banking

Details financial information as well as structural data (number of institutions

and branches) for all FDIC-insured institutions in a quarterly publication.

Energy

Energy Industries Data and Reports

Includes forecasts and analyses, renewable and alternative fuels, as well as state
and U.S. historical data overviews.

International Energy Outlook

19

Presents an assessment by the Energy Information Administration (EIA) of the

outlook for international energy markets through 2030.

Minerals Revenue Management Statistics

Provides many statistics for mineral commodity and revenue.

Oil and Gas Valuation Guidance

Provides calculations for asset valuation for coal, gas and oil.
Environment

Air Pollutant Emissions Trends

Provides current emissions trends data and documentation from the National
Emissions Inventory (NEI) under the U.S. Environmental Protection Agency (EPA)

Enviro-facts

Offers a one-stop-shop for all environmental facts.

Guide to the Bio solids Risk Assessments for the EPA Part 503 Rule

Gives complete guide created to protect public health and environment from
pollutants present in bio solids (sewage sludge).

State of the Land

Lists maps and charts provided by the Natural Resources Conservation Service
(NRCS).
Health and Safety

CDC WONDER - Public Health Statistics

Provides information resources to public health professionals and the public at

large from the Centers for Disease Control and Prevention (CDC).

Medical Expenditure Panel Survey (MEPS)

Offers data on the cost and use of health care and health insurance coverage.

OSHA Inspection Statistics

Supplies inspections data and statistics in occupational safety and health

administration from the U.S. Department of Labor.

Workplace Injury, Illness and Fatality Statistics

20

Gives information collected annually on the rate/ number of injuries, illnesses,

and fatal injuries in the workplace, and compares statistics by incident, industry,
geography, occupation and other characteristics.
Housing

House Vacancies and Homeownership

Shares statistics on the need for housing programs and initiatives, as well as
helps determine the current economic indicators based on the housing market.
This site uses current rental and home owner vacancy rates and descriptions of
the available properties to obtain statistics.

Housing and Urban Development (HUD) Data Sets

Provides data sets that include collections from the American Housing Survey,
HUD median family income limits, as well as other housing topics.

New Home Construction

Offers data about building permits, housing start-up projects and housing
completions.

New Home Sales

Supplies data about annual housing sales.

Transportation

Aviation Data and Statistics

Provides reports on accidents, passengers, cargo, safety, funding and many

other topics in aviation.

Bureau of Transportation Statistics

Reports statistics compiled by the Research and Innovative Technology

Administration (RITA) in coordination with the U.S. Department of Transportation
(DOT).

Highway Statistics

Details annual federal highway statistics divided into categories such as driver,
vehicle, fuel and more.

Motor Vehicle Crash Fatalities and Injuries

21

Provides information from the National Highway Traffic Safety Administration

(NHTSA).

National Transit Data

Follows the transit industry and provides statistics to help in future investments
and opportunities.
6. Business Types
x.

i.
ii.
iii.
iv.
v.
vi.
vii.
viii.
ix.
x.
xi.
xii.
xiii.
xiv.

Green Businesses
Startups & High Growth Businesses
Home-Based Businesses
Online Businesses
Franchise Businesses
Buying Existing Businesses
Self Employed & Independent Contractors
Women-Owned Businesses
Veteran-Owned Businesses
People with Disabilities
Young Entrepreneurs
Encore Entrepreneurs
Minority-Owned Businesses
Native Americans

i.
Green Businesses
The explosion of organic and eco-friendly products on retail store shelves is more
than just a passing fad. It's big business. This reality presents opportunities for
environmentally minded entrepreneurs ready to start their own small business.
Successful green businesses not only benefit the environment, but also use
green business practices as a means to market their products. If you are thinking
of starting a green business, consider the following tips:
Find Your Niche
The eco-friendly lifestyle continues to catch on with consumers which presents
many growth possibilities for businesses. Production of food, cosmetics and
cleaning supplies are growing areas within organic trade. To be successful, look
for opportunities that match your interests.
Get Certified
To differentiate your product or service as environmentally sound, consider
obtaining certification from an independent, third-party. Being certified means
that you can include their "eco label" on your product's label and other
marketing materials. This Eco label is important for attracting "green" customers,
and can strengthen the value of your brand. Investigate the following
organizations and programs for certification opportunities.
22

Domestic Certification

Products: Green Seal sets product standards and awards its label to a wide
variety of products

Agriculture, Manufacturing and Electricity: Certified by Scientific

Certification Systems

Buildings: The U.S. Green Building Council certifies new and existing
buildings using the Leadership in Energy and Environmental Design (LEED)
Green Building Rating System

Chlorine-Free Products: Certified by the Chlorine Free Products Association

Energy Efficient Products: Certified by the U.S. Government's ENERGY

STAR Program

Organic Produce: Certified by the The U.S. Department of Agriculture's

National Organic Program

Renewable Energy: Certified by the Center for Resource Solution's Green

e-Certification Program

Wood Products: Criteria set by Forest Stewardship Council; certified by

Scientific Certification Systems

International Certification

The European Union Eco-Label Program encourages businesses to market

products and services that are kinder to the environment to European
consumers

Canada's Eco Logo Label program certifies products from the United States
and Canada in more than 120 categories

Germany's Blue Angel program provides eco labeling for a wide variety
products

Japan's Eco Mark Program provides product certification and eco labeling
for several product types

Taiwan's Green Mark and Energy Label programs provide certification and
eco labeling for green and energy efficient products

Eco label Resources

23

The Global Eco labelling Network is a nonprofit association of third-party,

environmental performance labeling organizations to improve, promote
and develop the "eco labelling" of products and services

The Collaborative Labeling and Appliance Standards Program (CLASP) is an

international organization that helps broker national policies for energy
efficiency standards and labels for appliances, equipment, and lighting
products

About Green Marketing.

Practice What You Preach
The most successful green businesses don't just sell the green lifestyle. They live
it. Selling green means being green, and this helps build your brand and image
as socially responsible. Before you start your business, consult the Small
Business Guide for Energy Efficiency.
Join Industry Partnerships
The U.S. Environmental Protection Agency (EPA) sponsors a wide variety of
industry partnership and product stewardship programs that aim to reduce the
impact of industrial activities on the environment. Joining one of these programs
helps you connect with others in your industry, grow your brand, and protect the
environment and natural resources.
ii.
Startups & High Growth Businesses
In the world of business, the word "startup" goes beyond a company just getting
off the ground. The term startup is also associated with a business that is
typically technology oriented and has high growth potential. Startups have some
unique struggles, especially in regard to financing. Thats because investors are
looking for the highest potential return on investment, while balancing the
associated risks.
To help you start, run and expand a startup or high growth business, we've
compiled these useful resources. Select a topic to jump to that area on this page.

Financing a startup

Dotcoms

Intellectual property

Marketing & social media

Mentoring & training

Environmental factors

24

Hiring employees & independent contractors

Financing a Startup
From seed capital to capital for expansion, getting financing is one of the most
important activities for a startup. Making sure you can impress the venture
capitalists and the angel investors takes preparation and practice. Use these
resources to help your startup secure financing.

Preparing Your Finances

Know the basics when it comes to preparing your finances.

Loans, Grants & Funding

Understand all of the funding options available to your startup, including loans,
grants and other funding.

How to Find and Attract Investors

Discover where to seek out and find potential venture capitalists for initial
business or expansion funding.

Financing Growth

Learn how to continue financing during the growth stages of your startup.
Dotcoms
The steps to starting a dotcom have many similarities to starting a brick and
mortar business. To gain insight on the numerous benefits and risks to starting
an online business, explore these resources.

Online Business Law

Understand the legal aspects of running an online business.

Setting up an Online Business

Learn about generating sales for an online business.

Intellectual Property
Entrepreneurs with high-growth startups need to make sure they have their ideas
protected. In the early stages of business, the idea is the driving force. These
resources can help you to protect your ideas and products.

25

Patents, Trademarks, Copyright

Learn how to protect yourself and your startup through intellectual property
protection methods.
Marketing & Social Media
Like most small businesses, marketing should be on every startup owners
agenda. Creating a brand and making sure that your customers and potential
customers know about your technology, innovation, or idea is important. Use
these resources to help build your brand with traditional marketing and social
media.

Marketing 101

Develop your marketing strategy before your startup begins operations.

Green Marketing

Discover special techniques for green marketing.

Mentoring & Training
Creating a startup can be an overwhelming endeavor, but finding a mentor and
additional resources can help keep you on the track toward success.

Finding a Mentor or Counselor

Gain invaluable insight from mentors or counselors during the beginning stages
of your business to help you avoid common mistakes.
Environmental Factors
A growing number of startups view global environmental problems as business
opportunities. Learn about environmental regulations, along with opportunities
for businesses in the green sector.

Green Guide for New Businesses

Learn how to make your startup a green business.

Environmental Regulations

Help your startup join the Green movement and learn about Green Technology
innovation grants and technical assistance.
Hiring Employees & Independent Contractors
26

Entrepreneurs need help to initiate and expand their startups. Make sure that
you are hiring the right people and understand the difference between an
employee and an independent contractor.

10 Steps to Hiring New Employees

Know the basics of hiring for your startup.

Employment & Labor Law

Learn what hiring means for your startup, from taxes to liabilities.

Human Resources

Manage worker issues effectively by understanding proper Human Resource

procedures.
iii.
Home-Based Businesses
What do Apple Computer, Hershey's, Mary Kay Cosmetics, and the Ford Motor
Company have in common? These well-known corporations all started out as
home-based businesses. In fact, more than half of all U.S. businesses are based
out of an owner's home.
Starting a home-based business has many rewards as well as challenges. This
guide provides resources that will help you about working out of your house,
starting a home-based business and managing your business within the law.

Before You Begin

Can you live and work in the same area? Find the answer by asking
yourself the following questions: Where in the home will the business be
located? What adjustments to living arrangements will be required? What
will be the cost of changes? How will your family react? What will the
neighbors think?

Home-Based Business....Is it For Me? Is working from home right for you?
Learn about several factors you should consider when starting a homebased business.

Starting a Business in Your Home: Weighing the Pros and Cons. Have you
thought about the characteristics and challenges that are most commonly
involved in launching home-based businesses? View the pros and cons
before you begin a home-based business.

Start a Home-Based Business

27

If you have decided you are ready to start a home-based business, then you
might already have an idea and/or the products you want to market. If not, think
about your background, what you are good at, and what experience you have.
This exploration can get you on your way to coming up with a sound idea. For
additional guidance on how to start your business, use the resources listed
below.

Check out the first steps for starting any small business

Obtain a checklist of things to do at How to Set Up a Home-Based Business

Get planning ideas by reading an article that provides a comprehensive

approach to developing a business plan for a home-based business

Learn how your local government's zoning ordinances may affect your
business. Not knowing the potential legal and community problems
associated with having a business at home, and the rules, can have
devastating consequences.

Buying a Work-at-Home Franchise

Home based franchises are becoming more common, but buyer beware! Some
"work at home" franchise opportunities are schemes to get your money.
Visit the Consumer Guide to Buying a Franchise for more information about
evaluating and buying into franchises and related work-at-home business
opportunities.
Financing a Home-Based Business
Federal agencies do not provide grants for starting a home-based business.
However, there are a number of low-interest loan programs that help individuals
obtain startup financing. Visit the Loans and Grants Search Tool to get a full list of
grant, loan and venture capital programs for which you might qualify.
Marketing a Home-Based Business
There are several ways to market your business and get in touch with your
customers. Customers are a key component to businesses success. Learn how to
successfully market your home-based business: Home-Based Business - Market
Your Product .
Filing Taxes for a Home-Based Business
Doing your personal taxes can be a pain, but now you have to do the taxes for
your home-based business as well. Use the resources below to learn how to
correctly file your small business taxes and get the proper deductions.
Small Business Self-Employed One-Stop Resource

Provides access to the official IRS gateway for tax information for small
business owners.
28

Small Business Expenses and Tax Deductions

Explains how to deduct business expenses on your income taxes.

Social Security Guide for the Self-Employed

Covers how to report your earnings since you are self-employed.

iv.
Online Businesses
Establishing a business presence on the Internet can be a lucrative way to sell,
market, and advertise your businesss goods and services. The following topics
provide details on how to start and manage an online business.
1. Start a Business
Regardless of where you choose to operate your business, certain general
requirements always apply. Before you can begin completing specific online
business steps you must follow the basic rules for starting a business. Use these
tools and resources to help take you from preparing your business plan and to
becoming a successful business owner.
2. Register a Domain Name
A domain name is the web address of your online business. Choosing and
registering a domain name is the first step to starting an online business. After
you've chosen the name you'd like to register, the process is simple and costfriendly. Where to register your name is up to the discretion of individual
businesses.

Certified Registering Authorities

Internet Domain Name Registration Services

Abusive Domain Name Registration

Be careful to avoid possible security risks by becoming aware of potential scams.

The Federal Trade Commission issued a consumer alert about Domain Name
Registration Scams.
The Internet Corporation for Assigned Names and Numbers is the non-profit
corporation that has technical oversight of Internet protocol address space
allocation, protocol parameter assignment, domain name system management,
and root server system management functions. It provides current news on
issues surrounding domain names.
3. Select a Web Host
A web host provides you with the space and support to create your website.
Choosing the host that best suits a business is up to the discretion of that
business. Costs and abilities, such as site maintenance, search registration, and
29

site development, vary from host to host but it is important for it to be both
reliable and secure.
4. Design Your Website
The website of your online business is extremely important to its success.
Because you don't have a physical location, this is considered your "store front".
Websites can be designed personally, by hiring someone to work as your site
designer, or by using an independent design firm.
Be sure to comply with U.S. trademark and intellectual property laws. The same
laws and regulations apply to online businesses as regular businesses. Search for
trademarks currently in use to avoid infringing on another company's rights on
your website.
5. Begin Advertising and Marketing
Similar to the traditional market place, online businesses cannot be successful
without customers. For online businesses, these customers come in the form of
site visitors or viewers. Generating the highest amount of traffic possible on your
website will create the highest chance that those visitors will become customers.
Register with search engines and use keywords that will drive the most traffic to
your site.
Advertising and marketing on the internet is regulated very similarly to the real
world, and many of the same rules apply. The Federal Trade Commission has
created several guides to help online businesses comply with these regulations.

Advertising and Marketing on the Internet: Rules of the Road

Dotcom Disclosures: Information About Online Advertising

For additional information, visit our guide to Online Advertising Law.
6. Comply with Online Business Regulations
Online businesses must comply with special laws and regulations that apply only
to them. A lawyer that specializes in internet law can assist businesses with all
aspects of starting and operating an online business. Contact an expert at the
Federal Trade Commission for more information.

The Ant cybersquatting Consumer Protection Act of 1999

Selling on the Internet: Prompt Delivery Rules

Children's Online Privacy Protection Act

7. Find State and Local Compliance Information

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In addition to Federal requirements, businesses must know and comply with

state and local laws and regulations. Select your state, county, and city to
determine what's required of your online business.
8. Learn Federal, State, and Local Tax Requirements
Online business are required to follow the same federal, state, and local tax laws
as regular businesses. If you are operating your online business in a state that
charges a sales tax; or levies a gross receipts or excise tax on businesses you
may have to apply for a tax permit or otherwise register with your state revenue
agency. Online businesses are responsible for collecting state and local sales
taxes from their customers when applicable, and paying these taxes to state and
local revenue agencies.
9. Understand International Trade Laws
Operating internationally requires many additional considerations from finding
overseas markets and suppliers to shipping and tax regulations. Follow
international trade laws for online business to be sure you are in compliance with
all regulations.
10. Additional Startup Resources
These guides provide additional information relevant to starting and operating an
online business.

Self-Employment
Resources for business owners who are starting or operating a business
through self-employment.

Home-Based Business
Resources for online businesses that are based at home.

v.
Franchise Businesses
Want to be your own boss, but not willing to take on the risk of starting your own
business from scratch? Franchising can be a great alternative if you want to have
some guidance in the start-up phase of the business.
What is franchising?
A franchise is a business model that involves one business owner licensing
trademarks and methods to an independent entrepreneur. Sometimes, franchises
are referred to as chains.
There are two primary forms of franchising:

Product/trade name franchising

Franchisor owns the right to the name or trademark and sells that right to a
franchisee
31

Business format franchising

Franchisor and franchisee have an ongoing relationship, and the franchisor often
provides a full range of services, including site selection, training, product
supply, marketing plans and even assistance in obtaining financing

Before Investing in a Franchise

Before you decide to franchise, you need to do your research. You could lose a
significant amount of money if you do not investigate a business carefully before
you buy. By law, franchise sellers must disclose certain information about their
business to potential buyers. Make sure you get all the information you need
first before entering into this form of business.
To about franchising opportunities, visit Federal Trade Commission Bureau of
Consumer Protection.
The decision to purchase a franchise involves many factors. To help you explore
if franchising is right for you, consider the following questions:

Do you know how much you can invest?

What are your abilities?

What are your goals?

Franchising Strategy
You need a strategy before investing in a franchise. Doing your homework about
the franchise first will help you gain a solid understanding of what to expect as
well as the risks that could be involved.

Be a Detective In addition to the routine investigation that should be

conducted prior to any business purchase, you should be able to contact
other franchisees before deciding to invest. You can obtain a Uniform
Franchise Offering Circular (UFOC), which contains vital details about the
franchise's legal, financial, and personnel history, before you sign a
contract.

Know What You are Getting Into Before entering into any contract as a
franchisee, you should make sure that you would have the right to use the
franchise name and trademark, receive training and management
assistance from the franchisor, use the franchisor's expertise in marketing,
advertising, facility design, layouts, displays and fixtures and do business
in an area protected from other competing franchisees.

Watch Out for Possible Pitfalls: The contract between the two parties
usually benefits the franchisor far more than the franchisee. The
32

franchisee is generally subject to meeting sales quotas and is required to

purchase equipment, supplies and inventory exclusively from the
franchisor.

Seek Professional Help The tax rules surrounding franchises are often
complex, and an attorney, preferably a specialist in franchise law, should
assist you to evaluate the franchise package and tax considerations. An
accountant may be needed to determine the full costs of purchasing and
operating the business as well as to assess the potential profit to the
franchisee.

vi.
Buying Existing Businesses
For some entrepreneurs, buying an existing business represents less of a risk
than starting a new business from scratch. While the opportunity may be less
risky in some aspects, you must perform due diligence to ensure that you are
fully aware of the terms of the purchase.
If you have decided to buy an existing business, you will want to be sure you are
making the right choice in your new venture. Only you can determine the right
business for your needs; however, the following topics can help guide you make
the best decision.
The Steps to Starting
There are many different types of businesses to buy. Take these steps to narrow
down the list of potential businesses you may want to purchase.
1. Identify Your Interests if you have absolutely no idea what business you
want to invest in, first eliminate businesses that are of no interest to you.
2. Consider Your Talents being honest about your skills and experience can
help you eliminate unrealistic business ventures.
3. List Conditions for Your Business Consider if a business has a condition
that is unfavorable to you, such as location and time commitment.
4. Quantify Your Investment finding profitable businesses for sale at
reasonable prices can be difficult. Ask yourself why this business is for sale in
the first place.
Advantages to Choosing an Existing Business
There are many favorable aspects to buying an existing business such as drastic
reduction in startup costs. You may be able to jump start your cash flow
immediately because of existing inventory and receivables.
Disadvantages to Choosing an Existing Business
There are also some downsides to buying an existing business. Purchasing cost
may be much higher than the cost of starting a new business because of the
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initial business concept, customer base, brand and other fundamental work that
has already been done. Also, be aware of hidden problems associated with the
business like debts the business is owed that you may not be able to collect.
Doing Due Diligence
As you become a business owner, there are items that need to be addressed
before entering into any business agreements or transactions.

Obtain all Licenses and Permits Most businesses need licenses and
permits to operate. The type of license or permit you need depends on
your industry and the state in which the business is located. Use SBAs
licenses and permits finder tool to get a listing of federal, state and local
permits and licenses you will need to run your business.

Zoning Requirements: Zoning requirements may affect the type of

business that you are intending to operate in a particular area. Visit the
Basic Zoning Laws for more information about zoning and to ensure your
business is abiding by all laws in your area.

Environmental Concerns: If you are acquiring real property along with

the business, it is important to check the environmental regulations in the
area. Visit EPAs Small Business Gateway for more information.

Determining the Value of a Business

There are a number of different methods to determine a fair and equitable price
for the sale of the business. Here are a few:

Capitalized Earning Approach: This method refers to the return on the

investment that is expected by an investor.

Excess Earning Method: Similar to the capitalized earning method,

except that it separates return on assets from other earnings.

Cash Flow Method: This method is typically used when attempting to

determine how much of a loan the cash flow of the business will support.
The adjusted cash flow is used as a benchmark to measure the firm's
ability to service debt.

Tangible Assets (Balance Sheet) Method: This method values the

business by the tangible assets.

Value of Specific Intangible Assets Method: This method compares

buying a wanted intangible asset versus creating it.

For more information, read SCOREs article on How to Value Your Business.
Doing Research for Purchasing a Business

34

Once you have found a business that you would like to buy, it is important to
conduct a thorough, objective investigation. The following list includes important
information you want to include when researching the business you want to buy.
Letter of Intent: The letter of intent should spell out the proposed price, the
terms of the purchase and the conditions for the sale of the business.
Confidentiality Agreement: A confidentiality agreement indicates that you
will not use the information about the seller's business for any purpose other
than making the decision to buy it.
Contracts and Leases: If the business has a current lease for the location, be
aware that you may have to work with the landlord to assume any existing lease
on the business premises or negotiate a new lease.
Financial Statements: Examine the financial statements from the business for
at least the past three to five years. Also make sure that an audit letter
accompanies the statements from a reputable CPA firm. You should not accept a
simple financial review by the business itself.
Tax Returns: Review the business's tax returns from the past three to five
years. This will help you determine the profitability of the business as well as any
outstanding tax liability.
Important Documents: Numerous documents should be checked during your
investigation. Examples include property documents, customer lists, sales
records, advertising materials, employee and manager information and
contracts.
Professional Help: A qualified attorney should be enlisted to help review the
legal and organizational documents of the business you are planning to
purchase. Also, an accountant can help with a thorough evaluation of the
financial condition of the business.
Sales Agreement for Buying a Business
The sales agreement is the key document to finalize the purchase of the
business. This agreement defines everything that you intend to purchase
including business assets, customer lists, intellectual property and goodwill. If
you do not have a lawyer to help you draft the terms of the sale, you should at
least have one review the agreement before you sign it.
Checklist for Closing on a Business
The closing is the final step in the process of buying a business. Keep in mind
that you should have legal counsel available to review all documentation
necessary for the transfer of the business.
The following items should be addressed in a closing:

35

Adjusted Purchase Price This will include prorated items such as rent,
utilities, and inventory up to the time of closing.

Review Required Documents These documents should include a

corporate resolution approving the sale, evidence that the corporation is in
good standing, or any tax releases that may have been promised by the
seller. Check with your local department of corporations or Secretary of
State for more information.

Signing Promissory Note In some cases, the seller will have back
financing, so have an attorney review any note documentation.

Security Agreements A security agreement lists the assets that will be

used for security as a promise for payment of the loan.

UCC Financing Statements Uniform Commercial Code documents are

recorded with the Secretary of State in the state you will be purchasing
your business.

Lease: If you agree to take over the lease, make sure that you have the
landlord's concurrence. If you are negotiating a new lease with the
landlord instead of assuming the existing lease, make sure both parties
are in agreement of the terms of the new lease.

Vehicles: If the purchase of the business includes vehicles, you may have
to complete transfer documents for the vehicles. Check with your local
Department of Motor Vehicles to determine the correct procedure and
necessary forms.

Bill of Sale: The bill of sale proves the sale of the business. It also
explicitly transfers ownership of tangible business assets not specifically
transferred on their own.

Patents, Trademarks and Copyrights: If there are any patents,

trademarks and/or copyrights associated with the business, you may need
to complete the necessary forms as part of the transaction.

Franchise: You may need to complete franchise documents if the

business is a franchise. See the Consumer Guide to Buying a Franchise for
more information.

Closing or Settlement Sheet The closing or settlement sheet will list all
financial aspects of the transaction. Everything listed on the settlement
should have been negotiated prior to the closing.

Covenant Not to Compete It is a good idea to have the seller sign an

agreement to not compete against the business. This will help prevent any
interference from the previous owner.

Consultation/Employment Agreement: If the seller is agreeing to

remain on for a specified amount of time, this documentation is necessary
for legal purposes.
36

Complete IRS Form 8594 Asset Acquisition Statement This

document will indicate how the purchase was allocated and the amount of
assets, which are important for your tax return.

Bulk Sale Laws: Make sure that you comply with bulk sale laws, which
govern the sale of business inventory.

vii.
Self Employed & Independent Contractors
Do you want to be self-employed or an independent contractor? This page will
discuss the many opportunities that are available to you and guide you to
success in the small business world.
Self-Employed Individuals
As an individual conducting your own business, you may want some guidance
along the way. For example, what taxes do you need to pay? To make sure you
have the basics covered, we've provided this list of helpful resources.
Starting a Business
Follow these Steps to Starting a Business

Learn essential steps you must take to legally operate a small business.

Buying Franchises and Other Business Opportunities

Get tips, advice and rules about buying franchises and how to avoid
scams.

Self-Employment Assistance for Unemployed Workers

Understand opportunities for assistance. States pay a self-employed

allowance, instead of regular unemployment insurance benefits, to help
unemployed workers while they are establishing businesses and becoming
self-employed. Participants receive weekly allowances while they are
getting their businesses off the ground.

Financing a Business
Federal and state government agencies do not provide grants to self-employed
individuals for starting a business. However, there are a number of low-interest
loan programs that help individuals obtain startup financing. Visit the Loans and
Grants Search Tool to get a full list of grant, loan and venture capital programs
for which you might qualify.
Tax Information for the Self-Employed
Employer Identification Number

Understand the Employer Identification Number (EIN), also known as a

federal tax identification number that is used to identify a business entity.
37

Small Business and Self-Employed One-Stop Resource

Get a broad range of state and local tax information, including resources
for specific industries, professions, self-employed entrepreneurs,
employers and small businesses.

Online Classroom

Participate in a series of self-directed workshops on a variety of topics for

small business owners, hosted by the Small Business/Self-Employed online
classroom.

Self-Employment Tax

View information on the Self-Employment Tax, a Social Security and

Medicare tax for individuals who work for themselves.

Sole Proprietorships

Obtain a listing of tax forms that a sole proprietor needs to file, along with
additional resources.

Visit the State and Local Tax page to about your states taxes required for selfemployed individuals.
Social Security
Social Security Information for the Self-Employed

Learn how to report your earnings.

