SOL Entrepreneurs

Choosing a Business to Start

So you've decided to start a business. Maybe you have a brilliant idea, and you're trying to figure out if it's viable or not. Or maybe you're out of work, or just fed up with your current job, and looking for an alternative.

Whatever the circumstances that have brought you to this point, the first question you need to ask yourself is, "Is owning a business right for me?" Are you cut out for entrepreneurship? Not everybody is. The rewards can be great, but so are the risks. And it will change your lifestyle in ways that you may not be prepared for.

Once you've decided to walk the entrepreneurial path, the next question to ask yourself is, "What type of business do I want to start?" There are, of course, thousands of choices. Even things you might think are out of your reach may not be. Short of something like pharmaceuticals that requires enormous research & development budgets, there are virtually no limits: automobile manufacturing, food products, import/export, and many others are open to even the individual entrepreneur. With an infinity of choices, how are you going to decide?

The Traditional Approach

The traditional approach to entrepreneurship is a methodical process. Generally speaking, the approach consists of researching the market, identifying a need, and creating a business to fill it. More specifically, the steps of the process are:

• Select the industry you're interested in working in.
• Research the kinds of businesses and various business models within that industry.
• Perform market research to see where there is an unmet need -- geographically, price wise, complementary products and services, etc.
• Analyze the competition.
• Develop a preliminary business plan for a business to meet that need.
• Do some more market research to assess the realistic market potential for your business. Will people buy it?
• Revise the business plan and determine your funding requirements.
• If needed, seek out lenders or investors.
• Start the business.

The other problem is that you may very well end up realizing far too late that you're doing something you really don't want to be doing, just because you figured you could make some decent money at it. Even when you're the boss, you can still end up feeling stuck and unfulfilled.

Do What You Love, and the Money Will Follow

Some of the common scenarios include:

• No one wants to buy it. You're passionate about it, but apparently no one else is. You can't sell people something they don't want to buy.
• Someone else already thought of it. You have a great idea, but it's a niche market, and someone's already beat you to it. And if they're better funded, they may be doing it better/faster/cheaper.
• A lot of people already thought of it. Highly competitive markets are no fun. I don't care how much you love the business you're in, if you're constantly having to go head-to-head with competitors, it will get old very quickly.
• There's more to it than you realized. You underestimated the costs, or the development time, or the incubation period for the marketing to take effect, or the amount of energy required, or the toll it would take on your personal life.

These approaches are not entirely mutually exclusive. Let's start with the idea, rather than with formal research. Some of the possible sources for business ideas include:

• Self-discovery. Find out what you're truly passionate about and figure out how to make a business out of it.
• Inspiration. That idea that just popped into your head one day may not be so crazy after all.
• Observation. Be constantly looking for unmet needs. Is there a product or service that you would buy if it were accessible and affordable?
• Imitation. Find a proven business model and replicate it in a different market. Or, consider buying a franchise, where you'll not only have a proven business model, but outside support for your business.

It doesn't matter where the idea comes from.

You can ask your friends and family, but when you do, make sure to let them know exactly what you are looking for -- honest, detailed feedback on the idea. True friends will be supportive of your ability to succeed, but they will also be willing to be honest with you.

If you make it past the friends and family round and still think you've got a viable business concept, put together a basic business plan. It doesn't have to be incredibly detailed -- you're not going to the bank or investors with it.

Now, think of the three to five most successful entrepreneurs you know. (If you don't know that many, you'd better meet some -- it's going to be very difficult to be a successful entrepreneur yourself without several of them in your network.) Contact them and see if they'll take a look at your business plan and meet you over lunch (your treat!) to discuss it. Now would also be a good time to find a mentor.

If you feel you need some market research, turn to an online community in which you participate regularly, or find an online community of people who match your target market. Ask a few questions in the discussion forums, preferably open-ended ones that will get you qualitative information, rather than just quantitative data. It may not be as statistically accurate as formal market research, but if you're not talking about risking huge sums of money, it's probably good enough. The higher the risk, the more formal research you need.

With this approach, you can pursue your passion, tempered by proven practices, and improve your possibilities of prosperity.

