This year, National Small Business Week falls in September. Small businesses are often described as the backbone of the American economy as they employ a majority of American workers and provide many of the services we all enjoy. Indeed, entrepreneurs who start small businesses deserve great recognition for work they do and the risks they take to advance their business visions and improve our economy.
Most entrepreneurs start their businesses because they see a market need they think they can fill. But, while they are focused on developing their product or improving the customer service model, individuals often overlook important formalities that come with business ownership.
This article will consider two such important formalities: the Business Plan and the Business Entity.
Draft a Business Plan
Every endeavor should start with a plan, and creating a small business is no different. Business plans provide entrepreneurs an opportunity to think through key elements of their businesses, focus on the business purpose, and project a vision for stages of business development. Business plans can serve as broad roadmaps for how to structure, run, and grow a business. Moreover, business plans are important to bringing new investors into a business or otherwise securing financing. Investors want to feel confident they will see a return on their investment and banks will require assurance of how their loans will be used.
Read more at: Navigating a Business Loan: Know the 5 C’s of Credit
Initial business plans do not need to be comprehensive statements of every aspect of a future enterprise and they do not need to be filled with corporate jargon. They do need to cover some basic points that are key to starting and running any business:
- A Value Proposition should make a clear and compelling statement about the unique value the new business will bring to the market.
- List the Key Activities the business will pursue to gain a competitive advantage. Key Activities often highlight areas like models for serving customers, efficient uses of supply lines, or new uses of technology.
- Describe the Key Resources the business will leverage to create value to customers and clients. These resources often include capital, intellectual property, knowledgeable staff, and geographic location.
- Outline Revenue Streams to explain how the company will actually make money. Some examples are direct sales, membership fees, and selling advertising space.
- Detail the Cost Structure of the new business. It will always cost money to make money. A new business should identify the most significant costs and consider how it will minimize them.
- Consider the Customer Segments the business will serve. Not all businesses serve all people. It is important to identify specifically who the new business will serve.
- Key Partnerships are important to creating and running a successful business. A business plan should list suppliers, manufacturers, subcontractors, and similar strategic partners it will rely on.
Select a Business Entity
While it is possible for an individual to run a business with no legal formalities, most new businesses will incorporate a legal structure. These structures provide business owners with protection from liabilities the businesses may incur, formalized agreements amongst partners and shareholders, and clear rules for taxation.
Several of the most common business structures include:
- Limited Liability Companies (LLCs) have become the most common form for new businesses in the last several decades. These structures offer maximum flexibility with no substantial restrictions on the number or character of owners/members. Members of an LLC can also choose how the entity will be taxed by the government. LLCs can grow to any size, but typically must convert to C Corporations if they are going to be sold to the public.
- S Corporations are highly restrictive corporate structures available to small businesses. Only individuals who are American citizens or permanent residents can hold shares in S Corps. Additionally, S Corps can have no more than 100 shareholders, making them impossible to sell publicly. However, in exchange for these restrictions, S Corps have the lowest overall tax of any corporate structure.
- C Corporations are extremely flexible entities with no restriction on share ownership. Indeed, all publicly traded corporations are C Corps. These entities can also issue different classes of stock, potentially gaining access to a broader array of investors. However, in exchange for this flexibility, C Corps face a special “double taxation” structure with the government that can result in much higher taxes than other structures.
If you’re ready to take the next step in starting or expanding your business, schedule time with a knowledgeable First Bank Wealth Management trusted advisor. We’ll help poise your business for long-term growth through our insightful business planning services.
By: David Frederick
|David Frederick, J.D., LL.M. is the Senior Vice President and Director of Client Success and Advice at First Bank Wealth Management and Adjunct Professor of Economics at Washington University. David may be reached by phone at 314-995-8764 or via email at [email protected].|