Module 1

If you have not recently purchased or started your business already, I ask you to consider two things before making a choice on what business to start. First, look at what you are already good at. You are the sum total of all your experiences to date, and you should consider building upon that experience base to start your new business. This will obviously help make you a better businessperson in that particular field, especially if you choose a field where you have had direct experience already doing that job. For example, you are working as an auto mechanic and choose to start your own shop. The linkage between skills and business is usually not that direct or obvious, however. If you like working with your hands, and are particular good at building things, you might consider starting your business in the building trades. If you currently are unhappy at your job, it is wise to reconsider your skills and decide on something that will make you happier. Secondly, and most importantly, do what you like to do. Starting a new business is a difficult undertaking, and the one thing that will keep you going when times get tough is a love for the business. The expression “life is too short” applies to those who have not found a career they love. You simply must consider the task at hand and whether you are suited to the business. For example, if you love working on cars in your spare time you might consider opening up an automotive service shop.

There are certain traits that successful small business people exhibit that have proven to lead to a higher probability for success for starting a new business. These traits are described below. It is not necessary that a person have all of them to be successful, but it is helpful to consider how you might overcome a weakness in an area. Perhaps hiring an employee with those strengths, or even a partner, might help mitigate a concern when one of these is missing.

Entrepreneurs are self starters: You must be willing to get up in the morning without the alarm, and keep going strong all day. If you don’t have the spirit, no one else will be as concerned with the success of your business as you.

Entrepreneurs like working with people: People skills are important with any job, but are critical to your success with your own business. If you are wanting to start a new business because you don’t like the boss, think twice. As a business owner, you will have more bosses than you ever realized. The customer, the IRS, the City, etc., etc., etc..

Entrepreneurs are good leaders: As the small business owner you are the one who employees, vendors and customers look to for leadership. You must be willing to lead the parade, with a smile on your face, even when times are tough and you don’t feel like it. The chain of command suddenly becomes less important than the mission of your business. And you are the one in charge.

Entrepreneurs Take Responsibility: The game of pass the blame has no place in the world of the small business. It really doesn’t matter. You are the owner, and the customer sees your name on the sign, holding you responsible. The price for not being so is failure. You must be the type who likes to take charge, and can see things through to their completion.

Entrepreneurs are good organizers: You must learn the skill of making plans and thinking things through before committing your precious resources to a project. The small business has limited time and resource, and a well organized person who manages their time and resources well will be more successful in the long run.

Entrepreneurs are good workers: You need to develop good work habits in the world of small business. Often, you are the production staff, accountant and supervisor all rolled into one, which demands that you are able to stay on task and get the job done.

Entrepreneurs are good decision makers: The small business owner often has to make more decisions more often than the manager of a large corporation. You don’t have the luxury of time, numbers of staff or high-priced research to help you with the decision, either. The customer may be waiting in the lobby for your price quote.

Entrepreneurs can be trusted: In small business your word is your bond. And in smaller, rural communities you don’t have the luxury of being able to generate a new customer for every one you take advantage of who doesn’t return. Customers, vendors and government officials who are important to your business are able to spot someone who is not totally honest relatively easily.

Entrepreneurs can stick with it: The most important piece of advice for the start-up business is: never, never, never, never, never, never, never give up. I’m not talking about lost causes here, but the average business will have at least two to three opportunities in the first year to call it quits. The successful small business person has learned to overcome these urges, and find ways to solve the problems, thereby improving the business in the process.

Entrepreneurs are in good health: The foregoing nine traits are enough to require a person to be in good physical condition to be successful. Successful small business people seem to be tireless in their pursuit of the interest of the business.

If you still want more information on your entrepreneurial potential, the Small Business Development Center has a self-survey available for clients that allows the individual to determine their strengths and weakness as they apply to running a small business. This survey takes about two hours, and could help you learn a few things about yourself, as well as what traits you might need to work on in making your business more successful.

A lot is made of this in many start-up sources. I will not spend an undue amount of time covering the various strengths and weaknesses of the various legal structures. Instead I would refer you to another SBDC resource for more detailed information. The Arizona Department of Commerce publishes their Guide to Establishing a Business annually, which covers the subject in greater detail than necessary for most students in their starting a business.