Work Activity Report - Form SSA-820-F4

Access the Social Security benefit claim form for self-employed individuals.

Government Contracting Opportunities

The government provides many opportunities for small businesses. The following
guide provides information on programs that help small businesses successfully
compete for federal contracting opportunities.
Register for Government Contracting
How to Become an Independent Contractor
Commonly known as consultants, freelancers and self-employed, independent
contractors are individuals who are hired to do a particular job, receiving
payment only for the work being done. Independent contractors are business
owners, and are not their clients' employees. They do not receive employee
benefits or the same legal protections as employees, and are often responsible
38

for their own expenses. If you think you want to be an independent contractor,
explore the resources below.
Start Your Business
Like all other small business owners, you will need to follow some essential steps
to starting your business. This includes getting the proper tax registrations,
business and occupational licenses and permits from federal, state and local
governments in order to operate legally.
As an independent contractor, you will also want to create a standard agreement
for your services. The U.S. Chamber of Commerce provides a sample agreement.
You can find a number of other sample agreements on the Internet, but it is best
to consult an attorney to draft one specifically for your business, since your
agreement will be a legal document between you and your client.
Find Business Opportunities
Large and small businesses, organizations and government agencies hire
independent contractors for a wide variety of jobs, from professionals such as
accountants and engineers to trades like construction and trucking.
These resources will help you connect with potential clients and locate
opportunities:
Job Referral Services

Find out how you can advertise your professional services and locate
clients using this directory of websites.

Government Contracting Opportunities

Learn how to bid on contracts, including professional and trade services,

with federal and state government agencies.

Operate Your Business

As an independent contractor you are responsible for paying your own taxes,
Social Security, unemployment taxes, workers' compensation, health insurance,
and other benefits. In addition, you and your client should understand the
differences between an independent contractor and an employee, as well as your
legal rights and responsibilities.
Pay Your Taxes
Independent contractors must pay federal taxes on income and FICA; however,
your client will not withhold taxes for you. As a business owner you will need to
pay estimated taxes throughout the year instead of once a year on April 15.

39

The following IRS resources will help you understand how to pay federal taxes as
an independent contractor:
Self-Employed Individual Tax Center

Get all the information you need on federal tax at this one-stop resource
for independent contractors.

Federal Tax Forms for Sole Proprietors

Obtain a list of IRS forms frequently used by independent contractors.

Depending on the location of your business, you may be required to file state
and local income and business taxes. Visit our State and Local Tax page for more
information.
Are You an Employee or Independent Contractor?
Because you or your client calls you an independent contractor doesn't mean
that you are one. There are legal requirements that classify workers into
employees and independent contractors. Before starting your first job (or even
the next one), it's important to become familiar with these distinctions.
As an independent contractor you do not have the same legal rights and
protections as employees:

You are paid only for the work performed. Your clients are not required to
pay employee benefits under the Fair Labor Standards Act (FLSA),
including overtime and minimum wage

You are not covered under your clients' workers' compensation benefits

You are not entitled to receive your clients' employee benefits

You are not covered under Equal Employment Opportunity laws as they
apply to your client's relationship with its employees

Your taxes are not withheld and paid by your client, including income, FICA
and unemployment

If your client misclassifies you as an employee, they may be required to pay back
taxes, and provide employee benefits, workers' compensation, unemployment,
and more.
Just as your client should be very careful to distinguish between employees and
contractors, so should you. If you feel you are being treated as an employee,
complete Form SS-8 to ask the IRS to make a determination. If the IRS
determines you are an employee, you should immediately contact an attorney.
You may be able to file a lawsuit against the employer under FLSA, state
unemployment or workers' compensation laws, and others. For more information,
visit Independent Contractor (Self-Employed) or Employee?
40

viii.
Women-Owned Businesses
SBA provides resources to help women entrepreneurs launch new businesses,
grow their businesses and compete in the global marketplace. With our online
resources, financing opportunities and Womens Business Centers, were here to
help you succeed.

Starting a Business
o

Thinking About Starting

Writing a Business Plan

Registering a Business

Licenses & Permits

Laws & Regulations

Preparing Business Taxes

Growing a Business
o

Hiring Employees

Employee Benefits

Employee Incentives

Marketing a Business

Exporting

Government Contracting

Financing a Business
o

Estimating Startup Costs

Financing Basics

Finding Loans, Grants and Venture Capital

Mentoring & Training

o

Find a Business Mentor

Online Training

Find Local Resources

Learn About the WOSB Program

41

SBA Resources for Women

SBAs Office of Womens Business Ownership

The Office of Womens Business Ownership is here to answer your
questions on the Womens Business Center program or other services for
women.

SBA Loans
SBA offers a variety of loan programs for specific purposessee which
programs you qualify for.

SBAs Womens Business Centers

SBAs national network of over 100 educational centers assist women in
starting and growing small businesses. Find One near You

SBAs Women-Owned Federal Contracting Program

The WOSB Federal Contract Program levels the playing field for women
competing for federal contracting opportunities.

On-line training curriculum: Dream Builder

Through a strategic alliance with Thunderbird School of Global Management, SBA
is pleased to provide access to the Dream Builder online training curriculum in
both English and Spanish.
Womens Entrepreneurship Partner Groups

Association for Enterprise Opportunity (AEO)

Association of Women's Business Centers (AWBC)

National Association of Women in Construction

National Association of Women in Real Estate Businesses (NAWRB)

National Association of Women's Business Owners (NAWBO)

National Women's Business Council (NWBC)

U.S. Women's Chamber of Commerce (USWCC)

WE Connect International

Women's Business Enterprise National Council (WBENC)

Women Impacting Public Policy (WIPP)

42

Women's Presidents' Organization (WPO)

ix.
Veteran-Owned Businesses
If you are a veteran or service-disabled veteran, SBA has resources to help you
start and grow your small business. From creating a business plan to finding your
first customer, we're here to help you succeed.

Starting a Business
o

Writing a Business Plan

Registering a Business

Licenses & Permits

Laws & Regulations

Preparing Business Taxes

Growing a Business
o

Hiring Employees

Employee Benefits

Employee Incentives

Marketing a Business

Business Exporting

Financing a Business
o

Estimating Startup Costs

Financing Basics

Preparing for Financing

Mentoring & Training

o

Find a Business Mentor

Online Training

Find Local Resources

Returning to Your Business

o

Getting Veterans Back to Business Guide

43

Selling to the Government

o

Government Contracting Resources

GSA Contracting Guidance

SBA Resources for Veterans

Financing for Veteran-Owned Businesses:

o

Military Reservist Economic Injury Disaster Loan

This provides funds to eligible small businesses to meet operating
expenses that can't be met due to an essential employee being
called to active duty.

Loans and Grants Search Tool

Many states and other organizations also provide loans to veterans.

Small Business Assistance:

o

Boots to Business: From Service to Startup

Veterans Business Outreach Centers

These provide entrepreneurial development services for veterans.

Office of Veterans Business Development

This provides access to training, counseling and assistance.

National Veterans Business Development Conference & Expo

This annual conference focuses on veteran small businesses and
federal procurement opportunities.

Business Resources for People with Disabilities

This offers information about starting, financing and running a small
business aimed at disabled persons, including service-disabled
veterans.

x.
People with Disabilities
Starting a business can be a great opportunity for many people with disabilities.
In addition to meeting career aspirations and goals, owning your own business
can provide benefits such as work flexibility and financial stability. This page
offers resources to help disabled people start, grow and manage a small
business.

44

For hiring, recruiting and accommodation requirements, visit Hiring People with
Disabilities.
Starting a Business

Entrepreneur Resources for People with Disabilities

Details important considerations for potential entrepreneurs with
disabilities.

Important Considerations for Entrepreneurs with Disabilities

Outlines important considerations for potential entrepreneurs with
disabilities.

Online Seminar: Self-Employment for Individuals with Disabilities

Introduces some of the critical factors in considering business feasibility,
developing financial resources, basic business plan development and the
identification and access to community small business resources for
disabled persons.

Small Business and Self-Employment Service

Provides access to information such as the pros and cons of starting a
business as a disabled person, counseling, and referrals regarding selfemployment and small business ownership opportunities for people with
disabilities.

START-UP USA
Contains self-employment information and resources for individuals with
disabilities.

State Vocational Rehabilitation Agencies

Lists programs that help people with disabilities become employed,
including self-employment.

Ticket to Work Program

Connects Social Security Disability Insurance and supplemental security
income beneficiaries with employment networks for training and other
support services needed to achieve your employment goals, including selfemployment.

Financing a Business
Federal and state government agencies do not provide grants to people with
disabilities for starting a business. However, there are a number of low-interest
loan programs that help disabled people obtain startup financing.
Visit the Loans and Grants Search Tool to get a full list of grant, loan and venture
capital programs for which you might qualify. The following loan programs are
specifically for business owners with disabilities:

45

Abilities Fund
Provides access to financial assistance and resources, and customized
training to entrepreneurs with disabilities.

Alternative Financing Technical Assistance Project

Offers information on state loan programs for entrepreneurs with
disabilities and success stories.

Illinois Minority, Women, and Disabled Participation Loan Program

Explains how Illinois small businesses can apply for assistance if they are
51 percent owned and managed by persons who are minorities, women or
disabled, with loans up to $50,000 or 50 percent of a total project cost.

Iowa Target Small Business Assistance Program

Outlines the criteria for loans, loan guaranty, and equity grants of up to
$50,000 that are earmarked to help women, minorities and persons with
disabilities start and expand their businesses.

Maine: Kim Wallace Adaptive Equipment Loan Program Fund

Explores financial assistance for disabled persons and businesses involved
in the purchase, construction or installation of adaptive products. This
equipment allows disabled persons to become more independent within
the community, promotes mobility and improves independence and
quality of life. Businesses may use loan funds to facilitate compliance with
the Americans with Disabilities Act (ADA).

Maryland Workability Loan Program

explains if you are eligible for home-based and business loans, from $500
to $5,000, for people with disabilities.

Michigan Telework Loan Fund

allows you to apply for loans for equipment and home modifications that
will allow Michigan residents with disabilities to either start a home-based
business or work for an employer from home.

Mississippi Capital Access Loan Program

Gives information on financing for borrowers who, for various reasons,
might have difficulty in obtaining conventional loans. Borrowers must
apply for a loan through a lending institution.

Tax Information

Accessible IRS Tax Products

Provides popular tax forms from the Internal Revenue Service (IRS) and
publications in accessible formats, including Braille and talking formats.

Facts About Disability-Related Tax Provisions

Contains facts on the IRS' disability-related provisions that are of particular
interest to businesses as well as people with disabilities.
46

Tax Incentives Packet on the Americans with Disabilities Act

explains how to take advantage of the tax credit and deduction available
for complying with the ADA.

Trade and Professional Resources

Business Leadership Network

Details the only national disability organization led by business for
business, and how it promotes best practices in hiring, retaining and
marketing to people with disabilities.

Chamber of Commerce for Individuals with Disabilities

Provides information about the national consumer volunteer organization
that uses business principles to improve the economic status of individuals
with disabilities.

Disabled Businesspersons Association

Explores the association that assists enterprising individuals with
disabilities to succeed in the business world.

National Arability Project

Gives resources to assist people with disabilities who are employed in
agriculture.

Job Accommodation Network (JAN)

Provides access to technical assistance, consulting and mentoring services
for disabled entrepreneurs.

Disability Entrepreneurs: What Can You Do Campaign

Explores information and resources for disabled entrepreneurs.

xi.
Young Entrepreneurs
Millennial Entrepreneurs
SBA has many resources specifically geared toward millennial entrepreneurs. In
the coming months, SBA will be announcing new activities, events, and resources
in addition to those listed below. Stay tuned!
Spotlighting Millennial Entrepreneurs
Take the Pledge
If you are a small business owner and would like to commit to helping America's
youth learn from your business, take the Small Biz 4 Youth pledge!
Take Our Free Online Course
SBA's Online Learning Center offers free courses in many business topics.
There is a course specifically designed for young entrepreneurs. The Young
Entrepreneurs Essential Guide to Starting a Business will help you learn how to
start out as a young entrepreneur.
47

After finishing the course, you will receive a certificate of completion and a tip
sheet that summarizes key points. You may also use the business planner for
guidance on creating your business plan. Read our blogs for more business tips
and advice.
Local Resources
Use our Local Assistance tool to find a counselor or mentor through a SCORE
chapter, Small Business Development Center or Womens Business Center near
you.
Empowering Youth to Succeed
The Interagency Working Group on Youth Programs provides information,
strategies, tools, and resources for youth, families, schools and community
organizations related to a variety of cross-cutting topics that affect youth.
Small Business and Self-Employed Tax Center
Click here to learn about small business tax forms and publications.
xii.
Encore Entrepreneurs
A growing number of workers age 50-plus are turning interests, hobbies or skills
into a small business. Whether you are interested in starting a small business
right away or are intending to wait until after retirement, now is the time to
explore the possibilities.
Whether your target market is global or just your neighborhood, the SBA and its
Resource Partners can help at every stage of turning your entrepreneurial dream
into a thriving business.
Summer of Encore Mentoring
Its official June 1 begins the Summer of Encore Mentoring. Encore
entrepreneurs over the age of 50 are one of the fastest growing groups of
business owners. If you are an individual age 50+, then entrepreneurship can
offer an opportunity for you to use your knowledge, passion, life and professional
experience toward creating a small business.
You can about becoming an encore entrepreneur at a local event near you by
clicking here.
Encore Entrepreneur Hires the Help
In 2009, Michele (Mickie) Muirhead, now 50, decided she wanted to start her own
business, launching HireTheHelp.com in Jamestown New York.
HireTheHelp.com offers house cleaning , elderly care, vehicle detail services
(pick-up and delivery), and assistance with computers, pet sitting, landscaping,
painting, handyman services, snow removal and almost anything you can
imagine in Chautauqua, Cattaraugus and Warren counties. Read about Michele's
story.
Your Gateway to Success - Encore Entrepreneurship Webinar Series
48

Have you considered developing a plan for your small business? Do you know
what options are available to finance your small business? Do you have
questions about the best way to market your new or existing small business?
Register Here!
Online Courses
Try our free online courses! Training is available anytime and anywhere, checkout
the Encore Entrepreneur and Encore Entrepreneurship for Women courses that
are designed specifically for the encore entrepreneur.
Starting a Business - Are You Ready?
Do you have what it takes to start your own company? Take the quiz and find
out!
Find Local Resources
Enter your zip code to find a small business counselor or mentor through a
Womens Business Center, SCORE chapter or Small Business Development
Center near you. SBA resources can help you about your target market, how to
manage a successful small business and ways to sustain your growth. You can
also search for events in your local area.
xiii.

Minority-Owned Businesses

SBAs 8(a) Business Development program can help qualifying minority-owned

firms develop and grow their businesses through one-to-one counseling, training
workshops, and management and technical guidance. The program also provides
access to government contracting opportunities, allowing these businesses to
become solid competitors in the federal marketplace.
How do I know if I qualify for the 8(a) program?
Some minority groups are presumed to be socially and economically
disadvantaged and can qualify for the 8(a) program. These groups include:
African Americans, Hispanic Americans, Native Americans, Asian Pacific
Americans and Subcontinent Asian Americans. Individuals who are not members
of one or more of these groups can be considered for the 8(a) program, but they
must provide substantial evidence and documentation that demonstrates that
they have been subjected to bias or discrimination and are economically
disadvantaged. Firms owned by Alaska Native Corporations, Indian Tribes, Native
Hawaiian Organizations and Community Development Corporations can also
apply to the program.
How does SBA support 8(a)-certified firms?
After businesses are accepted into the program, SBA provides business
development assistance and helps them maintain program requirements. In
addition, SBAs Mentor-Portege program, a subset of the 8(a) program, pairs
mentor firms with protg firms to provide managerial and technical assistance
49

as well as joint venture and subcontracting opportunities to help the protg

compete successfully for federal contracts.
How do I find out more about the 8(a) program?
Small businesses interested in the 8(a) program should contact their local SBA
district office.
xiv.
Native Americans
There are many opportunities throughout the federal government for businesses
owned by Native Americans. These include government contracting, business
development and other programs that are designed to help Native American
entrepreneurs start, grow and manage their businesses.
SBA Programs for Native American Small Businesses
SBAs Office of Native American Affairs can help ensure Native-owned small
businesses have full access to business development and expansion tools.
As defined by SBAs regulations, native-owned businesses are presumed to be
socially and economically disadvantaged. These businesses can apply for the
nine-year, 8(a) Business Development Program certification.
The 8(a) program helps firms grow their businesses through one-to-one
counseling, training workshops, and management and technical guidance. It also
provides access to government contracting opportunities, allowing businesses to
become solid competitors in the federal marketplace. Business development
services, such as counseling and training, are provided by SBA's District Office
staff.
Other Federal Programs
The Department of the Interiors Bureau of Indian Affairs provides services to
federally recognized tribes. Through Indian Affairs programs, tribes can take
advantage of education, job training and employment opportunities.
To about all of the programs and resources available to you and other Native
Americans, please visit the following:

Online Training: Native American Business Primer

SBA's Office of Native American Affairs

Indian Affairs Division of Economic Development

U.S. Department of Agriculture American Indian & Alaska Native Programs

White House President Obama and the Native American Community

U.S. Senate Committee on Indian Affairs

50

National Congress of American Indians

Office of the Comptroller of the Currency- Federal Agencies Native

American Offices, Programs, and Resources

U.S. Department of Health & Human Services Administration for Native

Americans

Minority Business Development Agency

7. Find a Mentor or Counselor

i.
Finding a Business Mentor
ii.
Women's Business Resources
i.
Finding a Business Mentor
In the first months of opening your business, youll need to make many
important decisions. But you dont have to make every decision on your own.
Ultimately, youre responsible for your business, but you can always consult a
mentor for advice.
xix.

What is a mentor?
A mentor is someone who has been down the same path you're taking. He or she
is experienced, successful and willing to provide advice and guidance for no
real personal gain. But how do you find a mentor?
Here are some steps for finding and working with a mentor for your new small
business venture.
1. Government-Sponsored Mentor Organizations
The government offers a great deal of free resources and services to support
small business owners, both online and in person:

SCORE Mentors: Sponsored by SBA, SCORE provides free and confidential

counseling, mentoring and advice to small business owners nationwide via
a network of business executives, leaders and volunteers. You can connect
with a SCORE volunteer through in-person and/or online counseling.

Small Business Development Centers: SBDCs provide management

assistance to current and prospective small business owners. SBDC
services include financial counseling, marketing advice and management
guidance. Some SBDCs provide specialized assistance with information
technology, exporting or manufacturing. SBDCs are partnerships primarily
between the government and colleges, administered by SBA.

Womens Business Centers: WBCs provides business training and

counseling with the unique needs of women entrepreneurs in mind. WBCs
are a national network of nearly 100 educational centers designed to
support women who want to start and grow small businesses.
51

Veterans Business Outreach Centers: VBOCs provide veterans with

entrepreneurial development services such as business training,
counseling and mentoring.

Minority Business Development Agency: MBDA advisors help minority

business owners gain access to capital, contracts, market research and
general business consulting.

Additional federal counseling programs can be found on Business.USA.gov.

2. Trade Associations

Many trade associations operate mentor-protg programs that provide guidance

to help you build a business. These mentoring programs are often conducted
through a combination of formal one-on-one mentoring sessions and group
networking with fellow protgs. Business owners might be connected with
multiple mentors for a more holistic experience.
Most industries are represented by trade associations, as are genders, ethnic
groups and business types. If you need help finding a trade association, consult
your local SBA district office.
3. Mentoring for Government Contractors
If your business plans to sell products and services to the federal government,
you may need specialized mentorship. The General Services Administration
(GSA) offers a Mentor-Protg Program that is specifically designed to encourage
prime contractors to help small businesses participate in government
contracting. The SBA also has a Mentor-Protg Program for small businesses.
4. Look to Your Network
Who do you know? Do you have a previous boss who inspired you or a friend who
is a successful business owner? Ask that person to be your mentor, and learn
from his or her advice and best practices. Just be prepared to share with them
why you chose them in particular, your goals and what you are looking for from
them.
5. Working with a Mentor
If you decide to work with a mentoring organization, ensure there is a formal
mentor-protg structure in place. If you work with an individual, youll need to
establish a mutually beneficial, structured relationship. Remember these tips
about mentoring:

Be organized, prepared and consistent. Make sure you are respectful of

your mentors time.

Do not expect your mentor to run your business for you or make decisions
for you. You should have realistic expectations about what a mentor can
provide you.
52

Plan your mentoring sessions in advance. These could be as simple as

having a one-on-one meeting once a month to discuss business goals,
obstacles and regulatory requirements that you dont understand.

Take notes, create action items and be prepared to review progress during
your next session.

Thank your mentor for his or her time and assistance with your business
decision-making skills.

ii.
Women's Business Resources
SBA and the Office of Women's Business Ownership collaborate with many
organizations to make the best possible resources available to women
entrepreneurs. Whether you are a woman interested in starting a business,
applying for a business loan, finding government contracting opportunities, or
improving an existing business, this page is a good point of reference for you.

Major Partners
National Women's Business Council
The National Women's Business Council (NWBC) is a federal advisory council
created to serve as an independent source of advice and counsel to the
President, Congress and the U.S. Small Business Administration on economic
issues of importance to women business owners. The council's mission is to
promote bold initiatives, policies and programs designed to support women's
business enterprises at all stages of development in the public and private
sector--from start-up to success to significance.
Other Useful Resources

Make Mine a Million

Gives access to creative women who are dedicated to helping other women
succeed in business.

Women Impacting Public Policy

Provides information on Women Impacting Public Policy, a national nonpartisan

public policy organization that advocates for and on the behalf of women and
minorities in business in the legislative process to help create economic
opportunities and build alliances to other small business organizations.

Association of Women's Business Centers

Provides women business owners and entrepreneurs with a variety of support

and services, including help in securing rounds of venture capital.
53

National Association of Women Business Owners

Provides information on an association committed to helping women

entrepreneurs become effective in economic, social and political spheres of
power.

National Association for Female Executives

Offers access to powerful research on women entrepreneurship.

SCORE

Enables you to get free and confidential business advice from mentors, both
online and in-person.
B. Write Your Business Plan
xxi.

1. Executive Summary
2. Company Description
3. Market Analysis
4. Organization & Management
5. Service or Product Line
6. Marketing & Sales
7. Funding Request
8. Financial Projections
9. Appendix
10.How to Make Your Business Plan Stand
Out

1. Executive Summary
The executive summary is often considered the most important section of a
business plan. This section briefly tells your reader where your company is,
where you want to take it, and why your business idea will be successful. If you
are seeking financing, the executive summary is also your first opportunity to
grab a potential investors interest.
The executive summary should highlight the strengths of your overall plan and
therefore be the last section you write. However, it usually appears first in your
business plan document.
What to Include in Your Executive Summary
Below are several key points that your executive summary should include based
on the stage of your business.
If You Are an Established Business
If you are an established business, be sure to include the following information:

The Mission Statement This explains what your business is all about.
It should be between several sentences and a paragraph.
54

Company Information Include a short statement that covers when

your business was formed, the names of the founders and their roles, your
number of employees, and your business location(s).

Growth Highlights Include examples of company growth, such as

financial or market highlights (for example, XYZ Firm increased profit
margins and market share year-over-year since its foundation). Graphs
and charts can be helpful in this section.

Your Products/Services -- Briefly describe the products or services you

provide.

Financial Information If you are seeking financing, include any

information about your current bank and investors.

Summarize future plans Explain where you would like to take your
business.

With the exception of the mission statement, all of the information in the
executive summary should be covered in a concise fashion and kept to one page.
The executive summary is the first part of your business plan many people will
see, so each word should count.
If You Are a Startup or New Business
If you are just starting a business, you won't have as much information as an
established company. Instead, focus on your experience and background as well
as the decisions that led you to start this particular enterprise.
Demonstrate that you have done thorough market analysis. Include information
about a need or gap in your target market, and how your particular solutions can
fill it. Convince the reader that you can succeed in your target market, then
address your future plans.
Remember, your Executive Summary will be the last thing you write. So the first
section of the business plan that you will tackle is the Company Description
section.
2. Company Description
This section of your business plan provides a high-level review of the different
elements of your business. This is akin to an extended elevator pitch and can
help readers and potential investors quickly understand the goal of your business
and its unique proposition.
What to Include in Your Company Description

Describe the nature of your business and list the marketplace needs that
you are trying to satisfy.

Explain how your products and services meet these needs.

55

List the specific consumers, organizations or businesses that your

company serves or will serve.

Explain the competitive advantages that you believe will make your
business a success such as your location, expert personnel, efficient
operations, or ability to bring value to your customers.

Next, youll need to move on to the Market Analysis section of your plan.
3. Market Analysis
The market analysis section of your business plan should illustrate your industry
and market knowledge as well as any of your research findings and conclusions.
This section is usually presented after the company description.
What to Include in Your Market Analysis
Industry Description and Outlook Describe your industry, including its
current size and historic growth rate as well as other trends and characteristics
(e.g., life cycle stage, projected growth rate). Next, list the major customer
groups within your industry.
Information About Your Target Market Narrow your target market to a
manageable size. Many businesses make the mistake of trying to appeal to too
many target markets. Research and include the following information about your
market:
Distinguishing characteristics What are the critical needs of your potential
customers? Are those needs being met? What are the demographics of the
group and where are they located? Are there any seasonal or cyclical purchasing
trends that may impact your business?
Size of the primary target market In addition to the size of your market,
what data can you include about the annual purchases your market makes in
your industry? What is the forecasted market growth for this group? For more
information, see our market research guide for tips and free government
resources that can help you build a market profile.
How much market share can you gain? What is the market share
percentage and number of customers you expect to obtain in a defined
geographic area? Explain the logic behind your calculation.
Pricing and gross margin targets Define your pricing structure, gross
margin levels, and any discount that you plan to use.
When you include information about any of the market tests or research studies
you have completed, be sure to focus only on the results of these tests. Any
other details should be included in the appendix.

56

Competitive Analysis Your competitive analysis should identify your

competition by product line or service and market segment. Assess the following
characteristics of the competitive landscape:

Market share

Strengths and weaknesses

How important is your target market to your competitors?

Are there any barriers that may hinder you as you enter the market?

What is your window of opportunity to enter the market?

Are there any indirect or secondary competitors who may impact your
success?

What barriers to market are there (e.g., changing technology, high

investment cost, lack of quality personnel)?