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Creating a Business Name

A great name is the beginning of a great brand. It should be memorable and create a certain feeling when heard. Here's a quick how-to on creating one and making sure it's not already used.

Here's How:

1.   Brainstorm. Think about how you want people to feel when they hear the name. Write down the words on paper and then categorize them by primary meaning.

2.   Relate. Think about related words and phrases that evoke the feelings you want. Hit the thesaurus and find all the synonyms for your words and phrases.

3.   Relate more. Find out the translations of your words. Figure out what colors, plants, animals, etc., relate to your words.

4.   Experiment. Start playing with combinations of your various words and partial words. Don't be judgmental now - just make a list.

5.   Reflect. Review your list and just give some thought to each name. How does it make you feel when you hear it?

6.   Communicate. Go over the list with someone you trust. Have them tell you how each name makes them feel, and how memorable they think it is.

7.   Prioritize. Throw out any that just don't fit and make a prioritized list of the rest.

8.   Check trademarks. Make sure no one is using that name in your line of business. You may be able to use the name in a completely different business, but be aware that it may create confusion for both you and them.

9.   Check domain names. You want to make sure that an appropriate domain name is available. You want YourCompanyName.com, of course. If that's not available, you may want to reconsider.

10.   Search the internet. Even if someone doesn't have the domain, you still want to see what else is out there that has the same name. That doesn't mean you don't use it if you find something, but you need to know.

11.   Check company names. If you're planning to incorporate, check with the Secretary of State (or other appropriate office outside the U.S.) of the state you're planning to incorporate in.

12.   Check assumed names. For sole proprietors, check for local assumed names (also known as DBA). In the U.S., you check this with the County Clerk.

13.   Stake your claim! Register your assumed name or file your incorporation papers right away. Also, start using either TM (trademark) or SM (service mark). You do NOT have to register them to use them.

14.   Get the domain(s). Find an inexpensive registrar and register your domain and any obvious variations on it. You shouldn't be paying more than $10 a year for each, and at that, it pays to prevent poachers.

15.   Protect your brand. A U.S. trademark or service mark costs $325. It's a drop in the bucket compared to trying to defend it later. It's not really necessary, though, for a small local business.

Tips:

1. Avoid generic names based on names, such as Joe's Bar, Sam's Hardware, etc. They're not memorable and are nearly impossible to trademark.
2. Avoid generic names that literally describe the product or service, like Computer Consulting Company, Appliance Sales and Service, Inc., etc.
3. Generally, avoid geographical names. Besides not generally being very memorable, what happens if you decide to move or expand?
4. Preferably, don't restrict future product or service lines. Be broad enough to include your wildest long-term vision for the business.
5. Try to keep the name short and easy to pronounce.

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What You Need:

• A thesaurus
• A writing pad and pen
• Friends for feedback

Choosing a Business Location

One of the basic concepts taught in almost every introductory marketing course is The Four P's: Price, Product, Promotion and Place. "Place" refers generally to distribution, i.e., where your customer evaluates and ultimately receives your product or service. While this may not matter much for people who work virtually, or who run a business that drop-ships from a third party, it's critical for restaurants, retailers, and even many service businesses. Ironically, while "place" is often the most permanent of the four P's, it's also often the most overlooked.

Location is about more than just choosing a building. Perhaps for you, opening your business in your own town, or even your part of town, is a given. But consider the big picture:

• State - Income taxes and sales taxes vary greatly from state to state, as do regulatory requirements. Is the state you live in friendly to entrepreneurship? To the specific type of business you want to run? Now might be the time to consider a move if it isn't, or possibly to open your business in a nearby state if you live near a state line. The Small Business Survival Index ranks the various U.S. states on how friendly they are to small business.
• City - Rent and other costs, availability of labor, taxes, regulations and government economic incentives can also vary greatly from city to city, even within the same state. Or maybe a small town is the perfect spot for your business.
• Part of town - What kind of commute is involved? Is the part of town consistent with the image for your business? Rent varies greatly according to location.
• Location relative to streets, parking, and other businesses - Do you need to be visible and/or easily accessible to pedestrian and automobile traffic? Will being close to businesses that draw a similar clientele help your business? For example, a sporting goods store or health food store might do very well next to a gym.
• Type of location Do you need office space, retail or warehouse? Retail is generally the most expensive of the three.