Prior to the creation of Corporations and stock, almost all businesses were Proprietorships. The Proprietorship is where an individual, say John Smith, starts a shoe business. John would acquire the necessary training (working for Uncle Samuel under an apprenticeship), leather, supplies, and tools, a retail location (preferably a different town than Uncle Samuel for reasons of competition), and would hang out a sign saying “John Smith, Cobbler”. This process is not much different today. Nationally, over 95% of all small businesses are structured as Proprietorships. A Proprietorship, even if John were to change the name to “Shoe Emporium” is still just an extension of John Smith personally. John is the company. He pays the self-employed tax and files a Schedule C with his annual tax return. He is fully responsible for any and all debts or liabilities of the company, to the full extent of his net worth. If John can’t pay his leather vender, he could be sued for repayment and find a judgment on his house. He was also limited by the money he had personally to buy the leather and tools and get started. But to get started, John had to do little more than hang out his sign. And he doesn’t have a Board of Directors to report to, asking why his Cost of Sales dropped one-tenth of a percent last month. When John dies or decides to sell the business he will find that the business really ceases to exist once that happens. All he (or his widow) is really selling is the assets of the business; the tools, leather, etc.

Another classic structure is the Partnership. It’s been said that the only ship that doesn’t sail is the Partnership”. This can be a challenging structure, but does have its uses. Say John (from above) starts his shoe business, making new shoes and repairing soles. He is fairly successful, but suddenly a Wal-Mart moves into town, and his customers are no longer happy waiting for John to make them shoes from their order. They want them on a shelf to pick out. In their size, ready to wear. To compete John decides to stock various sizes and styles of shoes. Maybe even purchase them from China so he can compete price-wise. But he doesn’t have the $50,000 which is necessary to keep all the inventory he needs. His friend, Bert, just sold his Carriage-making business, and received $50,000 cash, so they decide to join forces and start “Shoe Emporium”. This is the classic or General Partnership. They are both equal partners. The advantage to the partnership was to join forces and generate enough cash. Like a Proprietorship it was easy to form, just putting out the new sign.

Now for the challenging part. Even though they are equal partners, are they? Bert put in $50,000 cash and John only put in his existing tools and inventory. John is doing all the work making the shoes and stocking and selling the inventory. Bert only comes by twice a month to ask for money. And he’s starting to ask a lot of questions of John, like why they don’t have enough size 12DD loafers. In a General Partnership, all partners are personally liable to the extent of the personal worth, like a Proprietorship, but for the debts and liabilities of the entire Partnership. If John gets fed up with doing all the work and decides to empty the safe and skip to Bermuda, Bert is still left to pay all the bills. And say Bert and John decide to go their separate ways. Like the Proprietorship, this involves discontinuing the business. Often, it will also involve having to sell the business to a third party because John doesn’t have the cash to pay Bert his share.

What about a marriage? If one spouse decides to start a Proprietorship in the state of Arizona, the other is a full partner (yes, just like a Partnership) whether they’re involved in the day-to-day operations or not. (Unless the business is started with legally designated sole and separate assets, not community property.) Your spouse is a partner, and many of the downsides to the Partnership can also apply when a business goes south and your spouse with it (see the Bermuda clause above).

The Corporation is the structure for sheltering liabilities. In a Corporation you are a separate legal entity, and sell stock to raise capital and start business. Even with the John Smith example he could incorporate, forming John Smith Shoes, Inc. Here John starts with the same need for cash for leather, supplies and tools. But he puts the cash into the corporation by buying 500 shares of stock for $10 per share. One advantage to John is his liability is now limited to his investment. If the Corporation is sued they can’t attach Johns house and other personal assets[1]. Another advantage would apply to the decision to grow into Shoe Emporium. Here John could sell stock to Bert, and could even limit Berts decision making ability within the Corporation. For instance, Preferred Stock usually contains no voting privileges, but also has a higher rate of return than the basic Common Stock that John owns. Also, when John decides to sell the business he can sell the stock to more than one person, and see that the business continues after he is gone. He can even “gift” shares of stock to his children, who might wish to take over the business in time.