Regulatory Restrictions Include any customer or governmental regulatory

requirements affecting your business, and how youll comply. Also, cite any
operational or cost impact the compliance process will have on your business.
Once youve completed this section, you can move on to the Organization &
Management section of your business plan.
4. Organization & Management
Organization and Management follows the Market Analysis. This section should
include: your company's organizational structure, details about the ownership of
your company, profiles of your management team, and the qualifications of your
board of directors.
Who does what in your business? What is their background and why are you
bringing them into the business as board members or employees? What are they
responsible for? These may seem like unnecessary questions to answer in a oneor two-person organization, but the people reading your business plan want to
know who's in charge, so tell them. Give a detailed description of each division or
department and its function.
This section should include who's on the board (if you have an advisory board)
and how you intend to keep them there. What kind of salary and benefits
package do you have for your people? What incentives are you offering? How
about promotions? Reassure your reader that the people you have on staff are
more than just names on a letterhead.

57

Organizational Structure
A simple but effective way to lay out the structure of your company is to create
an organizational chart with a narrative description. This will prove that you're
leaving nothing to chance, you've thought out exactly who is doing what, and
there is someone in charge of every function of your company. Nothing will fall
through the cracks, and nothing will be done three or four times over. To a
potential investor or employee, that is very important.
Ownership Information
This section should also include the legal structure of your business along with
the subsequent ownership information it relates to. Have you incorporated your
business? If so, is it a C or S corporation? Or perhaps you have formed a
partnership with someone. If so, is it a general or limited partnership? Or maybe
you are a sole proprietor.
The following important ownership information should be incorporated into your
business plan:

Names of owners

Percentage ownership

Extent of involvement with the company

Forms of ownership (i.e., common stock, preferred stock, general partner,

limited partner)

Outstanding equity equivalents (i.e., options, warrants, convertible debt)

Common stock (i.e., authorized or issued)

Management Profiles

Experts agree that one of the strongest factors for success in any growth
company is the ability and track record of its owner/management team, so
let your reader know about the key people in your company and their
backgrounds. Provide resumes that include the following information:

Name

Position (include brief position description along with primary duties)

Primary responsibilities and authority

Education

Unique experience and skills

Prior employment
58

Special skills

Past track record

Industry recognition

Community involvement

Number of years with company

Compensation basis and levels (make sure these are reasonable -- not too
high or too low)

Be sure you quantify achievements (e.g. "Managed a sales force of ten

people," "Managed a department of fifteen people," "Increased revenue by
15 percent in the first six months," "Expanded the retail outlets at the rate
of two each year," "Improved the customer service as rated by our
customers from a 60 percent to a 90 percent rating")

Also highlight how the people surrounding you complement your own skills. If
you're just starting out, show how each person's unique experience will
contribute to the success of your venture.
Board of Directors' Qualifications
The major benefit of an unpaid advisory board is that it can provide expertise
that your company cannot otherwise afford. A list of well-known, successful
business owners/managers can go a long way toward enhancing your company's
credibility and perception of management expertise.
If you have a board of directors, be sure to gather the following information when
developing the outline for your business plan:

Names

Positions on the board

Extent of involvement with company

Background

Historical and future contribution to the company's success

Next, move on to the Service or Product Line section of your plan.

5. Service or Product Line
Once youve completed the Organizational and Management section of your
plan, the next part of your business plan is where you describe your service or
product, emphasizing the benefits to potential and current customers. Focus on
why your particular product will fill a need for your target customers.

59

What to Include in Your Service or Product Line Section

A Description of Your Product / Service
Include information about the specific benefits of your product or service from
your customers' perspective. You should also talk about your product or service's
ability to meet consumer needs, any advantages your product has over that of
the competition, and the current development stage your product is in (e.g.,
idea, prototype).
Details about Your Products Life Cycle
Be sure to include information about where your product or service is in its life
cycle, as well as any factors that may influence its cycle in the future.
Intellectual Property
If you have any existing, pending, or any anticipated copyright or patent
filings, list them here. Also disclose whether any key aspects of a product may be
classified as trade secrets. Last, include any information pertaining to existing
legal agreements, such as nondisclosure or non-compete agreements.
Research and Development (R&D) Activities
Outline any R&D activities that you are involved in or are planning. What results
of future R&D activities do you expect? Be sure to analyze the R&D efforts of not
only your own business, but also of others in your industry.
Next, move on to the Marketing & Sales Management section of your plan.
Online Course
How to Prepare a Business Plan
6. Marketing & Sales
Once youve completed the Service or Product Line section of your plan, the next
part of your business plan should focus on your marketing and sales
management strategy for your business.
Marketing is the process of creating customers, and customers are the lifeblood
of your business. In this section, the first thing you want to do is define your
marketing strategy. There is no single way to approach a marketing strategy;
your strategy should be part of an ongoing business-evaluation process and
unique to your company. However, there are common steps you can follow which
will help you think through the direction and tactics you would like to use to drive
sales and sustain customer loyalty.
An overall marketing strategy should include four different strategies:

A market penetration strategy.

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A growth strategy. This strategy for building your business might include:
an internal strategy such as how to increase your human resources, an
acquisition strategy such as buying another business, a franchise strategy
for branching out, a horizontal strategy where you would provide the same
type of products to different users, or a vertical strategy where you would
continue providing the same products but would offer them at different
levels of the distribution chain.

Channels of distribution strategy. Choices for distribution channels could

include original equipment manufacturers (OEMs), an internal sales force,
distributors, or retailers.

Communication strategy. How are you going to reach your customers?

Usually a combination of the following tactics works the best: promotions,
advertising, public relations, personal selling, and printed materials such
as brochures, catalogs, flyers, etc.

After you have developed a comprehensive marketing strategy, you can then
define your sales strategy. This covers how you plan to actually sell your product.
Your overall sales strategy should include two primary elements:

A sales force strategy. If you are going to have a sales force, do you plan
to use internal or independent representatives? How many salespeople
will you recruit for your sales force? What type of recruitment strategies
will you use? How will you train your sales force? What about
compensation for your sales force?

Your sales activities. When you are defining your sales strategy, it is
important that you break it down into activities. For instance, you need to
identify your prospects. Once you have made a list of your prospects, you
need to prioritize the contacts, selecting the leads with the highest
potential to buy first. Next, identify the number of sales calls you will make
over a certain period of time. From there, you need to determine the
average number of sales calls you will need to make per sale, the average
dollar size per sale, and the average dollar size per vendor.

Next, if you are seeking financing for your business, youll need to complete the
next part of your plan Funding Request.
7. Funding Request
If you are seeking funding for your business venture, use this section to outline
your requirements.
Your funding request should include the following information:

Your current funding requirement

Any future funding requirements over the next five years

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How you intend to use the funds you receive: Is the funding request for
capital expenditures? Working capital? Debt retirement? Acquisitions?
Whatever it is, be sure to list it in this section.

Any strategic financial situational plans for the future, such as: a buyout,
being acquired, debt repayment plan, or selling your business. These
areas are extremely important to a future creditor, since they will directly
impact your ability to repay your loan(s).

When you are outlining your funding requirements, include the amount you want
now and the amount you want in the future. Also include the time period that
each request will cover, the type of funding you would like to have (e.g., equity,
debt), and the terms that you would like to have applied.
To support your funding request youll also need to provide historical and
prospective financial information.
Once you have completed your funding request, move on to the next part of your
plan Financial Projections.
8. Financial Projections
Financial Projections
You should develop the Financial Projections section after you've analyzed the
market and set clear objectives. That's when you can allocate resources
efficiently. The following is a list of the critical financial statements to include in
your business plan packet.
Historical Financial Data
If you own an established business, you will be requested to supply historical
data related to your company's performance. Most creditors request data for the
last three to five years, depending on the length of time you have been in
business.
The historical financial data to include are your company's income statements,
balance sheets, and cash flow statements for each year you have been in
business (usually for up to three to five years). Often, creditors are also
interested in any collateral that you may have that could be used to ensure your
loan, regardless of the stage of your business.
Prospective Financial Data
All businesses, whether startup or growing, will be required to supply prospective
financial data. Most of the time, creditors will want to see what you expect your
company to be able to do within the next five years. Each year's documents
should include forecasted income statements, balance sheets, cash flow
statements, and capital expenditure budgets. For the first year, you should
supply monthly or quarterly projections. After that, you can stretch it to quarterly
and/or yearly projections for years two through five.
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Make sure that your projections match your funding requests; creditors will be on
the lookout for inconsistencies. It's much better if you catch mistakes before they
do. If you have made assumptions in your projections, be sure to summarize
what you have assumed. This way, the reader will not be left guessing.
Finally, include a short analysis of your financial information. Include a ratio and
trend analysis for all of your financial statements (both historical and
prospective). Since pictures speak louder than words, you may want to add
graphs of your trend analysis (especially if they are positive).
Next, you may want to include an Appendix to your plan. This can include items
such as your credit history, resumes, letters of reference, and any additional
information that a lender may request.
9. Appendix
The Appendix should be provided to readers on an as-needed basis. In other
words, it should not be included with the main body of your business plan. Your
plan is your communication tool; as such, it will be seen by a lot of people. Some
of the information in the business section you will not want everyone to see, but
specific individuals (such as creditors) may want access to this information to
make lending decisions. Therefore, it is important to have the appendix within
easy reach.
The appendix would include:

Credit history (personal & business)

Resumes of key managers

Product pictures

Letters of reference

Details of market studies

Relevant magazine articles or book references

Licenses, permits or patents

Legal documents

Copies of leases

Building permits

Contracts

List of business consultants, including attorney and accountant

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Any copies of your business plan should be controlled; keep a distribution record.
This will allow you to update and maintain your business plan on an as-needed
basis. Remember, too, that you should include a private placement disclaimer
with your business plan if you plan to use it to raise capital.
Return to the Essential Elements of a Good Business Plan.
10.
How to Make Your Business Plan Stand Out
One of the first steps to business planning is determining your target market and
why they would want to buy from you.
For example, is the market you serve the best one for your product or service?
Are the benefits of dealing with your business clear and are they aligned with
customer needs? If you're unsure about the answers to any of these questions,
take a step back and revisit the foundation of your business plan.
The following tips can help you clarify what your business has to offer, identify
the right target market for it and build a niche for yourself.
Be Clear About What You Have to Offer
Ask yourself: Beyond basic products or services, what are you really selling?
Consider this example: Your town probably has several restaurants all selling one
fundamental productfood. But each is targeted at a different need or clientele.
One might be a drive-thru fast food restaurant, perhaps another sells pizza in a
rustic Italian kitchen, and maybe theres a fine dining seafood restaurant that
specializes in wood-grilled fare. All these restaurants sell meals, but they sell
them to targeted clientele looking for the unique qualities each has to offer. What
they are really selling is a combination of product, value, ambience and brand
experience.
When starting a business, be sure to understand what makes your business
unique. What needs does your product or service fulfill? What benefits and
differentiators will help your business stand out from the crowd?
Dont Become a Jack of All Trades-Learn to Strategize
Its important to clearly define what youre selling. You do not want to become a
jack-of-all trades and master of none because this can have a negative impact on
business growth. As a smaller business, it's often a better strategy to divide your
products or services into manageable market niches. Small operations can then
offer specialized goods and services that are attractive to a specific group of
prospective buyers.
Identify Your Niche
Creating a niche for your business is essential to success. Often, business owners
can identify a niche based on their own market knowledge, but it can also be

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helpful to conduct a market survey with potential customers to uncover

untapped needs. During your research process, identify the following:

Which areas your competitors are already well-established

Which areas are being ignored by your competitors

Potential opportunities for your business

C. Choose Your Business Structure

xxx.

1.
2.
3.
4.
5.
6.

Sole Proprietorship
Limited Liability Company
Cooperative
Corporation
Partnership
S Corporation

1. Sole Proprietorship
A sole proprietorship is the simplest and most common structure chosen to start
a business. It is an unincorporated business owned and run by one individual
with no distinction between the business and you, the owner. You are entitled to
all profits and are responsible for all your businesss debts, losses and liabilities.
Forming a Sole Proprietorship
You do not have to take any formal action to form a sole proprietorship. As long
as you are the only owner, this status automatically comes from your business
activities. In fact, you may already own one without knowing it. If you are a
freelance writer, for example, you are a sole proprietor.
But like all businesses, you need to obtain the necessary licenses and permits.
Regulations vary by industry, state and locality. Use the Licensing & Permits tool
to find a listing of federal, state and local permits, licenses and registrations
you'll need to run a business.
If you choose to operate under a name different than your own, you will most
likely have to file a fictitious name (also known as an assumed name, trade
name, or DBA name, short for "doing business as"). You must choose an original
name; it cannot already be claimed by another business.
Sole Proprietor Taxes
Because you and your business are one and the same, the business itself is not
taxed separately-the sole proprietorship income is your income. You report
income and/or losses and expenses with a Schedule C and the standard Form
1040 . The bottom-line amount from Schedule C transfers to your personal tax
return. Its your responsibility to withhold and pay all income taxes, including

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self-employment and estimated taxes . You can find more information about
sole proprietorship taxes and other forms at IRS.gov.
Advantages of a Sole Proprietorship

Easy and inexpensive to form: A sole proprietorship is the simplest and

least expensive business structure to establish. Costs are minimal, with
legal costs limited to obtaining the necessary license or permits.

Complete control. Because you are the sole owner of the business, you
have complete control over all decisions. You arent required to consult
with anyone else when you need to make decisions or want to make
changes.

Easy tax preparation. Your business is not taxed separately, so its easy
to fulfill the tax reporting requirements for a sole proprietorship. The tax
rates are also the lowest of the business structures.

Disadvantages of a Proprietorship

Unlimited personal liability. Because there is no legal separation

between you and your business, you can be held personally liable for the
debts and obligations of the business. This risk extends to any liabilities
incurred as a result of employee actions.

Hard to raise money. Sole proprietors often face challenges when trying
to raise money. Because you cant sell stock in the business, investors
won't often invest. Banks are also hesitant to lend to a sole proprietorship
because of a perceived lack of credibility when it comes to repayment if
the business fails.

Heavy burden. The flipside of complete control is the burden and

pressure it can impose. You alone are ultimately responsible for the
successes and failures of your business.

2. Limited Liability Company

A limited liability company is a hybrid type of legal structure that provides the
limited liability features of a corporation and the tax efficiencies and operational
flexibility of a partnership.
The "owners" of an LLC are referred to as "members." Depending on the state,
the members can consist of a single individual (one owner), two or more
individuals, corporations or other LLCs.
Unlike shareholders in a corporation, LLCs are not taxed as a separate business
entity. Instead, all profits and losses are "passed through" the business to each
member of the LLC. LLC members report profits and losses on their personal
federal tax returns, just like the owners of a partnership would.
Forming an LLC

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While each state has slight variations to forming an LLC, they all adhere to some
general principles:
Choose a Business Name. There are 3 rules that your LLC name needs to
follow: (1) it must be different from an existing LLC in your state, (2) it must
indicate that it's an LLC (such as "LLC" or Limited Company") and (3) it must not
include words restricted by your state (such as "bank" and "insurance"). Your
business name is automatically registered with your state when you register your
business, so you do not have to go through a separate process. Read more here
about choosing a business name.
File the Articles of Organization. The "articles of organization" is a simple
document that legitimizes your LLC and includes information like your business
name, address, and the names of its members. For most states, you file with the
Secretary of State. However, other states may require that you file with a
different office such as the State Corporation Commission, Department of
Commerce and Consumer Affairs, Department of Consumer and Regulatory
Affairs, or the Division of Corporations & Commercial Code. Note: there may be
an associated filing fee.
Create an Operating Agreement. Most states do not require operating
agreements. However, an operating agreement is highly recommended for multimember LLCs because it structures your LLC's finances and organization, and
provides rules and regulations for smooth operation. The operating agreement
usually includes percentage of interests, allocation of profits and losses,
member's rights and responsibilities and other provisions.
Obtain Licenses and Permits. Once your business is registered, you must
obtain business licenses and permits. Regulations vary by industry, state and
locality. Use the Licensing & Permits tool to find a listing of federal, state and
local permits, licenses and registrations you'll need to run a business.
Hiring Employees. If you are hiring employees, read more about federal and
state regulations for employers.
Announce Your Business. Some states, including Arizona and New York,
require the extra step of publishing a statement in your local newspaper about
your LLC formation. Check with your state's business filing office for
requirements in your area.
LLC Taxes
In the eyes of the federal government, an LLC is not a separate tax entity, so the
business itself is not taxed. Instead, all federal income taxes are passed on to the
LLC's members and are paid through their personal income tax. While the federal
government does not tax income on an LLC, some states do, so check with your
state's income tax agency.
Since the federal government does not recognize LLC as a business entity for
taxation purposes, all LLCs must file as a corporation, partnership, or sole
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proprietorship tax return. Certain LLCs are automatically classified and taxed as
a corporation by federal tax law. For guidelines about how to classify an LLC, visit
IRS.gov.
LLCs that are not automatically classified as a corporation can choose their
business entity classification. To elect a classification, an LLC must file Form
8832. This form is also used if an LLC wishes to change its classification status.
Read more about filing as a corporation or partnership and filing as a single
member LLC at IRS.gov.
You should file the following tax forms depending on your classification:

Single Member LLC. A single-member LLC files Form 1040 Schedule C like
a sole proprietor.

Partners in an LLC. Partners in an LLC file a Form 1065

return like owners in a traditional partnership.

LLC filing as a Corporation. An LLC designated as a corporation files Form

1120, the corporation income tax return.

partnership tax

The IRS guide to Limited Liability Companies provides all relevant tax forms and
additional information regarding their purpose and use.
Combining the Benefits of an LLC with an S-Corp
There is always the possibility of requesting S-Corp status for your LLC. An
attorney can advise you on the pros and cons. You'll have to make a special
election with the IRS to have the LLC taxed as an S-Corp using Form 2553 . You
must file prior to the first two months and fifteen days of the beginning of the tax
year in which the election is to take effect. For more information about S-Corp
status, visit IRS.gov.
The LLC remains a limited liability company from a legal standpoint, but for tax
purposes it can be treated as an S-Corp. Be sure to contact the state's income
tax agency where you plan to file your election form. Ask about the tax
requirements and if they recognize elections of other entities (such as the SCorp).
Advantages of an LLC

Limited Liability. Members are protected from personal liability for

business decisions or actions of the LLC. This means that if the LLC incurs
debt or is sued, members' personal assets are usually exempt. This is
similar to the liability protections afforded to shareholders of a
corporation. Keep in mind that limited liability means "limited" liability members are not necessarily shielded from wrongful acts, including those
of their employees.

Less Recordkeeping. An LLC's operational ease is one of its greatest

advantages. Compared to an S-Corporation, there is less registration
paperwork and there are smaller start-up costs.
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Sharing of Profits. There are fewer restrictions on profit sharing within

an LLC, as members distribute profits as they see fit. Members might
contribute different proportions of capital and sweat equity. Consequently,
it's up to the members themselves to decide who has earned what
percentage of the profits or losses.

Disadvantages of an LLC

Limited Life. In many states, when a member leaves an LLC, the

business is dissolved and the members must fulfill all remaining legal and
business obligations to close the business. The remaining members can
decide if they want to start a new LLC or part ways. However, you can
include provisions in your operating agreement to prolong the life of the
LLC if a member decides to leave the business.

Self-Employment Taxes. Members of an LLC are considered selfemployed and must pay the self-employment tax contributions towards
Medicare and Social Security. The entire net income of the LLC is subject
to this tax.

3. Cooperative
A cooperative is a business or organization owned by and operated for the
benefit of those using its services. Profits and earnings generated by the
cooperative are distributed among the members, also known as user-owners.
Typically, an elected board of directors and officers run the cooperative while
regular members have voting power to control the direction of the cooperative.
Members can become part of the cooperative by purchasing shares, though the
amount of shares they hold does not affect the weight of their vote.
Cooperatives are common in the healthcare, retail, agriculture, art and
restaurant industries.
Forming a Cooperative
Forming a cooperative is different from forming any other business entity. To start
up, a group of potential members must agree on a common need and a strategy
on how to meet that need. An organizing committee then conducts exploratory
meetings, surveys, and cost and feasibility analyses before every member
agrees with the business plan. Not all cooperatives are incorporated, though
many choose to do so. If you decide to incorporate your cooperative, you must
complete the following steps:

File Articles of Incorporation. The articles of incorporation legitimizes

your cooperative and includes information like the name of the
cooperative, business location, purpose, duration of existence, and names
of the incorporators, and capital structure. Once the charter members
(also known as the incorporators) file with your state business entity
registration office and the articles are approved, you should create bylaws
for your cooperative.

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Create Bylaws. While the law does not require bylaws, they do need to
comply with state law and are essential to the success of your
cooperative. Bylaws list membership requirements, duties, responsibilities
and other operational procedures that allow youre cooperative to run
smoothly. According to most state laws, the majority of your members
must adopt articles of incorporation and bylaws. Consult an attorney to
verify that your bylaws comply with state laws.

Create a Membership Application. To recruit members and legally

verify that they are part of the cooperative, you must create and issue a
membership application. Membership applications include names,
signatures from the board of directors and member rights and benefits.

Conduct a Charter Member Meeting and Elect Directors. During this

meeting, charter members discuss and amend the proposed bylaws. By
the end of the meeting, all of the charter members should vote to adopt
the bylaws. If the board of directors were not named in the articles of
incorporation, you must designate them during the charter meeting.

Obtain Licenses and Permits. You must obtain relevant business

licenses and permits. Regulations vary by industry, state and locality. Use
our Licensing & Permits tool to find a list of federal, state and local
permits, licenses and registrations you'll need to run a business.

Hiring Employees. If you are hiring employees, read more about federal
and state regulations for employers.

Each state will have slightly different laws that govern a cooperative. Consult an
attorney, your Secretary of State or State Corporation Commissioner for more
information regarding your state's specific laws.
Cooperative Taxes
Most businesses need to register with the IRS, register with state and local
revenue agencies, and obtain a tax ID number or permit. A cooperative operates
as a corporation and receives a "pass-through" designation from the IRS. More
specifically, cooperatives do not pay federal income taxes as a business entity.
Instead, the cooperative's members pay federal taxes when they file their
personal income tax. Members pay federal and state income tax on the margins
earned by the cooperative, though the amount of taxation varies slightly by
state. Cooperatives must follow the rules and regulations of the IRS's Subchapter
T Cooperatives tax code to receive this type of tax treatment.
To file taxes on income received from cooperatives, please refer to IRS
instructions on how to file Form 1099-PATR . More information about taxable
distributions received from cooperatives is available at IRS.gov. If you create a
consumer cooperative for retail sales of goods or services that are generally for
personal, living, or family, you will need to file Form 3491 Consumer Cooperative
Exemption Application for exemption from Form 1099-PATR.

70

Some cooperatives, like credit unions and rural utility cooperatives, are exempt
from federal and state taxes due to the nature of their operations. Check with
your state's income tax agency for information about state taxes.
Advantages of a Cooperative

Less Taxation. Similar to an LLC, cooperatives that are incorporated

normally are not taxed on surplus earnings (or patronage dividends)
refunded to members. Therefore, members of a cooperative are only taxed
once on their income from the cooperative and not on both the individual
and the cooperative level.

Funding Opportunities. Depending on the type of cooperative you own

or participate in, there are a variety of government-sponsored grant
programs to help you start. For example, the USDA Rural Development
program offers grants to those establishing and operating new and
existing rural development cooperatives.

Reduce Costs and Improve Products and Services. By leveraging

their size, cooperatives can more easily obtain discounts on supplies and
other materials and services. Suppliers are more likely to give better
products and services because they are working with a customer of more
substantial size. Consequently, the members of the cooperative can focus
on improving products and services.

Perpetual Existence. A cooperative structure brings less disruption and

more continuity to the business. Unlike other business structures,
members in a cooperative can routinely join or leave the business without
causing dissolution.

Democratic Organization. Democracy is a defining element of

cooperatives. The democratic structure of a cooperative ensures that it
serves its members' needs. The amount of a member's monetary
investment in the cooperative does not affect the weight of each vote, so
no member-owner can dominate the decision-making process. The "one
member-one vote" philosophy particularly appeals to smaller investors
because they have as much say in the organization as does a larger
investor.

Disadvantages of a Cooperative

Obtaining Capital through Investors. Cooperatives may suffer from

slower cash flow since a member's incentive to contribute depends on how
much they use the cooperative's services and products. While the "one
member-one vote" philosophy is appealing to small investors, larger
investors may choose to invest their money elsewhere because a larger
share investment in the cooperative does not translate to greater decisionmaking power.

Lack of Membership and Participation. If members do not fully

participate and perform their duties, whether it be voting or carrying out
daily operations, then the business cannot operate at full capacity. If a lack
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of participation becomes an ongoing issue for a cooperative, it could risk

losing members.
4. Corporation
Corporation (C Corporation)
A corporation (sometimes referred to as a C corporation) is an independent legal
entity owned by shareholders. This means that the corporation itself, not the
shareholders that own it, is held legally liable for the actions and debts the
business incurs.
Corporations are more complex than other business structures because they
tend to have costly administrative fees and complex tax and legal requirements.
Because of these issues, corporations are generally suggested for established,
larger companies with multiple employees.
For businesses in that position, corporations offer the ability to sell ownership
shares in the business through stock offerings. Going public through an initial
public offering (IPO) is a major selling point in attracting investment capital and
high quality employees.
Forming a Corporation
A corporation is formed under the laws of the state in which it is registered. To
form a corporation youll need to establish your business name and register your
legal name with your state government. If you choose to operate under a name
different than the officially registered name, youll most likely have to file a
fictitious name (also known as an assumed name, trade name, or DBA name,
short for "doing business as"). State laws vary, but generally corporations must
include a corporate designation (Corporation, Incorporated, Limited) at the end
of the business name.
To register your business as a corporation, you need to file certain documents,
typically articles of incorporation, with your states Secretary of State Office.
Some states require corporations to establish directors and issue stock
certificates to initial shareholders in the registration process. Contact your state
business entity registration office to find out about specific filing requirements in
the state where you form your business.
Once your business is registered, you must obtain business licenses and permits.
Regulations vary by industry, state and locality. Use our Licensing & Permits
tool to find a listing of federal, state and local permits, licenses and registrations
you'll need to run a business.
If you are hiring employees, read more about federal and state regulations for
employers.
Corporation Taxes

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Corporations are required to pay federal, state, and in some cases, local taxes.
Most businesses must register with the IRS and state and local revenue agencies,
and receive a tax ID number or permit.
When you form a corporation, you create a separate tax-paying entity. Regular
corporations are called C corporations because Subchapter C of Chapter 1 of
the Internal Revenue Code is where you find general tax rules affecting
corporations and their shareholders.
Unlike sole proprietors and partnerships, corporations pay income tax on their
profits. In some cases, corporations are taxed twice - first, when the company
makes a profit, and again when dividends are paid to shareholders on their
personal tax returns. Corporations use IRS Form 1120 or 1120-A, U.S. Corporation
Income Tax Return to report revenue to the federal government.
Shareholders who are also employees pay income tax on their wages. The
corporation and the employee each pay one half of the Social Security and
Medicare taxes, but this is usually a deductible business expense.
Read more about tax requirements for Corporations on IRS.gov.
Advantages of a Corporation

Limited Liability. When it comes to taking responsibility for business

debts and actions of a corporation, shareholders personal assets are
protected. Shareholders can generally only be held accountable for their
investment in stock of the company.

