Category Archives: Blog

BLOG: Financing your Business Part II – Credit Factors

iStock_000003732935SmallThe first part of this series, An Overview of Business Financing, gave you important questions to help you determine your need for financial assistance.  We also briefly touched on some of the programs the SBA provides to assist business owners that are seeking financing.  However, before you can qualify for SBA’s financial assistance, you should first understand some basic credit factors that apply to all loan requests.

BLOG: Registering as a Government Contractor

In our “Choosing your Entrepreneurial Path” series we discussed Government Contracting as one of the options.  Since this is a Virginia SBDC blog and the government literally lives in our backyard, it is likely that many of the entrepreneurs who are reading this are considering or already are building a government contracting business.

With that said, in this and future post we are going to dive much deeper into government contracting and the federal contracting process.  To start us off we are going to look at the importance of small business classification and the registration process.

What is a Small Business?

Federal, state, and local governments offer businesses the opportunity to sell billions of dollars worth of products and services to them. Many government agencies require that some percentage of their procurements be set aside for small businesses. To be a small business, you must adhere to industry size standards established by the U.S. Small Business Administration.

The SBA, for most industries, defines a "small business" either in terms of the average number of employees over the past 12 months, or average annual receipts over the past three years. In addition, SBA defines a U.S. small business as:

  • Organized for profit'Having a place of business in the US
  • Operating primarily within the U.S. or making a significant contribution to the U.S. economy through payment of taxes or use of American products, materials, or labor
  • Independently owned and operated
  • Not dominant in its field on a national basis

The business may be a sole proprietorship, partnership, corporation, or any other legal form. In determining what constitutes a small business, the definition will vary to reflect industry differences, such as size standards.

Size Standards

The most common size standards for “small business” are as follows:

  • 500 employees for most manufacturing and mining industries
  • 100 employees for all wholesale trade industries, except federal prime contractors and subcontractors where the maximum number of employees is 500
  • $6.5 million for most retail and service industries
  • $31 million for most general and heavy construction industries
  • $13 million for all special trade contractors
  • $0.75 million for most agricultural industries

About 25% of all industries have a size standard that is different from these levels. They vary from $0.75 million to $32.5 million, based on average annual revenues, and from 100 to 1,500 employees for size standards based on number of employees. Several SBA programs have either alternative or unique size standards, such as the Small Business Investment Company Program.

SBA has also established a table of size standards, matched to North American Industry Classification System (NAICS) industries. The table is available at

In addition to establishing eligibility for SBA programs, all federal agencies must use SBA's size standards for their federal government contracts to identify small businesses. Agencies must also use SBA’s size standards for their other programs and regulations, unless they are authorized by federal statute to use something else.

For further information, you may contact the Office of Size Standards:

Office of Size Standards
U.S. Small Business Administration
409 3rd St., SW, Washington, DC 20416
Phone: 202-205-6618 — Fax: 202-205-6390

Once you have classified your company based on the established size standards, you are ready to begin registering to do business with the government. Follow these easy steps to certify your business as small and obtain the registrations you need to begin bidding on government proposals.

Steps to Registering as a Federal Contractor and to Certifying Your Business as Small

According to the SBA these are the steps you need to take when registering as a federal contractor:

  1. Obtain a D-U-N-S Number: You will need to obtain a Dun & Bradstreet D-U-N-S® Number. This is a unique nine-digit identification number for each physical location of your business. The assignment of a D-U-N-S Number is free for all businesses required to register with the federal government for contracts or grants. Visit the D-U-N-S Request Service to register or read a quick overview here.
  2. Register your Business with the System of Award Management (SAM):  You need to register your business with the federal government's SAM, the primary database of vendors doing business with the federal government. When you register, you will "self-certify" that your business as “small,” meaning you don’t have to supply documented proof, you just certify it by checking off that box. Federal Acquisitions Regulations (FAR) require all prospective vendors to be registered in SAM prior to the award of a contract, basic agreement, basic ordering agreement, or blanket purchase agreement.
  3. Find the NAICS Codes for Your Company:  You may also find that you need a North American Industry Classification System (NAICS) code for administrative, contracting, and tax purposes. The code classifies the economic sector, industry, and country of your business. For Federal contracting purposes, you will need to identify in SAM all the NAICS codes applicable to your business.  Read Identifying Industry Codes for more information.
  4. Obtain Past Performance Evaluations:  Businesses interested in getting on the U.S. General Services Administration (GSA) Schedule for contracts should obtain an Open Ratings, Inc. Past Performance Evaluation. Open Ratings, a Dun & Bradstreet Company, conducts an independent audit of customer references and calculates a rating based upon a statistical analysis of various performance data and survey responses. While some GSA Schedule solicitations contain the form to request an Open Ratings Past Performance Evaluation, vendors may also submit an online request directly to Open Ratings.