The disadvantage to the Corporation is that it is relatively complex to form. John would have to file with the Arizona Corporation Commission, have an attorney draft Articles of Incorporation and Bylaws, publish the Articles in the newspaper for three consecutive issues, etc. Legal costs will typically run more than $1,000 to start a corporation in Arizona. And the recordkeeping is more difficult thereafter. More forms to file, records of corporation meetings, etc. More taxes and returns to file.

There is even a special category of Corporation for the small business, called the S Corporation (as opposed to the typical C Corporation). Here the stockholders are limited to 75 individuals, but the tax is paid by the individual stockholders personally. This is important, because in the typical C Corporation the taxes are paid by the Corporation, and any personal funds drawn by the stockholders are also taxed as dividends. Double taxation. There are many other rules for S Corporations, but most domestic small businesses are eligible.

The bottom line is usually this. Most small businesses can start as a Proprietorship. They don’t need the protection from liabilities (it’s difficult to obtain credit anyway!) and the risks are minimal and can be insured against. Once you become successful the structure indicated probably would change to the Corporation. This allows protection of the assets you have accumulated, and offers some distinct tax advantages (such as owning your building personally and leasing it to the Corporation, or having a year end for the Corporation that’s different from your personal, so you can control bonus and salary). Also, the Corporation will allow you to plan for the ultimate disposition or turnover of the business to children.

For many businesses the location is critical to your success. Retail businesses in particular have depended on their location for success or failure for many years. Large retailers like Wal-Mart spend large amounts of time and money to research the best location for their new stores. This is particularly interesting when you consider that Wal-Mart itself started in rural Arkansas, in small, lightly populated communities. At the time the experts would have never recommended that a retailer would do well in this location. But Sam Walton ignored the standard of the day. And the rest is history.

The introduction of home shopping, and the Internet becoming more commercially user-friendly, will no doubt continue the trend away from reliance on location as a critical factor for success. Changing trends are an important consideration in your choosing a new business. It is a good idea to have looked into the changing nature of your chosen industry, and possibly the incorporation of some new ideas or leading edge technologies into your business plans.

For wholesalers or manufacturers, location can be an important consideration for other reasons. The patterns of distribution may dictate a location being more favorable than another. In our rural areas we have historically had a major disadvantage due to the long distance to large population markets. In particular, our location relative to the Phoenix and Tucson metropolitan areas has been a disadvantage for many businesses. This is also changing, however. Today, through United Parcel Service or American Express, you can reach anyone in the state of Arizona with a parcel the very next day. In Northeast Arizona we are actually in a better position to reach markets to the East than anyone else in the state. However, the infrastructure doesn’t currently exist to consolidate shipping here. Depending on your distribution channel, the majority of Arizona business incorporates the distinct advantage of our location to major population centers in Arizona and Southern California. We need to exploit the changes as they occur, and utilize our natural strengths wherever possible.

The decade of the 90’s has shown marked increases in small businesses, with the largest share coming from the rapidly increasing home business market. The start-up business run out of the home requires special considerations in areas unthought of for other businesses. For instance, in a home business it is important to look and sound like a professional business. Your image should be to the customer the same as if you were located in an office in the downtown business district. This needs to be accommodated with separation of space and duties of home and business. Have a separate phone line to be answered professionally like a business should. Have separate space for your work where you can be free of distractions of the home. Have specified hours where you are dedicated to working on business “stuff.” If you are not careful, your time allocation for home and business activities can get out of balance. Either way, you need to make sure you have time to do all the things you want and need to do, in proper proportions or balance. The most typical imbalance is putting too much into the business relative to personal activities. While this is a typical problem for most new businesses, the problem can be less noticed in the home business because you are always there. Take time to evaluate your schedule periodically, and ask your family for feedback.