Ability to Generate Capital. Corporations have an advantage when it

comes to raising capital for their business - the ability to raise funds
through the sale of stock.

Corporate Tax Treatment. Corporations file taxes separately from their

owners. Owners of a corporation only pay taxes on corporate profits paid
to them in the form of salaries, bonuses, and dividends, while any
additional profits are awarded a corporate tax rate, which is usually lower
than a personal income tax rate.

Attractive to Potential Employees. Corporations are generally able to

attract and hire high-quality and motivated employees because they offer
competitive benefits and the potential for partial ownership through stock
options.

Disadvantages of a Corporation

Time and Money. Corporations are costly and time-consuming ventures

to start and operate. Incorporating requires start-up, operating and tax
costs that most other structures do not require.

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Double Taxing. In some cases, corporations are taxed twice - first, when
the company makes a profit, and again when dividends are paid to
shareholders.

Additional Paperwork. Because corporations are highly regulated by

federal, state, and in some cases local agencies, there are increased
paperwork and recordkeeping burdens associated with this entity.

5. Partnership
A partnership is a single business where two or more people share ownership.
Each partner contributes to all aspects of the business, including money,
property, labor or skill. In return, each partner shares in the profits and losses of
the business.
Because partnerships entail more than one person in the decision-making
process, its important to discuss a wide variety of issues up front and develop a
legal partnership agreement. This agreement should document how future
business decisions will be made, including how the partners will divide profits,
resolve disputes, change ownership (bring in new partners or buy out current
partners) and how to dissolve the partnership. Although partnership agreements
are not legally required, they are strongly recommended and it is considered
extremely risky to operate without one.
Types of Partnerships
There are three general types of partnership arrangements:

General Partnerships assume that profits, liability and management

duties are divided equally among partners. If you opt for an unequal
distribution, the percentages assigned to each partner must be
documented in the partnership agreement.

Limited Partnerships (also known as a partnership with limited liability)

are more complex than general partnerships. Limited partnerships allow
partners to have limited liability as well as limited input with management
decisions. These limits depend on the extent of each partners investment
percentage. Limited partnerships are attractive to investors of short-term
projects.

Joint Ventures act as general partnership, but for only a limited period of
time or for a single project. Partners in a joint venture can be recognized
as an ongoing partnership if they continue the venture, but they must file
as such.

Forming a Partnership
To form a partnership, you must register your business with your state, a process
generally done through your Secretary of States office.
Youll also need to establish your business name. For partnerships, your legal
name is the name given in your partnership agreement or the last names of the
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partners. If you choose to operate under a name different than the officially
registered name, you will most likely have to file a fictitious name (also known as
an assumed name, trade name, or DBA name, short for "doing business as").
Once your business is registered, you must obtain business licenses and permits.
Regulations vary by industry, state and locality. Use our Licensing & Permits
tool to find a listing of federal, state and local permits, licenses and registrations
you'll need to run a business.
If you are hiring employees, read more about federal and state regulations for
employers.
Partnership Taxes
Most businesses will need to register with the IRS, register with state and local
revenue agencies, and obtain a tax ID number or permit.
A partnership must file an annual information return to report the income,
deductions, gains and losses from the businesss operations, but the business
itself does not pay income tax. Instead, the business "passes through" any profits
or losses to its partners. Partners include their respective share of the
partnership's income or loss on their personal tax returns.
Partnership taxes generally include:

Annual Return of Income

Employment Taxes

Excise Taxes

Partners in the partnership are responsible for several additional taxes, including:

Income Tax

Self-Employment Tax

Estimated Tax

Filing information for partnerships:

Partnerships must furnish copies of their Schedule K-1 (Form 1065)

partners by the date Form 1065 is required to be filed, including
extensions.

Partners are not employees and should not be issued a Form W-2.

The IRS guide to Partnerships provides all relevant tax forms and additional
information regarding their purpose and use.
Advantages of a Partnership

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to all

Easy and Inexpensive. Partnerships are generally an inexpensive and

easily formed business structure. The majority of time spent starting a
partnership often focuses on developing the partnership agreement.

Shared Financial Commitment. In a partnership, each partner is

equally invested in the success of the business. Partnerships have the
advantage of pooling resources to obtain capital. This could be beneficial
in terms of securing credit, or by simply doubling your seed money.

Complementary Skills. A good partnership should reap the benefits of

being able to utilize the strengths, resources and expertise of each
partner.

Partnership Incentives for Employees. Partnerships have an

employment advantage over other entities if they offer employees the
opportunity to become a partner. Partnership incentives often attract
highly motivated and qualified employees.

Disadvantages of a Partnership

Joint and Individual Liability. Similar to sole proprietorships,

partnerships retain full, shared liability among the owners. Partners are not
only liable for their own actions, but also for the business debts and
decisions made by other partners. In addition, the personal assets of all
partners can be used to satisfy the partnerships debt.

Disagreements among Partners. With multiple partners, there are

bound to be disagreements Partners should consult each other on all
decisions, make compromises, and resolve disputes as amicably as
possible.

Shared Profits. Because partnerships are jointly owned, each partner

must share the successes and profits of their business with the other
partners. An unequal contribution of time, effort, or resources can cause
discord among partners.

6. S Corporation
An S corporation (sometimes referred to as an S Corp) is a special type of
corporation created through an IRS tax election. An eligible domestic corporation
can avoid double taxation (once to the corporation and again to the
shareholders) by electing to be treated as an S corporation.
An S corp is a corporation with the Subchapter S designation from the IRS. To be
considered an S corp, you must first charter a business as a corporation in the
state where it is headquartered. According to the IRS, S corporations are
"considered by law to be a unique entity, separate and apart from those who
own it." This limits the financial liability for which you (the owner, or
"shareholder") are responsible. Nevertheless, liability protection is limited - S
corps do not necessarily shield you from all litigation such as an employees tort
actions as a result of a workplace incident.

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What makes the S corp different from a traditional corporation (C corp) is that
profits and losses can pass through to your personal tax return. Consequently,
the business is not taxed itself. Only the shareholders are taxed. There is an
important caveat, however: any shareholder who works for the company must
pay him or herself "reasonable compensation." Basically, the shareholder must
be paid fair market value, or the IRS might reclassify any additional corporate
earnings as "wages."
Forming an S Corporation
Before you form an S Corporation, determine if your business will qualify under
the IRS stipulations .
To file as an S Corporation, you must first file as a corporation. After you are
considered a corporation, all shareholders must sign and file Form 2553 to elect
your corporation to become an S Corporation.
Once your business is registered, you must obtain business licenses and permits.
Regulations vary by industry, state and locality. Use the Licensing & Permits tool
to find a listing of federal, state and local permits, licenses, and registrations
you'll need to run a business.
If you are hiring employees, read more about federal and state regulations for
employers.
Combining the Benefits of an LLC with an S Corp
There is always the possibility of requesting S Corp status for your LLC. Your
attorney can advise you on the pros and cons. You'll have to make a special
election with the IRS to have the LLC taxed as an S corp using Form 2553. And
you must file it before the first two months and fifteen days of the beginning of
the tax year in which the election is to take effect.
The LLC remains a limited liability company from a legal standpoint, but for tax
purposes it's treated as an S corp. be sure to contact your state's income tax
agency where you will file the election form to learn about tax requirements.
Taxes
Most businesses need to register with the IRS, register with state and local
revenue agencies, and obtain a tax ID number or permit.
All states do not tax S corps equally. Most recognize them similarly to the federal
government and tax the shareholders accordingly. However, some states (like
Massachusetts) tax S corps on profits above a specified limit. Other states don't
recognize the S corp election and treat the business as a C corp with all of the
tax ramifications. Some states (like New York and New Jersey) tax both the S
corps profits and the shareholder's proportional shares of the profits.
Your corporation must file the Form 2553 to elect "S" status within two months
and 15 days after the beginning of the tax year or any time before the tax year
for the status to be in effect.
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Read more about IRS filing requirements for S Corporations.

Advantages of an S Corporation

Tax Savings. One of the best features of the S Corp is the tax savings for
you and your business. While members of an LLC are subject to
employment tax on the entire net income of the business, only the wages
of the S Corp shareholder who is an employee are subject to employment
tax. The remaining income is paid to the owner as a "distribution," which is
taxed at a lower rate, if at all.

Business Expense Tax Credits. Some expenses that

shareholder/employees incur can be written off as business expenses.
Nevertheless, if such an employee owns 2% or more shares, then benefits
like health and life insurance are deemed taxable income.

Independent Life. An S corp designation also allows a business to have

an independent life, separate from its shareholders. If a shareholder
leaves the company, or sells his or her shares, the S corp can continue
doing business relatively undisturbed. Maintaining the business as a
distinct corporate entity defines clear lines between the shareholders and
the business that improve the protection of the shareholders.

Disadvantages of an S Corporation

Stricter Operational Processes. As a separate structure, S corps

require scheduled director and shareholder meetings, minutes from those
meetings, adoption and updates to by-laws, stock transfers and records
maintenance.

Shareholder Compensation Requirements. A shareholder must

receive reasonable compensation. The IRS takes notice of shareholder red
flags like low salary/high distribution combinations, and may reclassify
your distributions as wages. You could pay a higher employment tax
because of an audit with these results.

D. Choose & Register Your Business

xxxvi.

1. Choose Your Business Name

2. Register Your Business Name
3. Register With State Agencies

1. Choose Your Business Name

Choosing a business name is an important step in the business planning process.
Not only should you pick a name that reflects your brand identity, but you also
need to ensure it is properly registered and protected for the long term. You
should also give a thought to whether its web-ready. Is the domain name even
available?
Here are some tips to help you pick, register, and protect your business name.
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Factors to Consider When Naming Your Business

Many businesses start out as freelancers, solo operations, or partnerships. In
these cases, its easy to fall back on your own name as your business name.
While theres nothing wrong with this, it does make it tougher to present a
professional image and build brand awareness.
Here are some points to consider as you choose a name:

How will your name look? On the web, as part of a logo, on social
media.

What connotations does it evoke? Is your name too corporate or not

corporate enough? Does it reflect your business philosophy and culture?
Does it appeal to your market?

Is it unique? Pick a name that hasnt been claimed by others, online or

offline. A quick web search and domain name search (more on this below)
will alert you to any existing use.

Check for Trademarks

Trademark infringement can carry a high cost for your business. Before you pick
a name, use the U.S. Patent and Trademark Offices trademark search tool to see
if a similar name, or variations of it, is trademarked.
If You Intend to Incorporate
If you intend to incorporate your business, youll need to contact your state filing
office to check whether your intended business name has already been claimed
and is in use. If you find a business operating under your proposed name, you
may still be able to use it, provided your business and the existing business offer
different goods/services or are located in different regions.
Pick a Name that is Web-Ready
In order to claim a website address or URL, your business name needs to be
unique and available. It should also be rich in key words that reflect what your
business does. To find out if your business name has been claimed online, do a
simple web search to see if anyone is already using that name.
Next, check whether a domain name (or web address) is available. You can do
this using the WHOIS database of domain names. If it is available, be sure to
claim it right away. This guide explains how to register a domain name.
Claim Your Social Media Identity
Its a good idea to claim your social media name early in the naming process
even if you are not sure which sites you intend to use. A name for your Facebook
page can be set up and changed, but you can only claim a vanity URL or custom
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URL once youve got 25 fans or likes. This custom URL name must be unique,
or un-claimed.
Register Your New Business Name
Registering a business name is a confusing area for new business owners. What
does it mean and what are you required to do?
Registering your business name involves a process known as registering a
Doing Business as (DBA) name or trade name. This process shouldnt be
confused with incorporation and it doesnt provide trademark protection.
Registering your Doing Business As name is simply the process of letting your
state government know that you are doing business as a name other than your
personal name or the legal name of your partnership or corporation. If you are
operating under your own name, then you can skip the process.
Learn about the requirements in your state and how to file in this Registering
Your Doing Business as Name guide.
Apply for Trademark Protection
A trademark protects words, names, symbols, and logos that distinguish goods
and services. Your name is one of your most valuable business assets, so its
worth protecting. You can file for a trademark for less than $300. Learn how to
trademark your business name.
2. Register Your Business Name
Naming your business is an important branding exercise, but if you choose to
name your business as anything other than your own personal name then youll
need to register it with the appropriate authorities.
This process is known as registering your Doing Business As (DBA) name.
What is a Doing Business As Name?
A fictitious name (or assumed name, trade name or DBA name) is a business
name that is different from your personal name, the names of your partners or
the officially registered name of your LLC or corporation.
Its important to note that when you form a business, the legal name of the
business defaults to the name of the person or entity that owns the business,
unless you choose to rename it and register it as a DBA name.
For example, consider this scenario: John Smith sets up a painting business.
Rather than operate under his own name, John instead chooses to name his
business: John Smith Painting. This name is considered an assumed name and
John will need to register it with the appropriate local government agency.

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The legal name of your business is required on all government forms and
applications, including your application for employer tax IDs, licenses and
permits.
Do I Need a Doing Business As Name?
A DBA is needed in the following scenarios:

Sole Proprietors or Partnerships If you wish to start a business under

anything other than your real name, youll need to register a DBA so that
you can do business as another name.

Existing Corporations or LLCs If your business is already set up and

you want to do business under a name other than your existing
corporation or LLC name, you will need to register a DBA.

Note: Not all states require the registering of fictitious business names or DBAs.
How to Register your Doing Business As Name
Registering your DBA is done either with your county clerks office or with your
state government, depending on where your business is located. There are a few
states that do not require the registering of fictitious business names.
3. Register with State Agencies
Register Your Business with State Agencies
Some business types require registration with your state government:

A corporation

A nonprofit organization

A limited-liability company or partnership

If you establish your business as a sole proprietorship, you wont need to register
your business at the state level. However, many states require sole proprietors to
use their own name for the business name unless they formally file another
name. This is known as your Doing Business as (DBA) name, trade name or a
fictitious name.
Select a state to find out about specific filing requirements in the state where
you will form your business.
Alabama

Kentucky

Ohio

Alaska

Louisiana

Oklahoma

Arizona

Maine

Oregon

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Arkansas

Maryland

Pennsylvania

California

Massachusetts

Puerto Rico

Colorado

Michigan

Rhode Island

Connecticut

Minnesota

South Carolina

Delaware

Mississippi

South Dakota

District of Columbia

Missouri

Tennessee

Florida

Montana

Texas

Georgia

Nebraska

U.S. Virgin Islands

Guam

Nevada

Utah

Hawaii

New Hampshire

Vermont

Idaho

New Jersey

Virginia

Illinois

New Mexico

Washington

Indiana

New York

West Virginia

Iowa

North Carolina

Wisconsin

Kansas

North Dakota

Wyoming

Changing Your Business Type

Your initial choice of a business type is not permanent. You can start out as a sole
proprietorship, and if your business grows and your risk of personal liability
increases, you can convert your business to an LLC.
If you change your business structure, follow the Internal Revenue Service's
instructions for Changes in Ownership or Organization.
You will also need to file new documents with your state government, and
depending on state and local laws, you may also need to obtain new business
licenses.
E. Choose Your Business Location & Equipment
xxxix.

1.
2.
3.
4.

Tips for Choosing Your Business Location

Basic Zoning Laws
Home-Based Business Zoning Laws
Leasing Commercial Space
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5. Buying Government Surplus

6. Leasing Business Equipment
1. Tips for Choosing Your Business Location
Choosing a business location is perhaps the most important decision a small
business owner or startup will make, so it requires precise planning and research.
It involves looking at demographics, assessing your supply chain, scoping the
competition, staying on budget, understanding state laws and taxes, and much
more.
Here are some tips to help you choose the right business location.
Determine Your Needs
Most businesses choose a location that provides exposure to customers.
Additionally, there are less obvious factors and needs to consider, for example:

Brand Image Is the location consistent with the image you want to
maintain?

Competition Are the businesses around you complementary or

competing?

Local Labor Market Does the area have potential employees? What will
their commute be like?

Plan for Future Growth If you anticipate further growth, look for a
building that has extra space should you need it.

Proximity to Suppliers They need to be able to find you easily as well.

Safety Consider the crime rate. Will employees feel safe alone in the
building or walking to their vehicles?

Zoning Regulations These determine whether you can conduct your

type of business in certain properties or locations. You can find out how
property is zoned by contacting your local planning agency.

Evaluate Your Finances

Besides determining what you can afford, you will need to be aware of other
financial considerations:

Hidden Costs Very few spaces are business ready. Include costs like
renovation, decorating, IT system upgrades, and so on.

Taxes What are the income and sales tax rates for your state? What
about property taxes? Could you pay less in taxes by locating your
business across a nearby state line?

83

Minimum Wage While the federal minimum wage is $7.25 per hour,
many states have a higher minimum. View the Department of Labors list
of minimum wage rates by state.

Government Economic Incentives Your business location can

determine whether you qualify for government economic business
programs, such as state-specific small business loans and other financial
incentives.

Is the Area Business Friendly?

Understanding laws and regulations imposed on businesses in a particular
location is essential. As you look to grow your business, it can be advantageous
to work with a small business specialist or counselor. Check what programs and
support your state government and local community offer to small businesses.
Many states offer online tools to help small business owners start up and
succeed. Local community resources such as SBA Offices, Small Business
Development Centers, Womens Business Centers, and other government-funded
programs specifically support small businesses.
The Bottom Line
Do your research. Talk to other business owners and potential co-tenants.
Consult the small business community and utilize available resources, such as
free government-provided demographic data, to help in your efforts.
2. Basic Zoning Laws
Local zoning ordinances and regulations are important considerations when
choosing your business location. Zoning laws impact several critical business
decisions such as purchasing property or making improvements to your existing
property, so it is important to understand the laws before you commit to
anything.
Property is zoned into commercial and residential uses, so a commercial building
cannot be built in a residential neighborhood and vice versa, unless there is a
change in zoning ordinances. Other considerations also come into play such as
how you intend to use your facility, the nature of any renovations, and so on.
Finding out How Property is zoned
You can find out how property is zoned by contacting your local planning agency.
One way to determine your local planning agency is to perform an internet
search using the name of your community or city, your state, and the term
planning.
Before getting too involved in a zoning issue, consider hiring a local land use
attorney to help you through the process and ensure you are compliant.

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3. Home-Based Business Zoning Laws

Home-based business owners are subject to many of the laws and regulations
that apply to other business owners.
While home-based business zoning laws have loosened up heavily over the
years, there are still some restrictions that you need to be aware of. Check with
your local planning office if you are unsure whether any of the following
restrictions apply to you:
Restrictions on Physical Changes to the Appearance of Your Home Most
zoning codes:

Prohibit exterior physical changes to the home for the purposes of

conducting business

Prohibit outside business activities, storage, or displays

Restrict or prohibit signage or commercial vehicles

Traffic Restrictions Most zoning codes:

Restrict the numbers of visitors to a home-based business

Restrict the number of employees working in the home or prohibit

employees altogether

Restrict business parking or require that additional parking be provided

External Effects or Nuisances Most zoning codes:

Restrict or prohibit nuisance impacts (e.g., noise, odors, glare)

Prohibit use or storage of hazardous materials

Business Activities Many zoning codes prohibit certain types of businesses in

residential areas.
4. Leasing Commercial Space
Leasing commercial office space is one of the largest expenses incurred by new
and expanding businesses, so it is important to do your due diligence. Here are
some tips for negotiating a commercial lease for your small business.
Lease Agreement
Lease term and rent are your first negotiation points. It is generally
recommended that small businesses negotiate one- to two-year leases with the
option to renew. You will also want to factor in rent increases over the term and
renewal options so you are not charged with an unexpected rent increase
without warning.

85

Consider working with a broker to help you negotiate with the landlord. It is also
important to consult a knowledgeable real estate lawyer; they can often
recommend the right choice for you and protect your interests as you negotiate
your lease through the broker.
Expenses
In addition to your monthly lease payment, find out what expenses you may
incur beyond rent.
Commercial real estate landlords often incorporate extra expenses into the lease
such as maintenance fees, upkeep for shared facilities (Common Area
Maintenance or CAM), etc. Other expenses to consider are utilities. These
charges are usually the responsibility of the tenant, so find out how these are
measured. Are they individually metered or apportioned by square footage? Ask
to see these hidden fees and policies as well as examples of costs that are
typically incurred by tenants.
Maintenance and Repair
While residential leasing often places the burden of maintenance and upkeep on
the shoulders of the landlord, commercial leases are different. Commercial leases
vary regarding maintenance and repair some stipulate that the tenant is
responsible for all property upkeep and repairs while others specify that the
tenant is responsible for systems like air conditioning, plumbing, etc.
Read the Lease
Be sure to read over your lease in detail and hire an attorney who specializes in
commercial real estate to walk you through the clauses and fine print.
Protect Your Business
To protect your investment and long-term business interests, it is worth
investigating and negotiating some potential add-on clauses to your lease. These
might include:

Sublease This builds in some flexibility, allowing you to sublet your

space to another business.

Exclusivity clause Prevents the landlord from leasing other spaces on

the property to a direct competitor of yours.

Co-tenancy If the propertys anchor tenant closes business, a cotenancy agreement can protect you from a potential loss of customers,
allowing you to break the lease if the landlord does not replace the anchor
tenant in a specified time period.

What if You Default?

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Should you default on your lease payments, there are steps you can take during
the lease negotiation process to protect yourself. Find out what the lease
agreement states. Will you be locked out immediately? Will the landlord initiate
eviction proceedings? Can you negotiate more time? Could you pay only the
current months rent instead of the remaining amount owed on the lease?
5. Buying Government Surplus
You have your business, but now you need supplies. Purchasing surplus goods
from the government is an easy and affordable way to equip your new and
expanding business. From computers to cars to gently used medical equipment,
just about anything you can think of that your business might need is sold by the
government at or below cost, or fair market value.
A Small Business Guide to Government Auctions and Sales
When a federal or state agency has extra equipment, seized goods, or forecloses
on a piece of property, the goods are either transferred to another government
agency or sold to the public. These items are sold "as is" by auction or
negotiated sale, either online, in-person or both. Online auctions work much the
same way as other auction sites, such as eBay. You visit an agency's auction site,
register your name and place your bid.
Unlike most state governments, there is no single online auction web site in the
federal government. Federal agencies responsible for disposing of excess
government property, such as the General Services Administration (GSA) or
Department of Defense (DoD), have their own auction sites. Federal law
enforcement agencies also run auction sites for seized property.
The following websites offer government surplus goods and real estate for sale.
Auction Sites

GovSales.gov
this resource aims to help you find everything you need for your small
business in one place. It catalogs most surplus items and real estate for
sale by the federal government, from cars and commercial real estate to
furniture, computers and office equipment.

Military Surplus
Offers excess/surplus property received from U.S. military services, sold by
the U.S. Defense Reutilization and Marketing Service. Items include
furniture, appliances, camping gear, vehicles, computers, office supplies
and radios.

U.S. Marshals Service - Seized Asset Information

Sells property to the public that has been seized by federal law
enforcement agencies. The property for sale can be residential and
commercial real estate, business establishments, and a variety of personal
property such as motor vehicles, boats, aircraft, jewelry, art, antiques and
collectibles.

87

U.S. Treasury - Seized Vehicles Sales

Lists vehicle auctions that take place in a variety of states. U.S. Treasury
seized vehicles are usually offered for sale at the Miami/Ft. Lauderdale,
Florida; Edison, New Jersey; Los Angeles, California; El Paso, Texas;
Nogales, Arizona; and Chula Vista, California auction sales centers.

U.S. Treasury - IRS

Offers properties that have been seized due to tax defaults at the IRS
auction.

Bid4Assets
enables you to bid on a wide variety of forfeited, surplus, tax-defaulted
and foreclosed property online using Bid4Assets' online auction
marketplace. Federal, state and local government agencies selling goods
on the site include the U.S. Marshall Service, U.S. Dept. of Treasury, U.S.
Dept. of Energy, the State of New Jersey and more than 40 counties
nationwide.

Guides to Government Auctions

Guide to Federal Government Sales: Consumer Tips

Offers a tip sheet from the General Services Administration (GSA) so that
you know what to expect at government sales or auctions and how to buy.

Government Auctions and Sales by Agency

Provides a full list of online retail stores and auctions run by U.S.
government agencies.

State and Local Surplus Property

Identifies more surplus property sales and auctions run by state and local
governments.

6. Leasing Business Equipment

Looking to equip your new business? Whether you need computers, desks,
machinery, or a vehicle, you want to make cost effective purchasing decisions.
Why not consider leasing equipment instead of buying it?
Here is some information to help you decide if leasing is right for you.
Benefits of Leasing Business Equipment
Aside from a reduced cash outlay, there are many benefits to leasing equipment:

Leasing can save you the time and hassle involved in finding someone
who will extend you credit for purchasing equipment.

You can keep pace with emerging technology.

Short-term leases give you the opportunity to evaluate whether the

equipment fits your needs.

Maintenance may be included in the lease, saving you additional costs.

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If you use the leased asset in your business, you may enjoy a potential tax
advantage because your lease or rental payments are fully deductible.

Leasing also has its disadvantages. For example, the lifetime cost of the asset is
generally going to be higher than if you purchased it. You are also giving up any
ownership interest, which can be especially costly if you rely on the equipment
and find at the end of the lease that the equipment is too expensive to purchase
outright. You may also find that you lose the tax benefits of depreciation
deductions.
Factors to Consider When Leasing Equipment
There are many variables to consider when making the decision to lease
equipment. Here are a few considerations:
1. If you anticipate needing the equipment for the long-term and want to
establish equity in it, try to negotiate a purchase option under which a
portion of your lease payments is credited to the purchase price.
2. Doing your homework can help prevent undesirable legal repercussions.
Consider asking a lawyer to look over a lease before signing it.
F. Business Licenses & Permits
xlv.