Items Needed for Registration

Below are some of the items that you will need in order to complete registration processes.

  • Your NAICS (North American Industry Classification) codes:  To find the NAICS codes, search at You can add or change NAICS codes at any time.
  • Your Data Universal Numbering System (D-U-N-S) Number:  As mentioned earlier this is a number given out for FREE by Dun & Bradstreet. You may get your number online at
  • Your Federal Tax Identification Number (TIN), also known as an Employer Identification Number (EIN) or Form SS- 4:  This can be obtained online, by phone, or fax. For information, go to the IRS Small Business/Self Employed Community website at and click on “Employer ID Numbers (EINs).”
  • Your Standard Industrial Classification (SIC) codes:  This is another type of code that describes your products and services. SIC codes can be four or eight numbers. You must have at least one SIC code for your registration to be complete. You can find your SIC code at
  • Your Product Service codes (PSC):  These are optional and provide additional information about your service for government buyers. Search for PSC codes at, click Downloads and scroll down to Reference Information.
  • Your Federal Supply Classification (FSC) codes:  These codes are optional and provide additional information about your products. Each Federal Supply Classification (FSC) code is derived from the Federal Supply Groups (FSG). Search for FSC codes at

More About Government Contracting

Contracting with the Federal government can open the door to many opportunities for your small business and can aid your business' growth. Visit the following pages for more information:


Small Business Development Website-

George Mason’s Mason Enterprise Center, as part of the Virginia SBDC and UANL are establishing the first International Sister Center partnership under the Small Business Network of the Americas

Assistant Secretary of State for Western Hemisphere Affairs Roberta Jacobson and Ambassador of Mexico to the United States Eduardo Medina Mora will deliver remarks and witness the signing of a memorandum of understanding between George Mason University and the Autonomous University of Nuevo León (UANL), February 6, 2014 at 3:30 p.m. in the Delegates Lounge at the U.S. Department of State. As leading members of Small Business Development Center (SBDC) networks, George Mason’s Mason Enterprise Center and UANL are establishing the first International Sister Center partnership under the Small Business Network of the Americas (SBNA).

As Sister Centers, George Mason and UANL will cooperate on soft landing programs for small businesses looking to establish a presence in the vicinity of Monterrey, Mexico or the Commonwealth of Virginia. George Mason will be represented by the Vice President for Global and International Strategies, Dr. Anne Schiller; UANL will be represented by Vice President for Sustainable Development, Dr. Sergio Fernandez Delgadillo. The Sister Centers will also generally support activities that promote bilateral trade, share best practices in entrepreneurial assistance, carry out faculty and student exchanges, and explore other possibilities for collaboration between SBDCs hosted by each university.

Launched in 2012 at the Sixth Summit of the Americas, SBNA is President Obama’s signature initiative to promote entrepreneurship, innovation, and small business growth in the Western Hemisphere. For more information on SBNA, see For inquiries on SBNA, please contact

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BLOG: Business Loans – Overview

When looking to fund your business, there are many options available.  Depending on what type of business you are operating or looking to start, the amount you need and the reason for your funding will likely determine the type of financing you want to obtain.  In future posts, we will look more closely into the most common type of financing businesses obtain through the SBA.  However, to give you a general idea of the different financing options available, here is a brief overview:

Friends and Family

One of the fastest ways to obtain funding is by asking your friends and family.  There are many different ways to structure a deal with friends and family, which can include low interest rates, equity compensation and even a pay-me-when-you-can attitude.  However, this type of funding can often cause stress on relationships, and many family members may believe it comes with the right to have a say in your business.  Obviously, you know your family best, and it is often recommended that you manage expectations and the possibility of failure right from the start.

Here is some additional reading about friends and family financing:

How to Borrow from Family and Friends --

6 Tips for Borrowing Startup Funds from Friends or Family --

Conventional loans

These loans come from private lenders and are not guaranteed by the government.  The terms of these types of loans vary, but usually they are for already established businesses that have good credit.  Additionally, these loans are usually for larger amounts, and the amount being borrowed plus what it is used for often determines the structure of the loan.

