Starting a Business

Steps For Starting A New Business

by Mary Hanson

Whether you are starting your first business or starting another business, there are a number of issues that usually come up. The following checklist may be helpful guide for setting up a business:

h Business Plan. Write down your analysis of the market for your product or service and your financial projections for the business. Set out all parts of your plan, including your assumptions and calculations, to help you identify problems before you start the business.

Even if no formal business plan is written up, you must have detailed financial projections. In today’s business environment, you cannot expect to enjoy large profit margins. Use many different assumptions to determine what profit margins you might expect, and whether the cash flow will adequately cover your expenses.

h Ownership. If the new business is going to involve other co-owners, get commitments from them. Identify the financial contributions to be made. Better yet, have the money put in. You don’t want to start the business and then later find that some of the supposed co-owners cannot or will not make their contributions. If the co-owners’ contributions are to be services or products rather than funds, can this "business" be structured as a contractual relationship among different businesses rather than co-ownership? Then, if a party fails to perform, that party may be replaced.

Start the business on your own if at all possible. If there must be co-owners, have an agreement that provides for buy out of co-owners who fail to perform.

h Entity. Determine whether you will form an entity for operation of the business. If you will have two or more co-owners, you will want to avoid operating as a general partnership, by operating under an entity (a corporation, a limited liability company, or some other separate business form).

If you will be the sole owner of the business, you should consider the pros and cons of using a corporation or limited liability company for protection from personal liability. The business, the type of business activities, and the types of risk involved in the business must be considered to determine whether the exposure to liability is significant and whether some exposure can be avoided.

h Business Name. The name issue has gotten much more difficult in recent years. You may have a website that puts you in competition with businesses across the country. You are more likely to bother (and be bothered by) businesses with the same or similar names in other parts of the country and to have to deal with trademark infringement claims.

You don’t want to be accused of infringing another business’s name and have to change your name. If you will be spending a great deal of money on name recognition, it may be critically important to select the right name, make sure it does not infringe someone else’s use of the name, and protect the name from infringement by others. If this is the case, it is more important to consider federal trademark registration.

If trademark registration does not fit your business or circumstances, you still need to conduct a search to make sure there is not a conflict with someone else’s use of the name or a similar name. Check local phone books, the internet, trade association databases, and the county recorder’s office to see if the name you wish to use has already been filed as another company’s DBA.

You will have to file a fictitious name statement (called a "DBA" for "doing business as") in order to open a bank account. Make sure the statement correctly identifies the person or entity using the name. For example, if your business is operated as a sole proprietorship, don't file a DBA showing the business as a partnership.

If you incorporate and get a corporate name that is the same as your business name, you will not be using a fictitious name and need not file a DBA.

In any event, be aware that filing a fictitious name statement does not protect your name. Although the name use issues are related, the filing of a DBA and the issue of protecting your name and product names as trademarks are separate issues.

h Product Name. Most advertising dollars are spent on product promotion. Protect your investment by making sure the product name is available and claiming a trademark in the name or logo. Consider whether to federally register your mark.

h Insurance. Line up insurance for the business. Do this early on in the business planning stage. It can be difficult for new businesses to obtain insurance, and some insurance is very expensive. Determine what insurance you need – for product liability, customer slip and fall, employee acts, auto use, workers’ compensation, errors and omissions coverage, and business interruption. You may be required, by your customers, vendors, or landlord, to have certain types of insurance, at certain levels. If you cannot obtain the insurance you need, or you cannot afford it, you may be unable to proceed with your planned business.

h Bank Account. Open a bank account under the name and entity you will be using for the business. This may be a last step, only needed when the business is receiving checks.

h Location. If your type of business requires a business location (office, store, industrial space) find a number of different potential locations. Do not select your location until you have found several potential locations and checked the zoning requirements and applicable city taxes for each one.

h City Taxes. Find out how much the city business license is. Many California cities have a city business license (a tax) based on a percentage of gross revenue! This tax can be unacceptably high. Find out where you want to locate the business before you start spending time looking at potential sites.

h Licenses and permits. Make sure you have or will be able to obtain all the licenses and permits you will need. This includes state licenses for occupations (such as a contractor's license or cosmetology license), county health permits (for restaurants), liquor licenses, sales tax permits, and anything else that may apply to your business. If you need a state license to operate your proposed business, you must obtain one before you start the business.

h Intellectual Property. Identify what types of intangible assets need to be protected in your business. What trade secrets, confidential information, inventions, computer programs, customer lists, logos, and product names will you have? First, recognize that you will have information, names, art work, or other intangibles of value that you need to protect. Then take steps to protect them, according to the type of protection that is available for each type of intellectual property. Have employees sign an agreement in which they acknowledge that your confidential information, including customer lists, pricing, and other valuable intangible property are your business trade secrets and in which they agree to protect it from disclosure and from improper use.

h Customers. Line up customers for your goods and services even before you are ready to sell. Customers are more important than business cards, names, city business licenses or almost anything else.

h Contracts. Start preparing your contracts for customers early on. Start collecting examples of contracts from your industry to create a written agreement with fairly standard terms and conditions appropriate for your business. For consulting services, make sure your customers agree to your rates, types of services, and payment terms. You must establish any late payment charges in an agreement, not later in an invoice. The agreement should also require the customer to pay any costs of collection, in case you must sue to collect.

Terms and conditions for products must be more detailed, covering issues including warranties, disclaimer of implied warranties, shipping costs, risk of loss in delivery, training, installation, returns, and other issues depending the product. You will want your terms and conditions to be similar to others in your industry.

h Employees. If you will be hiring employees, obtain all information on applicable state and federal payroll taxes, workers’ compensation insurance, and state and federal laws on hiring and employment. Obtain a federal employer ID number, get the forms you need to have new employees sign for state and federal withholding and immigration law compliance, and obtain the notices you need to have posted at the workplace. Line up a payroll service or other method of handling payroll. As early as possible, determine what your employment policies will be. Have new employees sign confidential information protection agreements, agreements to have disputes handled by arbitration, and other agreements at the time they are hired.

h Accounting and Taxes. Set up your accounting books and plan your tax payments. It is easier (and less expensive) to do things right from the beginning, rather than try to gather and reconstruct information later. Your books must be clear on what assets and what transactions are in the business. The more time goes by without good accounting and procedures for timely payment of taxes, the worse it gets. Be prepared to spend a lot of money later on accounting and tax services, as well as tax penalties and interest, if you don't spend some money early on to set up right.

From the beginning, use an accountant who can provide both accounting and tax planning advice for your business.

Most of the issues covered above eventually must be addressed in order to operate a business. By addressing these issues early on, you can make choices that serve your business best.

Mary Hanson, MBA, Attorney at Law (310) 543-1355 Torrance (Los Angeles County), California USA