This topic can span over hundreds of pages, and this will only be a summary covering incorporation and raising capital.Starting a business is very exciting and is something many Americans aspire to do in their lifetimes.Many people overlook some of the basic steps they must take in order to protect themselves.
Most people will tell you that first step is writing a business plan.A business plan is an overview of what your business intends to do, what you’re going to sell, to whom, and how.It can be a simple or complex document.A business plan will help you stay organized and on track, and is completely essential if you plan to seek outside investment.
After you have a business plan your priority should be separating your future business from yourself from a liability standpoint.As an example, If one of your employees ends up attacking one of your customers, you do not want to be held personally liable for their actions. Liability will fall on your business, or ideally on the deranged employee.
Incorporating – Creating a Separate Legal Entity
Although there are a few different structures available (sole proprietorship, partnership, etc.), I will primarily focus on corporations and limited liability companies.
A corporation is the most “concrete” business structure.It requires the most amount of work to formulate and maintain, however there are countless benefits.For example, if you plan on raising capital, the corporate structure makes this process very systematic through the sale of stock in the company.There are two types of corporations, C and S.
C corporations are typically used by large businesses that have a lot of shareholders and are always seeking to raise capital.There are a few downsides, such as double taxation, which means that the corporation must pay taxes at the corporate level, and then the shareholders must pay individual taxes on the dividends the company pays out on a personal level. This is obviously a problem when it is a small company because then the owners are paying taxes twice.
S corporations, on the other hand, don’t pay income taxes, and aren’t subject to double taxation. S corps are more adept for smaller companies, and have have a few limitations such as a limit on total amount of shareholders and their qualifications. I typically advise my friends and colleagues who are starting a business to strongly consider the S Corp structure.
As stated earlier, a corporation is a separate legal entity, and your personal assets are generally protected.However, in practice most banks require personal guarantees when you are new to the business world, and your business doesn’t have a credit history of its own.Therefore in the beginning, you are mostly protected legally, not necessarily financially. As time goes on, it will be to your benefit to begin establishing a corporate credit history. First step is to apply for a DUNS number from Dun & Bradstreet, a company that keep track of corporate credit histories. DUNS number is free and you may apply for one at the DNB website.
There are a number of rules set forth by the government that you must follow in order to operate your business.For example, your board of directors must hold annual meetings, file annual reports, allow election of new directors, and so on.All these tasks are much simpler than they sound.An annual meeting can be noted by a simple word document simply stating what was discussed, for how long, who was present, and their signatures.To put things in perspective, me and one of my colleagues had our first meeting for my web consulting company during a deployment on an Iraqi rooftop, which I later documented using an annual directors meeting template I found online. To find a sample document, just do a simple Google search for “sample corporate minutes”.
A corporation is managed by a group of directors who are elected by shareholders.Not all shareholders can vote since there are voting and non-voting stocks.Once the company begins to make profit additional stocks may be issued to key employees as bonuses. Stock ownership gives key personnel a lot more incentive than a simple cash payment.Steve Jobs, for example, has an annual salary of $1, his entire wealth comes from stock ownership in his companies.
It is also important to keep personal assets, such as your bank accounts, apart from your companies.In the event that somebody sues your company, and investigation shows that you intermingled your personal assets with your companies’ assets, you may be held accountable – this is called piercing the corporate veil.
Ideally, If you have the money for it, consulting a lawyer regarding this may be a good idea.If you don’t have the resources to get a lawyer, there are a number of companies (CorpAmerica.com, LegalZoom.com) that will file all the paperwork for you, usually for around $140, and allow you to incorporate in any state that you want.Most companies incorporate in either Nevada or Delaware due to their corporation-favoring laws.
Raising Capital
Once your company is established and legally separated from you, you may begin to raise cash.Raising cash is a difficult task, even if you have a very creative idea.Be prepared to have your business plan scrutinized!Banks and investors will look at your (and your partners), history,prior business ventures, and education when considering lending you money.
If your business doesn’t require a lot of startup capital, you may be able to finance it yourself.You should not dump all your cash into the business, cash is the last thing you want to run out of.However, you may consider taking out a personal asset-backed loan, such as a home- equity loan.You may also use your credit-cards, but have a backup plan of where you will get money if you reach your limit. Here is a good article on 20 creative ways for raising money.