Learn more at

Venture Capital and Angel Investors:

Venture capital (VC) is a type of equity financing that addresses the funding needs of entrepreneurial companies that -- for reasons of size, assets, and stage of development -- cannot seek capital from more traditional sources, such as public markets and banks. Venture capital investments are generally made as cash in exchange for shares and an active role in the invested company.

Business “angels” are high-net-worth individual investors who seek high returns through private investments in start-up companies. Private investors generally are a diverse and dispersed population who made their wealth through a variety of sources. But the typical business angels are often former entrepreneurs or executives who cashed out and retired early from ventures that they started and grew into successful businesses.

VC and angel funding are usually for high-growth startups that have the potential of generating a large return on investment through either an Initial Public Offering (IPO) or through a merger or acquisition of the company.

Learn more at

Government Loans

There are many different types of loan programs that the SBA offers.  While the U.S. Small Business Administration does not make direct loans to small businesses, it does establish guidelines for lenders, community development organizations, and microlending institutions. When a business applies for an SBA loan, it is actually applying for a commercial loan, usually through a bank or financial institution.  The role of the SBA is to structure requirements for lenders, as well as establish an SBA guaranty that the loan will be repaid.  The percentage of the loans that the SBA will guarantee depends on the type of loan a business applies for.  Depending on current economic conditions, the government will alter its fiscal policy and priorities which can affect changes and the types of programs available.  It is important to speak with your local SBA about the most current policies and programs.

In upcoming posts we will dive a little deeper into the specifics of the different types of loans the SBA offers.  These loans include the Basic 7(a), SBA Express, Patriot Express, Small Loan Advantage, Community Advantage, CDC/504 Loans, Disaster Loans, and Microloans.

More Information

Above are some of the more common avenues for small businesses to finance their business; however, we only scratched the surface.  There are many other options to include crowdfunding, equipment loans, lines of credit, etc.  Again it is often dependent on the type, stage and amount of financing your business needs.  Do your research, see what’s available and choose the type of financing that best suits your business.


BLOG: SBA Working to Get Loans Into the Hands of Veterans

Loan ApplicationNew Veterans Advantage Program Makes Loans Cheaper for Veteran Borrowers Starting or Growing Their Business

Starting January 1 and for the rest of the 2014 fiscal year, the U.S. Small Business Administration (SBA) has set the borrower upfront guaranty fee to zero for all veteran loans approved during that timeframe under the SBA Express program, which supports loans of up to $350,000.

This program, called SBA’s Veterans Advantage, is available to small businesses owned and controlled by veterans, active-duty military participating in the Transition Assistance Program, reservists, National Guard members, and spouses or widowed spouses of service members or veterans who died during service or as a result of service-related disabilities.

The SBA Express Loan Program, which supports loans up to $350,000, is SBA’s most popular loan delivery method for getting capital into the hands of veteran–owned businesses.

SBA also supports a direct working capital loan program for small businesses with an essential employee who is a military reservist called to active duty. These Military Reservist Economic Injury Disaster Loans (MREIDL) provide funds so that these small businesses can cover operating expenses the company would have been able to cover had the essential employee not been called to active duty.

In addition to assisting veterans in preparing loan packages, the Small Business Development Centers (SBDCs) offer counseling, mentoring, and training in your area. Click here to find a location near you.

Note:  The SBA Patriot’s Express loan program expired December 31, 2013.

BLOG: Financing your Business Part I- An Overview of Business Financing

Now that you’ve chosen or possibly started down your entrepreneurial path, the next step is to determine how to finance the start or the ongoing operations of your business.  But first, there are certain things you should think about.

Questions to ask yourself before seeking Financial Assistance

1.  Do you need more capital or can you manage existing cash flow more effectively?

2.  How do you define your need? Do you need money to expand, as a cushion against risk, to manage cash flow, or what?

3.  How urgent is your need? You can obtain the best terms when you anticipate your needs rather than looking for money under pressure.

4.  How great are your risks? All businesses carry risks, and the degree of risk will affect cost and available financing alternatives.

5.  In what state of development is the business? Needs are most critical during transitional stages.

6.  For what purposes will the capital be used? Any lender will require that capital requested is for very specific needs.

7.  What is the state of your industry? Depressed, stable, or growth conditions require different approaches to money needs and sources. Businesses that prosper while others are in decline will often receive better funding terms.

8.  Is your business seasonal or cyclical? Seasonal needs for financing generally are short term. Loans advanced for cyclical industries such as construction are designed to support a business through depressed periods.