1. Federal Licenses & Permits

2. State Licenses & Permits

1. Federal Licenses & Permits

If your business is involved in activities supervised and regulated by a federal
agency such as selling alcohol, firearms, commercial fishing, etc. then you
may need to obtain a federal license or permit. Here is a brief list of business
activities that require these forms and information on how to apply.
In addition, you can also discover which general business permits, licenses and
registrations required by your state, county or city.
Agriculture
If you import or transport animals, animal products, biologics, biotechnology or
plants across state lines, youll need to apply for a permit from the U.S.
Department of Agriculture (USDA).
Alcoholic Beverages
If you manufacture, wholesale, import, or sell alcoholic beverages at a retail
location, you will need to register your business and obtain certain federal
permits (for tax purposes) with the U.S. Treasurys Alcohol and Tobacco Tax and
Trade Bureau (TTB). The website has a number of online tools that make this
process straightforward. If you are just starting a business in this trade, start by
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reading the TTBs New Visitors Guide which offers helpful information for small
business owners.
Remember, you will also need to contact your local Alcohol Beverage Control
Board for local alcohol business permit and licensing information.
Aviation
Does your business involve the operation of aircraft; the transportation of goods
or people via air; or aircraft maintenance? If so, youll need to apply for one or
more of the following licenses and certificates from the Federal Aviation
Administration:

FAA Licenses and Certificates - Get licensing information for airmen,

aircraft, airports, airlines and medical aviation services.

Pilot Licenses and Training Requirements

Aircraft Mechanic Licenses

Firearms, Ammunition and Explosives

Businesses who manufacture, deal and import firearms, ammunitions and
explosives must comply with the Gun Control Acts licensing requirements. The
Act is administered by the Bureau of Alcohol, Tobacco, Firearms and Explosives
(ATF). Refer to the following resources from the ATF to make sure your business
is properly licensed:

Firearms Industry Guide Includes information on obtaining and renewing

a federal firearms license, importing firearms and ammunitions, and more.

Explosives Industry Guide Find out how to get a federal explosives

license.

How to Become a Federal Firearms Licensee (FFL)

How to Become a Federal Explosives Licensee (FEL)

Fish and Wildlife

If your business is engaged in any wildlife related activity, including the
import/export of wildlife and derivative products, must obtain an appropriate
permit from the U.S. Fish and Wildlife Service.
Commercial Fisheries
Commercial fishing businesses are required to obtain a license for fishing
activities from the NOAA Fisheries Service. This guide includes quick links to
permit applications and information.

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Maritime Transportation
If you provide ocean transportation or facilitate the shipment of cargo by sea,
youll need to apply here for a license from the Federal Maritime Commission.
Mining and Drilling
Businesses involved in the drilling for natural gas, oil or other mineral resources
on federal lands may be required to obtain a drilling permit from the Bureau of
Ocean Energy Management, Regulation and Enforcement (formerly the Minerals
Management Service).
Nuclear Energy
Producers of commercial nuclear energy and fuel cycle facilities as well as
businesses involved in the distribution and disposal of nuclear materials must
apply for a license from the U.S. Nuclear Regulatory Commission
Radio and Television Broadcasting
If your business broadcasts information by radio, television, wire, satellite and
cable, you may be required to obtain a license from The Federal Communications
Commission (FCC).
Transportation and Logistics
If you operate an oversize or overweight vehicle, youll need to abide by the U.S.
Department of Transportation offers guidelines on maximum weight. Permits for
oversize / overweight vehicles are issued by your state government. Get contact
information here.
2. State Licenses & Permits
Starting a business? Confused about whether you need a business license or
permit?
Virtually every business needs some form of license or permit to operate legally.
However, licensing and permit requirements vary depending on the type of
business you are operating, where its located, and what government rules apply.
To help you identify the specific licenses or permits your business may need,
simply select a state from the list below to learn about specific license and
permit requirements in the area where your business is located.
State Business License Offices

Alabama

Kentucky

Ohio

Alaska

Louisiana

Oklahoma

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Arizona

Maine

Oregon

Arkansas

Maryland

Pennsylvania

California

Massachusetts

Puerto Rico

Colorado

Michigan

Rhode Island

Connecticut

Minnesota

South Carolina

Delaware

Mississippi

South Dakota

District of Columbia

Missouri

Tennessee

Florida

Montana

Texas

Georgia

Nebraska

U.S. Virgin Islands

Guam

Nevada

Utah

Hawaii

New Hampshire

Vermont

Idaho

New Jersey

Virginia

Illinois

New Mexico

Washington

Indiana

New York

West Virginia

Iowa

North Carolina

Wisconsin

Kansas

North Dakota

Wyoming

G. Learn About Business Laws

xlvii.

1. Advertising & Marketing Law

2. Employment & Labor Law
3. Finance Law
4. Intellectual Property Law
5. Online Business Law
6. Privacy Law
7. Environmental Regulations
8. Regulation of Financial Contracts
9. Workplace Safety & Health Law
10.Foreign Workers & Employee Eligibility
11.Contact a Government Agency

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1. Advertising & Marketing Law

Marketing and advertising your products or services effectively is key to the
success of your business. However, all businesses have a legal responsibility to
ensure that any advertising claims are truthful, not deceptive and that your
marketing activities dont break the law.
The Federal Trade Commission (FTC) oversees and regulates advertising and
marketing law in the United States. These laws can potentially impact many
areas of your business, including how you label your products, how you conduct
email and telemarketing campaigns, any health and environmental claims you
may make, as well as how you advertise to children.
Below you will find links to useful FTC resources and guides that can help you
understand these laws and how they apply to your business.

Truth in Advertising and Marketing Claims Refer to this guide to learn

how you can ensure your promotion activities are truthful and not
deceptive. Areas covered include using endorsements in your marketing,
advertising to children, Made in the USA labels and health and
environmental claims.

Industry Guides The FTC has some rules and compliance guides for
specific industries including franchises, real estate, clothing
manufacturers, and others. Check out this guide for information on laws
that could affect your industry or business type.

Telemarketing Learn how the National Do Not Call Registry and other
laws impact your telemarketing efforts and how to comply.

Email SPAM Planning an email campaign? The law is very specific on

what email you can send and to whom. In this guide.

Advertising Frequently Asked Questions (FAQs) Answers to small

business owner FAQs about marketing and advertising law.

2. Employment & Labor Law

Hiring your first employee or building your business team brings with it a whole
new area for compliance employment and labor law.
These laws cover everything from preventing discrimination and harassment in
the workplace, workplace poster requirements, wage and hour laws and workers
compensation regulations.
The U.S. Department of Labor oversees federal employment and labor law;
however, individual states also have their own specific laws. To help you
understand and comply with these laws, refer to the following small business
guides and resources.

Find out which Federal Employment Laws Apply to Your Business This
online tool from the Department of Labor the First Step Employment

93

Law Advisor can help you determine which laws apply to you and how
to comply.

State Labor Laws Each state has its own laws with which you must
comply. This site includes links to your state labor office.

Browse Laws by Category Get easy-to-understand information about a

number of federal employment laws using the eLaws online tool from
the Department of Labor.

Find Information by Topic Access the most commonly asked search terms
and topics from the Department of Labor.

Employment Law Guide This comprehensive guide describes major

employment laws that impact businesses and is designed for those
needing hands-on information to develop wage, benefit, safety and
health, and nondiscrimination policies.

10 Steps to Hiring your First Employee These 10 easy steps will guide
you through what you need to do when you hire your first employee.

3. Finance Law
Antitrust, bankruptcy, and securities laws protect the financial interests of small
businesses and individual investors. In this section, you will find an overview on
these important laws and how to comply. If your business is facing bankruptcy,
you will also find information on this process.

Antitrust Laws Refer to this guide from the Federal Trade Commission for
information on how antitrust laws work. Antitrust laws promote vigorous
competition and protect consumers from anticompetitive mergers and
business practices.

Bankruptcy In addition to offering tips and resources that can help you
avoid bankruptcy, check out this guide for an explanation of bankruptcy
options, the process and the tax consequences.

Securities Law If your business sells publicly traded securities, then you
will need to comply with certain financial and reporting obligations. These
include creating clear Securities and Exchange Commission (SEC)
disclosure documents and complying with Sarbanes-Oxley. This guide from
the SEC provides a gateway to information for smaller companies.

4. Intellectual Property Law

If youve got a great idea, logo, business name, or even an invention, you need
to protect it. The steps involved in filing for patents, trademarks or copyrights are
covered in this section, along with additional resources that can help you
safeguard your intellectual properties, such as having employees or vendors sign
non-disclosure agreements.

Understand Intellectual Property and How to protect your Business This

business guide from STOPfakes.gov is an essential starting point for
understanding your intellectual property rights and finding the right
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protection for your business.

Applying for a Patent about how to apply for a patent through the U.S.
Patent and Trademark Office (USPTO).

Registering a Trademark or Service Mark Find out how to file for

trademark or service mark protection for your business name, symbols
and logos.

Copyright your Work Books, movies, digital works, and musical

recordings are all examples of copyrighted works. Refer to this guide from
U.S. Copyright Office for more information on what protection copyright
affords and the process of copyrighting your work.

5. Online Business Law

i.
ii.

Collecting Sales Tax Online

International Online Sales

i.
Collecting Sales Tax Online
If you run a business with a physical storefront, collecting sales tax is
straightforward. You charge your customers the sales tax required by the
jurisdiction where your business is located. For example, if you operate a retail
store in Nashville, Tenn., you collect both state and local sales taxes from
customers buying merchandise at your store.
But suppose you start selling your products online. Does that mean you charge
customers the same sales taxes that you do to those who are coming into your
store? It depends.
When to Collect Sales Tax Online
If your business has a physical presence in a state, such as a store, office or
warehouse, you must collect applicable state and local sales tax from your
customers. If you do not have a presence in a particular state, you are not
required to collect sales taxes.
In legal terms, this physical presence is known as a "nexus." Each state defines
nexus differently, but all agree that if you have a store or office of some sort, a
nexus exists. If you are uncertain whether or not your business qualifies as a
physical presence, contact your state's revenue agency. If you do not have a
physical presence in a state, you are not required to collect sales taxes from
customers in that state.
This rule is based on a 1992 Supreme Court ruling in which the justices ruled that
states cannot require mail-order businesses, and by extension, online retailers to
collect sales tax unless they have a physical presence in the state.

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State Exemptions
Keep in mind that not every state and locality has a sales tax. Alaska,
Delaware, Hawaii, Montana, New Hampshire and Oregon do not have a
sales tax. In addition, most states have tax exemptions on certain items, such as
food or clothing. If you are charging sales tax, you need be familiar with
applicable rates.
Determining which sales tax to charge can be a challenge. Many online retailers
use online shopping-cart software services to handle their sales transactions.
Several of these services are programmed to calculate sales tax rates for you.
ii.
International Online Sales
Selling your products online allows for immediate entry into the global
marketplace. However, shipping your product overseas presents a few
challenges if you have little experience with taxes, duties, customs laws, and
consumer protection issues involved with international commerce.
If you are just getting started, the following resources will help you to understand
legal and regulatory requirements when shipping overseas:

Export.gov - E-Commerce Toolbox: This site brings together information

and resources the U.S. Department of Commerce and other U.S.
government agencies offer to U.S. businesses interested in using the
Internet to export their products.

Electronic Commerce: Selling Internationally - A Guide for Business: As

members of the Organization for Economic Cooperation and Development,
the United States and 28 other countries have signed on to guidelines that
help protect consumer information on the Internet.

6. Privacy Law
For many companies, collecting sensitive consumer and employee information is
an essential part of doing business. It is your legal responsibility to take steps to
properly secure or dispose of it. Financial data, personal information from
children, and material derived from credit reports may raise additional
compliance considerations. In addition, you may have legal responsibilities to
victims of identity theft.
The Federal Trade Commission (FTC) regulates and oversees business privacy
laws and policies that impact consumers. Check out the following guides from
more information on how you can ensure you are compliant.

Protecting Consumer Privacy In general, your online and offline privacy

policy is your companys pledge to your customers about how you will
collect, use, share, and protect the consumer data you collect from them.
While not required by law, the FTC prohibits deceptive practices. In this
FTC guide and read 7 Considerations for Crafting an Online Privacy Policy
to help you develop yours.

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Protecting Childrens Privacy Online The law sets out specific guidelines
about the online collection of personal information from children under 13.
Refer to this guide to see if your site is compliant.

Using and Disposing of Consumer and Employee Credit Reports Does

your business use consumer or credit reports to evaluate customers
creditworthiness? Do you consult reports when evaluating applications for
jobs, leases, and insurance? About your responsibilities for handling this
data.

Enforcing Data Security and Preventing Identity Theft If you keep

sensitive personal information about customers or employees in your files,
you are required to have a sound security plan in place to collect only
what you need, keep it safe, and dispose of it securely. Develop your plan
with help from this FTC guide.

Safeguarding Sensitive Financial Data Do you offer your customers

financial products or services, like loans, investment advice, or insurance?
Learn how to comply with information-sharing practices to safeguard
sensitive data.

7. Environmental Regulations
Environmental regulations can impact a business at any time. Whether you
produce products that could potentially harm the environment, are engaged in
agricultural farming, or need to dispose of pollutants or hazardous or nonhazardous waste you must comply with the law. Businesses impacted by
disasters such as flooding or fire, are also required to implement cleanup plans to
avoid pollutants entering and damaging the ecosystem.
The Environmental Protection Agency and state agencies enforce environmental
laws. To find out what laws impact your business and how you can comply, check
out the resources below.

EPA Environmental Laws and Regulations Search laws and compliance

guides by topic and industry.

EPA Small Business Guide about the laws that apply specifically to small
businesses.

State Environmental Laws Search this interactive map for information

about federal laws that apply in your state, as well as links to your state
government website for state-specific laws.

8. Regulation of Financial Contracts

If you are conducting business transactions outside of your state, such as
borrowing money, leasing equipment, establishing contracts and selling goods,
you need to comply with the Uniform Commercial Code (UCC). UCC consists of
uniform rules coordinating and simplifying the sale of goods and
other commercial transactions throughout the United States.
Commercial transactions often occur across state lines. Goods, for example, may
be manufactured in one state, distributed in another and sold to a customer in a
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third state. Banking and credit transactions often occur between financial
institutions in one state and customers in another state.
For small businesses, UCC comes into effect when borrowing money from an out
of state lender or negotiating a lien. Here is what you need to know:

Borrowing Money: UCC Filing Statements The Uniform Commercial

Code or UCC, as it relates to lending, is a way for each state to have a
consistent method of recording the security of a loan. When banks or SBA
lenders make secured loans, or loans with collateral, they file a UCC-1
form with the state where the loan agreement is executed. This filing
essentially makes the loan security, or collateral, a matter of public record.
Without this filing, a lender could run into difficulties, laying claim to the
collateral in case of default. Talk to your lender about the process of filing
a UCC-1 form.

Securing Liens and the UCC If your business provides goods or

services on credit, Article 9 of the UCC provides a means for you to secure
payment from your debtor. If you are in the construction business, the
equivalent law is called a construction lien. Visit your states website for
information on filing a lien or finance statement to ensure payment of
credit under these laws.

Remember that laws vary from state to state, so you should consult an attorney
on matters concerning UCC filings, liens and security agreements.
9. Workplace Safety & Health Law
As a small business owner, providing workers with a safe and healthy workplace
is critical to the wellbeing of your employees and the success of your business
but it is also the law.
Under the Occupational Safety and Health Act (OSHA), employers must provide a
workplace free from recognized hazards that cause, or are likely to cause, death
or serious physical harm to your employees.
The following workplace safety and health resources from the U.S. Department of
Labors Occupational Safety and Health Administration will help you understand
requirements that apply to your business and how to comply.

Find the Workplace Health and Safety Requirements that Apply to You
Follow this step-by-step guide to pinpoint which OSHA requirements apply
to your workplace and how you can comply.

Request an On-Site Consultation Service Get free advice from trained

state government staff at your place of work.

State-Specific Requirements Some states do operate their own job safety

and health programs. Check here to see which states have OSHAapproved plans and the standards they mandate.

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Training and Educational Programs Take advantage of a wide selection of

training courses and educational programs offered by the Occupational
Safety and Health Administration for employers.

10.
Foreign Workers, Immigration, and Employee Eligibility
As you prepare to hire employees, be sure that you understand all laws and
regulations about employee eligibility. In particular, the Immigration and
Nationality Act (INA) governs immigration and citizenship in the United States.
The INA is especially important to small business owners because it addresses
employment eligibility, employment verification and non-discrimination. This
guide provides an overview of these provisions and assistance on how to comply
with the INA.
Employee Eligibility Verification (I-9 Form)
Federal law requires you, as an employer, to verify an employee's eligibility to
work in the United States. Within three days of hiring a new employee, you must
complete an Employment Eligibility Verification Form, commonly referred to as
an I-9 form. This requires examining acceptable forms of the employees
documentation to confirm his or her citizenship or eligibility to work in the United
States. You can only request documentation specified on the I-9 form. Employers
who ask for other types of documentation not listed on the I-9 form may be
subject to discrimination lawsuits.
You do not file the I-9 with the federal government. Rather, you are required to
keep an I-9 form on file for three (3) years after the date of hire or one (1) year
after the date the employee's employment ends, whichever is later. The U.S.
Immigration and Customs Enforcement (ICE) agency conducts routine workplace
audits to ensure that employers are properly completing and retaining I-9 forms,
and that employee information on I-9 forms matches government records.

Download Form I-9 (Employment Eligibility Verification)

Provides the form that all U.S. employers are responsible for completing
and retaining for each individual they hire for employment in the United
States, including citizens and non-citizens.

Instructions for Completing the I-9: Handbook for Employers

Gives comprehensive guidelines for completing Form I-9, Employment
Eligibility Verification.

For complete information about using, understanding and keeping up to

date with the Form I-9, visit I-9 Central. You can use information taken from
the Form I-9 to verify electronically the employment eligibility of newly hired
employees through E-Verify. To get started, register with E-Verify to virtually
eliminate Social Security mismatch letters, improve the accuracy of wage and
tax reporting, protect jobs for authorized workers and help maintain a legal
workforce.
Hiring and Employment

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Labor Laws and Foreign Workers

Covers foreign labor certification programs, administered in part by the
U.S. Department of Labor, that permit U.S. employers to hire foreign
workers, temporarily or permanently, to fill jobs essential to the U.S.
economy. These programs are generally designed to ensure that allowing
foreign workers into the United States on a permanent or temporary basis
will not adversely affect the job opportunities, wages and working
conditions of U.S. workers.

Foreign Labor Certification

Provides information on the foreign labor certification process and how
employers can apply to bring foreign workers into the U.S. for
employment.

Hiring Guest Workers

Describes the U.S. Department of Labor (DOL) certifications issued for
permanent and temporary employment.

Wages under Foreign Labor Certification

Explains the Immigration and Nationality Act (INA), which allows U.S.
employers to hire foreign workers on a temporary or permanent basis to
perform certain types of work. The U.S. Department of Labor's
Employment and Training Administration generally certifies employers to
obtain special visas to hire foreign workers when there are insufficient
qualified U.S. workers available and willing to work at wages that meet or
exceed the current wage paid for that occupation.

Fair Employment Practices (Non-Discrimination)

The INA includes provisions that protect U.S. citizens and certain work-authorized
individuals from employment discrimination based on citizenship or immigration
status. The INA protects all work-authorized individuals from national origin
discrimination, unfair documentary practices relating to the employment
eligibility verification process and from retaliation.
The U.S. Department of Justice enforces the INA's non-discrimination provisions,
and provides the following guidance to help small businesses understand these
provisions:

Business Guide to Fair Employment

Describes employer obligations under the Immigration Reform and Control
Act of 1986, and the Immigration and Nationality Act's anti-discrimination
provision.

Immigration-Related Unfair Employment Practices FAQs

Provides information about anti-discrimination provisions in the INA, and
the role of the Department of Justice's Office of Special Counsel for
Immigration Related Unfair Employment Practices in enforcing antidiscrimination cases.

Verifying the Employment Eligibility of Your Employees without Committing

Unlawful Discrimination
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Offers tips to small employers concerning the employment eligibility

verification process.
No-Match Letters
When you send an employee's W-2 form to the Social Security Administration
(SSA), the employee's name and Social Security number are checked against
SSA records. ICE will also verify the accuracy of information on I-9 forms. If either
(or both) SSA or ICE cannot verify employ information, a no-match letter will be
sent to you indicating that the employee's name or Social Security number did
not match government records.
If you get a no-match letter for an employee, avoid taking immediate action
against the employee. A no-match letter simply says the employee's information
did not match government records, and is not necessarily an indication that the
employee is ineligible to work in the U.S. In fact, firing an employee solely on the
basis of a no-match letter may open you up to a discrimination lawsuit. At the
same time, if you do not follow up on a no-match letter in a timely manner, you
may be cited for knowingly employing an unauthorized worker, which is a
violation of federal law.
So, how do you act on a no-match letter while protecting yourself from legal
action from both an employee and the federal government? Current regulations
do not provide procedures that help protect an employer from allegations that he
knowingly employed unauthorized workers. However, the ICE has proposed new
rules that specify "safe harbor" procedures that an employer should follow when
receiving a no-match letter. These new rules do not necessarily protect the
employer from allegations of discrimination.
This resource, Proposed Safe Harbor Procedures for Employers Who Receive a
No-Match Letter, offers more information about ICE's safe harbor procedures and
protecting yourself from allegations of unlawful discrimination.
11.

Contact a Government Agency

Federal Compliance Contacts and Resources

Assistance with Regulatory Compliance

Economic Development Agencies

Federal Compliance Contacts and Resources

U.S. Army Corps of Engineers (USACE)

Consumer Product Safety Commission (CPSC)

U.S. Department of Agriculture (USDA)

U.S. Department of Commerce

101

U.S. Department of Defense (DOD)

U.S. Department of Education

U.S. Department of Energy

U.S. Department of Health and Human Services (HHS)

U.S. Department of Homeland Security

Department of Housing and Urban Development (HUD)

Department of Justice (DOJ)

Department of Labor (DOL)

Department of State (DOS)

Department of Transportation (DOT)

Department of Veterans Affairs (VA)

Department of the Interior (DOI)

Department of the Treasury

Environmental Protection Agency (EPA)

Equal Employment Opportunity Commission (EEOC)

Export-Import Bank of the United States

Federal Communications Commission

Federal Deposit Insurance Corporation (FDIC)

Federal Energy Regulatory Commission

Federal Housing Finance Agency

Federal Maritime Commission

Federal Reserve Board

Federal Trade Commission (FTC)

General Services Administration (GSA)

Institute of Museum and Library Services (IMLS)

National Aeronautics and Space Administration (NASA)

102

National Archives and Records Administration (NARA)

National Credit Union Administration (NCUA)

National Endowment for the Arts (NEA)

National Labor Relations Board (NLRB)

National Science Foundation (NSF)

Nuclear Regulatory Commission

Pension Benefit Guaranty Corporation (PBGC)

U.S. Securities and Exchange Commission (SEC)

Small Business Administration

Social Security Administration

Tennessee Valley Authority (TVA)

U.S. Agency for International Development (USAID)

Assistance with Regulatory Compliance

You may have a specific question about a topic not covered here at SBA.gov. Use
these links to help you contact the appropriate federal agency for extra help.
File a Complaint - Unfair Regulatory Enforcement

Small Business National Ombudsman

Provides assistance, from The National Ombudsman, to small businesses
when they experience excessive or unfair federal regulatory enforcement
actions, such as repetitive audits or investigations, excessive fines,
penalties, threats, retaliation or other unfair enforcement action by a
federal agency.

Get In-Person Help with General Business Issues

State Economic Development Agencies

Offers access to state economic development agencies for learning about
counseling and financial services programs that can help small business
get established in local communities.

Small Business Development Center (SBDC) Locator

lists local SBDCs for getting free information on starting, running and
managing a business in your area.

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SCORE - Local Offices

helps locate local SCORE office to help entrepreneurs obtain free and
confidential small business advice.

Minority Business Development Centers

provides local and regional programs to assist minority-owned enterprises
with start-up advice, business planning and financial assistance.

Contact Elected Officials

U.S. Senate Committee on Small Business and Entrepreneurship

U.S. House Small Business Committee

Contact Your U.S. Representative

Contact Your U.S. Senator

The White House

Economic Development Agencies

Every state and many local governments have economic development agencies
dedicated to assisting new and established businesses start, grow and succeed.
Services provided by these agencies typically include:

Startup advice, training and resources

Financial assistance with loans, grants and tax-exempt bonds

Business location and site selection assistance

Employee recruitment and training assistance

Click on the links below to access your states economic development agency.
Contact your city or county government in your state to learn about local
economic development services available in your area.
H. Business Financials
lii.

1.
2.
3.
4.
5.
6.
7.

Estimating Startup Costs

Using Personal Finances
Preparing Financial Statements
Developing a Cash Flow Analysis
Breakeven Analysis
Borrowing Money for Your Business
SBA Financial Assistance Eligibility
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8. Is Your Business Fiscally Fit?

