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| Regional and Area Office Alliances > Region IV > Small Business Tool Kit > Chapter 1 |
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| SMALL BUSINESS TOOL KIT |
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CHAPTER 1 HOW TO START A BUSINESS IN SOUTHEAST ALABAMA
A. BUSINESS START-UP CHECKLIST There are a number of steps that should be taken before starting a small business in southeast Alabama. A detailed description of all the steps involved in starting a small business is discussed in the following sections of this book. The following checklist is designed for use as a general reference guide by the business owner to plan and prepare adequately for entry into the world of entrepreneurship. START-UP CHECKLIST _____ Prepare a written business plan with financial statements included. _____ Decide whether you wish to operate as a sole proprietorship, partnership or corporation. _____ Establish a source of adequate and reliable financing. _____ Check on zoning ordinances. _____ Select a suitable location. _____ Retain an attorney and CPA, if appropriate. _____ Acquire all necessary licenses and permits. _____ Obtain tax ID number and forms. _____ Open bank accounts. _____ Choose an accounting system and method of inventory control _____ Arrange for utilities, telephone and other services. _____ Determine insurance coverage needs. B. GENERATING IDEAS The main message of this manual is to stress the importance of prior planning and thinking through your idea. Prior planning encourages systematic thinking by management and leads to the development of proper controls. The result is a better overall preparedness and a more vivid sense of the interacting responsibilities. The first step in the process is generating your idea. This is only the very first step; many things remain to be done before you can expect to realize and make money from the idea. At the minimum level your ideas will need to pass several tests so that you may determine whether or not it is an original idea, whether the idea can be produced and distributed profitably, and whether or not your idea can be protected. This seems simple enough until you examine the underlying questions that must be resolved. For example, to determine the commercial merit of an idea the following areas should be considered:
It will take a great deal of personal commitment to turn your idea into reality. Small business owners must be willing to work exceptionally long hours and often forego financial rewards in the early stages of their operations, if these rewards come about at all. All too many businesses fail, but proper planning and dedication will certainly increase your chances for a successful venture. C. TECHNICAL & MANAGERIAL EXPERIENCE NEEDED One of the most common mistakes made in starting a business is trying to do so without the necessary training and experience. Before you start a business, you should ask yourself whether you actually have the background, experience and training that is required. For example, a retailer would need some expertise in management, sales and buying. The management experience would need to include personnel, record keeping and marketing, as well as other skills. If you do not already have this experience, how do you get it? Generally, it is best to work for a time in a company similar to your proposed business. This gives you a closer look at what that type of business entails without risking your investment during the learning period. Another suggestion for gaining expertise is to take courses at your local college or university. Most area schools offer both credit and continuing education courses. Various seminars and workshops are also offered throughout the year. There are many publications available that offer help and insight to many of the day-to-day problems that a small business owner faces. The Small Business Administration (SBA) issues a wide range of management and technical publications to assist the small business owner. To obtain a list of the available publications go to: Small Business Administration Publications on-lineThe Government Printing Office also publishes several useful books that are available by writing: Government Printing OfficeGovernment Printing Office Titles (partial listing): The Dictionary of Occupational Titles. Descriptive information about many types of jobs in the American Economy. The Occupational Outlook Handbook. Description of jobs and qualifications with job requirement projections. The local library and area bookstores can also provide relevant reading material. The Dothan Area Chamber of Commerce maintains a "Resource Room" with various publications that are helpful in small business development, as well as a computer with links to many web pages, and templates for developing handbooks. A copy of "The Code of Alabama" is also available. It is not necessary to be an expert in every aspect of your business. Many small business people rely on outside services, such as those of qualified small business lawyers and certified public accountants. Also, other paid professional services are commonly available. D. WRITING A BUSINESS PLAN One of the most important early steps to take in starting or expanding a business is to write a business plan. A Business Plan is a description of your business, including your product or service, your market(s), your people, and your financial needs. There are three major reasons why you should take the time to create a written business plan. The first reason is that the process of putting a business plan together, including the thought you put into it before beginning to write the plan, forces you to take an objective, critical and unemotional look at your business project in its entirety. It is a useful management tool that can help you plot a course for your company’s start-up and initial growth. A second advantage that comes with having a written business plan is that the finished product, your business plan, is an operating tool which will help you manage your business and provides a means to measure your success. A properly prepared business plan is a vital sales tool you will use to impress potential investors with your planning ability and your general competence as a manager and a businessperson. Since many businesses only start or expand through borrowed monies, the presentation of reliable and complete information in a business plan is essential. What A Bank Looks For In A Business Plan The Business Plan is an excellent tool to present to a banker when financing is needed. A good business plan tells the banker that the applicant has put a great deal of thought and effort into this decision. A well-presented business plan will let the banker know that he is dealing with a serious, well-informed prospect, giving him more faith in you as an entrepreneur. If a business plan is to be submitted to a bank, it is important to realize how a banker analyzes a business plan and what questions he or she will ask during this analysis. A banker’s job is to assess the degree of risk in each proposed loan and to be satisfied that the borrower, while still allowing the businesses to operate profitably, can repay the loan. A banker does this by analyzing a number of things:
E. BUSINESS PLAN OUTLINE
Once you have decided to start a business, you must decide what type of business entity to use. There are many legal and tax considerations, which will enter into a sound decision. These legal considerations can become very involved and it is advised that you consult an attorney to help you determine the appropriate structure. There are five principle forms of business structures: the Proprietorship, the Partnership, the Corporation, the Subchapter S Corporation, and the Limited Liability Company (LLC). The decision should be based on your specific circumstances, goals and needs. These structures, along with their advantages and disadvantages, are listed below: A sole proprietorship is an extension of the individual, and income is reported on the individual tax return using the individual’s social security number. Effective January 1, 2001, the "Alabama Partnership Act" was repealed and replaced with the 1996 "Uniform Partnership Act" (Covered in Alabama Code Title 10, Chapter 8A). The "Alabama Limited Partnership Act of 1997" may be found at Title 10-2B, Code of Alabama, 1975, and the "Limited Liability Company Act" is located at Title 10-12. Corporations are covered in Title 10-2, Code of Alabama, 1975, and Title 26 of the U.S. Code and Title 26 of the Code of Federal Regulations.
