How to Start a Business and Write a Business Plan. Kentucky Coalition of nurse practitioners & nurse midwives 26 th ANNUAL regional apn conference April 15-18, 2014 Lexington, KY.
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How to Start a Business and Write a Business Plan Kentucky Coalition of nurse practitioners & nurse midwives 26th ANNUAL regional apn conference April 15-18, 2014 Lexington, KY
Cory Reitz, CPA/ABV, CVA, MBAPartnerRay, Foley, Hensley & Company, PLLCCertified Public Accountants and Consultants230 Lexington Green Circle, Suite 600Lexington, KY 40503-3326859-231-1800Direct line: email@example.com
Starting a Business • Websites that are good references: • U.S. Small Business Administration http://www.sba.gov/content/follow-these-steps-starting-business • Internal Revenue Service http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Starting-a-Business • Commonwealth of Kentucky http://onestop.ky.gov/plan/Pages/default.aspx • Kentucky Small Business Development Center http://ksbdc.org/
Is Entrepreneurship for You? Some characteristics and skills commonly found in successful entrepreneurs: Risk taker Independent Persuasive Able to negotiate Creative Supported by others
Questions to Ask Yourself Before Starting Your Business • Why am I starting a business? • What kind of business do I want? • Who is my ideal customer? • What products or services will my business provide? • Am I prepared to spend the time and money needed to get my business started? • What differentiates my business idea and the products or services I will provide from others in the market? • Where will my business be located? • How many employees will I need? • What types of suppliers do I need? • How much money do I need to get started? • Will I need to get a loan? • How soon will it take before my products or services are available? • How long do I have until I start making a profit? • Who is my competition? • How will I price my product compared to my competition? • How will I set up the legal structure of my business? • What taxes do I need to pay? • What kind of insurance do I need? • How will I manage my business? • How will I advertise my business?
10 Steps to Starting A Business Step 1: Write a Business Plan Use tools and resources to create a business plan. They 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.
10 Steps to Starting A Business (continued) 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… Step 6: Register a Business Name ("Doing Business As") Register your business name with your state government. Step 7: Get a Tax Identification Number Learn which tax identification number you'll need to obtain from the IRS and your state revenue agency.
10 Steps to Starting A Business (continued) Step 8: Register for State and Local Taxes Register with your state to obtain a tax identification number, workers' compensation, unemployment and disability insurance. Step 9: Obtain Business Licenses and Permits Get a list of federal, state and local licenses and permits required for your business. Step 10: Understand Employer Responsibilities Learn the legal steps you need to take to hire employees.
Understand Your Market • Learn about your customer, your competitors and your industry. • Research your market. • How to Conduct Market Research: 1. Identify Official Government Sources of Market and Industry Data - Economic Indicators (www.economicindicators.gov) • Employment Statistics (www.bls.gov/ces) US Dept. of Labor Bureau of Labor Statistics • Income and Earnings (www.bls.gov/bls/wages.htm) US Dept. of Labor Bureau of Labor Statistics 2. Identify Additional Sources of Analysis (trade groups, magazines, academic institutions, etc.)
Choose Your Business Structure Sole Proprietorship LIMITED LIABILITY CORPORATION CORPORATION PARTNERSHIP S CORPoration http://onestop.ky.gov/start/Pages/structure.aspx
Sole Proprietor 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 aren’t 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 it’s 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 can’t 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.
Limited Liability Company 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. • 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 self-employed 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.
Corporation 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. • 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.
Partnership Advantages of a Partnership • 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 partnership’s 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.
S Corporation 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.
Choose & Register Your Business Choose your business name Uniqueness, check for trademarks, connotations, web, part of a logo, social media, trademark protection, etc. Register your business name Register your “Doing Business As” name with the state government (http://revenue.ky.gov/business/register.htm) Register with state agencies https://secure.kentucky.gov/sos/ftbr/welcome.aspx
Obtain Business Licenses & Permits • Step 1: Tax Registration • Employer Identification Number (EIN) Employers with employees, business partnerships, and corporations, must obtain an Employer Identification Number (EIN) from the U.S. Internal Revenue Service. The EIN is also known as an Employer Tax ID and Form SS-4. http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Apply-for-an-Employer-Identification-Number-(EIN)-Online • Kentucky Tax Registration Businesses that operate within Kentucky are required to register for one or more tax-specific identification numbers, licenses or permits, including income tax withholding, sales and use tax (seller's permit), and unemployment insurance tax. Contact the following agency for more information about business registration and your tax obligations: http://revenue.ky.gov/business/register.htm
Obtain Business Licenses & Permits (continued) • Step 2: Business Licenses • General Business Licenses • Information about how to obtain business and occupational licenses and permits. KY One Stop Business Portal http://onestop.ky.gov/start/Pages/default.aspx
Obtain Business Licenses & Permits (continued) • Step 3: Local Permits You may be required to apply for permits and licenses from your local government (e.g., city or county). Every place has different requirements. The following are common types of local permits and licenses. • Business Licenses / Tax Permits - from your city or county clerk or revenue department. Many jurisdictions require a trader's license or tax certificate in order to operate. https://www.lexingtonky.gov/index.aspx?page=169 http://www.fcps.net/administration/departments/tax-office/tax-forms • Health Permit - from your city or county health department. • Occupational Permit - from your city or county building and planning development department. This permit is required for home-based business in some jurisdictions. • Signage Permit - from your city or county building and planning department. Some jurisdictions require a permit before you can erect a sign for your business. • Alarm Permit - from you city or county police or fire department. If you have installed a burglar or fire alarm, you will likely need an alarm permit. http://www.lexingtonky.gov/index.aspx?page=123 • Zoning Permit - from your city or county building and planning department. This permit is generally required if you are developing land for specific commercial use.