9.  How strong is your management team? Management is the most important element assessed by money sources.

10.  Perhaps most importantly, how does your need for financing mesh with your business plan? If you don’t have a business plan, make writing one your first priority. Most capital sources (especially if you are seeking debt financing) will want to see your business plan for the start-up and growth of your business.

Not All Money Is the Same

There are two types of financing: equity and debt. When looking for money, you must consider your company’s debt-to-equity ratio—the relation between dollars you’ve borrowed and dollars you’ve invested in your business. The more money that owners have invested in their business, the easier it is to attract financing.

If your firm has a high ratio of equity to debt, you should probably seek debt financing. However, if your company has a high proportion of debt to equity, experts advise that you should increase your ownership capital (equity investment) for additional funds. That way you won’t be over-leveraged to the point of jeopardizing your company’s survival.

Equity Financing

Equity financing is when the money is in the form of an investment that buys shares in the company.  Most small or growth-stage businesses use limited equity financing. As with debt financing, additional equity often comes from non-professional investors such as friends, relatives, employees, customers, or industry colleagues. However, the most common source of professional equity funding comes from angel investors and/or venture capitalists. These are institutional risk takers and may be groups of wealthy individuals, government-assisted sources, or major financial institutions. Most specialize in one or a few closely related industries. The high-tech industry of California’s Silicon Valley is a well-known example of capitalist investing.

Venture capitalists are often seen as deep-pocketed financial gurus looking for start-ups in which to invest their money, but they most often prefer three-to-five-year old companies with the potential to become major regional or national concerns and return higher-than-average profits to their shareholders. Venture capitalists may scrutinize thousands of potential investments annually, but only invest in a handful. The possibility of a public stock offering is critical to venture capitalists. Quality management, a competitive or innovative advantage, and industry growth are also major concerns.  You’ll also want to know what kind of return they are looking at.  For example, there have been periods when venture capitalists are looking for an ROI (return on investment) of 5 times their original investment within three years.

Different venture capitalists have different approaches to management of the business in which they invest. They generally prefer to influence a business passively, but will react when a business does not perform as expected and may insist on changes in management or strategy. Relinquishing some of the decision-making and some of the potential for profits are a main disadvantage of equity financing.

Debt Financing

Debt financing is when the money is in the form of a loan.  There are many sources for debt financing: banks, savings and loans, commercial finance companies, and the U.S. Small Business Administration (SBA) are the most common. State and local governments have developed many programs in recent years to encourage the growth of small businesses in recognition of their positive effects on the economy. Family members, friends, and former associates are all potential sources, especially when capital requirements are smaller.

Traditionally, banks have been the major source of small business funding. Their principal role has been as a short-term lender offering demand loans, seasonal lines of credit, and single-purpose loans for machinery and equipment. Banks generally have been reluctant to offer long-term loans to small firms. The SBA-guaranteed lending program encourages banks and non-bank lenders to make long-term loans to small firms by reducing their risk and leveraging the funds they have available. The SBA’s programs have been an integral part of the success stories of thousands of firms nationally.

In addition to equity considerations, lenders commonly require the borrower’s personal guarantees in case of default. This ensures that the borrower has a sufficient personal interest at stake to give paramount attention to the business, in addition to the bank being able to take possession of the collateral in case of default. For most borrowers this is a burden, but also a necessity.

Type of Financing

Which type of financing is best for you?  If you are just starting off, probably the most important factor is the type of business you are starting.  For example, if you are considering purchasing a franchise, that has a proven business model, then most likely you will want to pursue debt financing.  However, if your goal is to create a new technology startup, then your venture is very risky and likely will require some sort of equity financing.   A good place to start is your local SBA, who can answer many of your questions and help you determine what’s best for your specific venture.

SBA Financing

The SBA provides a number of financial assistance programs for small businesses. They have been specifically designed to meet a business’s key financing needs including the need for debt financing (loans), equity financing (investment/seed money), and surety bonds. SBA does not provide grant funds to finance small businesses. SBA addresses these needs through the following three broad finance programs, but before reviewing these programs you will benefit from SBA’s online course, Finance Primer

Debt Financing – SBA’s Loan Programs

SBA does not make loans directly to borrowers; it works with thousands of lenders and other intermediaries, who will make the loan if the SBA guarantees that the loan will be repaid. However, you might not want an SBA-guaranteed loan, if you have access to other financing on reasonable terms. Additional information on SBA loans, including credit and eligibility requirements, how to apply, etc., is available at