1. Estimating Startup Costs
If you are planning to start a business, it is critical to determine your budgetary
needs.
Since every business is different, and has its own specific cash needs at different
stages of development, there is no universal method for estimating your startup
costs. Some businesses can be started on a smaller budget, while others may
require considerable investment in inventory or equipment. Additional
considerations may include the cost to acquire or renovate a building or the
purchase of long-term equipment.
To determine how much seed money you need to start, you must estimate the
costs of doing business for the first months. Some of these expenses will be onetime costs such as the fee for incorporating your business or the price of a sign
for your building. Some will be ongoing costs, such as the cost of utilities,
inventory, insurance, etc.
While identifying these costs, decide whether they are essential or optional. A
realistic startup budget should only include those things that are necessary to
start a business.
These essential expenses can be divided into two separate categories: fixed and
variable. Fixed expenses include rent, utilities, administrative costs and
insurance costs. Variable expenses include inventory, shipping and packaging
costs, sales commissions, and other costs associated with the direct sale of a
product or service. The most effective way to calculate your startup costs is to
use a worksheet that lists both one-time and ongoing costs.
2. Using Personal Finances
Learn How Your Personal Finances Can Affect Your Business Finances
Starting a business can be a tremendous strain on your personal finances. It
takes time before your new venture turns a profit and provides financial support
for you and your family. Before starting a business, it is important to get your
finances in order.
To get started, write a monthly household budget that accounts for your income
and your household expenses. Be as conservative as possible because
maintaining your household expenses is vital to the success of your business.
Any strain on your personal budget can cause a financial risk to your business.
It is also important to check your personal credit history. Because you have not
established a business credit history, lenders and suppliers will use your personal
credit history to determine your terms of credit.
Your credit report, which is issued by a credit bureau, determines how potential
lenders and suppliers will perceive you. You should know what appears on your
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credit report because you may find errors to correct. You can get a copy of your
personal credit report from one of the three major credit bureaus: Equifax,
Experian, or TransUnion.
3. Preparing Financial Statements
Understanding financial statements is essential to the success of a small
business. They can be used as a roadmap to steer you in the right direction and
help you avoid costly breakdowns. Financial statements have a value that goes
far beyond preparing tax returns or applying for loans.
Below you will find information on the primary financial statements: the balance
sheet and the income statement.
Balance Sheet
Click one of the following links to jump to the topic of your choice.
Assets
Liabilities and Net Worth
Equity
The balance sheet is a snapshot of your business financials. It includes assets,
and liabilities and net worth. The "bottom line" of a balance sheet must always
include (assets = liabilities + net worth). The individual elements of a balance
sheet change from day to day and reflect the activities of a business. Analyzing
how the balance sheet changes over time will reveal important financial
information about a business. It can help you can monitor your ability to collect
revenues, manage your inventory, and assess your ability to satisfy creditors and
stockholders.
Liabilities and net worth on the balance sheet represent sources of funds.
Liabilities and net worth are composed of creditors and investors who have
provided cash or its equivalent to your business. As a source of funds, they
enable your business to continue or expand operations.
Assets represent the use of funds. A business uses cash or other funds provided
by the creditor/investor to acquire assets. Assets include things of value that are
owned or due to a business.
Liabilities represent obligations to creditors while net worth represents the
owner's investment in the business. Both creditors and owners are "investors" in
the business with the only difference being the timeframe in which they expect
repayment.
Top of Section

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Assets
Anything of value that is owned or due to the business is included under the
Asset section of a Balance Sheet.
Current Assets
Current assets mature in less than one year. They are the sum of:

Cash

Accounts Receivable (A/R)

Inventory

Notes Receivable (N/R)

Other current assets

Cash: Cash pays bills and obligations. Inventory, receivables, land, building,
machinery and equipment do not pay obligations even though they can be sold
for cash and then used to pay bills. If cash is inadequate or improperly managed,
a business may become insolvent or forced into bankruptcy. Cash includes all
checking, money market and short-term savings accounts. About how to
develop a cash flow analysis for your business.
Accounts Receivable (A/R): Accounts receivable are dollars due from customers.
More specifically, inventory is sold and shipped, an invoice is sent to the
customer, and cash is collected at later time. The receivable exists for the time
period between the selling of the inventory and the receipt of cash. Receivables
are proportional to sales. As sales rise, the investment you must make in
receivables also increases.
Inventory: Inventory consists of the goods and materials a business purchases to
resell at a profit. In the process, sales and receivables are generated. The
business purchases raw material inventory that is processed (called work-inprocess inventory) to be sold as finished goods inventory. For a business that
sells a product, inventory is often the first use of cash. Purchasing inventory to
be sold at a profit is the first step in making a profit. Selling inventory does not
bring cash back into the businessit creates a receivable. Only after a time lag
(equal to the receivable's collection period) will cash return to the business. So
its important that inventory is well managed so the business does not keep too
much cash tied up in inventory, as this will reduce profits.
At the same time, a business must keep sufficient inventory on hand to prevent
stock outs (having nothing to sell). Insufficient inventory will erode profits and
may result in the loss of customers.
Notes Receivable (N/R): N/R is a claim due to the business as a result of the
business making a loan, such as a promissory note. Notes receivable is usually a
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claim due from one of three sources: customers, employees or officers of the
business.

Customer notes receivable is when the customer who borrowed from the
business when the customer failed to pay the invoice according to the
agreed-upon payment terms. The customer's obligation may have been
converted to a promissory note.

Employee notes receivable may be for legitimate reasons, such as a down

payment on a home, but the business is neither a charity nor a bank. If the
business wants to help an employee, it can co-sign on a loan advanced by
a bank.

An officer or owner borrowing from the business is the worst form of note
receivable. If an officer takes money from the business, it should be
declared as a dividend or withdrawal and reflected as a reduction in net
worth. Treating it in any other way leads to possible manipulation of the
business's stated net worth. Banks and other lending institutions often
condemn this practice.

Other Current Assets: Other current assets consist of prepaid expenses, other
miscellaneous and current assets.
Fixed Assets
Fixed assets represent the use of cash to purchase physical assets whose life
exceeds one year, such as:

Land

Building

Machinery and equipment

Furniture and fixtures

Leasehold improvements

Intangibles
Intangibles are assets with an undetermined life that may never mature into
cash. For most analysis purposes, intangibles are ignored as assets and are
deducted from net worth because their value is difficult to determine. Intangibles
consist of assets such as:

Research and development

Patents

Market research

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Goodwill

Organizational expense

Intangibles are similar to prepaid expenses- the purchase of a benefit that will be
expensed at a later date. Intangibles are recouped, like fixed assets, through
incremental annual charges (amortization) against income. Standard accounting
procedures require most intangibles to be expensed as purchased and never
capitalized (include in the balance sheet). An exception to this is purchased
patents that may be amortized over the life of the patent.
Other Assets
Other assets consist of miscellaneous accounts, such as deposits and long-term
notes receivable from third parties. They are turned into cash when the asset is
sold or when the note is repaid.
Total Assets
Total Assets represent the sum of all the assets owned by or due to a business.
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Liabilities and Net Worth

Liabilities and net worth are sources of cash listed in descending order from the
most nervous creditors and soonest to mature obligations (current liabilities), to
the least nervous and never due obligations (net worth).
There are two sources of funds: lender-investor and owner-investor. Lenderinvestor funds consist of trade suppliers, employees, tax authorities and financial
institutions. Owner-investor funds consist of stockholders and principals who loan
cash to the business. Both lender-investor and owner-investors have invested
cash or its equivalent into the business. The only difference between the
investors is the maturity date of their obligations and the degree of their
nervousness.
Current Liabilities
Current liabilities are those obligations that will mature and must be paid within
12 months. These are liabilities that can create a business's insolvency if cash is
inadequate. A satisfied set of current creditors is a healthy and important source
of credit for short-term uses of cash (inventory and receivables). A dissatisfied
set of current creditors can threaten the survival of the business. The best way to
ensure creditors will be satisfied is to keep their obligations current.
Current liabilities consist of the following obligation accounts:

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Accounts Payable (A/P)

Accrued expenses

Notes Payable (N/P)

Current portion of Long-Term Debt (LTD)

Proper matching of sources and uses of funds requires that short-term (current)
liabilities must be used only to purchase short-term assets (inventory and
receivables).
Accounts Payable (A/P): Accounts payable are obligations due to trade suppliers
who have provided inventory, goods or services used in operating the business.
Suppliers generally offer terms (just like you do for your customers), since the
suppliers' competition offers payment terms. Whenever possible, you should take
advantage of payment terms because this will keep your costs down. If the
business is paying its suppliers in a timely fashion, days payable will not exceed
the terms of payment.
Accrued Expenses: Accrued expenses are obligations owed, but not billed such
as wages and payroll taxes, or obligations accruing. These expenses can also be
paid over a period of time such as interest on a loan.
Accruals include wages, payroll taxes, interest payable and employee benefits
accruals such as pension funds. As a labor-related category, it should vary in
accordance with payroll policy. For example, if wages are paid weekly, the
accrual category should seldom exceed one week's payroll and payroll taxes.
Notes Payable (N/P): Notes payable are obligations in the form of promissory
notes with short-term maturity dates of less than 12 months. Often, they are
payable upon demand. Other times they have specific maturity dates (30, 60,
90, 180, 270, 360 days maturities are typical). Notes payable include only the
principal amount of the debt. Any interest owed is listed under accruals.
The proceeds of notes payable should be used to finance current assets
(inventory and receivables). The use of funds must be short-term so that the
asset matures into cash prior to the obligation's maturation. Proper matching
would indicate borrowing for seasonal swings in sales, which cause shifts in
inventory and receivables, or to repay accounts payable when attractive discount
terms are offered for early payment.
Non-current Liabilities
Non-current liabilities are those obligations that will be payable in the following
year. There are three types of non-current liabilities, only two of which are listed
on the balance sheet:

Non-current portion of Long-Term Debt (LTD)

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Notes Payable to Officers, Shareholders, or Owners

Contingent Liabilities

Non-current portion of long-term debt is the principal portion of a term loan not
payable in the coming year. Subordinated officer loans are treated as an item
that lies between debt and equity. Contingent liabilities listed in the footnotes are
potential liabilities, which hopefully never become due.
Non-current Portion of Long-Term Debt (LTD): Non-Current portion of LTD is the
portion of a term loan that is not due within the next 12 months. It is listed below
the current liability section to demonstrate that the loan does not have to be fully
liquidated in the coming year. LTD provides cash to be used for a long-term asset
purchase, either permanent working capital or fixed assets.
Notes Payable to Officers, Shareholder or Owners: Notes payable to officers,
shareholders or owners represent cash that the shareholders or owners have put
into the business. For tax reasons, owners may increase their equity investment
beyond the initial business capitalization by making loans to the business rather
than purchasing additional stock. Any return on investment to the owners can
therefore be paid as tax-deductible interest expense rather than as non-taxdeductible dividends.
When a business borrows from a financial institution, it is common for the officer
loans to be subordinated or put on standby. The subordination agreement
prohibits the officer from collecting his or her loan prior to the repayment of the
institution's loan. When on standby, the loan will be considered as equity by the
financial institution. Notes receivable officer are considered a bad sign to lenders,
while notes payable officer are considered to be reassuring.
Contingent Liabilities: Contingent Liabilities are potential liabilities that are not
listed on the balance sheet. They are listed in the footnotes because they may
never become due and payable. Contingent liabilities include lawsuits,
warranties and cross Guarantees.
If the business has been sued, but the litigation has not been initiated, there is
no way of knowing whether or not the suit will result in a liability to the business.
It will be listed in the footnotes because, while not a real liability, it does
represent a potential liability which may impair the ability of the business to
meet future obligations. Alternatively, if the business guarantees a loan made by
a third party to an affiliate, the liability is contingent because it will never
become due as long as the affiliate remains healthy and meets its obligations.
Total Liabilities: Total liabilities represent the sum of all monetary obligations of a
business and claims creditors have on its assets.
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Equity
Equity is represented by total assets minus total liabilities. Equity or Net Worth is
the most patient and last to mature source of funds. It represents the owners'
share in the financing of all the assets.
Top of Section

Income Statement
The income statement, also known as the profit and loss statement, includes
all income and expense accounts over a period of time. This financial statement
shows how much money the business will make after all expenses are accounted
for. An income statement does not reveal hidden problems, like insufficient cash
flow. Income statements are read from top to bottom and represent earnings and
expenses over a period of time.
4. Developing a Cash Flow Analysis
For small businesses, cash is king. You need it to start, operate, and expand your
operations, but many small business owners often have trouble managing and
maintaining cash. Inaccurate cash flow analysis - or lack of available cash - can
affect the everyday operations of your business and your eligibility to receive a
loan.
Cash flow is the movement of money in and out of your business. The process
includes:

Inflow which comes from operations such as the sale of goods and
services, loans, lines of credit, and asset sales.

Outflow which occurs during operations such as business expenditures,

loan payments, and business purchases.

It's crucial to balance these two figures and maintain a reasonable balance of
cash at all times. An effective cash flow system will help you manage funds to
cover operational costs and bills and help you foresee potential problems in the
future.
Profit and loss statements and income statements can be used to determine
projections for future cash flow trends of your business. These financial
documents are instrumental in making cash flow projections. However, a cash
flow statement serves an important and independent purpose - it accounts for
non-cash items and expenses to adjust profit figures. Cash flow analysis
statements display not only changes over time, but also available net cash.
Cash flow analysis statements are generally separated into three parts:

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Operating activities: This section evaluates net income and loses of a

business. By assessing sales and business expenditures, all income from
non-cash items is adjusted to incorporate inflows and outflows of cash
transactions to determine a net figure.

Investment activities: This section reports inflows and outflows from

purchases and sales of long-term business investments such as property,
assets, equipment, and securities. For example - if your bakery business
purchases an additional piece of kitchen equipment, this would be
considered an investment and accounted for as an outflow of cash. If your
business then sold equipment that was no longer needed, this would be
considered an inflow of cash.

Financing activities: This section accounts for the cash flow trends of all
money that is related to financing your business. For example: if you
received a loan for your small business, the loan itself would be considered
an inflow of cash. Loan payments would be considered an outflow of cash,
and both would be recorded in this part of the cash flow analysis
statement.

Making cash flow projections and computing cash flow statements can be
confusing if you have never managed these types of finances before. Ask your
business accountant or contact a business expert from your local SCORE office
for help.
5. Breakeven Analysis
Breakeven Analysis: How to Know When You Can Expect a Profit
Breakeven analysis is used to determine when your business will be able to cover
all its expenses and begin to make a profit. It is important to identify your startup
costs, which will help you determine your sales revenue needed to pay ongoing
business expenses.
For instance, if you have $5,000 of product sales, this will not cover $5,000 in
monthly overhead expenses. The cost of selling $5,000 in retail goods could
easily be $3,000 at the wholesale price, so the $5,000 in sales revenue only
provides $2,000 in gross profit. The breakeven point is reached when revenue
equals all business costs.
To calculate your breakeven point, you will need to identify your fixed and
variable costs. Fixed costs are expenses that do not vary with sales volume, such
as rent and administrative salaries. These expenses must be paid regardless of
sales, and are often referred to as overhead costs. Variable costs fluctuate
directly with sales volume, such as purchasing inventory, shipping, and
manufacturing a product. To determine your breakeven point, use the equation
below:
Breakeven point = fixed costs/ (unit selling price variable costs)

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6. Borrowing Money for Your Business

After you have developed a cash flow analysis and determined when your
business will make profit, you may decide you need additional funding.
Borrowing money is one of the most common sources of funding for a small
business, but obtaining a loan isn't always easy. Before you approach a lender for
a loan, you will need to understand the factors the bank will use to evaluate your
application. This page outlines some of the key factors a lender uses to analyze a
potential borrower.
Click one of the following links to jump to the section of your choice:

Types of Financing

Ability to Repay

Credit History

Equity Investment

Collateral

Management Experience

Questions Your Lender Will Ask

Types of Financing
There are two types of financing: equity financing and debt financing. When
looking for money, you must consider your company's debt-to-equity ratio. This
ratio is the relation between dollars you have borrowed and dollars you have
invested in your business. The more money owners have invested in their
business, the easier it is to obtain financing.
If your firm has a high ratio of equity to debt, you should probably seek debt
financing. However, if your company has a high proportion of debt to equity,
experts advise that you should increase your ownership capital (equity
investment) for additional funds. This will prevent you from being over-leveraged
to the point of jeopardizing your company's survival.
Equity Financing
Equity financing (or equity capital) is money raised by a company in exchange
for a share of ownership in the business. Ownership accounts for owning shares
of stock outright or having the right to convert other financial instruments into
stock. Equity financing allows a business to obtain funds without incurring debt,
or without having to repay a specific amount of money at a particular time.

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Most small or growth-stage businesses use limited equity financing. Equity often
comes from investors such as friends, relatives, employees, customers, or
industry colleagues. The most common source of equity funding comes from
venture capitalists. These are institutional risk takers and may be groups of
wealthy individuals, government-assisted sources, or major financial institutions.
Most specialize in one or a few closely related industries.
Debt Financing
Debt financing means borrowing money that must be repaid over a period of
time, usually with interest. Debt financing can be either short-term, with full
repayment due in less than one year, or long-term, with repayment due over a
period greater than one year. The lender does not gain an ownership interest in
the business, and debt obligations are typically limited to repaying the loan with
interest. Loans are often secured by some or all of the assets of the company. In
addition, lenders commonly require the borrower's personal guarantee in case of
default. This ensures that the borrower has a sufficient personal interest at stake
in the business.
Loans can be obtained from many different sources, including banks, savings and
loans, credit unions, commercial finance companies, and SBA-guaranteed loans.
State and local governments have many programs that encourage the growth of
small businesses. Family members, friends, and former associates are all
potential sources, especially when capital requirements are smaller.
Traditionally, banks have been the major source of small business funding. The
principal role of banks includes short-term loans, seasonal lines of credit, and
single-purpose loans for machinery and equipment. Banks generally have been
reluctant to offer long-term loans to small firms. SBAs guaranteed lending
programs encourage banks and non-bank lenders to make long-term loans to
small firms by reducing their risk and leveraging the funds they have available.
Ability to Repay
The ability (or capacity) to repay the funds you receive from a lender must be
justified in your loan package. Banks want to see two sources of repayment
cash flow from the business as well as a secondary source such as collateral. The
lender reviews the past financial statements of a business to analyze its cash
flow.
Generally, banks are more comfortable offering assistance to businesses that
have been in existence for a number of years and have a proven financial track
record. If the business has consistently made a profit and that profit can cover
the payment of additional debt, it is likely that the loan will be approved. If
however, the business is a start-up or has been operating marginally and has an
opportunity to grow, it is necessary to prepare a thorough loan package with a
detailed explanation including how the business will be able to repay the loan.
Credit History

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When a small business requests a loan, one of the first things a lender looks at is
personal and business credit history. So before you even start the process of
preparing a loan request, you want to make sure you have good credit.
Get your personal credit report from one of the credit bureaus, such as
TransUnion, Equifax or Experian. You should initiate this step well in advance of
seeking a loan. Personal credit reports may contain errors or be out of date, and
it can take three to four weeks for errors to be corrected. It is up to you to see
that corrections are made, so make sure you check regularly on progress. You
want to make sure that when a lender pulls your credit report, all the errors have
been corrected and your history is up to date.
Once you obtain your credit report, check to make sure that all personal
information, including your name, Social Security number and address is correct.
Then carefully examine the rest of the report, which contains a list of all the
credit you obtained in the past such as credit cards, mortgages, student loans
and information on how you paid that credit. Any item indicating that you have
had a problem in paying will be toward the top of the list. These are the credits
that may affect your ability to obtain a loan.
If you have been late by a month on an occasional payment, this probably will
not adversely affect your credit. But it is likely that you will have difficulty in
obtaining a loan if you are continuously late in paying your credit, have a credit
that was never paid, have a judgment against you, or have declared bankruptcy
in the last seven years.
A person may have a period of bad credit as a result of divorce, medical crisis, or
some other significant event. If you can show that your credit was good before
and after this event and that you have tried to pay back those debts, you should
be able to obtain a loan. It is best if you write an explanation of your credit
problems and how you have rectified them, and attach this to your credit report
in your loan package.
Each credit bureau has a slightly different way of presenting your credit
information. Contact the bureau you used for more specific information how to
read your credit report. If you need additional help in interpreting or evaluating
your credit report, ask your accountant or a local banker.
Equity Investment
Don't be misled into thinking that a start-up business can obtain all financing
through conventional or special loan programs. Financial institutions want to see
a certain amount of equity in a business.
Equity can be built up through retained earnings or by the injection of cash from
either the owner or investors. Most banks want to see that the total liabilities or
debt of a business is not more than four times the amount of equity. So if you
want a loan for your business, make sure that there is enough equity in the
company to leverage that loan.

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Owners usually must put some of their own money into the business to get a
loan. The amount of financing depends on the type of loan, purpose and terms.
Most banks want the owner to put in at least 20 to 40 percent of the total
request.
Having the right debt to equity ratio does not guarantee your business will get a
loan. There are a number of other factors used to evaluate a business, such as
net worth, which is the amount of equity in a business, which is often a
combination of retained earnings and owner's equity.
Collateral
When a financial institution gives a loan, it wants to make sure it will get its
money back. That is why a lender usually requires a second source of repayment
called collateral. Collateral is personal and business assets that can be sold in
case the cash generated by the small business is not sufficient to repay the loan.
Every loan program requires at least some collateral. If a potential borrower has
no collateral, he/she will need a co-signer who has collateral to pledge.
Otherwise it may be difficult to obtain a loan.
The value of collateral is not based on market value; rather, it is discounted to
take into account the value that would be lost if the assets had to be liquidated.
This table gives a general approximation of how different forms of collateral are
valued by a typical lender and the SBA:
COLLATERAL TYPE

LENDER

SBA

House

Market Value x 0.75

- Mortgage balance

Market Value x 0.80

- Mortgage balance

Car

Not applicable

Not applicable

Truck & Heavy Equipment

Depreciated Value x
0.50

Same

Office Equipment

Not applicable

Not applicable

Furniture & Fixtures

Depreciated Value x
0.50

Same

Inventory:
Perishables

Not applicable

Not applicable

Jewelry

Not applicable

Not applicable

Other

10%-50%

10%-50%

Receivables

Under 90 days x 0.75

Under 90 days x

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0.50
Stocks & Bonds

50%-90%

50%-90%

Mutual Funds

Not applicable

Not applicable

Individual Retirement Account

(IRA)

Not applicable

Not applicable

Certificate of Deposit (CD)

100%

100%

Collateral Coverage Ratio

The bank will calculate your collateral coverage ratio as part of the loan
evaluation process. This ratio is calculated by dividing the total discounted
collateral value by the total loan request.
Management Experience
Managerial expertise is a critical element in the success of any business. In fact,
poor management is most frequently cited as the reason businesses fail. Lenders
will be looking closely at your education and experience as well as that of your
key managers.
To strengthen your management skills, SBA offers a wide range of free, online
training courses. You can also get management advice from counselors at your
local SCORE office.
Questions Your Lender Will Ask

Before you apply for a loan, you need to think about a variety of
questions:

Can the business repay the loan? (Is cash flow greater than debt service?)

Can you repay the loan if the business fails? (Is collateral sufficient to
repay the loan?)

Does the business collect its bills?

Does the business pay its bills?

Does the business control its inventory?

Does the business control expenses?

Are the officers committed to the business?

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Does the business have a profitable operating history?

Does the business match its sources and uses of funds?

Are sales growing?

Are profits increasing as a percentage of sales?

Is there any discretionary cash flow?

What is the future of the industry?

Who is your competition and what are their strengths and weaknesses?

7. SBA Financial Assistance Eligibility

The types of businesses that are eligible for financial assistance from the SBA,
must:

Operate for profit

Be engaged in, or propose to do business in, the United States or its

possessions

Have reasonable owner equity to invest

Use alternative financial resources, including personal assets, before

seeking financial assistance

Special Considerations
Special considerations apply to some types of businesses and individuals, which
include:

Franchises are eligible except when a franchiser retains power to control

operations to such an extent as to equate to an employment contract. The
franchisee must have the right to profit from efforts commensurate with
ownership.

Recreational facilities and clubs are eligible provided: the facilities are
open to the general public, or in membership-only situations, membership
is not selectively denied or restricted to any particular groups

Farms and agricultural businesses are eligible. However, these

applicants should first explore Farm Service Agency (FSA) programs,
particularly if the applicant has a prior or existing relationship with FSA.

Fishing vessels are eligible. However, those seeking funds for the
construction or reconditioning of vessels with a cargo capacity of five tons
or more must first request financing from the National Marine Fisheries
Service.

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Medical facilities including hospitals, clinics, emergency outpatient

facilities, and medical and dental laboratories are eligible. Convalescent
and nursing homes are also eligible, provided they are licensed by the
appropriate government agency and they provide more than room and
board.

An Eligible Passive Company (EPC) is a small entity that does not

engage in regular and continuous business activity. An EPC must use loan
proceeds to acquire or lease, and/or improve or renovate real or personal
property that it leases to one or more operating companies for use in the
operating company's business. .

Change of ownership. Loans for this purpose are eligible provided the
business benefits from the change. In most cases, this benefit should be
seen in promoting the development of the business or, perhaps, in
preserving its existence.

Legal aliens are eligible; however, consideration is given to status (e.g.,

resident, lawful temporary resident) in determining the businesses degree
of risk.

Probation or parole. Applications will not be accepted from firms in

which a principal is currently incarcerated, on parole, on probation or is a
defendant in a criminal proceeding. Judgments are made on a case-bycase evaluation of the nature, frequency, timing of the offenses, and
disposition of the offenses. Fingerprint cards are required only when a
felony offense is disclosed.

Ineligible Businesses
Ineligible businesses include those engaged in illegal activities, loan packaging,
speculation, multi-sales distribution, gambling, investment or lending, or where
the owner is on parole. Specific types of businesses not eligible include:

Real estate investment firms when the loan is used for investment
purposes.

Firms involved in speculative activities that develop profits from

fluctuations in price rather than through the normal course of trade, such
as wildcatting for oil and dealing in commodities futures, when not part of
the regular activities of the business.

Dealers of rare coins and stamps.

Firms involved in lending activities, such as banks, finance companies,

factors, leasing companies, insurance companies, and any other firm
whose stock in trade is money.

Pyramid sales plans, where a participant's primary incentive is based on

the sales made by an ever-increasing number of participants.

Firms involved in illegal activities.

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Gambling activities, including any business whose principal activity is

gambling. The rule does not restrict loans to businesses that obtain less
than one-third of their annual gross income from either the sale of official
state lottery tickets under a state license, or legal gambling activities
licensed and supervised by a state authority.

Charitable, religious, or other nonprofit or eleemosynary institutions,

government-owned corporations, consumer and marketing cooperatives,
and churches and organizations promoting religious objectives.

8. Is Your Business Fiscally Fit?

Financial Literacy and Education Commission
The Financial Literacy and Education Commission was established under Title V
of the Fair and Accurate Credit Transactions (FACT) Act of 2003 to improve the
financial literacy and education of persons in the United States. The U.S. Small
Business Administration (SBA) wishes to bring financial literacy not only to
America as a whole, but specifically to small businesses and future
entrepreneurs. The commission was asked to develop a national financial
education website (www.MyMoney.gov), along with a hotline (1-888-My Money)
and a national strategy on financial education. It is chaired by the Secretary of
the Treasury and comprises the heads of 21 federal entities, including SBA.

Money Smart for Small Business

If you want to start a business or learn how to better manage your business
money, begin with Money Smart. SBA and FDIC jointly provide an instructor-led
business training curriculum, Money Smart for Small Business, for free. This
curriculum is designed to provide introductory-style training for new and aspiring
entrepreneurs. The 13 modules provide the most essential information on
running a small business from a financial standpoint. In addition to grounding
participants in the basics, the curriculum serves as a foundation for more
advanced training and technical assistance.

Money Smart for Small Business consists of 13 modules listed below that
cover a wide range of interests and knowledge level of the targeted audience.
Each module is available in English and Spanish and has three components
including a text accessible instructor guide, participant guide, and PowerPoint
slides. The materials are designed to teach each module in approximately one
hour. Modules can be taught in any order or independently. All the Money Smart
curricula are free and available for download. PDF English versions of the files
are made available below for easy access. To be informed about the latest
developments of Money Smart for Small Business or to join the Money Smart
for Small Business Trainers Alliance please go to the FDIC website here.

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The 13 modules include:

1. Is Owning a Business a Good Fit for You? - NEW
After completing this module, participants will be able to:

Distinguish the myths and realities of small business ownership.

Start a self-assessment to determine their readiness to become business

owners.

