Read an Excerpt
The Unofficial Guide to Starting a Small Business
By Marcia Layton Turner
John Wiley & SonsISBN: 0-7645-7285-7
Chapter OneGET THE SCOOP ON ...
Protecting your product * Getting on the IRS's good side * Incorporating pros and cons * License and permit prerequisites
Getting Up and Running
For many people, the paperwork required to start a business will be fairly minimal. However, taking steps up front to protect the fruits of your labor will save you time, money, and worry later on.
Considering how best to safeguard your business's intellectual property and what type of business structure to adopt are critical aspects of starting a new business. If patents, copyrights, or trademarks are involved, you can count on lots of forms being part of your start-up activities. Ensuring that your business has the right to use the name you have carefully selected, to market any products or services you have developed, and to operate using sound financial management practices is critical for longevity.
Not following proper procedures at the outset can cost you thousands of dollars in penalties and fines, not to mention potential lawsuits, if you're careless. Consider your start-up legal fees as an investment in protecting the intellectual property of your business. I've identified the most important procedures and government requirements you'll need to be aware of and have summarized them here.
Although the government doesn't require a mission statement, developing one is a smart first step for new business owners. While you're immersed in paperwork, forms, and legal documents, a mission statement can remind you of why you're doing this; it keeps you focused on the big picture. It will also help when you seek out advice on what form of business structure you should adopt.
Some of the elements of your mission statement might include
* The ultimate purpose of the business-what you want customers to gain from their association with you.
* Who your company aims to serve (such as businesses or individuals, adults or children, less fortunate or upper income, etc.).
* The benefits of the products and services you'll be selling.
* What clients should expect from you in terms of service, responsiveness, and professionalism.
* How you expect to be treated by customers, suppliers, and partners.
* How prominent you intend the company to become in your industry. Some owners want their companies to remain well-kept secrets in order to keep competitors in the dark, while others strive to be vocal industry leaders.
* What you want the company to become known for, also known as its Unique Selling Proposition (USP).
* How important monetary success, such as profitability, is to the company.
* Operating principles you will follow in your efforts to achieve client objectives, including ethical issues or response times, for example.
* Your financial goal, either in terms of annual company revenue or your own target salary.
* Your exit strategy-whether you intend to sell the business once you reach a certain sales level, hand it down to the next generation, or go public.
Developing and establishing your organization's guiding principles will help you in many ways as you grow-in your marketing to clients, in attracting and retaining the right employees, and in determining which growth opportunities should be pursued. Your mission will help to establish the corporate culture for your company by setting standards and expectations for employees, as well as defining priorities.
Once your organization's mission has been set, your focus should be on protecting corporate assets.
Patents, copyrights, and trademarks
A company's intellectual property is often its most valuable asset. As the world economy shifts from industrial- to information-based, ownership of ideas is at the core. Patent, copyright, and trademark documentation helps to determine who is the rightful owner of inventions, concepts, brands, and artistic creations. Copyright or trademarks can also dramatically increase the marketability of a business. So protecting intellectual property rights can significantly increase the potential value of a business. And whoever files first has a clear advantage.
Patents are the worldwide standard for assigning ownership of an invention or process. Before filing a patent application, an inventor should first confirm that a patent is not currently held by someone else for the same product or process. To qualify for patenting, an invention must be new, proven to work, and tangible; intangible ideas are not patentable.
Patent searches can be done online at the U.S. Patent and Trademark database (uspto.gov). Another more costly yet less time-consuming option is to work with an attorney who specializes in patent filings. Costs range anywhere from $2,000 to $6,000 for a typical search-and-filing process.
Keep in mind, however, that having a patented product does not guarantee business success. At the same time, a patented product or process is not necessary to establish a thriving company. Legal documents such as patents and trademarks merely help to protect your ownership rights.
Where patents protect tangible ideas or products, copyrights protect the ownership of creative ideas and products, such as fine artwork, music, and books. The creator of such works has the right to prevent others from using, copying, or distributing his or her works without permission.
Copyrights are easier to secure than patents but much harder to enforce, unfortunately. The U.S. Copyright Office of the Library of Congress issues and administers copyrights that are registered with their office.
To apply for a copyright, complete an application and send it along with a check for $30 and a complete copy of whatever work you are seeking to copyright. You can download an application at the U.S. Copyright Office Web site at copyright.gov.
Be sure to complete and file the appropriate application for the copyright, depending on whether it's for music, art, or written work.
In some cases, a company's identity or brand name is its most valuable asset. A well-known brand name connotes a certain level of quality or prestige that many consumers have come to trust and associate with a particular company. To allow someone to tamper with that brand image could be extremely damaging and costly to a company-which is where trademarks come in.
Trademarks protect both product and service names and their associated symbols for an initial period of 20 years. During that time, no one else may use that symbol or name without the company's approval. By definition, trademarks identify the source or owner of the mark.
Selecting a company's name is one of the most important decisions you will make as you start your business. A business's name will help identify what the company does, as well as establish its image. Discount Duds, for example, presents a very different image than Van Wert Clothiers.
Begin the process of generating potential names by brainstorming with managers, consultants, and friends. Consider the ambiance you plan for the company, the level of service and pricing strategy you have defined, as well as synonyms or phrases frequently associated with your product or service.
