Starting a New Business

Starting and managing a business takes motivation, desire and talent.  It also takes research and planning.  Like a chess game, success in small business starts with decisive and correct opening moves.  Although initial mistakes are not fatal, it takes skill, discipline, and hard work to regain the advantage.

To increase your chance of success, take the time up front to explore and evaluate your business and personal goals.  Then use this information to build a comprehensive and well-thought-out business plan that will help you reach these goals.

The process of developing a business plan will help you think through some important issues that you may not have considered yet.  Your plan will become a valuable tool, indeed a necessity as you set out to raise money for your business and it will also provide milestones to gauge your success. 

Getting Started

Before starting out, list your reasons for wanting to go into business. Some of the most common reasons for starting a business are:

• You want to be your own boss.
• You want financial independence.
• You want creative freedom.
• You want to use your skills and knowledge.

Next, you need to determine what business is ‘right for you’. Ask yourself these questions:

• What do I like to do with my time?
• What technical skills have I learned or developed?
• What do others say I am good at?
• How much time do I have to run a successful business?
• Do I have any hobbies or interests that are marketable?

Then you should identify the niche your business will fill. Conduct the necessary research to answer these questions:

• Is your idea practical, and will it fill a need?
• What is your competition?
• What is your business advantage over existing firms?
• Can you deliver a better quality of service?
• Can you create a demand for your business?

The final step before developing your plan is the pre-business checklist. You should answer these questions:

• What business are you interested in starting?
• What services or products will you sell?
• Where will you be located?
• What skills and experience do you bring to the business?
• What will be your legal structure? (see following overview)
• What will you name your business?
• What equipment or supplies will you need?
• How will your company's business records be maintained?
• What insurance coverage will be needed?
• What financing will you need?
• What are your resources?
• How will you compensate yourself?

Your answers will help you create a focused, well-researched plan. Your business plan should serve as a blueprint. It should detail how the business will be operated, managed, and capitalised.

Types of Business Organisations

When organising a new business, one of the most important decisions to be made is choosing the structure of a business. Factors influencing your decisions about your business organisation include:

• Legal restrictions.
• Liabilities assumed.
• Risks Involved.
• Type of business operation.
• Size of the business.
• Earnings distribution.
• Number of employees.
• Tax advantages or disadvantages.
• Length of business operation.

There are three ways a business can be organised and structured – as a sole trader, partnership, or corporation; the advantages and disadvantages of each are as follows:

Sole Trader.

This is the easiest and least costly way of starting a business, a sole trader is just a person who owns and controls their own business – it is simply yourself ‘trading as’. Anyone can set up business as a sole trader provided only that in any given business they have the necessary qualifications imposed by the licensing authority for that particular business. For example, a plumber must be registered, plus there are fees to obtain business name registration and other necessary licenses. Apart from that, it’s just a matter of finding a location and opening the door for business. Legal fees for starting the business will be minimal because there are no documents required and the owner of the business has absolute authority over all business decisions.

Advantages of being a sole trader:

• Easiest to get started.
• You receive all profits.
• No government regulations.
• Freedom of action.
• Maximum authority.
• Tax advantages in a small business.

Disadvantages of being a sole trader:

• Personal liability for all debts
• Illness or death endangers or ends business.
• Growth limited to personal ambition.
• Family or personal affairs easily mixed with business.

Partnership

A partnership agreement should include the following:

• Type of business.
• Name and address of the partners.
• The name and purpose of the business.
• Amount of equity invested by each.
• Division of profit or loss.
• Partners' compensation.
• The role of each partner in management.
• Distribution of assets on dissolution.
• Duration of partnership.
• Provisions for changes or dissolving the partnership.
• Dispute settlement clause.
• Restrictions of authority and expenditures.
• Settlement in case of death or incapacitation.

Advantages of a partnership:

• Two heads are better than one.
• Additional sources of capital.
• Greater management expertise
• Better credit rating than corporations of similar size.
• Profits do not have to be disclosed.
• May have tax advantages.

Disadvantages of a partnership:

• Unlimited liability of all partners.
• Death, withdrawal, or bankruptcy of one partner.
• Difficulty in dissolving partnership.
• Debt of one partner becomes the debt of all partners.
• Growth inhibited by size of partnership.
• No clear line of authority.
• May have to pay provisional tax.

A Company

Control is exercised through regular board of directors meetings and annual stockholders meetings. Records must be kept to document decisions made by the board of directors. Small, closely held corporations can operate more informally (recent changes mean that only one director is required for a small company) but keeping minutes of company meetings cannot be eliminated entirely. Officers of a corporation can be held liable for improper actions because unlike a sole trader or a partnership, a company is a legal entity in its own right and exists separately from its owners.

Advantages of forming a company:

• Limited liability for shareholders.
• Continuity even if the owners die.
• Transfer of shares.
• Easier to raise capital.
• Change in ownership need not effect management.

Disadvantages of a company:

• Heavier taxes with corporations.
• The law regulates companies very strictly
• Management control limited.
• Less freedom of activity.
• Legal formalities are complex.
• Expensive to start.

Whether you’ve decided to start from scratch, buy into an existing business, or enter into a franchise arrangement, much of the essential groundwork is the same.