Assuming that you need more money than you can personally invest, or you’ve already run out of personal investment, there are a few routes available for raising cash.Keep in mind that good rule of thumb when estimating how much you will need is to calculate all your expected expenses, and then double the figure.
In the beginning family and friends is a very common route to go.Larry Page and Sergey Brin, founders of Google, were able to raise close to one million dollars from family friends, which is a lot more than most companies need when starting out.The problem with borrowing from family is that there is there is always a chance that your business will fail and you will lose their money.It’s important to plan carefully and ask for investment from people who believe in legitimate business, and hopefully don’t know any criminal connections.
Getting a bank loan is a another way of raising money, however, as I said earlier most banks will require a personal guarantee, so be prepared to pay back the money if your business fails.There are a lot of government backed programs available that help keep interest rates down, such as the Patriot Express Loan, something available for veterans.There are also a number of programs available through the Small Business Administration, although in practice we’ve found it very difficult to get money from then being Caucasian and male.On the other hand, if you are a minority or a woman, or ideally both, it will be much easier to get money via this route.
Angel investors are individuals or companies than lend money to start up companies.Once again Google, received $25 million from Sequoia Capital during their start up steps.Getting an angel investor is very difficult, and be prepared to give up a good percentage of your company.However, it’s better to have as smaller slice of a large pie then to not have a pie at all.Angel Investors typically specialize in different fields, and will be looking for specific characteristics of your business and your market focus.As with banks, your personal background will be very important.Personal credibility is very important, having a Harvard MBA will make negations much easier.
In practice I find that raising cash and operating a company is too great of a task for one person.Raising capital and performing other legal functions in relation to your company is a full time job in itself, and leaves very little time to work on your actual product. Eventually what makes your company will be your product, not your legal entity and pass-through taxation, and you must focus majority of your attention on your product and your customers.
It is important for one to remember that starting the business and raising capital is just the first step. It takes a lot of dedication and in some cases a lot of help from other people to keep the business successful. Even businesses with great products fail because of poor management and lack of marketing.
Starting a US Business and Raising Capital
This topic can span over hundreds of pages, and this will only be a summary covering incorporation and raising capital. Starting a business is very exciting and is something many Americans aspire to do in their lifetimes. Many people overlook some of the basic steps they must take in order to protect themselves.
Most people will tell you that first step is writing a business plan. A business plan is an overview of what your business intends to do, what you’re going to sell, to whom, and how. It can be a simple or complex document. A business plan will help you stay organized and on track, and is completely essential if you plan to seek outside investment.
After you have a business plan your priority should be separating your future business from yourself from a liability standpoint. As an example, If one of your employees ends up attacking one of your customers, you do not want to be held personally liable for their actions. Liability will fall on your business, or ideally on the deranged employee.
Incorporating – Creating a Separate Legal Entity
Although there are a few different structures available (sole proprietorship, partnership, etc.), I will primarily focus on corporations and limited liability companies.
A corporation is the most “concrete” business structure. It requires the most amount of work to formulate and maintain, however there are countless benefits. For example, if you plan on raising capital, the corporate structure makes this process very systematic through the sale of stock in the company. There are two types of corporations, C and S.
C corporations are typically used by large businesses that have a lot of shareholders and are always seeking to raise capital. There are a few downsides, such as double taxation, which means that the corporation must pay taxes at the corporate level, and then the shareholders must pay individual taxes on the dividends the company pays out on a personal level. This is obviously a problem when it is a small company because then the owners are paying taxes twice.
S corporations, on the other hand, don’t pay income taxes, and aren’t subject to double taxation. S corps are more adept for smaller companies, and have have a few limitations such as a limit on total amount of shareholders and their qualifications. I typically advise my friends and colleagues who are starting a business to strongly consider the S Corp structure.
As stated earlier, a corporation is a separate legal entity, and your personal assets are generally protected. However, in practice most banks require personal guarantees when you are new to the business world, and your business doesn’t have a credit history of its own. Therefore in the beginning, you are mostly protected legally, not necessarily financially. As time goes on, it will be to your benefit to begin establishing a corporate credit history. First step is to apply for a DUNS number from Dun & Bradstreet, a company that keep track of corporate credit histories. DUNS number is free and you may apply for one at the DNB website.