Set a plan of action gathering feedback from family, friends and potential
customers.

Download the Owning a Business Instructor Guide, Participant Guide,

and Classroom Presentation to get started!

2. Planning for a Healthy Business -NEW

After completing this module, participants will be able to:

Convert a vague idea into a resource plan.

Understand how a business plan helps motivate stakeholders to support

their business ideas.

Understand the importance of personal credit and a healthy relationship

with lenders.

Download the Planning for a Healthy Business Instructor Guide, Participant

Guide, and Classroom Presentation to get started!

3. Managing Cash Flow - NEW

After completing this module, participants will be able to:

Understand the purpose of cash flow management in a small business.

Make cash flow projections based on the cash cycle.

Identify some ways to manage cash flow, including receivables and

payables.

Work more effectively with technical experts.

Download Managing Cash Flow Instructor Guide, Participant Guide, and

Classroom Presentation to get started!

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4. Banking Services
after completing this module, you will be able to:

Identify the most common banking services for a small business, including
business checking, payroll processing, business loan and others

Evaluate your business and what banks have to offer to you

Identify which banking services are the best for your business

Download the Banking Services Instructor Guide, Banking Services Participant

Guide, and Banking Services Classroom Presentation to get started!

5. Organizational Types
after completing this module, you will be able to:

Explain general characteristics, pros, and cons of these five common

organizational types: Sole proprietor, Partnerships, Limited liability
company(LLC), C-corporation and S-corporation

Understanding what is the consideration when you decide your

organization types

Identify which organization types can benefit your business

Download the Organizational Types Instructor Guide, Organizational Types

Participant Guide, and Organizational Types Classroom Presentation to get
started!

6. Time Management
after completing this module, you will be able to:

Understand why time management is important to small business

Apply some general time management practices, including: Pareto

Analysis, ABC Method, Eisenhower method and POSEC method.

Download the Time Management Instructor Guide, Time Management Participant

Guide, and Time Management Classroom Presentation to get started!

7. Financial Management
after completing this module, you will be able to:

Understand the concept of financial management and its importance

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Explain financial management practices, rules, and tools commonly

available to small business

Identify financing basics for small business, such as: start up financing,
financing fixed asset, working capital

Download the Financial Management Instructor Guide, Financial Management

Participant Guide, and Financial Management Classroom Presentation to get
started!

8. Record keeping
after completing this module, you will be able to:

Explain record keeping basics- practices, rules, and tools

Understand how and which records can benefit your business

Identify software products relevant to business record keeping

Download the Record Keeping Instructor Guide, Record Keeping Participant

Guide, and Record Keeping Classroom Presentation to get started!

9. Credit reporting
after completing this module, you will be able to:

Understand the purpose for credit reporting and its benefits, risks, and
responsibilities

Explain how these credit reports works and Identify differences between
business and consumer credit reports

Understand how to improve your business credit.

Download the Credit Reporting Instructor Guide, Credit Reporting Participant

Guide, and Credit Reporting Classroom Presentation to get started!

10. Risk Management

after completing this module, you will be able to:

Identify the common risks relevant to a small business.

Identify the common warning signs of risk for a small business.

Implement, monitor, and evaluate a risk management plan for their

business
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Download the Risk Management Instructor Guide, Risk Management Participant

Guide, and Risk Management Classroom Presentation to get started!
11. Insurance
After completing this module, you will be able to:

Understand why insurance is needed for a small business

Identify other types of insurance that a small business should consider

Explain how to choose the insurance products that are best for your
business.

Download the Insurance Instructor Guide, Insurance Participant Guide, and

Insurance Classroom Presentation to get started!

12. Tax Planning and Reporting

after completing this module, you will be able to:

Understand the federal, state, and local tax reporting requirements of a

small business

Explain how to manage your tax obligations and establish proper accounts

Understand how the forms and processes are used to pay business taxes

Download the Tax Planning and Reporting Instructor Guide, Tax Planning and
Reporting Participant Guide, and Tax Planning and Reporting Classroom
Presentation to get started!

13. Selling a Small Business and Succession Planning

after completing this module, you will be able to:

Explain how to sell and close a business

Understand benefits of creating a retirement plan

Download the Selling a Small Business Instructor Guide, Selling a Small Business
Participant Guide, and Selling a Small Business Classroom Presentation to get
started!
I. Finance Your Business
lvii.

1. Loans
2. Grants
3. Venture Capital
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4. Business USA Financing Tool

1. Loans
i.

SBA Loans

ii.

Business Loan Application Checklist

iii.

SBA Loan Application Checklist

iv.

Acquiring Financing

i.
SBA Loans
If youre planning to start a business or expand an existing business, you might
need financing help. SBA participates in a number of loan programs designed for
business owners who may have trouble qualifying for a traditional bank loan.
To start the process, you should visit a local bank or lending institution that
participates in SBA programs. SBA loan applications are structured to meet SBA
requirements, so that the loan is eligible for an SBA guarantee. This guarantee
represents the portion of the loan that SBA will repay to the lender if you default
on your loan payments.
The SBA Loan Application Checklist provides a listing of forms and documents
you and your lender will need to create a loan package to submit to SBA.
The following are direct links to information about commonly requested SBA
programs:
Starting and Expanding Businesses

Basic 7(a) Loan Program

Gives 7(a) loans to eligible borrowers for starting, acquiring and expanding
a small business. This type of loan is the most basic and the most used
within SBA's business loan programs. Borrowers must apply through a
participating lender institution.

Certified Development Company (CDC) 504 Loan Program

Provides growing businesses with long-term, fixed-rate financing for major
fixed assets, such as land and buildings.

Microloan Program
Offers very small loans to start-up, newly established or growing small
business concerns. SBA makes funds available to nonprofit community
based lenders which, in turn, make loans to eligible borrowers in amounts

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up to a maximum of $50,000. Applications are submitted to the local

intermediary and all credit decisions are made on the local level.
Disaster Loans

Disaster Assistance Loans

Provide financial assistance to victims of disasters or to individuals in a
declared disaster area. You may be eligible for this type of loan even if you
don't own a business.

Economic Injury Loans

Assist small businesses, small agricultural cooperatives and nonprofit
organizations as they recover from economic losses resulting from
physical disaster or an agricultural production disaster.

Export Assistance Loans

Export Express
Provide exporters and lenders with a streamlined method of obtaining
financing for loans and lines of credit up to $500,000. Lenders use their
own credit decision process and loan documentation; exporters get access
to their funds faster. SBA provides an expedited eligibility review with a
response in less than 24 hours.

Export Working Capital

Offers loans targeted at businesses that are able to generate export sales
but need additional working capital to support these opportunities.

International Trade Loans

Gives term loans that are designed for businesses that plan to
start/continue exporting or those that that have been adversely affected
by competition from imports. The proceeds of the loan must enable the
borrower to be in a better position to compete.

Veteran and Military Community Loans

Military Reservist Economic Injury Disaster Loan

Offers funds to eligible small businesses to meet ordinary and necessary
operating expenses that could have been met, but are unable to meet,
because an essential employee was "called-up" to active duty in their role
as a military reservist.

Special Purpose Loans

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CAP Lines
Help small businesses meet their short-term and cyclical working-capital
needs through the SBA umbrella program called CAP Lines.

Pollution Control Loans

Provides financing to eligible small businesses for the planning, design or
installation of a pollution control facility.

U.S. Community Adjustment And Investment Program (CAIP)

CAIP is a program established to assist U.S. companies that are doing
business in areas of the country that have been negatively affected by the
North American Free Trade Agreement (NAFTA). To be eligible, a business
must reside in a county noted as being negatively affected by NAFTA,
based on job losses and the unemployment rate of the county.

ii.
Business Loan Application Checklist
SBA is not the only source for small-business loans. State and local economicdevelopment agencies and numerous nonprofit organizations provide lowinterest loans to small business owners who may not qualify for traditional
commercial loans.
When it comes to applying for these loans, the good news is that most of these
other lenders require the same kinds of information. Of course, each loan
program has specific forms you need to fill out. But for the most part, youll need
to submit the same types of documentation. So its a good idea to gather what
youll need before you even start the application process.
Here are the typical items required for any small business loan application:
Loan Application Form
Forms vary by program and lending institution, but they all ask for the same
information. You should be prepared to answer the following questions. Its a
good idea to have this information prepared before you fill out the application:

Why are you applying for this loan?

How will the loan proceeds be used?

What assets need to be purchased, and who are your suppliers?

What other business debt do you have, and who are your creditors?

Who are the members of your management team?

Personal Background
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Either as part of the loan application or as a separate document, you will likely
need to provide some personal background information, including previous
addresses, names used, criminal record, educational background, etc.
Resumes
Some lenders require evidence of management or business experience,
particularly for loans that can be used to start a new business.
Business Plan
All loan programs require a sound business plan to be submitted with the loan
application. The business plan should include a complete set of projected
financial statements, including profit and loss, cash flow and balance sheet.
Here are some resources for preparing your business plan:

Essential Elements of Writing a Good Business Plan

Templates for Writing a Business Plan

Personal Credit Report

Your lender will obtain your personal credit report as part of the application
process. However, you should obtain a credit report from all three major
consumer credit rating agencies before submitting a loan application to the
lender. Inaccuracies and blemishes on your credit report can hurt your chances
of getting a loan approved. Its critical you try to clear these up before beginning
the application process.
Business Credit Report
If you are already in business, you should be prepared to submit a credit report
for your business. As with the personal credit report, it is important to review
your business credit report before beginning the application process.
Income Tax Returns
Most loan programs require applicants to submit personal and business income
tax returns for the previous three years.
Financial Statements
Many loan programs require owners with more than a 20 percent stake in your
business to submit signed personal financial statements.
You may also be required to provide projected financial statements either as part
of, or separate from your business plan. It is a good idea to have these prepared
and ready in case a program for which you are applying requires these
documents to be submitted individual.
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The following forms may be used to prepare your projected financial statements:

Balance Sheet

Income Statement

Cash Flow

Bank Statements

Many loan programs require one year of personal and business bank statements
to be submitted as part of a loan package.
Accounts Receivable and Accounts Payable
Most loan programs require details of a businesss most current financial
position. Before you begin the loan application process, make sure you have
accounts receivable and accounts payable.
Collateral
Collateral requirements vary greatly. Some loan programs do not require
collateral. Loans involving higher risk factors for default require substantial
collateral. Strong business plans and financial statements can help you avoid
putting up collateral. In any case, it is a good idea to prepare a collateral
document that describes cost/value of personal or business property that will be
used to secure a loan.
Legal Documents
Depending on a loans specific requirements, your lender may require you to
submit one or more legal documents. Make sure you have the following items in
order, if applicable:

Business licenses and registrations required for you to conduct business

Articles of Incorporation

Copies of contracts you have with any third parties

Franchise agreements

Commercial leases

Organizing your documents

Keeping good records is essential for running a successful business, but even
more critical when applying for a loan. Make sure required documents are orderly
and accurate. All information you provide will be verified by your lender and the
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organization guaranteeing the loan. False or misleading information will result in

your loan being denied. Finally, make sure you keep personal copies of all loan
packages.
More Information
If you plan on applying for an SBA loan, check out the SBA Loan Application
Checklist for specific requirements.
iii.
SBA Loan Application Checklist
Once you have decided to apply for a loan guaranteed by the SBA, you will need
to collect the appropriate documents for your application. The SBA does not
provide direct loans. The process starts with your local lender, working within
SBA guidelines.
Use the checklist below to ensure you have everything the lender will ask for to
complete your application. Once your loan package is complete, your lender will
submit it to the SBA.
1. SBA Loan Application To begin the process, you will need to complete
an SBA loan application form. Access the most current form here: Borrower
Information Form - SBA Form 1919
2. Personal Background and Financial Statement To assess your
eligibility, the SBA also requires you complete the following forms:

Statement of Personal History - SBA Form 912

Personal Financial Statement - SBA Form 413

3. Business Financial Statements To support your application and

demonstrate your ability to repay the loan, prepare and include the
following financial statements:

Profit and Loss (P&L) Statement This must be current within 180
days of your application. Also include supplementary schedules from the
last three fiscal years.

Projected Financial Statements Include a detailed, one-year

projection of income and finances and attach a written explanation as to
how you expect to achieve this projection.

4. Ownership and Affiliations Include a list of names and addresses of

any subsidiaries and affiliates, including concerns in which you hold a
controlling interest and other concerns that may be affiliated by stock
ownership, franchise, and proposed merger or otherwise with you.
5. Business Certificate/License Your original business license or
certificate of doing business. If your business is a corporation, stamp
your corporate seal on the SBA loan application form.
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6. Loan Application History Include records of any loans you may have
applied for in the past.
7. Income Tax Returns Include signed personal and business federal
income tax returns of your business principals for previous three years.
8. Rsums Include personal rsums for each principal.
9. Business Overview and History Provide a brief history of the business
and its challenges. Include an explanation of why the SBA loan is needed
and how it will help the business.
10.Business Lease Include a copy of your business lease, or note from
your landlord, giving terms of proposed lease.
11.If You are Purchasing an Existing Business The following
information is needed for purchasing an existing business:

Current balance sheet and P&L statement of business to be purchased

Previous two years federal income tax returns of the business

Proposed Bill of Sale including Terms of Sale

Asking price with schedule of inventory, machinery and equipment,

furniture and fixtures

iv.
Acquiring Financing
If you've ever applied for a charge account, a personal loan, insurance, or a job,
there's a file about you. This file contains information on where you work and
live, how you pay your bills, and whether you've been sued, arrested or filed for
bankruptcy.
Companies that gather and sell this information are called Consumer Reporting
Agencies (CRAs). The most common type of CRA is the credit bureau. The
information CRAs sell about you to creditors, employers, insurers and other
businesses is called a consumer report.
The Fair Credit Reporting Act regulates the collection, dissemination and use
of consumer credit information. If your business uses credit reports for the
following reasons, there are rules and regulations you must follow to ensure
privacy of credit information:

To extend credit to your customers

As a pre-employment check for potential employers

Or furnish customer information to credit reporting agencies

The resources below can provide more information on these requirements and
how to comply.
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Using Consumer Credit Reports: What Employers Need to Know

Explains how you, as an employer, can use consumer reports when you hire new
employees and when you evaluate employees for promotion, reassignment, and
retention as long as you comply with the Fair Credit Reporting Act.

Credit Reports: What Information Providers Need to Know

Provides guidance for businesses that are reporting consumer credit information
to credit reporting agencies, including rules that must be followed under the Fair
Credit Reporting Act.
Using Consumer Credit Reports : What Insurers Need to Know
Details how insurance providers using consumer credit reports to underwrite
insurance policies and to screen high-risk applicants must comply with privacy
regulations under the Fair Credit Reporting Act.
Using Consumer Credit Reports : What Landlords Need to Know
Offers a fact sheet for landlords using consumer and credit reports to evaluate
rental applications.

Disposing of Consumer Report Information? New Rule Tells How

Covers how businesses should take appropriate measures to dispose of sensitive

information derived from consumer reports. This new federal rule was
established to help protect the privacy of consumer information and reduce the
risk of fraud and identity theft.
More Information

Pre-Employment Checks

Explains the use of personal information, such as credit reports, used in

background screening.

Protecting Financial Information

Provides education and guidance to help financial companies comply with the
Safeguard Rule.
2. Grants
The federal government does NOT provide grants for starting and expanding a
business.
Government grants are funded by your tax dollars and therefore require very
stringent compliance and reporting measures to ensure the money is well spent.
As you can imagine, grants are not given away indiscriminately.

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Grants from the federal government are only available to non-commercial

organizations, such as non-profits and educational institutions in areas such as,
medicine, education, scientific research and technology development. The
federal government also provides grants to state and local governments to assist
them with economic development.
Some business grants are available through state and local programs, non-profit
organizations and other groups. For example, some states provide grants for
expanding child care centers; creating energy efficient technology; and
developing marketing campaigns for tourism. These grants are not necessarily
free money, and usually require the recipient to match funds or combine the
grant with other forms of financing such as a loan. The amount of the grant
money available varies with each business and each grantor.
If you are not one of these specialized businesses, both federal and state
government agencies provide financial assistance programs that helps small
business owners obtain low-interest loans and venture capital financing from
commercial lenders.
Venture Capital

Venture Capital

SBIC Directory

3. Venture Capital
About Venture Capital
Understanding Venture Capital
Angel Investors
Understanding Equity Capital
The Venture Capital Process
About Venture Capital
Venture capital is a type of equity financing that addresses the funding needs of
entrepreneurial companies that for reasons of size, assets, and stage of
development cannot seek capital from more traditional sources, such as public
markets and banks. Venture capital investments are generally made as cash in
exchange for shares and an active role in the invested company.
Venture capital differs from traditional financing sources in that venture capital
typically:

Focuses on young, high-growth companies

Invests equity capital, rather than debt

Takes higher risks in exchange for potential higher returns

Has a longer investment horizon than traditional financing

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Actively monitors portfolio companies via board participation, strategic

marketing, governance, and capital structure

Successful long-term growth for most businesses is dependent upon the

availability of equity capital. Lenders generally require some equity cushion or
security (collateral) before they will lend to a small business. A lack of equity
limits the debt financing available to businesses. Additionally, debt financing
requires the ability to service the debt through current interest payments. These
funds are then not available to grow the business.
Venture capital provides businesses a financial cushion. However, equity
providers have the last call against the companys assets. In view of this lower
priority and the usual lack of a current pay requirement, equity providers require
a higher rate of return/return on investment (ROI) than lenders receive.
Understanding Venture Capital
Venture capital for new and emerging businesses typically comes from high net
worth individuals (angel investors) and venture capital firms. These investors
usually provide capital unsecured by assets to young, private companies with the
potential for rapid growth. This type of investing inherently carries a high degree
of risk. But venture capital is long-term or patient capital that allows
companies the time to mature into profitable organizations.
Venture capital is also an active rather than passive form of financing. These
investors seek to add value, in addition to capital, to the companies in which
they invest in an effort to help them grow and achieve a greater return on the
investment. This requires active involvement; almost all venture capitalists will,
at a minimum, want a seat on the board of directors.
Although investors are committed to a company for the long haul, that does not
mean indefinitely. The primary objective of equity investors is to achieve a
superior rate of return through the eventual and timely disposal of investments.
A good investor will be considering potential exit strategies from the time the
investment is first presented and investigated.
Angel Investors
Business angels are high net worth individual investors who seek high returns
through private investments in start-up companies. Private investors generally
are a diverse and dispersed population who made their wealth through a variety
of sources. But the typical business angels are often former entrepreneurs or
executives who cashed out and retired early from ventures that they started and
grew into successful businesses.
These self-made investors share many common characteristics:

They seek companies with high growth potentials, strong management

teams, and solid business plans to aid the angels in assessing the

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companys value. (Many seed or startups may not have a fully developed
management team, but have identified key positions.)

They typically invest in ventures involved in industries or technologies

with which they are personally familiar.

They often co-invest with trusted friends and business associates. In these
situations, there is usually one influential lead investor (archangel) those
judgment is trusted by the rest of the group of angels.

Because of their business experience, many angels invest more than their
money. They also seek active involvement in the business, such as
consulting and mentoring the entrepreneur. They often take bigger risks or
accept lower rewards when they are attracted to the non-financial
characteristics of an entrepreneurs proposal.

Understanding Equity Capital

Equity capital or financing is money raised by a business in exchange for a share
of ownership in the company. Ownership is represented by owning shares of
stock outright or having the right to convert other financial instruments into
stock of that private company. Two key sources of equity capital for new and
emerging businesses are angel investors and venture capital firms.
Typically, angel capital and venture capital investors provide capital unsecured
by assets to young, private companies with the potential for rapid growth. Such
investing covers most industries and is appropriate for businesses through the
range of developmental stages. Investing in new or very early companies
inherently carries a high degree of risk. But venture capital is long term or
patient capital that allows companies the time to mature into profitable
organizations.
Angel and venture capital is also an active rather than passive form of financing.
These investors seek to add value, in addition to capital, to the companies in
which they invest in an effort to help them grow and achieve a greater return on
the investment. This requires active involvement and almost all venture
capitalists will, at a minimum, want a seat on the board of directors.
Although investors are committed to a company for the long haul, that does not
mean indefinitely. The primary objective of equity investors is to achieve a
superior rate of return through the eventual and timely disposal of investments.
A good investor will be considering potential exit strategies from the time the
investment is first presented and investigated.
The Venture Capital Process
A startup or high growth technology companies looking for venture capital
typically can expect the following process:

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Submit Business Plan. The venture fund reviews an entrepreneurs

business plan, and talks to the business if it meets the funds investment
criteria. Most funds concentrate on an industry, geographic area, and/or
stage of development (e.g., Start-up/Seed, Early, Expansion, and Later).

Due Diligence. If the venture fund is interested in the prospective

investment, it performs due diligence on the small business, including
looking in great detail at the companys management team, market,
products and services, operating history, corporate governance
documents, and financial statements. This step can include developing a
term sheet describing the terms and conditions under which the fund
would make an investment.

Investment. If at the completion of due diligence the venture fund

remains interested, an investment is made in the company in exchange
for some of its equity and/or debt. The terms of an investment are usually
based on company performance, which help provide benefits to the small
business while minimizing risks for the venture fund.

Execution with VC Support. Once a venture fund has invested, it

becomes actively involved in the company. Venture funds normally do not
make their entire investment in a company at once, but in rounds. As
the company meets previously-agreed milestones, further rounds of
financing are made available, with adjustments in price as the company
executes its plan.

Exit. While venture funds have longer investment horizons than

traditional financing sources, they clearly expect to exit the company
(on average, four to six years after an initial investment), which is
generally how they make money. Exits are normally performed via
mergers, acquisitions, and IPOs (Initial Public Offerings). In many cases,
venture funds will help the company exit through their business networks
and experience.

Directory of SBIC Licensees

The Small Business Investment Company (SBIC) Program works with private
investment funds licensed as SBICs to provide growth capital to U.S. small
businesses. Although SBICs regulated by SBA, they are private, profit-seeking
investment companies that make independent investment decisions. This
directory will provide you with the contact information needed to about the SBIC
Licensees in your state.
The Small Business Investment Company (SBIC) Program works with private
investment funds licensed as SBICs to provide growth capital to U.S. small
businesses. Although SBICs regulated by SBA, they are private, profit-seeking
investment companies that make independent investment decisions. This
directory will provide you with the contact information needed to about the SBIC
Licensees in your state.
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Explanation of Directory Information

Details on each SBIC listed below include the following information:
Preferred Investment Size: The amount the SBIC is willing to invest or loan.
Investment Policy: The type of investment the SBIC is willing to make (for
example, loans, equity or debt with equity features).
Investment Type: The various stages of financing that the SBIC is willing to
fund (for example, seed, start-up, early stage, expansion financing, later stage
financing, or managed buyout, leveraged buyout or acquisition).
Industry Preference: Type of industry or industries the SBIC is interested in
financing. Usually based on the knowledge and experience of the SBIC's
management.
Geographic Preference: The area of the United States where the SBIC prefers
to make financing.
Regulatory Capital: A Licensee's private paid-in capital and surplus or private
partners' contributed capital (excluding non-cash contributions), plus unfunded
binding commitments from institutional investors.
Leverage from SBA: A Licensee's outstanding debentures, participating
securities or preferred stock guaranteed or purchased by SBA.
Capital Resources: The sum of a Licensee's regulatory capital and leverage
from SBA.
SBIC Licenses by State
Alabama
Alaska
American Samoa
Arizona
Arkansas
California
Colorado
Connecticut
Delaware
District of Columbia
Florida

Georgia
Guam
Hawaii
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine

New Mexico
Maryland
New York
Massachusetts
North Carolina
Michigan
North Dakota
Minnesota
Northern Marianas
Mississippi
Islands
Missouri
Ohio
Montana
Oklahoma
Nebraska
Oregon
Nevada
Pennsylvania
New Hampshire
Puerto Rico
New Jersey
Rhode Island

South Carolina
South Dakota
Tennessee
Texas
Utah
Vermont
Virginia
Virgin Islands
Washington
West Virginia
Wyoming
Wisconsin

4. Business USA Financing Tool

To help you identify what government financing programs may be available to
help you start or expand your business, check out the Access Financing Wizard
from Business USA.
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In a few quick steps, this wizard will guide you to government resources to
access financing for your business!
Keep in mind that SBA and Business USA do not provide grants to start or grow a
business. Some federal grants do exist, but are only available to certain noncommercial organizations. Read more about grants here.
J. Filing & Paying Taxes
lxi.

1.
2.
3.
4.
5.

Is It A Business or a Hobby?
Obtain Your Federal Business Tax ID
Determine Your Federal Tax Obligations
Determine Your State Tax Obligations
Determine When the Tax Year Starts

1. Is It A Business or a Hobby?
The Internal Revenue Service reminds taxpayers to follow appropriate guidelines
when determining whether an activity is a business or a hobby, an activity not
engaged in for profit.
This is an explanation of the rules that determine if an activity qualifies as a
business and what limitations apply if the activity is not a business. Incorrect
deduction of hobby expenses account for a portion of the overstated
adjustments, deductions, exemptions and credits that add up to $30 billion per
year in unpaid taxes, according to IRS estimates.
In general, taxpayers may deduct ordinary and necessary expenses for
conducting a trade or business. An ordinary expense is an expense that is
common and accepted in the taxpayers trade or business. A necessary expense
is one that is appropriate for the business. Generally, an activity qualifies as a
business if it is carried on with the reasonable expectation of earning a profit.
In order to make this determination, taxpayers should consider the following
factors:

Does the time and effort put into the activity indicate an intention to make
a profit?

Does the taxpayer depend on income from the activity?

If there are losses, are they due to circumstances beyond the taxpayers
control or did they occur in the start-up phase of the business?

Has the taxpayer changed methods of operation to improve profitability?

Does the taxpayer or his/her advisors have the knowledge needed to carry
on the activity as a successful business?

Has the taxpayer made a profit in similar activities in the past?

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Does the activity make a profit in some years?

Can the taxpayer expect to make a profit in the future from the
appreciation of assets used in the activity?

The IRS presumes that an activity is carried on for profit if it makes a profit
during at least three of the last five tax years, including the current year at
least two of the last seven years for activities that consist primarily of breeding,
showing, training or racing horses.
If an activity is not for profit, losses from that activity may not be used to offset
other income. An activity produces a loss when related expenses exceed income.
The limit on not-for-profit losses applies to individuals, partnerships, estates,
trusts, and S corporations. It does not apply to corporations other than S
corporations.
Deductions for hobby activities are claimed as itemized deductions on Schedule
a (Form 1040). These deductions must be taken in the following order and only to
the extent stated in each of three categories:

Deductions that a taxpayer may take for personal as well as business

activities, such as home mortgage interest and taxes, may be taken in full.