Obtain Business Licenses & Permits (continued) • Step 4: Incorporation Filing • If your business is a corporation, a non-profit, a limited liability company or a partnership (limited, or limited liability) you must register with a state agency. If your business is a sole proprietorship, you do not need to register your business with the state. • http://onestop.ky.gov/start/Pages/default.aspx
Obtain Business Licenses & Permits (continued) • Step 5: Doing Business As (DBA) • A fictitious name filing, also known as Doing Business As or DBA, allows you to create name for your business that is different than your personal name, the names of your partners or the officially registered name of your LLC or corporation. In Kentucky, Sole Proprietorships wishing to operate under an assumed name must contact the county clerk office where the business is located to file an assumed name registration form. General Partnerships doing business under an assumed name, must submit aCertificate of Assume Name with the Kentucky Secretary of State and the county clerk where the business is primarily located. All other business entities (Corporations, LLCs, etc. are required to making business entity filings with the Secretary of State).
Obtain Business Licenses & Permits (continued) • Step 6: Employer Requirements • If you plan to have employees, here are some requirements: • Withholdings income taxes Federal income tax – Form W-4, W-2 State income tax - http://revenue.ky.gov/wht/ • Employee Eligibility Verification (I-9 Form) • Insurance – Unemployment http://www.oet.ky.gov/des/ui/ui.htm , Workers Comp, Workplace Poster Requirement (Fed & State)
Writing a Business Plan Components of a business plan: Executive Summary Company Description Market Analysis Organization & Management Service or Product Line Marketing & Sales Funding Request Financial Projections Appendix
Executive Summary • Start-up or New Business • Focus on your experience and background as well as the decisions that led you to start this particular business. • Show that you’ve done your homework with market analysis, why you think there’s a need or gap in the marketplace, try to convince the reader that you will be successful, and you future plans. • Should be the last thing you write.
Company Description 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. • 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.
Market Analysis 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.
Market Analysis (continued) What to include in Your Market Analysis: • 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.
Market Analysis (continued) What to include in Your Market Analysis: • 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 you’ll comply. Also, cite any operational or cost impact the compliance process will have on your business.
Organization & Management What to include: • Organizational Structure – Organization chart with narrative descriptions • Ownership Information - Legal structure (S-Sorp, C-Corp, Partnership, Sole Proprieter, etc.) - Names of owners - Percentage ownership - Management profiles (key people and their backgrounds) - Name - Positions (incl brief position description along w/ primary duties) - Past track record - Special skills - Prior employment - Compensation levels - Quantify acheivements - Board of Directors
Service or Product Line A Description of Your Product / Service Include information about the specific benefits of your service – from your customers' perspective. You should also talk about your service's ability to meet consumer needs, any advantages your have over that of the competition.
Marketing & Sales Develop a marketing strategy (creating customers/patients or bringing in business) • Strategies for a marketing strategy: • Market penetration strategy • Growth strategy (increase human resources, buying another business, expanding services, etc.) • Communication strategy (how are you going to reach your customers/patients? Promotions, advertising, public relations, personal selling, print materials, etc.)
Marketing & Sales (continued) • Develop a sales strategy (creating customers or bringing in business) • Strategies for a sales strategy: • Identify your patients/customers • Make contacts
Funding Request If you need funding to start your business, you should include the following: • Your current funding requirement • Any future funding requirements over the next five years • 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).
Funding Request (continued) • 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 you’ll also need to provide historical and prospective financial information.
Financial Projections • 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. • 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).
Appendix The appendix would include: • Credit history (personal & business) • Resumes of key managers • 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
Common Business Plan Mistakes or Pittfalls Plan is poorly written Plan presentation is sloppy Plan in incomplete Too vague Too detailed Unfounded or unrealistic assumptions Inadequate research Claim there’s no risk involved in your new venture Claims there’s no competition The business plan is really no plan at all