A business plan is normally divided into two main sections. First,
there is a narrative section explaining what the business will do, how and where
it will be done, who will run the business and how it will be financed. The
second section concentrates on the financial aspects, and normally comprises a
profit projection, a cash flow forecast and accompanying notes.
The business plan will normally be drawn up with the help of your
accountant. It does not need to be a large document, and in fact is likely to be
more effective if it gives the reader all the relevant information in just a few
pages. However, the more elaborate the proposed venture, the more detail is
likely to be required.
Preparation of a business plan serves a number of purposes. Firstly, it
makes you commit your ideas in writing. In doing this, fresh ideas (and
potential hurdles)may spring to mind which may help you to clarify the precise
direction that you wish to take, rather than set off without planning your
route. If there are any fundamental flaws in your business plan, it is
preferable to identify these at the outset, rather than hit an obstacle later
on, when correction may prove costly.
The second purpose of a business plan is to encourage you to consider
the financial aspects of the proposed venture, such as pricing policy, whether
the business will provide you with the desired level of income, how much capital
you will need to start up and how your bank balance is likely to stand from
month to month. Only by quantifying your expectations will you know later on
whether things are going as intended. The third purpose of a business plan is to
assist in raising finance. This may be finance from private or corporate
investors, but more commonly the finance will come from a bank.
If you approach a bank for loan or overdraft facilities, they will
almost certainly ask you to prepare a cash flow forecast to enable them to
consider your application. By having this readily available within the business
plan, you can save time by avoiding the need for an additional appointment, and
more importantly, the bank manager will see that your proposals have been
carefully thought through beforehand. This is likely to help in getting your
relationship with the bank off to a good start.
People to
Contact
Having established what you are trying to achieve and
how you are going to go about it, it is important to seek expert advice on the
various aspects of your new venture.
Accountant and Independent Financial
Adviser
Firstly you will need an accountant and an Independent
Financial Adviser. Your business will be offering goods or services in exchange
for payment. Records of the transactions need to be kept and tax liabilities
need to be agreed with the IRS. These are all areas in which we can give advice,
and this advice can prove invaluable. This is particularly so in the first year
of a new business when, if your affairs are planned carefully, the potential to
achieve tax savings is often at its greatest.
Accurate accounts to be need to be prepared.
Keeping good books from the start will keep audit and accountancy costs
down.
Our other functions in the early stages are to assist in the
preparation of your business plan and cash flow forecast, assist with business
registrations and to advise on alternative methods of financing the business.
Lawyer
Next, you need to
consider whether it is appropriate to engage the services of a lawyer. The key
issues on which you may require a lawyer's advice or assistance are as follows:
Purchase or lease of property: You will need to
consider any planning restrictions and ensure that you can use the property for
its intended purpose. You will also need to be satisfied that you are not taking
over any hidden liabilities.
Standard terms of business: Careful consideration should be given as to
how much credit you will offer your customers, and how this will affect your
cashflow.
Protection of your trading name and product: A business's brand and
product are often its most valuable assets. They can frequently be protected by
the registration of a trademark or a patent.
Employment
contracts
So far as possible, you will require flexibility in your contractual
arrangements with employees while protecting the business against possible legal
claims.
Distribution, agency and franchise agreements: It is often only when a
relationship breaks down that the inadequacy of the contractual agreements
entered into by a business in its start-up phase really comes home to roost.
It is advisable to take advice from a lawyer with sufficient expertise in
the areas where you will need advice.
Bank
Selecting a bank is the next issue. Armed
with your business plan and the benefit of professional advice, you will by now
have a clearer picture of what you require from a bank. If you expect to operate
your account in credit, your main concern is likely to be that the bank charges
are kept to a minimum. If you need finance from the bank, you will also be
concerned with the relative cost and flexibility of a bank loan compared with an
overdraft facility. Knowing the right questions to ask will help you to ensure
that you explore all the options and make the best decision.
One of the most common questions raised by
proprietors of new businesses is which bank they should use. If you have a good
relationship with your current bank, then speak to your branch manager. If in
doubt, speak to more than one and compare their terms.