There are many factors to consider in choosing the location for your business. While cost is obviously a major consideration, you must also think about your various constituencies. Is your location important to...

• You? The space has to work for you, or it won't work. Remember, you're the one has to work there every day.
• Your customers? It also has to work for your customers, or it won't work. No customers = no business.
• Your employees? This issue may not be as critical at first, especially if you don't have any employees yet. But the ability to attract and keep good employees will be affected by your location.
• Strategic partners? While this may not seem like a big issue, the reality is that strategic partnerships happen more easily when the partners are local to each other. Why do you think that certain areas become hubs for certain types of business, such as Silicon Valley for the tech industry?
• Potential investors or buyers? You may not even be thinking about that yet, but potential investors looking at the long-term value of the business will see location as an important factor.

Each of these groups has different concerns about the location:

• Cost - Most obviously, can you afford it? Also, though, consider whether your customers and employees can afford it. For example, is there free parking, or is it expensive? Will higher rent cause you to charge higher prices to your customers? That's not necessarily a bad thing, but a factor to consider. What about taxes? Income taxes and sales taxes vary greatly from state to state, and if you buy your own property,
• Convenience - Is it easy to find? Is parking close by? Consider your clients. If you're dealing with pregnant mothers and the elderly, they may have a different concept of "convenient".
• Safety - This is an increasingly important issue for both customers and employees. Is the parking close by? Well lit? Is there security on the premises?
• Prestige - Would a downtown address add credibility? Will wealthy clients favor a business in their own neighborhood? Some places even provide virtual offices with prestigious addresses, such as Beverly Hills, Silicon Valley, or Manhattan.
• Traffic - Retailers and restaurants love it, office workers don't.
• Facility requirements - Do you have any special needs, such as high power consumption or specialized wiring? Do you need meeting space, but only occasionally? You might consider a shared office suite (often called executive suites) in that case.
• Zoning - Many cities have very strict zoning requirements. Make sure your business is even allowed there before you sign the lease!

As you can see, a fully informed decision involves a fairly complex matrix of issues. Determine your priorities, keep an open mind about your options, do your research, and get ready to make one of the most important decisions about your business.

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Sole Proprietorship Startup Cost

So you want to start a business. You want to be a sole proprietor -- run your own show. Great! Good for you.

There is more to going into business for yourself than just getting business cards printed or sticking up a web page (the modern-day version of "hanging out your shingle"). Unanticipated business expenses can wreak havoc on both your business and personal life. Great expectations are great; realistic expectations are better.

Equipment - No matter what, every self-employed entrepreneur has some equipment needs. Will you need a new computer or upgrades to your existing one? Are you prepared to pay for repairs? Do you have a back-up plan when equipment is being repaired? This may include your cell phone or its charger, your computer monitor, your car, the widget on your gadget -- anything you use which is integral to your business can break down, including your own body and mind.

How will your business be handled if you are ill or hurt?

Space - Whether you use your home, your car, your best friend's garage, an office suite, or Starbuck's, you need a business space. Will you need a space to build, write, store, or meet with prospective clients? How much space will you need? Will your space meet the IRS requirements for a tax deduction? If you are planning to home office, have you considered the added utility bills, such as increased electricity for computer, lights, etc.?

Marketing - This may include additional cell phone time, business cards, advertising in local print media, flyers - printing, paper, design, ink. Don't let those hidden costs sneak up on you. For example, with an inkjet printer, the ink is often more expensive than the paper, especially if you print in color. What about web hosting? Domain name?

Networking - Although networking is probably the least expensive marketing you can do, it is important to attend networking events for certain types of business. Such events incur costs for meals, parking, travel, etc.

Wardrobe - Will you need a change in wardrobe to maintain the needed image for your new business? Think about what image you want to project to your target market. If you've been wearing business casual at work, and suddenly you have to go buy a couple of new suits, it can add up, and unfortunately, it's not tax-deductible.

Transportation - Will there be changes in your traveling needs? Gas costs have risen (like you haven't noticed), and if you're traveling to visit prospects, be prepared to visit the pump more often. Also, your vehicle may need to be able to carry your product or equipment, or you may need to be able to take clients to lunch. Is your vehicle up to the task? You may need to clean out the trunk and the back seat and have it detailed.