Deductions that dont result in an adjustment to basis, such as advertising,

insurance premiums and wages, may be taken next, to the extent gross
income for the activity is more than the deductions from the first category.

Business deductions that reduce the basis of property, such as

depreciation and amortization, are taken last, but only to the extent gross
income for the activity is more than the deductions taken in the first two
categories.

2. Obtain Your Federal Business Tax ID

An Employer Identification Number (EIN) is also known as a Federal Tax
Identification Number, and is used to identify a business entity. Generally,
businesses need an EIN. You may apply for an EIN in various ways, and now you
may apply online. You must check with your state to determine if you need a
state number or charter.

Do You Need an EIN?

Do You Need a New EIN?

How to Apply for an EIN

How Long Will it Take to Get a Number?

Lost or Misplaced Your EIN?

How EINs are Assigned and Valid EIN Prefixes

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Canceling an EIN Closing Your Account

Who is a Responsible Party?

Apply for an EIN Online

References/Related Topics
Understanding Your EIN
Virtual Small Business Tax Workshop
Correcting Business Information Where a Nominee Was Used
Change in Application for Employer Identification Number
3. Determine Your Federal Tax Obligations
When starting a business, you must decide what form of business entity to
establish. Your form of business (e.g., sole proprietorship, partnership, LLC)
determines which income tax return form you have to file. The federal
government levies four basic types of business taxes:

Income tax

Self-employment tax

Taxes for employers

Excise taxes

To about these taxes, visit the Internal Revenue Service's (IRS) Guide to Business
Taxes.
Federal Income Taxes
Select the form of your business below to find out which federal tax forms you
need to file:

Sole Proprietorship

Partnership

Corporation

S Corporation

Limited Liability Company (LLC)

State Income Taxes

Nearly every state levies a business or corporate income tax. Like federal taxes,
your state tax requirement depends on the legal structure of your business. For
example, if your business is an LLC, the LLC is taxed separately from the owners
of the business, while sole proprietors report their personal and business income
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taxes using the same form used to report their business taxes. Consult the
General Tax Information link on the State and Local Tax Guide for specific
requirements.
4. Determine Your State Tax Obligations
In addition to business taxes required by the federal government, you will have
to pay some state and local taxes. Each state and locality has its own tax laws.
The links below provide access to key resources that will help you learn about
your state tax obligations. Having knowledge of your state tax requirement can
help you avoid problems and your business save money. The most common
types of tax requirements for small business are income taxes and employment
taxes.
Income Taxes
Nearly every state levies a business or corporate income tax. Your tax
requirement depends on the legal structure of your business. For example, if
your business is a Limited Liability Company (LLC), the LLC gets taxed separately
from the owners, while sole proprietors report their personal and business
income taxes using the same form. Consult the General Tax Information link
under your state for specific requirements.
Employment Taxes
In addition to federal employment taxes, business owners with employees are
also responsible for paying certain taxes required by the state. All states require
payment of state workers' compensation insurance and unemployment
insurance taxes. The following states/territories also require a business to pay for
temporary disability insurance:

California

Hawaii

New Jersey

New York

Rhode Island

Puerto Rico

State and Territory Tax Resources

Use the links below to find out more about what you have to do to register and
be open for business in your state.
5. Determine When the Tax Year Starts
You must figure your taxable income on the basis of a tax year and file an
income tax return. A tax year is an annual accounting period for keeping
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records and reporting income and expenses. An annual accounting period does
not include a short tax year. The tax years you can use are:

Calendar year - A calendar tax year is 12 consecutive months beginning

January 1 and ending December 31.

Fiscal year - A fiscal tax year is 12 consecutive months ending on the last
day of any month except December. A 52- to 53-week tax year is a fiscal
tax year that varies from 52 to 53 weeks but does not have to end on the
last day of a month.

Unless you have a required tax year, you adopt a tax year by filing your first
income tax return using that tax year. A required tax year is a tax year required
under the Internal Revenue Code and the Income Tax Regulations. You have not
adopted a tax year if you merely did any of the following.

Filed an application for an extension of time to file an income tax return

Filed an application for an employer identification number

Paid estimated taxes for that tax year

If you file your first tax return using the calendar tax year and you later begin
business as a sole proprietor, become a partner in a partnership, or become a
shareholder in an S corporation, you must continue to use the calendar year
unless you get IRS approval to change it or are otherwise allowed to change it
without IRS approval.
Generally, anyone can adopt the calendar year. However, if any of the following
apply, you must adopt the calendar year:

You keep no books or records

You have no annual accounting period

Your present tax year does not qualify as a fiscal year

You are required to use a calendar year by a provision of the Internal

Revenue Code or the Income Tax Regulations

Short Tax Year

A short tax year is a tax year of less than 12 months. A short period tax return
may be required when you (as a taxable entity):

Are not in existence for an entire tax year

Change your accounting period

Tax on a short period tax return is figured differently for each situation.

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Not in Existence Entire Year

Even if you (a taxable entity) were not in existence for the entire year, a tax
return is required for the time you were in existence. Requirements for filing the
return and figuring the tax are generally the same as the requirements for a
return for a full tax year (12 months) ending on the last day of the short tax year.
For more information, see Publication 538, Accounting Periods and Methods
(PDF).
Changing Your Tax Year
Once you have adopted your tax year, you may have to get IRS approval to
change it. To get approval, you must file Form 1128, Application to Adopt,
Change, or Retain a Tax Year (PDF). See the instructions for Form 1128 for
exceptions. If you qualify for an automatic approval request, a user fee is not
required. If you do not qualify for automatic approval, a ruling must be requested
and a user fee is required. See the instructions for Form 1128 for information
about user fees if you are requesting a ruling.
K. Hire & Retain Employees
lxvi.

lxxi.
lxxii.

1.
2.
3.
4.
5.
6.
7.

Hire Your First Employee

Hire a Contractor or an Employee?
Pre-Employment Background Checks
Required Employee Benefits
Optional Employee Benefits
Writing Effective Job Descriptions
Employee Handbooks

1. Hire Your First Employee

If your business is booming, but you are struggling to keep up, perhaps it's time
to hire some help.
The eight steps below can help you start the hiring process and ensure you are
compliant with key federal and state regulations.
Step 1. Obtain an Employer Identification Number (EIN)
Before hiring your first employee, you need to get an employment identification
number (EIN) from the U.S. Internal Revenue Service. The EIN is often referred to
as an Employer Tax ID or as Form SS-4. The EIN is necessary for reporting taxes
and other documents to the IRS. In addition, the EIN is necessary when reporting
information about your employees to state agencies. Apply for EIN online or
contact the IRS at 1-800-829-4933.
Step 2. Set up Records for Withholding Taxes
According to the IRS, you must keep records of employment taxes for at least
four years. Keeping good records can also help you monitor the progress of your
business, prepare financial statements, identify sources of receipts, keep track of

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deductible expenses, prepare your tax returns, and support items reported on
tax returns.
Below are three types of withholding taxes you need for your business:

Federal Income Tax Withholding

Every employee must provide an employer with a signed withholding
exemption certificate (Form W-4) on or before the date of employment.
The employer must then submit Form W-4 to the IRS. For specific
information, read the IRS' Employer's Tax Guide [PDF].

Federal Wage and Tax Statement

Every year, employers must report to the federal government wages paid
and taxes withheld for each employee. This report is filed using Form W-2,
wage and tax statement. Employers must complete a W-2 form for each
employee who they pay a salary, wage or other compensation.

Employers must send Copy a of W-2 forms to the Social Security Administration
by the last day of February to report wages and taxes of your employees for the
previous calendar year. In addition, employers should send copies of W-2 forms
to their employees by Jan. 31 of the year following the reporting period. Visit
SSA.gov/employer for more information.

State Taxes
Depending on the state where your employees are located, you may be
required to withhold state income taxes. Visit the state and local tax page
for more information.

Step 3. Employee Eligibility Verification

Federal law requires employers to verify an employee's eligibility to work in the
United States. Within three days of hire, employers must complete Form I-9,
employment eligibility verification, which requires employers to examine
documents to confirm the employee's citizenship or eligibility to work in the U.S.
Employers can only request documentation specified on the I-9 form.
Employers do not need to submit the I-9 form with the federal government but
are required to keep them on file for three years after the date of hire or one
year after the date of the employee's termination, whichever is later.
Employers can use information taken from the Form I-9 to electronically verify
the employment eligibility of newly hired employees by registering with E-Verify.
Visit the U.S. Immigration and Customs Enforcement agencys I-9 website to
download the form and find more information.
Step 4. Register with Your State's New Hire Reporting Program
All employers are required to report newly hired and re-hired employees to a
state directory within 20 days of their hire or rehire date. Visit the New Hires

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Reporting Requirements page to and find links to your state's New Hire Reporting
System.
Step 5. Obtain Workers' Compensation Insurance
All businesses with employees are required to carry workers' compensation
insurance coverage through a commercial carrier, on a self-insured basis or
through their states Workers' Compensation Insurance program.
Step 6. Post Required Notices
Employers are required to display certain posters in the workplace that inform
employees of their rights and employer responsibilities under labor laws. Visit
the Workplace Posters page for specific federal and state posters you'll need for
your business.
Step 7. File Your Taxes
Generally, employers who pay wages subject to income tax withholding, Social
Security and Medicare taxes must file IRS Form 941, Employer's Quarterly
Federal Tax Return. For more information, visit IRS.gov.
New and existing employers should consult the IRS Employer's Tax Guide to
understand all their federal tax filing requirements.
Visit the state and local tax page for specific tax filing requirements for
employers.
Step 8. Get Organized and Keep Yourself Informed
Being a good employer doesn't stop with fulfilling your various tax and reporting
obligations. Maintaining a healthy and fair workplace, providing benefits and
keeping employees informed about your company's policies are key to your
business' success. Here are some additional steps you should take after you've
hired your first employee:
Set up Recordkeeping
In addition to requirements for keeping payroll records of your employees for tax
purposes, certain federal employment laws also require you to keep records
about your employees. The following sites provide more information about
federal reporting requirements:

Tax Recordkeeping Guidance

Labor Recordkeeping Requirements

Occupational Safety and Health Act Compliance

Employment Law Guide (employee benefits chapter)

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Apply Standards that Protect Employee Rights

Complying with standards for employee rights in regards to equal opportunity

and fair labor standards is a requirement. Following statutes and regulations for
minimum wage, overtime, and child labor will help you avoid error and a lawsuit.
See the Department of Labors Employment Law Guide for up-to-date
information on these statutes and regulations.
Also, visit the Equal Employment Opportunity Commission and Fair Labor
Standards Act.
2. Hire a Contractor or an Employee?
Independent contractors and employees are not the same, and it's important to
understand the difference. Knowing this distinction will help you determine what
your first hiring move will be and affect how you withhold a variety of taxes and
avoid costly legal consequences.
Whats the Difference?
An Independent Contractor:

Operates under a business name

Has his/her own employees

Maintains a separate business checking account

Advertises his/her business' services

Invoices for work completed

Has more than one client

Has own tools and sets own hours

Keeps business records

An Employee:

Performs duties dictated or controlled by others

Is given training for work to be done

Works for only one employer

Many small businesses rely on independent contractors for their staffing needs.
There are many benefits to using contractors over hiring employees:

Savings in labor costs

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Reduced liability

Flexibility in hiring and firing

Why Does It Matter?

Misclassification of an individual as an independent contractor may have a
number of costly legal consequences.
If your independent contractor is discovered to meet the legal definition of an
employee, you may be required to:

Reimburse them for wages you should've paid them under the Fair Labor
Standards Act, including overtime and minimum wage

Pay back taxes and penalties for federal and state income taxes, Social
Security, Medicare and unemployment

Pay any misclassified injured employees workers' compensation benefits

Provide employee benefits, including health insurance, retirement, etc.

Tax Requirements
Visit the IRS Independent Contractor or Employee guide to learn about the tax
implications of either scenario, download and fill out a form to have the IRS
officially determine your workers status, and find other related resources.
Employment Information
There is no single test for determining if an individual is an independent
contractor or an employee under the Fair Labor Standards Act. However, the
following guidelines should be taken into account:
1. The extent to which the services rendered are an integral part of the
principal's business
2. The permanency of the relationship
3. The amount of the alleged contractor's investment in facilities and
equipment
4. The nature and degree of control by the principal
5. The alleged contractor's opportunities for profit and loss
6. The amount of initiative, judgment, or foresight in open market
competition with others that is required for the success of the claimed
independent contractor
7. The degree of independent business organization and operation
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Whether a person is an independent contractor or an employee generally

depends on the amount of control exercised by the employer over the work
being done. Read Equal Employment Opportunity Laws - Who's Covered? For
more information on how to determine whether a person is an independent
contractor or an employee, and which are covered under federal laws.
3. Pre-Employment Background Checks
When you are hiring employees, you might need more information on a
candidate to make an informed decision.
The following list includes the types of information that employers often consult
as part of a pre-employment check, and the laws governing access and use for
making hiring decisions.
Credit Reports
Under the Fair Credit Reporting Act (FCRA), businesses must obtain an
employee's written consent before seeking an employee's credit report. If you
decide not to hire or promote someone based on information in the credit report,
you must provide a copy of the report and let the applicant know of his or her
right to challenge the report under the FCRA. Visit the FTCs Bureau of Consumer
Protections website for more information.
Criminal Records
To what extent a private employer may consider an applicant's criminal history in
making hiring decisions varies from state to state. Because of this variation, you
should consult with a lawyer or do further legal research on the laws of your
state before exploring whether or not an applicant has a criminal past.
For Federal Bureau of Investigation (FBI) checks, consult these resources:

FBI Services for Businesses

FBI Criminal History Checks for Employment and Licensing

FBI Checks on Employees of Banks and Related Entities

Lie Detector Tests

The Employee Polygraph Protection Act prohibits most private employers from
using lie detector tests, either for pre-employment screening or during the
course of employment. The law includes a list of exceptions that apply to
businesses that provide armored car services, alarm or guard services, or those
that manufacture, distribute, or dispense pharmaceuticals.
Even though there is no federal law specifically prohibiting you from using a
written honesty test on job applicants, these tests frequently violate federal and
state laws that protect against discrimination and violations of privacy.

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Medical Records
Under the Americans with Disabilities Act, employers cannot discriminate based
on a physical or mental impairment or request an employee's medical records.
Businesses can, however, inquire about an applicant's ability to perform specific
job duties. Some states also have stronger laws protecting the confidentiality of
medical records.
Bankruptcies
Bankruptcies are a matter of public record and may appear on an individual's
credit report. The Federal Bankruptcy Act prohibits employers from
discriminating against applicants because they have filed for bankruptcy.
Military Service
Military service records may be released only under limited circumstances, and
consent is generally required. The military may, however, disclose name, rank,
salary, duty assignments, awards and duty status without the service member's
consent.
School Records
Under the Family Educational Rights and Privacy Act and similar state laws,
educational records such as transcripts, recommendations and financial
information are confidential and will not be released by the school without a
student's consent.
Workers' Compensation Records
Workers' compensation appeals are a matter of public record. Information from a
workers' compensation appeal may be used in a hiring decision if the employer
can show the applicant's injury might interfere with his ability perform required
duties.
4. Required Employee Benefits
Employee benefits play an important role in the lives of employees as well as
their families. For that reason, the benefits you offer can be a deciding factor for
a potential employees decision to work at your business.
There are two types of employee benefits must provide by law those the
employer must provide by law and those the employer offers as an option to
compensate employees. Examples of required benefits include Social Security
and workers' compensation, while optional benefits include health care insurance
coverage and retirement benefits. Both required and optional benefits have legal
and tax implications for the employer.
This guide helps employers understand what they need to do to supply employee
benefits required by law.

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Social Security Taxes

Every employer must pay Social Security taxes at the same rate paid by their
employees.
The following sites from the Social Security Administration can help you comply:

Information and Resources for Employers

Social Security: Business Services Online

Employer W-2 Filling Instructions and Information

Instructions for Hiring Employees Not Covered by Social Security

Unemployment Insurance
Businesses with employees may be required to pay unemployment insurance
taxes. If your business is required to pay these taxes, you must register with your
state's workforce agency, which can be found on our State and Local Tax page
Workers Compensation
Businesses with employees are required to carry Workers' Compensation
Insurance coverage through a commercial carrier, on a self-insured basis, or
through the state Workers' Compensation Insurance program. Visit the Workers'
Compensation page for more information.
Disability Insurance
The following states and territories require businesses to provide partial wage
replacement insurance coverage to their eligible employees for non-work related
sickness or injury:

California

Hawaii

New Jersey

New York

Puerto Rico

Rhode Island

Leave Benefits
The majority of common leave benefits offered by employers are not required by
federal law, and are offered to employees as part of the employer's overall
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compensation and benefits plan. These leave benefits include holiday/vacation,

jury duty, personal leave, sick leave and funeral/bereavement leave. However,
employers are required to provide leave under the Family and Medical Leave Act
(FMLA).
Family and Medical Leave
The Family and Medical Leave Act (FMLA) entitles employees up to have 12
weeks of job-protected, unpaid leave during any 12-month period for any of the
following reasons:
1. Birth and care of the eligible employee's child, or placement for adoption
or foster care of a child with the employee
2. Care of an immediate family member (spouse, child, parent) who has a
serious health condition
3. Care of the employee's own serious health condition
FMLA requires group health benefits to be maintained during the leave as if
employees continued to work instead of taking leave. FMLA applies to private
employers with 50 or more employees, and to all public employers. Visit the
Department of Labors website for more information.
5. Optional Employee Benefits
In addition to required employee benefits, businesses can provide optional
benefits and incentives that can improve the lives of their employees and
families.
This guide will help explain legal and tax implications of these benefits and
highlight some common employee incentive programs.
Health Plans
Group health plans
Businesses that offer group health plans must comply with a federal law. Visit
DOLs Health Benefits Advisor interactive Website for a step-by-step guide on
how to determine which laws apply to your business.
DOL also provides guides to understanding your fiduciary responsibilities under a
group health plan and reporting and disclosing employee benefit plans [PDF].
For more information, visit DOLs website.
Affordable Health Care Act
The Affordable Care Act aims to lower health care costs for small business
owners and expand coverage options for employees. To learn about the Small
Business Health Care Tax Credit and find more resources about the law, visit the
Health Care and Health Care Reform page.

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COBRA Benefits
Consolidated Omnibus Budget Reconciliation Act (COBRA) provides certain
former employees, retirees, spouses, former spouses, and dependent children
the right to temporarily continue health coverage at group rates. Businesses are
required to provide COBRA benefits when employees are terminated or laid off.
The following Department of Labor (DOL) resources describe an employer's
requirements under COBRA:

An Employer's Guide to Group Health Continuation Coverage Under COBRA

[PDF)

COBRA Continuation Health Coverage Frequently Asked Questions

Retirement Plans and Pensions

The federal government has a wide range of resources to help small business
owners select a plan retirement or pension plan for their employees including the
following:

Small Business Retirement Savings Advisor

Choosing a Retirement Solution for Your Small Business

Tips for Selecting and Monitoring Service Providers for Your Employee
Benefit Plan

Small Business Guide to Federal Pension Insurance

[PDF]

Visit the following resources to about specific retirement or pension plans for
your small business:

Simplified Employee Pension (SEP) Retirement Plans for Small Business

SIMPLE IRA Plans for Small Businesses

Payroll Deduction IRAs for Small Businesses

401(k) Plans For Small Businesses

Employee Incentive Programs

A small investment in providing incentive programs for your employees can pay
large dividends. These programs can help boost morale through engagement
and reward, stimulate productivity and encourage group participation in your
business success. The following are just a few of many incentive programs your
small business can offer employees:

Flex time: One of the biggest reasons work-at-home business owners

enjoy what they do is not necessarily that they are their own boss, but
that they can work the hours that work for them. Likewise, offering the
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opportunity for flexible hours can be a great incentive for attracting and
retaining high performing and motivated employees.

Family events: Your business success depends not only on your

employees, but also the support of their families. Plan company functions
and events that are oriented towards employees and their families such as
picnics, movie nights, take your child to work days - the choice is yours
and doesnt need to break the bank.

Project completion perks: Incentivizing employees for goal-oriented

project completion is a great way to build a team but also to engage and
stimulate your employees to support your business objectives. This can
involve recognizing individual achievement or team success. Consider
catered lunches, on-site massage therapy, and other perks to keep
employees motivated as they work towards a team goal.

Workplace wellness programs: What better way to show your

investment in your employees than to help them invest in their wellness?
And it doesn't have to involve a great deal of money or administrative
work. Survey your employees' wellness priorities - whether it's losing
weight, quitting smoking, or enhancing the workplace team environment.
From there, compile a calendar or schedule of activities. Wellness
initiatives can also be tied to incentives and perks. Incentivize employees
to quit smoking by offering a prize or bonus to those who quit or look for
ways to encourage other healthy lifestyle choices such as introducing a
30-minute lunchtime team walk.

Corporate memberships: Discounted or free corporate memberships

can help promote employee wellbeing (e.g. gym memberships) while also
enabling and promoting company goals. Recreational or entertainment
memberships can act as venues for client entertainment and can be tax
deducted.

6. Writing Effective Job Descriptions

Job descriptions are an essential part of hiring and managing your employees.
These written summaries ensure your applicants and employees understand
their roles and what they need to do to be held accountable.
Job descriptions also:

Help attract the right job candidates

Describe the major areas of an employees job or position

Serve as a major basis for outlining performance expectations, job

training, job evaluation and career advancement

Provide a reference point for compensation decisions and unfair hiring

practices

Overview

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A job description should be practical, clear and accurate to effectively define

your needs. Good job descriptions typically begin with a careful analysis of the
important facts about a job such as:

Individual tasks involved

The methods used to complete the tasks

The purpose and responsibilities of the job

The relationship of the job to other jobs

Qualifications needed for the job

What to Avoid
Dont be inflexible with your job description. Jobs are subject to change for
personal growth, organizational development and/or evolution of new
technologies. A flexible job description encourages employees to grow within
their position and contribute over time to your overall business.
What to Include
Job descriptions typically include:

Job title

Job objective or overall purpose statement

Summary of the general nature and level of the job

Description of the broad function and scope of the position

List of duties or tasks performed critical to success

Key functional and relational responsibilities in order of significance

Description of the relationships and roles within the company, including

supervisory positions, subordinating roles and other working relationships

Additional Items for Job Descriptions for Recruiting Situations

Job specifications, standards, and requirements

Job location where the work will be performed

Equipment to be used in the performance of the job

Collective Bargaining Agreements if your company's employees are

members of a union
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Salary range

Proper Language in the Job Description

Keep each statement in the job description crisp and clear:

Structure your sentences in classic verb/object and explanatory phrases.

Since the occupant of the job is the subject of your sentence, it may be
eliminated. For example, a sentence pertaining to the description of a
receptionist position might read: "Greets office visitors and personnel in a
friendly and sincere manner."

Always use the present tense of verbs.

If necessary, use explanatory phrases telling why, how, where, or how

often to add meaning and clarity (e.g. "Collects all employee time sheets
on a bi-weekly basis for payroll purposes.")

Omit any unnecessary articles such as "a," "an," "the," or other words for
an easy-to-understand description.

Use unbiased terminology. For example, use he/she approach or construct

sentences in such a way that gender pronouns are not required.

Avoid using adverbs or adjectives that are subject to interpretation such as

"frequently," "some," "complex," "occasional," and "several."

7. Employee Handbooks
An employee handbook is an important communication tool between you and
your employees. A well-written handbook sets forth your expectations for your
employees, and describes what they can expect from your company. It also
should describe your legal obligations as an employer, and your employees'
rights. This guide will help you write an employee handbook, which typically
includes the topics below.
Non-Disclosure Agreements (NDAs) and Conflict of Interest Statements
Although NDAs are not legally required, having employees sign NDAs and conflict
of interest statements helps to protect your trade secrets and company
proprietary information.
Anti-Discrimination Policies
As a business owner, you must comply with the equal employment opportunity
laws prohibiting discrimination and harassment, including the Americans with
Disabilities Act. Employee handbooks should include a section about these laws,
and how your employees are expected to comply. Visit the Employment
Discrimination and Harassment page for more information
Compensation

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Clearly explain to your employees that your company will make required
deductions for federal and state taxes, as well as voluntary deductions for the
companys benefits programs. In addition, you should outline your legal
obligations regarding overtime pay, pay schedules, performance reviews, and
salary increases, time keeping records, breaks and bonuses. Visit the following
pages for more information.

Wage & Hour Laws

Employment Taxes

Workers' Compensation

Work Schedules
Describe your companys policies regarding work hours and schedules,
attendance, punctuality and reporting absences, along with guidelines for
flexible schedules and telecommuting.
Standards of Conduct
Document your expectations of how you want your employees to conduct
themselves including dress code and ethics. In addition, remind your employees
of their legal obligations, especially if your business is engaged in an activity that
is regulated by the government.
General Employment Information
Your employee handbook should include an a overview of your business and
general employment policies covering employment eligibility, job classifications,
employee referrals, employee records, job postings, probationary periods,
termination and resignation procedures, transfers and relocation, and union
information, if applicable.
Visit the following pages for more information.

Employment & Labor Laws

Foreign Workers, Immigration & Employee Eligibility

Performing Pre-Employment Background Checks

Terminating Employees

Unions

Safety and Security

Describe your companys policy for creating a safe and secure workplace,
including compliance with the Occupational Safety and Health Administration's
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laws that require employees to report all accidents, injuries, potential safety
hazards, safety suggestions and health and safety related issues to
management.
Safety policies should also include your companys policy regarding bad weather
and hazardous community conditions.
Add your commitment to creating a secure work environment, and your
employees responsibility for abiding by all physical and information security
policies, such as locking file cabinets or computers when not in use.
The Workplace Safety & Health guide provides information on your legal
requirements as an employer.
Computers and Technology
Outline policies for appropriate computer and software use, and steps employees
should take to secure electronic information, especially any personal identifiable
information you collect from your customers.
Visit the Information Security page related to privacy for more information on
your legal requirements as a business owner.
Media Relations
Its a good business practice to have a single point of contact for all media
inquiries. Your employee handbook should include a section that explains how
your employees should handle calls from reporters or other media inquiries.
Employee Benefits
Make sure to detail any benefit programs and eligibility requirements, including
all benefits that may be required by law.
This section should also outline your plans for optional benefits such as health
insurance, retirement plans and wellness programs.
Leave Policies
Your companys leave policies should be carefully documented, especially those
you are required to provide by law. Family medical leave, jury duty, military
leave, and time off for court cases and voting should all be documented to
comply with state and local laws. In addition, you should explain your policies for
vacation, holiday, bereavement and sick leave.

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