SBIC Financing – SBA’s Small Business Investment Company Program

SBICs are privately owned and managed investment funds, licensed and regulated by the SBA. SBICs are similar to venture capital, private equity and private debt funds in terms of how they operate and their ultimate objective to generate high returns for their investors. However, SBICs limit their investments to qualified small business concerns as defined by SBA regulations. Additional information is available at

Surety Bonds – SBA’s Bonding Programs

The Surety Bond Guarantee (SBG) Program was developed to provide small and minority contractors with contracting opportunities for which they would not otherwise bid. SBA can guarantee bonds for contracts up to $2 million, covering bid, performance and payment bonds for small and emerging contractors who cannot obtain surety bonds through regular commercial channels. SBA’s guarantee gives sureties an incentive to provide bonding for eligible contractors, which strengthen a contractor’s ability to obtain bonding and greater access to contracting opportunities. A surety guarantee, between a surety and the SBA, provides that SBA will assume a predetermined percentage of loss in the event the contractor should breach the terms of the contract. More information is at

In the rest of this series, we will take a deeper look at some of the factors that you need to consider when applying for a loan.


BLOG: Choosing your Entrepreneurial Path: Franchising

An important step in the small business startup process is deciding whether or not to go into business at all. Each year, thousands of potential entrepreneurs are faced with this difficult decision; because of the risk and work involved in starting a new business, many new entrepreneurs choose franchising as an alternative to starting a new, independent business from scratch.

One of the biggest mistakes you can make is to hurry into business, so it’s important to understand your reasons for going into business, and determine if owning a business is right for you.

If you are concerned about the risk involved in a new independent business venture, then franchising may be the best business option for you. But remember that hard work, dedication, and sacrifice are essential to the success of any business venture, including franchising.

**Veteran Tip—Military Experience and Veterans Advantage for Franchising

Case for Veterans - Mark Siebert, CEO of franchise consulting firm IFranchise Group says, "For a franchisor, a veteran is an ideal franchisee," They're used to systems and structure, they're almost universally hard-working and they're willing to follow the rules."

Veterans Advantage - There are hundreds if not thousands of franchises that offer some sort of large discount (sometimes $0 startup costs!) to veterans.  A good place to learn a little more and see what opportunities are available is the International Franchise Association’s VetFran website,  You can also check franchise opportunities at the Veterans Business Service website They have an extensive list of franchisors that are specifically looking to work with veterans.

What is Franchising?

A franchise is a legal and commercial relationship between the owner of a trademark, service mark, trade name, or advertising symbol and an individual or group wishing to use that identification in a business. The franchise governs the method of conducting business between the two parties. Generally, a franchisee sells goods or services supplied by the franchiser or that meet the franchiser’s quality standards.

Franchising is based on mutual trust between the franchiser and franchisee. The franchiser provides the business expertise (marketing plans, management guidance, financing assistance, site location, training, etc.) that otherwise would not be available to the franchisee. The franchisee brings the entrepreneurial spirit and drive necessary to make the franchise a success.

There are primarily two forms of franchising:

•  Product/trade name franchising

•  Business format franchising

In the simplest form, a franchiser owns the right to the name or trademark and “rents” that right to a franchisee. This is known as product/trade name franchising. The more complex form, business format franchising, involves a broader ongoing relationship between the two parties. Business format franchises often provide a full range of services, including site selection, training, product supply, marketing plans, and even assistance in obtaining financing.

Shopping at a Franchise Exposition

Attending a franchise exposition allows you to view and compare a variety of franchise possibilities. Keep in mind that exhibitors at the exposition primarily want to sell their franchise systems. Be cautious of salespersons who are interested in selling a franchise that you are not interested in.

Before you attend, research what type of franchise best suits your investment limitations, experience, and goals. When you attend, comparison shop for the opportunity that best suits your needs and ask questions.

Know how much you can invest: An exhibitor may tell you how much you can afford to invest or that you can’t afford to pass up this opportunity. Before beginning to explore investment options, consider the amount you feel comfortable investing and the maximum amount you can afford.

Know what type of business is right for you: An exhibitor may attempt to convince you that an opportunity is perfect for you. Only you can make that determination. Consider the industry that interests you before selecting a specific franchise system. Ask yourself the following questions:

•  Have you considered working in that industry before?

•  Can you see yourself engaged in that line of work for the next twenty years?

•  Do you have the necessary background or skills?

If the industry does not appeal to you or you are not suited to work in that industry, do not allow an exhibitor to convince you otherwise. Spend your time focusing on those industries that offer a more realistic opportunity.