Filing fees - Will you be filing a DBA ("doing business as", also known as "fictitious business name" or "assumed name")? The laws vary from state to state and country to country, but even if local laws don't require it, your bank probably will in order to accept checks made payable to the business name. 

Banking - If you want to accept checks and credit card payments under your business name, your bank will likely require you to have a business account, rather than a personal account, even if you're a sole proprietor. Find a bank that specializes in serving small business so that your monthly fees stay reasonable.

Credit Card Processing - Will you be accepting payment by credit card? You will need to have the proper agreements and equipment in place. Merchant accounts generally have an initial cost for equipment plus monthly fees or minimums.

Licensing - Does your new business require local, state, national, or international licenses?

Continuing Education - Will you need it to keep yourself and your business competitive? Is ongoing certification needed or even required by law?

Insurance/Bonding - Does your business have any such legal or ethical requirements? Are there industry standards you need to abide by? What risks are you undertaking that you might be professionally liable for?

Professional Services - You may not think you need ongoing accounting, legal, or other help, but what about an initial consultation with a CPA to get your books set up properly? Or with an attorney to draft your basic contract? Or a business coach? "Sole proprietor" doesn't have to mean you do everything yourself.

Taxes - Prepare to pay quarterly as cash starts to flow. Entrepreneurs have many deductible items, but they also have to pay all social security taxes. Remember, no one is withholding for you. A good practice is to set up a separate account for taxes and transfer money into there as it comes in.

Plan for these things when you're calculating your initial cash flow requirements, and you'll save your sanity, and maybe even your business, down the road.

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Choosing a CPA

CPAs are more than just individuals who do your yearly taxes. They can advise you on a long list of other services, which may include advice on your accounting system, financial, retirement, estate and tax planning. CPAs are part of a business owner's professional team along with a banker and a lawyer.

Ask for Recommendations
Your local Chamber of Commerce will tell you the names of CPAs who are members. When you attend any type of meeting, or meet other business owners, ask for CPA recommendations.

Use the 60% Rule
If you're a business owner, pick a CPA who has 60% of their business coming from business owners like you! They're more apt to keep up with the laws regarding clients they deal with most often. If you're a corporation, make sure that the person specializes in corporate accounting, including financial statements, audits, etc.

Interview CPAs!
Ask what type of services they do for their clients, how long they've been in business full time, and for references. Don't forget to ask to see their license. Ask them about the benefits of choosing them over another CPA.

Rates
Ask about their rates and what those rates include. If they have a rate chart, all the better! Also, ask what their hourly rate is and what the cost would be to answer questions during the year.

Ask Them About Record Keeping
Ask what computer program they prefer you use for your record keeping and why they prefer that program. Many times, if you use the program they suggest, it can save you some money because they can use your data files. Some even have programs they'll set up especially for you!

Bring Your Records to the Interview
Bring a copy of at least one year's tax return when you interview a CPA. This way your prospective CPA can give you educated "guesstimates" as to what their services will cost you.

How To File
If you want to save some money, ask how they want your paper files.... If you bring your files to them in shoeboxes (hey, many folks do), you will pay to have all that deciphered! You can save money if you separate the information the way the CPA suggests.

Corporation vs. Individual
Are you interested in hiring a corporation of CPAs or a CPA that has their own business? If you opt for the corporation, find out if you'll be dealing with one particular person, or will it be whoever answers the phone when you call. It's best to have one person to build a relationship with!

When do they work?
What are their hours of operation? Make sure that you can call them at hours that are convenient for you.

Making a Decision
Interview at least 3 CPAs. Don't rush this decision. Make sure you have the best CPA and bookkeeper for you and your business!

Passive Income

Do you want to continue working 50, 70, 100 hours a week the rest of your life?

Good! Neither do I.

Do you want to be able to take time off whenever you want to, without worrying about what's going to happen to your business?

So do I!

