Starting a small business is
considered by many to be the American dream. But for many people this
dream ends rather quickly and they are left owing large debts.
Statistics vary, but the Small Business Administration estimates that
as many as 4 out of 5 businesses fail during the first five years. Here
are a few questions to consider to help keep your dream from turning
into a nightmare.
Do you know the business?
The first thing you need to know is how to produce the product or
provide the service. If you don’t, it is advisable to find a job in the
industry for at least a year. While you are there, try and learn as
much as you can. You may find out that the industry is not for you
Do you have a good idea?
You don’t necessarily need a new idea, but you don’t want to put a
product or service on the market if the market is already full of
similar products or services. It is hard enough to get started without
attempting to compete with existing businesses which already have loyal
Can you raise money?
The first step in raising the required capital is to get a realistic
estimate of the amount of money you will need to start up your
business. Getting a realistic estimate should be done very early in the
process. Try to keep in mind all future expenses such as rent,
supplies, inventory, equipment, wages, and advertising.
To ease your financial burden, you may want to find investors for
your business. Generally, a knowledgeable investor will not put his or
her money into a new business unless you have made a sizable financial
commitment yourself. An experienced investor knows that you will be
more motivated to make your business work if you have a considerable
amount of your own money in the business. Most such investors will look
for you to put up at least 50% of the start-up costs.
There are two basic types of investors, those who are looking for
equity and those who are simply looking to collect interest on a loan.
Commercial banks will lend money without seeking an equity interest,
but will usually ask for some kind of collateral. When giving an equity
interest, you are giving up partial ownership, so it is important to
consider your options when looking for an investor. Consider whether
you would rather share ownership or be required to make loan payments.
Report 3 January 1996
If you are having trouble getting a bank loan, try the Small
Business Administration. The Small Business Administration (SBA) is a
government agency that provides advice and other services to
prospective businesspeople. It may provide loans, but you must meet
certain requirements. For most prospective borrowers, the SBA will
provide loan guarantees. To be eligible for such a loan guarantee, you
must first seek financing from a bank or other financial institution.
If you are rejected for the loan, then you are eligible for a loan
guarantee for up to 90% of the loan from the SBA. You then can reapply
for private financing with the guarantee.
What kind of structure should I use?
There are three basic structures that you can use for your business,
and each has its advantages and disadvantages. As a prospective
business person, you should consider which is best for your company’s
1) Sole Proprietorship
A sole proprietorship is the ownership of all of the assets of the
company by an individual. This type of business structure presents the
least complications for a new business person. However, if you are a
sole proprietor and you decide to use a fictitious name, you must
register it with the county clerk’s office.
- easy to set up.
- least expensive start-up.
- decision making is simple and quick.
- no protection from creditors. All personal assets are subject to the liens of creditors.
- all help is from employees who expect to get paid.
A partnership is the association of two or more people. It may be
established by a written or oral agreement. There is a sharing of the
profits and losses of the business by the partners.
When starting a partnership, it is best to have a written
partnership agreement. This agreement should spell out how the business
will be run and how the profits and losses will be split. It is
advisable to get legal help for this, but it is not necessary. Another
consideration when starting a partnership is taxes. Each partner is
taxed individually. The partnership must fill out a tax return, but it
is merely informational.
- usually able to raise more capital than a sole proprietorship
- each partner only taxed individually
- each partner is still liable for the debts of the partnership
- profits must be split with other partners
A corporation is an artificial legal person. Generally, a
corporation is more complicated than a partnership or a sole
proprietorship and more expensive to establish. There are more legal
requirements, and seeking legal help is probably necessary.
- like a partnership, more potential to raise capital than a sole proprietorship
- limited liability of owners; owners’ personal property protected from claims against the corporation
- strict legal requirements
- expense of start-up
- a corporation is taxed on its profits, shareholders must pay taxes on dividends. In effect, the profits are taxed twice.
How should you plan?
Generally, it is a good idea to have two basic written plans for
your new company. One is a business plan which defines how you will run
your firm. The other should be a financial plan which outlines some of
the aspects of your company’s budget.
A business plan should begin with a cover sheet which lists the name
of the business, the address and phone number, the names of the owners
of the business, and the primary goals of the business. When
considering the rest of the business plan, keep in mind why you are
writing it. Your business plan can be a useful tool in attracting
investors. If that is the case, you would probably want to write a
detailed report, and it could be advisable to seek professional help.
However, if the business plan is for yourself, its presentation can be
more informal. In any case, your plan should include the following:
- the principal good or service
- the location
- the type of legal business structure
- the unique features of your business
- the relevant experience that you and your partners bring to the business
- the reasons why the business will succeed
- the advantages your business has over others of its type
The financial plan also has several key elements:
- summary of start-up costs and funding
- estimation of operating expenses, which would include salaries, supplies, taxes, utilities, loan payments, etc.
- estimation of income, both weekly and monthly
- analysis of cash flow. Having cash available is important to any business.
- estimation of the volume of business it will take to break
even. This will help you make realistic decisions about the viability
of your business.
How should you be insured?
All businesses need some type of insurance, but insurance needs will
differ from company to company. In New York State, if a small business
has any employees, it must then carry workers’ compensation and
disability insurance. If the business owns vehicles, it must have
automobile insurance. Landlords often require a business owner to have
liability insurance. Bankers and investors may want a company to have
fire and other types of insurance. In some cases, partners in a firm
will want the other partners to have life insurance. This will be
especially important if the business relies on each partner’s unique
What about licensing?
Currently, most businesses must be registered in some way and many
will need one or more licenses from regulatory agencies. All
partnerships and those sole proprietorships that choose to do business
under an assumed name must register with the country clerk’s office in
the county where the principal place of business is located. All
corporations must register with the New York Department of State.
Since so many businesses are required to be licensed, it is best to
contact some licensing agencies directly to find out if your company
needs a license:
- For New York State, contact:
New York State Department of State, Division of Licensing Services
New York, NY 10007
- For New York City, contact:
New York City Department of Consumer Affairs, Division of Licenses
New York, NY 10004
Outside of New York City you should contact your county clerk’s office.
For Additional Information and Resources
Service Corps of Retired Executives
United States Small Business Administration
26 Federal Plaza, Room 3100
New York, NY 10278
Small Business Development Center
1 Pace Plaza
New York, NY 10038
Small Business Development Center
94-20 Guy R. Brewer Boulevard
Jamaica, NY 11451
Small Business Institute
School of Business
Riverdale, NY 10471