One question that most start-ups ask is what should be provided in the way of a computer. Unless your business is built around the computer or providing services from the computer this may not always be an easy question to answer. When starting a new business resources are in short supply, and adding an expensive computer may be impractical in the beginning. However, with “state of the art” personal computer systems running less than $2,000 today, for most businesses we advise that they get as much computer up front as possible. The ability to print your own business cards, brochures, advertise on the Internet, send E-Mail and Faxes to clients, do financial accounting, budgets, and business plans are just a few of the uses that most businesses can realize benefits from using the modern PC today.

If you can’t afford a “state of the art” system today, a reasonable alternative may be to purchase an older system first. Many of the five-year old computer systems still have good capabilities in accounting, budgeting, and word processing. Buys can be found for as cheaply as $50 at thrift stores, bargain sales or in the paper. Such a system will probably not allow you to do printing of brochures, business cards, get on the Internet or other uses, which will still be an incentive to add that updated system in time when your business has started to churn the cash and can support the purchase.

This is one of the most important areas for any new business to spend time on in the planning stages. A concept is what makes your small business different from the myriad of others offering your product or services today. Even if you have no competition, there is something that your customers are doing today to meet their needs. By having a concept that is unique to your business, you will be differentiating yourself from your competitors, and giving the customer something more than “price” as a means of evaluating whether to try you or not. It is hazardous at best for small businesses to try to compete with larger, well established firms on the basis of price alone. They can outlast you when it comes to operating on insufficient margins, and they already have the existing buyers as customers. Those customers may even resist trying your product or service at the lower price you offer anyway. (What is wrong with your product or service that you can afford to sell more cheaply than my existing provider?)

The concept doesn’t always have to stress the “unique” over the other common factors which will make your firm successful. For instance, most businesses say they will provide good customer service. Your concept may involve providing pickup or delivery, extending your hours, or other things that your customer will appreciate. The key is that you have identified the issues that you will use to gain market share, made them part of your plan, and stressed areas that will contribute to your success in this area. In the above example, everyone in your chosen industry will say that their goal is to provide good customer service. Your concept, which may be built on providing free pickup and delivery will make the customer happy, and offer tangible benefits that they can see as “value added” prior to trying your product or service. More importantly, this can contribute to their decision to try you instead of your competitors or even switch from their previous provider of the product or service.

An example of a business concept for an auto body firm might read, “to offer free, drive-up estimates, and pickup and delivery for vehicles we work on.” This speaks to what is unique about this business, and hopefully they will get new and return customers based on the fact that they really value their customers time. (Who today really has enough time, right?) For the Small Business Development Center our concept is “to provide training and seminars, leading to counseling and involvement, leading to economic development for the region.” The economic development of the region is the colleges ultimate goal in providing the SBDC service, and our means of accomplishing this involves offering quality training programs. The training programs are often the best means of getting clients to allow us to counsel and assist in other ways to help make more of an impact.

The mission statement is not to be confused with the Concept in the previous section. While the Concept deals with the specific issue or issues that will make you successful, your mission statement should be the guiding principals for your business. The two are usually quite different. The mission statement says what your overall goal or goals are, which probably will not speak to your product or services uniqueness or what makes your business tick. And this will be different for all businesses. The best mission statements are not too specific (i.e.: we will make $1 million in the first year) and not too general (i.e.: we will be the best!) The best mission statement speaks to what you really want to accomplish, for your customers and yourself. The goal of making a million dollars does not often provide real guidance as a mission statement in making your business successful. When things are not going so well, which will happen to all businesses at some time, this will not be of much help in keeping you on the right track. A good mission statement might be “to provide the best quality products possible, at a fair price, and under a working environment which promotes growth for all employees”. The point is, the mission statement will define what is important to you.

How do you go about defining your mission statement? A number of larger organizations spend a great deal of time and effort defining and scripting their mission statements. With small businesses it can be as simple as you, the founder, putting down your plan of what you believe to be most important. Or it can be more involved, perhaps a brainstorming session where you sit down with your partners and/or key employees and look at your strengths and weaknesses, opportunities and threats, and set goals for the business. Try to keep it short and concise, and feel free to hang it out for all to see. Keep it to one paragraph or less if you can. A mission statement that is too long to remember or gathers dust in a plan on your bookshelf isn’t worth very much.

