Frequently Asked Questions From Small Business Owners

---

Before starting out, list the reasons you want to go into business. Some of the most common reasons for starting a business include being self-employed, wanting financial and creative independence, and maximizing your skills and knowledge.

When determining what business is right for you, consider what you like to do with your time, what technical skills you have, recommendations from others, and whether any of your hobbies or interests are marketable. You must also decide what kind of time commitment you are willing to make to run a business.

Then research to identify the niche your business will fill. Your research should address such questions as what services or products you plan to sell, whether your idea fits a genuine need, what competition exists, and how you can gain a competitive advantage. Most importantly, can you create a demand for your business?

In order to be successful, your business must be based on more than a desire to be your own boss.  You must be willing to plan ahead and make improvements or adjustments along the way.  Carefully do an honest assessment of your own personality.  Do you have the discipline to work all day from home without being distracted by the television or by other people in your household?  

It is critical to establish a professional environment in your home.  Set up a separate office in your home if at all possible.  This limits daily distractions and keeps you focused on the task at hand.  It also helps to keep you organized by giving you a dedicated space for your business.  

Home-based businesses are subject to many of the same laws and regulations affecting other businesses.  Be sure to contact Quinnessentials to find out which laws and regulations affect your business.  For example, certain products may not be produced in the home.

Most states outlaw home production of fireworks, drugs, poisons, explosives, sanitary or medical products, and toys.  Some states also prohibit home-based businesses from making food, drink, or clothing.

You may need to obtain a work certificate, business license, or a license from the state, a sales and use tax number, a separate business telephone, and a separate business account with your bank.

Last, if your business has employees, you must withhold income and social security taxes, pay unemployment taxes, carry workers compensation, comply with minimum wage requirements, and follow employee health and safety laws.  

There are four main types of business entity structures defined below to help you determine which one best fits your business.

Limited Liability Company (LLC)

Like C Corps and S Corps, LLCs provide their owners with limited liability protection.  This means the business assets are owned separately by the LLC and not by the owners.  This protects (generally) the individual owner's personal assets from liability.

An LLC does not pay federal income tax, but passes it through to the personal tax returns of the owners or members.  It is then taxed as personal income by the IRS.  However, an LLC is responsible for paying payroll tax, sales tax, property tax, and taxes on tariffs.

S Corporation

S Corps are formed and regulated at the state level and limit the liability of the owners / investors only to the value of their investment.  The owners of a corporation are not personally liable for business debts, claims, or other liabilities.  

Unlike the C Corp, the S Corp does not pay corporate income tax similar to the LLC.  The net profit from the S Corp flows through to the shareholders and owners personal tax returns.  Also like the LLC, an S Corp is responsible for paying payroll tax, sales tax, property tax, and taxes on tariffs.

C Corporation

The C Corp is formed by creating and filing "Articles of Incorporation" with the secretary of state within the state of incorporation.  It is the most formal type of company structure.  The C Corp must hold an Annual Meeting, and file minutes from the meeting.  It must have a board of directors and meet numerous rules and regulations.

Ownership in a C Corp is determined by who owns stock in the company, as the company is required to issue stock.  This allows the ownership of a C Corp to be fluid and stocks are bought and sold.  Stocks may be bought and sold on a public stock market once an Initial Public Offering (IPO) is made, making stocks available to the public.  

Last, C Corps are subject to "double taxation" because it pays corporate taxes on profits when the corporate tax return is filed, and the shareholders must pay taxes on their personal returns for the dividends they receive.

Nonprofit Corporation

This entity is formed by filing Articles of Incorporation in the state in which it will operate.  It is treated like a corporation by granting it the same rights and privileges afforded to for-profit corporations.  

The Nonprofit Corporation donates any revenues generated to achieve a specific goal this is of public benefit.  They are allowed to create profits as long as they are used to preserve the existence and expansion of the corporation.

Only payroll taxes and taxes on income unrelated to the main purpose of the business are taxed.  Otherwise the Nonprofit Corporation is exempt from federal, sales, and property taxes.

A typical business plan includes the following sections:

Introduction

This section gives a detailed description of the business, its goals, discusses its ownership and legal structure, lists the skills and experience you bring to the business, and identifies the competitive advantage your business possesses.

Marketing Section

This section identifies what products and/or services your business offers and the customer demand for them. Furthermore, it pinpoints your market, its size, and locations. Finally, it explains various advertising, marketing, and pricing strategies you plan to utilize.

Financial Management

This section explains the source of, and the amount of initial equity capital needed. It includes a monthly operating budget for the first year as well as an expected return on investment, or ROI, and monthly cash flow for the first year. It also provides projected income statements and balance sheets for a two-year period and discusses the break-even point. 

This section should also explain your personal balance sheet and method of compensation. Discuss who will maintain your accounting records and how they will be kept. Finally, provide "what if" statements that address alternative approaches to any problem that may develop.

Operations

This section explains how the business will be managed on a day-to-day basis. It should cover hiring and personnel procedures, insurance, and lease or rent agreements. It should also account for the equipment necessary to produce your products and/or services and for production and delivery of products and services.

Concluding Statement 

In the ending summary statement, the business goals and objectives are summarized, and it expresses your commitment to the success of your business. 

Failure to properly plan cash flow is one of the leading causes of small business failures. Experience has shown that many small business owners lack an understanding of basic accounting principles. Knowing the basics will help you better manage your cash flow.

Cash-flow analysis should show whether your daily operations generate enough cash to meet your obligations, and how major outflows of cash to pay your obligations relate to major inflows of cash from sales. As a result, you can tell if inflows and outflows from your operation combine to result in a positive cash flow or in a net drain. Any significant changes over time will also appear. 

A monthly cash-flow projection helps to identify and eliminate deficiencies or surpluses in cash and to compare actual figures to past months. When cash-flow deficiencies are found, business financial plans must be altered to provide more cash. When excess cash is revealed, it might indicate excessive borrowing or idle money that could be invested. The objective is to develop a plan that will provide a well-balanced cash flow.

Your business can increase cash reserves in a number of ways:

Collecting Receivables 

Actively manage accounts receivable and quickly collect overdue accounts. Revenues are lost when a firm's collection policies are not aggressive

Tighten Credit Requirements

As credit and terms become more stringent, more customers must pay cash for their purchases, thereby increasing the cash on hand and reducing the bad-debt expense. While tightening credit is helpful in the short run, it may not be advantageous in the long run. Laxer credit restrictions allow more customers the opportunity to purchase your products or services

Manipulating the Price of Products

Many small businesses fail to make a profit because they erroneously price their products or services. Before setting your prices, you must understand your product's market, distribution costs, and competition. Monitor all factors that affect pricing on a regular basis      and adjust as necessary

Taking Out Short-term Loans

Loans from various financial institutions are often necessary for covering short-term cash-flow problems. Revolving credit lines and equity loans are common types of credit used in this situation

Increase Sales

Increased sales would appear to increase cash flow. However, if large portions of your sales are made on credit, when sales increase, your accounts receivable increase, not your cash. Meanwhile, inventory is depleted and must be replaced. Because receivables usually      will not be collected until 30 days after sales, a substantial increase in sales can quickly deplete your firm's cash reserves.