There are a number of rules set forth by the government that you must follow in order to operate your business. For example, your board of directors must hold annual meetings, file annual reports, allow election of new directors, and so on. All these tasks are much simpler than they sound. An annual meeting can be noted by a simple word document simply stating what was discussed, for how long, who was present, and their signatures. To put things in perspective, me and one of my colleagues had our first meeting for my web consulting company during a deployment on an Iraqi rooftop, which I later documented using an annual directors meeting template I found online. To find a sample document, just do a simple Google search for “sample corporate minutes”.
A corporation is managed by a group of directors who are elected by shareholders. Not all shareholders can vote since there are voting and non-voting stocks. Once the company begins to make profit additional stocks may be issued to key employees as bonuses. Stock ownership gives key personnel a lot more incentive than a simple cash payment. Steve Jobs, for example, has an annual salary of $1, his entire wealth comes from stock ownership in his companies.
It is also important to keep personal assets, such as your bank accounts, apart from your companies. In the event that somebody sues your company, and investigation shows that you intermingled your personal assets with your companies’ assets, you may be held accountable – this is called piercing the corporate veil.
Ideally, If you have the money for it, consulting a lawyer regarding this may be a good idea. If you don’t have the resources to get a lawyer, there are a number of companies (CorpAmerica.com, LegalZoom.com) that will file all the paperwork for you, usually for around $140, and allow you to incorporate in any state that you want. Most companies incorporate in either Nevada or Delaware due to their corporation-favoring laws.
Raising Capital
Once your company is established and legally separated from you, you may begin to raise cash. Raising cash is a difficult task, even if you have a very creative idea. Be prepared to have your business plan scrutinized! Banks and investors will look at your (and your partners), history, prior business ventures, and education when considering lending you money.
If your business doesn’t require a lot of startup capital, you may be able to finance it yourself. You should not dump all your cash into the business, cash is the last thing you want to run out of. However, you may consider taking out a personal asset-backed loan, such as a home- equity loan. You may also use your credit-cards, but have a backup plan of where you will get money if you reach your limit. Here is a good article on 20 creative ways for raising money.
Assuming that you need more money than you can personally invest, or you’ve already run out of personal investment, there are a few routes available for raising cash. Keep in mind that good rule of thumb when estimating how much you will need is to calculate all your expected expenses, and then double the figure.
In the beginning family and friends is a very common route to go. Larry Page and Sergey Brin, founders of Google, were able to raise close to one million dollars from family friends, which is a lot more than most companies need when starting out. The problem with borrowing from family is that there is there is always a chance that your business will fail and you will lose their money. It’s important to plan carefully and ask for investment from people who believe in legitimate business, and hopefully don’t know any criminal connections.
Getting a bank loan is a another way of raising money, however, as I said earlier most banks will require a personal guarantee, so be prepared to pay back the money if your business fails. There are a lot of government backed programs available that help keep interest rates down, such as the Patriot Express Loan, something available for veterans. There are also a number of programs available through the Small Business Administration, although in practice we’ve found it very difficult to get money from then being Caucasian and male. On the other hand, if you are a minority or a woman, or ideally both, it will be much easier to get money via this route.
Angel investors are individuals or companies than lend money to start up companies. Once again Google, received $25 million from Sequoia Capital during their start up steps. Getting an angel investor is very difficult, and be prepared to give up a good percentage of your company. However, it’s better to have as smaller slice of a large pie then to not have a pie at all. Angel Investors typically specialize in different fields, and will be looking for specific characteristics of your business and your market focus. As with banks, your personal background will be very important. Personal credibility is very important, having a Harvard MBA will make negations much easier.
In practice I find that raising cash and operating a company is too great of a task for one person. Raising capital and performing other legal functions in relation to your company is a full time job in itself, and leaves very little time to work on your actual product. Eventually what makes your company will be your product, not your legal entity and pass-through taxation, and you must focus majority of your attention on your product and your customers.
It is important for one to remember that starting the business and raising capital is just the first step. It takes a lot of dedication and in some cases a lot of help from other people to keep the business successful. Even businesses with great products fail because of poor management and lack of marketing.