Insurance
Agent
The various types of insurance which you may need are
as follows:
Employers' liability: This is necessary if you employ
anyone. It covers personal injury and damage to personal property of employees.
(This includes yourself).
Auto insurance: Check that all vehicles are covered
for business use and that there are no important exclusions in the policy.
Public liability: This covers personal injury and damage to personal
property of the public. It is not compulsory, but is advisable, especially if
you have business premises.
Property damage: This covers buildings and contents
for fire and theft. Make sure that the level of cover is adequate.
Consequential loss: This covers loss of profits
arising from interruption to the business through fire, theft, flood etc.
Professional indemnity: This may be necessary in
certain professions, particularly where client care is involved.
Healthcare: This type of insurance is often
overlooked. It covers you for loss of earnings when you are unable to work due
to personal illness or disability. The required level of cover requires careful
consideration and we can help you decide on this.
Keyman life insurance: This is appropriate where the
future of the business depends on certain individuals. Your own life cover
should not be overlooked, especially if you have family dependants.
It is also advisable to consider pension arrangements at an early
stage. Some agents are able to advise on both general insurance on the one hand,
and life assurance and pension planning on the other. Other brokers may
specialise in one area only, in which case you will need to take separate
advice. We will be pleased to offer a recommendation and also assist with your
pension planning, especially as this has an impact on your tax affairs.
Choosing a
Legal Structure
You will need to decide whether you are going
to run your business in your own right or through a limited company. There are
reasons for and against setting up a limited company and the decision often
depends on the type of business you are in.
The size of the business can often influence the decision, and it is
not uncommon to see a business set up in somebody's own name and then switch to
a limited company after a year to two.
The most common types of entity are as
follows:
Sole proprietor
A sole proprietor is a person who
is in business on his or her own account. There are no statutory requirements
governing the format of a sole prop's accounting records, nor is there any need
to have them audited. However, it is important that the records are reliable
enough to enable accounts to be prepared each year, and for sales tax returns to
be prepared.
The best system for keeping your books will depend on the size and
nature of your business. For some businesses, this will be a simple record,
while other businesses may warrant a more sophisticated system.
Partnership
A partnership
exists where two or more individuals enter into business together, in their own
right. They will be governed by the partnership agreement. Each partner may be
personally liable for the debts of the partnership and this liability is
unlimited. The requirements for accounting records are similar to those of a
sole proporietor, and again no audit is necessary. Sole proporietor and
partnerships pay income tax on their annual profits. This is based on the
earnings of the business and is paid regardless of how much the proprietors draw
personally from the business during the year.
Limited Liability Company and Corporations
A
limited liability company, by contrast, pays corporation tax on its profits,
rather than income tax. The company is a legal entity in its own right, and is
effectively the proprietor of the business. A company must have at least one
shareholder (the owner) and at least one director (who manages the business).
The directors and shareholders need not be the same people, but in practice, for
the vast majority of smaller companies, the directors are also the shareholders.
Limited companies are incorporated, which imposes accounting, reporting and
public disclosure requirements. The liability of individual shareholders is
limited to the amount of their share capital, except to the extent that personal
guarantees have been given to third parties (eg. the bank).
While the company pays corporation tax on its profits, the directors
from a personal point of view, have income tax deducted on any salary which they
take from the company. Similarly, shareholders may receive a dividend from the
company and they too may incur income tax on this. The decision as to whether to
incorporate your business as a limited company will be based on commercial as
well as tax considerations. This decision is a very important one, and each case
is different.
Registering with the
Authorities
For all businesses, there are a number of
registrations which need to be considered, and these are as follows:
Internal Revenue Service
Firstly, there is a legal
requirement to notify the Internal Revenue that you have commenced business, and
it is advisable to do this fairly promptly to be on the safe side.
Social Security
If your business is not operated
through a limited company, you will need to register separately for SS and MED
insurance contributions. Contact your local Social Security office and they will
send you a registration form.
Taxes
Whether or not your business is run through a
limited company, you will need to register for sales tax. Federal and State
quarterly tax payments are required.
Licences
Many businesses need licences from local
city/county offices in order to trade legally. We recommend that you get legal
advice if in any doubt.
Until next time....
Nick
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