An example of a mission statement, for the same auto body shop mentioned previously, might be “offering old fashioned service using the most modern technology.” This statement is short, yet speaks to two important factors. The ‘old fashioned service’ brings about a visualization of a time gone by, where you would pull into a Texaco station and have several uniformed attendants help you with gas, checking under the hood, washing the windshield. (Yes, it was featured in old television commercials!) But it is not just ‘good’ or ‘excellent’ customer service. They are overused and oversold in todays market. What is excellent customer service? Old fashioned customer service brings out the visual and has real meaning to a lot of potential customers. The other aspect is the ‘most modern technology.’ This is important to a lot of consumers, who probably made the second-largest investment in the lives with their automobile. They need to know that they can have their vehicle repaired to where it looks like new. The curves and bends in todays vehicle designs require the most ‘modern technology’ to fix like new.

The SBDC has its mission statement built into its logo, and is featured on all letterhead, business cards, brochures, etc. “Working with small businesses to maximize their successes” defines what we want to accomplish. By helping small businesses be successful we are helping with local economic development which is good for the college, also.

Another important area that needs lots of forethought for new businesses is image. This is typically thought of in terms of brochures, business cards, and advertising. You should consider other things as well, including your location, appearance of facilities, how you answer the phone, how do your employees dress, and others. Wherever you interact with customers should be looked at. What does your competition look like? Look at successful businesses in your industry and make sure your image is at least as good or better. Customers often make unconscious buying decisions based on image alone. Don’t underestimate the importance of looking and acting the part.

This is an area for start-ups that gives people a lot of grief, unnecessarily. I’ve touched on the various taxes here by type, which have become more numerous over the years. The key to this area is to make the use of professionals who can help you get set up right, and get you started. Obtaining the services of an accountant can be invaluable in the process. Then once you are comfortable with the forms and process you can take over more and more yourself. But in the beginning make sure you get the help you need. To not know and not pay the proper taxes can be disastrous!

As a startup you will probably pay less taxes than you used to as an employee. In the beginning you will have lots of deductions, and with losses which can be expected by many industries you will not pay income taxes at all. In fact, startup losses can be used to offset other income or even rolled forward and reduce your overall taxes in some instances. Once you are profitable you will need to begin paying income taxes quarterly to the Arizona Department of Revenue and the Internal Revenue Service (IRS). In the case of the IRS, you will also make quarterly payments of unemployment taxes and social security taxes with your quarterly income tax installments. For proprietorships you will pay this all together in a tax referred to as the “self employed tax”. An IRS tax publication #334 is available to assist in this area. (See resource listing at the end of the book.)

This is paid to the Arizona Department of Revenue. The sales tax is the most commonly paid tax for most small businesses and even those that do not sell retail may wish to have a “resale number.” This is a requirement by firms you might purchase supplies from in order to avoid paying their sales tax. In general, if your product requires packaging or raw materials for the manufacture and sale, these items do not require that you pay a sales tax. Other taxes included in the category are use taxes on tobacco and alcohol and special fuel taxes. A short application to the Arizona Department of Revenue is required, which normally take one to two weeks to process. You can get a copy of the form at your local Small Business Development Center office.

Although not formally a tax, Workers Compensation is required for even one employee. The State Fund is a private, non-profit organization that you need to pay premiums to locally (their office in Show Low, AZ serves Navajo and Apache Counties). This protects employees who may be injured on the job.

These taxes are paid to the Navajo or Apache County Assessor. As a percentage of revenues these taxes can be less significant, however, with some industries they can be very significant. For example, the agriculture industry has larger amounts of real estate, and have historically paid personal property tax on their livestock also. The County Assessor will get your name and address from the Arizona Department of Revenue if you file for a resale number, and send you a statement at year end automatically. This will need to be returned by March 31 of the next year with your fixed assets shown at cost and your numbers of livestock. From here the Assessor will calculate your tax and send you a billing later in the year.

Beyond the importance of choosing a good name for marketing purposes you must consider name protection and at what level you want to be assured that no one else can use your name. Choosing a name with an identity that relates to your product or service can have benefits in enhancing image and relating to potential customers. If in hearing your name the customer can envision your product or service, this can be a positive feature.