The strongest and most protectable trademarks are those that consist of words or phrases that have been newly created or coined, rather than a collection of several common words. Made-up words are considered the most distinctive trademarks and are more easily protected than generic or common terms.
Once you have settled on a name, the next step is to confirm that no one else in your service area is already using it. "Service area" is a key issue; if you intend to operate only in your local area, you may only need to check local records. However, if you will be operating nationally or internationally, it is best to conduct a national or international name search to ensure that you won't encounter problems down the road. If another company has already registered a business name as its own, by trademark or incorporation, you cannot use it without their permission.
The process of running a name search through your attorney's office can cost anywhere from $500 on up, depending on the geographic area being searched. An international search will cost several thousand dollars. Weigh that against the potential loss of business if you are prevented from exporting your company's name to other countries.
Although you'll want to complete the search before expanding into a new area, it's not necessary to make the investment now, when cash may be tight. Reevaluate the need to register your company name in other areas every six months, as your business grows and matures.
Selection of your business's corporate structure affects how you track revenue, pay employees, and complete government paperwork. Your options currently range from operating as a sole proprietorship, a partnership, a corporation, a limited liability company, a limited liability partnership, or a professional corporation. Most importantly, a separate corporate entity shifts liability for financial obligations or lawsuits from the business owner to the business itself. This is the major reason many business owners incorporate-to shield themselves from corporate liabilities.
Be aware, however, that individuals and businesses can choose to sue whomever they please, so despite the fact that you've incorporated, you can still be named personally in any lawsuit. Incorporating generally helps protect personal assets, such as a house or car, in such instances.
Many companies start out as one-person operations. These solo businesses are often run as sole proprietorships, which are taxed at individual rates rather than corporate tax rates. As the IRS sees it, any income generated for the business is passed through directly to the business owner.
To establish a sole proprietorship, you need to complete a Doing Business As (DBA) certificate, available at a legal stationery shop, search courthouse records to confirm that no other business has already registered the same name, and pay the requisite fee, typically under $50.
If you have a partner in the business, you can also file a DBA for a partnership. The main difference with a partnership, however, is that each partner is equally responsible for the acts and omissions of the other. So if your partner chooses to buy a building for your new business, you are both responsible for the mortgage payments.
Incorporating enables you to separate your business obligations from your personal obligations. Once your business is officially incorporated, you become an employee. Any revenue earned is paid to the company, not to you personally. Taxes are also paid monthly, not quarterly or annually as they are with sole proprietorships, on salaries and wages paid to employees-like you, the owner.
The major advantage is that if the company is ever sued, you may be able to shield some of your personal property.
Another advantage-to your clients-is that if you operate as a freelancer or independent consultant, for example, your corporate clients do not need to issue 1099 forms at the end of each year summarizing what they paid you. It's also clearer to the government that you are not an employee-a situation some companies are concerned about proving. Being able to tell clients that you operate a corporation, in some cases, may give you an edge when competing for business.
Although the actual process of incorporating can be handled in minutes, consulting your attorney and accountant before initiating anything will also save you time and money. Doing so will ensure that you've selected the appropriate form of incorporation, that you've elected appropriate officers, and that the paperwork is all in order.
Keep in mind that incorporating in a state different from your home state, such as Delaware, frequently does not eliminate the annual franchise fee that home states charge all corporations operating in their borders. This franchise fee is also payable regardless of the size of your sales. If you incorporate before you actually plan to start operating, you will still be expected to cough up the annual fee (which is generally somewhere between $100 and $400). Depending on the number of shareholders involved in the company, you may elect to file as a Subchapter S corporation or as a Subchapter C. Most smaller companies are Subchapter S corporations. Operating as a Subchapter S corporation allows you to avoid being "double taxed." Instead of reporting profits on the corporate return, shareholders (including the business owner) are taxed on amounts received from the company. Allowing profits to be distributed to shareholders without taxation at the corporate level is called "pass through" tax treatment.
Limited liability companies
Both limited liability companies (LLC) and limited liability partnerships (LLP) have a general partner, who is personally liable for the actions of the organization, and limited partners, who are not liable. LLPs are frequently used in real estate transactions, where there are several silent partners not involved in the day-to-day decision-making. LLCs are becoming very popular among law and consulting firms, where the partners are active in daily operations; and they are less expensive and less complex to set up and manage than corporations.
If you're starting a business in order to provide professional services, such as architecture design, legal services, medical or dental services, accounting guidance, or financial planning, among others, you should consider comparing the advantages and disadvantages of a professional corporation-generally identified by a PC, PA, P. Corp., (Professional Corporation), or Inc., with those having either a Subchapter S or C. Find out first from your state whether your services are on their list of what are considered "professional services," since that list varies by state. In some states, professional services are defined as those services that require a license.
Professional corporations (PC) are taxed like a C corporation, unless the owner(s) have elected to be taxed as an S corporation. PCs do not have the advantage of graduated corporate federal income tax rates and some states require that professional corporations pay a flat tax rate regardless of income level.
The advantages come into play mainly when a professional service provider, such as a doctor, operates within a larger organization and wants to set up his or her own entity.
Excerpted from The Unofficial Guide to Starting a Small Business by Marcia Layton Turner Excerpted by permission.
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