There's a saying in the corporate world: "Don't make yourself irreplaceable. If you can't be replaced, you can't be promoted." As an entrepreneur, this is still true in its own way. Let's think of "being promoted" as earning more and working less. You can raise your prices, but until you can remove yourself from being directly involved in doing the work that generates the income, there's always going to be a limit to how much you can earn, and it can only increase very slowly.

Passive income, on the other hand, is income that does not require your direct involvement.

Some kinds of passive income you may be familiar with include owning rental property, royalties on an invention or creative work, and network marketing. If you want to earn more, work less, and have a decent retirement, you're going to have to start creating income streams that do not require your direct involvement. Whether you're just starting your business, or you've been running it a while, the sooner you start thinking about how you are going to shift your business model to create more passive income, the sooner you can achieve personal and financial freedom.

Let's look at two basic types of passive income, and a third type of income that, while technically not passive, is a key strategy for earning more and working less.

Residual Income

Residual income is revenue that occurs over time from work done one time. Some examples include:

• An insurance agent who gets commission every year when a customer renews his policy
• A network marketing or direct sales rep's income from her direct customers when they reorder product every month
• An aerobics instructor who produces a video and sells it at the gyms where she teaches
• A marketing consultant who creates a workbook and sells it in e-book format on the Internet
• A photographer who makes his photos available through a stock photography clearinghouse and gets paid a royalty whenever someone buys one of his images
• A restaurant or retail owner who has grown to the point of hiring a trustworthy manager

Note that this is different from merely recurring income. Recurring income may still require your involvement to earn the income, e.g., a coach or consultant on a monthly retainer, or a caterer who delivers lunch every Monday to the local school board. While this "active recurring income" offers welcome stability, it also tends to tie you down, and you still have limits on your earning capacity based on your own personal production capacity.

Leveraged Income

Leveraged income leverages the work of other people to create income for you. Some examples of leveraged income include:

• An e-book author selling her e-book through affiliates who promote the product
• A network marketer who builds a downline and receives commissions on the sales made by people in his downline
• A general contractor who makes a profit margin on the work done by sub-contractors
• Franchising your business model to other entrepreneurs (the ultimate leveraged income)

Active Leveraged Income

This is a term I use to describe income that requires your direct participation, but that you can make more money by having more people involved. This generally involves a one-time event, such as:

• A seminar or class
• A conference or convention
• Concerts and dance recitals
• Raves and other parties

Applying It

Now is the time to think about how to apply this in your business. Can you create a product that people will buy over and over again? Can you engage others to sell your product? How could you make money off the work of others?

The sooner you answer these questions, the sooner you'll have financial and personal freedom.

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Business Legal Organization Structure

Choosing the proper legal organizational structure for your business is one of the most important decisions you will make. While it may not have much impact on the day-to-day operations of a small business, it can have a huge impact come tax time, when you want to borrow money or attract investors, or in the unfortunate event you get taken to court. While it is possible to change your structure at a later date, it can be a difficult and expensive process. Better to make the right decision in the first place.

In the United States, you are not required to have an attorney prepare and file the paperwork to create any of the structures listed below. In fact, there are numerous books and other products available to help you do the filings yourself, as well as many Internet services that will do them for you. However, depending on the size and complexity of your business, you may want to consult with an attorney, and you almost certainly should consult with your tax advisor regarding which structure is best for your situation. This article can't possibly answer all your questions, but it will help you determine the right ones to ask a qualified professional.

The following are the basic forms of business ownership in the United States. There are variants from state to state, so be sure to check with your state's Secretary of State Office for the exact details in your state.

Sole Proprietorship. The individual owner of an unincorporated business operates the business as an extension of himself. The profits and losses of the business are reported on the tax return of the owner - there is no separate business filing. The owner is personally responsible for any liabilities of the business. If someone sues the business for breach of contract, personal injury, or to collect a debt, the court can directly levy the personal bank account and other property of the owner. The major advantage of sole proprietorship is that it is the simplest and least expensive structure, as there is really nothing to set up and maintain, except perhaps a fictitious business name (aka DBA, or Doing Business As).