In Arizona to protect a tradename can be done in more than one way. First, in your County you can file a Fictitious Business Name Statement. For Navajo and Apache Counties this is done with the County Recorders office, and requires a statement be filed in three consecutive issues of a major newspaper. For the state level you must file with the Arizona Secretary of State’s Trademark and Trade Name Office. If you a going to be doing business in other states and need name protection, you will need to register your name as a Federal Trademark with the U.S. Commissioner of Patents and Trademarks in Washington, D.C. If you are incorporating in Arizona, the Arizona Corporation Commission will handle name registration for you.

In many instances, to open a separate checking account for your business you will need a copy of the Fictitious Business Name Statement or other proof that you own your trade name. Short of registering the name, you can apply for a Taxpayer Identification Number with the IRS. This is as simple as filling out the form and sending it in. There is no cost, and in two to three weeks they will mail back your confirmation letter with your name and number. In most instances the banks will accept this as proof of your trade name. If you do not need to protect your chosen name you may not wish to register it at all. The Taxpayer number can be a good alternative to more formal registration. The worst case is someone else assumes your name and asks you to choose another. If this would be a problem then go ahead and register your name as detailed above.

Most businesses do not require a business license to operate in Arizona or Navajo and Apache County. In fact, not all of our cities have licensing requirements. It is best to check with your local City or Town manager if the business you’re planning is within an incorporated area. Outside of the registration of vendors with Peddlers Permits the County will not get involved in licensing businesses. This does not include Health Department certification of restaurants and kitchen facilities, which is administered by the County using state Health and Safety codes as a guide. On the state level, specialized businesses such as day care, hospitals, dairies, meat plants, etc. will require state and/or federal licenses. Operating a business on an Indian reservation or Indian trust lands will usually require a Business and/or site lease from tribal authority. This process is quite lengthy and can involve a multitude of approvals, including Bureau of Indian Affairs, tribal, Department of Justice, and other agencies. For more information on licensing your business, your local Small Business Development Center can provide you with a list of state agencies who license specialized industries.

For some of us, it is difficult to ask for help in starting a new business. Starting a small business is unlike any other endeavor you might have undertaken. It involves a skill set that is separate and distinct from those of larger corporations. You must either utilize outside consultants or educate yourself to do it yourself. A combination of the two together are usually best. Whether or not you are able to take the advise of others, you must be open to new ideas and willing to change your mindset on how things should be done. As you progress with your new business in the first couple of years you will be forced to make changes “on the go”. Many of these changes will be dictated by the business conditions, and many may be from changes in course due to unforeseen events. The more you can be open and honest in your dealings with consultants, friends, major customers, etc., the easier it will be to make these changes ultimately. You will be benefiting from the experience of others to minimize your own mistakes.

One of the most important sources of help is family and friends. Without the support of these people your chances of success may be greatly diminished. With their support, it is unlikely that you cannot accomplish all you set your mind to. We too often see small businesses act to break up marriages when one spouse is starting a new business and the other is not fully committed to the project or supportive. Build your support base before you actually take the plunge!

The Small Business Development Center (SBDC) can be a good source of help to get things started. This text is part of an educational program that is just the beginning to getting a small business off the ground. Using an SBDC counselor for feedback is an important part of this program. A “mentor” who can assist with contacts and give impartial advise is helpful to the process, and can improve your chances of success.

The professionals you hire can be significant “partners” in your business. Your accountant is one of the most important partners. This person can help you formulate your legal structure, bookkeeping and tracking systems, and controls to monitor your business to make sure you have adequate time to make changes when things don’t go as planned. Your attorney can be another important team member. Although you may not use this persons services heavily up front, the time you spend selecting and developing a relationship can yield significant benefits down the road should you develop more of a need. A good banker can also be an asset to this informal team. Their outlook is often more conservative than the others, but can also be turned into significant support should things not go as planned when they have been actively informed.

[1] Unless John can be implicated personally. Say John acted outside the best interest of the Corporation, or was personally negligent in creating a liability for the Corporation. He can be sued personally, which is referred to as “piercing the corporate veil”.