The sole proprietorship is usually defined as business owned and operated by one person. To establish a sole proprietorship, you need only obtain necessary licenses and begin operation. Advantages
The Uniform Partnership Act, adopted by many states, defines a partnership as "an association of two or more persons to carry on as co-owners of a business for profit." Though not specifically required by the Act, written Articles of Partnership are customarily executed. These articles outline the contribution by the partners into the business (whether financial, material, or managerial) and generally delineate the roles of the partners in the business relationship. Some of the characteristics that distinguish a partnership from other forms of business organizations are the limited life of a partnership, unlimited liability of at least one partner, co-ownership of the assets, sharing of managerial duties and a sharing of the profits. Advantages
For business entities formed as LLC’s or LLP’s there is a beneficial tax status and limited liability of all its members. It is treated like a corporation for limited liability purposes, but for federal tax purposes it is treated as a partnership. A summary of the features of the LLC and LLP is available on-line at www.asbdc.org/llc.htm The Corporation The corporation is by far the most complex of the business structures. A corporation is a distinct legal entity. That is, it is separate from the individuals who own it. A corporation is formed by the authority of a state government. Corporations, which do business in more than one state, must comply with federal laws regarding interstate commerce as well as with the state laws, which may vary considerably. The procedure ordinarily required to form a corporation begins with a subscription for capital stock must be taken and a tentative organization created. Then, approval must be obtained from the Secretary of State in the state in which the corporation is to be formed. This approval is in the form of a charter for the corporation, stating the limitations of the particular enterprise. Advantages
The Subchapter S Corporation is a legal corporation that is afforded special tax treatment under Subchapter S of the Internal Revenue Code. The characteristics of the S Corporation are: under state law, S Corporations retain the normal features of corporations, to include limited liability, but for federal tax purposes they are treated much like partnerships. The S Corporation is absolved from payment of taxes; hence the stockholders report corporate income, loss, deductions and credits on their individual tax returns. In most all other aspects, the S corporation operates in compliance with state and federal laws relating to corporations, just as a regular corporation. Advantages
The following procedures apply to the formation of an Alabama (domestic) for –Profit Corporation under Title 10, Code of Alabama 1975, as last amended. The proposed name of the corporation must be reserved with the Corporate Section of the Office of the Secretary of State. If the proposed name is available, a Certificate of Name Reservation will be issued. This requirement may be accomplished by writing or calling the Corporate Section at (334) 242-5324. Alabama law requires that the name contain the word ‘corporation’ or ‘incorporated’ or an abbreviation of on such word. Additionally, there is a $10.00 fee for the certificate, which is collected when the articles of Incorporation are filed. After receiving the Certificate of Name Reservation, the Articles of Incorporation may be filed. The necessary forms can be obtained and additional questions answered by writing or calling the following office: State of Alabama G. SAMPLE DOCUMENTS THE BALANCE SHEET The Balance Sheet is a measure of the solvency of the business and the degree of the owner’s investment, which, in the last analysis, is the "cushion" that protects creditors. Illustrated below is a typical balance sheet format (applicable to any type of business). Name of Company Balance Sheet As Of__________________________________
THE INCOME STATEMENT The Income Statement (Profit and Loss) records all income and expenses of the business during a specified time period and is the accepted method of determining profits and losses. The Internal Revenue Service requires all businesses to submit this report at the end of each year. Profit and Loss Statement
(1) Sales or Gross Receipts - represents total amount of money that the business makes from the sale of its merchandise, less discounts and refunds. (2) Cost of Goods Sold - the cost of the merchandise that the business sells. These costs differ with each type of business. (3) Operating Expenses - all business costs other than the costs of the merchandise. (4) Net Profit (loss) - sales less cost of goods sold less operating expenses less tax. THE CASH FLOW STATEMENT The Cash Flow Statement is the most critical planning tool for a new or growing business. It shows how much cash will be needed, when it will be needed and where it will come from. It attempts to budget monthly cash needs, and shows the flow of cash into the business from sales, collection of receivables; it shows the flow of cash out of the business through payment of expenses and loans over a period of time. The banker uses this information to analyze possible shortfalls of cash and as a guide to borrowing needs. Your statement should show Cash Flow over the full twelve-month period. This Cash Flow Statement (reprinted from SBA management Aid 1.001 the ABC's of Borrowing) represents a cash flow statement for a three-month period.
H. FEASABILITY CHECKLIST This feasibility checklist is designed to help the pre-business person determine whether his or her idea represents a valid business opportunity. The high failure rate of new business indicates that relatively few new businesses result in successful ventures. Too many entrepreneurs strike out on a business venture absolutely convinced of its merits without having adequately evaluated its real potential.
This checklist is a tool to help the entrepreneur determine if there are any major obstacles that will prevent the business from becoming successful. Each NO answer should be carefully reviewed to determine how great an impact it will have on the business and to see if anything can be done to correct the problems it might create.
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