General Partnership. Two or more people own the business jointly and share profits and losses of the business as spelled out in the partnership agreement. Each partner is potentially responsible for the full amount of all liabilities of the business, i.e., a creditor can collect the full amount of a debt of the partnership from the partner that is the easiest to collect from. Distribution of profits and losses is determined by the partnership agreement and passes through to the individual partners. It does not have to match the ownership percentages. The partnership itself is not subject to any income or franchise tax. Control of the business is determined by the partnership agreement, but unless stated otherwise, the partners control the business jointly, with each partner having an equal vote. An advantage of partnerships is that, like a sole proprietorship, no state filings are required to create the business entity, nor are there any ongoing reporting requirements.

Limited Partnership. The basic structure and tax implications are the same as for a general partnership, but the limited partnership allows for one or more limited partners, or "silent partners", to own a portion of the business, but not participate in the management of the business. The partnership must also have a general partner who has personal liability for all liabilities of the partnership. This structure allows a partnership to have outside investors without subjecting them to the liabilities of the business.

Limited Liability Partnership (LLP). The LLP is a fairly new structure that appeared as a result from demand from attorney and accounting firms to be able to limit the liability between partners (attorney and accounting firms were at one time not allowed to incorporate, though they are now). An LLP is taxed like a partnership, but limits the liabilities of all partners much like an LLC. However, at this point in time, LLP laws vary significantly from state to state. For example, California and New York only allow this form for attorney and accounting firms. In many other states, partners in an LLP only have a "limited shield", and are not afforded the same protection they would enjoy in an LLC or corporation. These restrictions make the LLP generally only a good choice for attorney and accounting firms, at least in the states with the limited shield law. Check with your Secretary of State for the specifics in your state.

Corporation ("C Corporation"). A corporation is owned by one or more stockholders, managed by a board of directors elected by the stockholders, and run day-to-day by officers appointed by the board of directors. A single individual can be the sole stockholder, director and officer of the company. The stockholders, directors and officers of the company are protected from the liabilities of the company, including liabilities for their own negligence when acting in their corporate role, except in certain extraordinary circumstances. In an ordinary corporation (a "C Corporation") the profits and losses of the corporation are not passed through to the tax returns of the owners. The corporation files its own tax return and pays its own taxes. It may also be subject to state franchise taxes or other annual fees.

As for individuals, corporate income tax rates are graduated based upon the taxable income, though the rates and levels of the brackets are different than for individuals. Whether incorporating will cost you more or less in taxes than another structure varies from situation to situation, so consult with a tax professional if you are considering incorporating.

S Corporation. After the corporation has been formed, the stockholders may elect "S Corporation" status by making a filing with the IRS. An S Corporation is taxed like a partnership and the profits and losses of S Corporations flow through to the federal tax returns of the owners in proportion to their stock ownership. They are protected from the liabilities of the business as in a C Corporation. The S-corporation structure is generally preferred over a standard corporation when most of the shareholders are employed by the corporation or otherwise involved in its day-to-day activities, and the corporation distributes most of its income to its shareholders each year. In other words, for small businesses.

Limited Liability Company (LLC). An LLC is a hybrid of a corporation and a partnership and is rapidly becoming the most popular structure for small businesses due to its flexibility and its low cost to create and maintain, while still offering most of the advantages of a corporation. The ownership percentages, profit and loss distributions, and voting powers of each member are determined by the LLC Articles of Organization, rather than by stock ownership. An LLC can choose to be taxed like a partnership or S Corporation with profits and losses flowing through to the owners’ tax returns, or taxed like a C Corporation, filing its own return. The owners and any officers and directors are protected from the liabilities of the company, as in a corporation. An LLC is generally subject to franchise tax, though this varies from state to state.

Non-Profit Corporation. A non-profit corporation does not have to be a "charity", per se. A non-profit corporations may be an industry association, a social organization, a research firm, or even a consulting group. It can even sell products or services. The difference is that there are no owners, and any "profits" are simply retained by the corporation to be reinvested for whatever the purpose of the corporation may be. How, then, does an entrepreneur make money with a non-profit organization? A non-profit can have employees, and those employees can be paid fair market value for their services. If you're trying to become a billionaire, this probably isn't the best choice, but many "social entrepreneurs" who simply want to make an acceptable living but have a vision to create something much larger than themselves start non-profit corporations and then become employees of the non-profit. There are many restrictions on non-profits that make it a challenging choice, but if you're more interested in seeing your vision come to life than in seeing your bank account explode, it is an option.

Professional Corporations (PC's), Professional Associations (PA's) and Professional Limited Liability Companies (PLLC's). These are special entity forms created for lawyers, doctors, CPA’s, architects, engineers and other professionals subject to licensing requirements and malpractice liability. They are similar to the standard forms, except that usually the appropriate state licensing body must approve the formation documents before they are filed with the Secretary of State.

As you can see, there are many choices and many factors to consider - there is no "one right answer". Many of the advantages of incorporating can be gained in other ways for sole proprietors, such as purchasing liability insurance. Also, the paper legalities are often outweighed by the real-world practicalities. For example, while a corporation may shield the owners from personal liability for debts, in your first 2-3 years in business, it's unlikely you'll even be able to get business credit without personally co-signing as a guarantor, in which case you forfeit that protection. Educate yourself, talk to a professional, and consider all your options carefully.

How To Setup an LLC

The Limited Liability Company, or LLC, has in recent years become the most popular legal structure for small businesses wishing to incorporate. The exact requirements vary slightly from state to state, but setting up an LLC is a relatively simple process that can usually be done in an hour or less, depending on the complexity of your organizational structure.

Here's How:

1.   Obtain a copy of your state's LLC Articles of Organization form from your state's Secretary of State office. When you contact them, also find out if the state in which you are incorporating requires you to post a notice in the newspaper. Also find out any specific rules regarding business names.

2.   Choose a name for your business that complies with your state's rules for LLC business names. The main part of the business name is generally very flexible, but each state has a list of prohibited words, such as "Corporation", "Incorporated", "Insurance", "City", and others. Your legal name must end with an LLC designator, such as "Limited Liability Company", "LLC", etc. Also, the name can not be the same as another LLC on file in the state in which you are filing.

3.   Fill out the LLC Articles of Organization form. This is usually a relatively simple process, as the only things you need to notify the state about regarding your LLC are items such as name, its business purpose, principal office address, the "registered agent" for receiving any legal documents, and the names of the initial members. You do NOT have to specify at this point the ownership distribution or management structure, just the names of the LLC's members.

4.   Publish a notice in your local newspaper of your intention to form an LLC (if required by your state - don't waste the money otherwise). This should be done prior to filing your Articles of Organization. Currently this is only required in Arizona and New York. Check with your state's Secretary of State to be certain.

5.   Submit your Articles of Organization form to your Secretary of State along with the appropriate filing fee. Fees range from $40 to $900, depending on the state. Be careful: some states may have a corporate tax which is separate from the filing fee but must be paid at the time of filing. For example, California has only a $70 - $100 filing fee, but an $800 annual tax.

6.   That's it, you're done! At least legally, that is. Now wasn't that easy? While you're done in terms of legal requirements, there's still a very important piece missing: the LLC Operating Agreement. However, the Operating Agreement is not required by the state, and can be created after the legal filings are done. If you are the sole owner of the LLC, you probably don't need one at this point. However, if there is so much as one other owner, it's best to make a written agreement of the terms.

7.   Create an LLC Operating Agreement that spells out the financial and management rights and responsibilities of the LLC members, such as: who contributes what if the LLC needs additional capital, when and how profits from the business will be distributed, under what terms members can leave the LLC, etc. Even (or perhaps especially) among friends and family, leaving these questions unanswered can create strains on both the business and personal relationships down the road. Put it in writing!

Tips:

1. Although not legally required, you should probably work out the details of the Operating Agreement well in advance of filing the LLC Articles of Organization. You may find that someone doesn't want to be a part of it once they know the whole deal, or perhaps that you need to bring someone else in. Work it out in advance.
2. You can hire an attorney for this, but really, unless your organization is fairly complex, you can do this yourself.
3. Unless you have a compelling reason otherwise, it's generally best for small businesses to incorporate in the state in which it will principally be doing business. There are some tax and organizational advantages to registering in certain states, however. Delaware, Nevada, and recently Wyoming are the most popular for out-of-state corporate registration. Consult with an attorney or research it on the web further if you are in doubt.

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Written by Scott Allen of "Your Guide To Entrepreneurs"