Comparison shop: Visit several franchise exhibitors engaged in the type of industry that appeals to you. Listen to the exhibitors’ presentations and discussions with other interested consumers. Get answers to the following questions:

•  How long has the franchiser been in business?

•  How many franchised outlets currently exist?

•  Where are they located?  Do they have exclusivity in their geographical area?

•  How much is the initial franchise fee and any additional startup costs? Are there any continuing royalty payments? How much?

•  What management, technical, and ongoing assistance does the franchiser offer?

•  What controls does the franchiser impose?

Exhibitors may offer you prizes, free samples, or free dinners if you attend a promotional meeting later that day or over the next week to discuss the franchise in greater detail. Do not feel compelled to attend; rather, consider these meetings as one way to acquire more information and ask additional questions. Be prepared to walk away from any promotion if the franchise does not suit your needs.

Get substantiation for any earnings representations: Some franchisers may tell you how much you can earn if you invest in their franchise system or how current franchisees in their system are performing. Be careful. The FTC requires that franchisers who make such claims provide you with written substantiation. This is explained in more detail in the section “Investigating Franchise Offers.” Make sure you ask for and obtain written substantiation for any income projections or income or profit claims. If the franchiser does not have the required substantiation or refuses to provide it to you, consider its claims to be suspect.

Take notes: It may be difficult to remember each franchise exhibit. Bring a pad and pen to take notes. Get promotional literature that you can review. Take the exhibitors’ business cards so you can contact them later with any additional questions.

Avoid high pressure sales tactics: You may be told that the franchiser’s offering is limited, that there is only one territory left, or that this is a one-time reduced franchise sales price. Do not feel pressured to make any commitment. Legitimate franchisers expect you to comparison shop and investigate their offering, because they want to have a franchisee who asks the right questions and who will succeed. A good deal today should be available tomorrow.

Investigating Franchise Offers

Before investing in any franchise system, be sure to get a copy of the franchiser's disclosure document. Sometimes this document is called a Franchise Offering Circular. Under the FTC’s Franchise Rule, you must receive the document at least 10 business days before you are asked to sign any contract or pay any money to the franchiser. You should read the entire disclosure document; make sure you understand all of the provisions. The following outline will help you to understand key provisions of typical disclosure document as well as ask questions about the disclosures. Get a clarification or answer to your concerns before you invest.

Business background: The disclosure document identifies the executives of the franchise system and describes their prior experience. Consider not only their general business background, but their experience in managing a franchise system. Also consider how long they have been with the company. Investing with an inexperienced franchiser may be riskier than investing with an experienced one.

Litigation history: The disclosure document helps you assess the background of the franchiser and its executives by requiring the disclosure of prior litigation. The disclosure document tells you if the franchiser or any of its executive officers have been convicted of felonies involving, for example, fraud, any violation of franchise law, unfair or deceptive practices law, or are subject to any state or federal injunctions involving similar misconduct. It also will tell you if the franchiser or any of its executives have been held liable or settled a civil action involving the franchise relationship. A number of claims against the franchiser may indicate that it has not performed according to its agreements, or, at the very least, that franchisees have been dissatisfied with the franchiser's performance. Be aware that some franchisers may try to conceal an executive’s litigation history by removing the individual’s name from their disclosure documents.

Bankruptcy: The disclosure document tells you if the franchiser or any of its executives have recently been involved in a bankruptcy. This will help you to assess the franchiser's financial stability and general business acumen, as well as predict if the company is financially capable of delivering promised support services.

Costs: The disclosure document tells you the costs involved to start one of the company’s franchises. It will describe any initial deposit or franchise fee, which may be nonrefundable, and costs for initial inventory, signs, equipment, leases, or rentals. Be aware that there may be other undisclosed costs.

The following checklist will help you ask about potential costs to you as a franchisee.

√  Continuing royalty payments

√  Advertising payments, both to local and national advertising funds

√  Grand opening or other initial business promotions

√  Business or operating licenses

√  Product or service supply costs

√  Real estate and leasehold improvements

√  Discretionary equipment such as a computer system or business alarm system

√  Training

√  Legal fees

√  Financial and accounting advice

√  Insurance

√  Compliance with local ordinances, such as zoning, waste removal, and fire and other safety codes

√  Health insurance

√  Employee salaries and benefits

It may take several months or longer to get your business started. Consider in your total cost estimate operating expenses for the first year and personal living expenses for up to two years. Compare your estimates with what other franchisees have paid and competing franchise systems; perhaps you can get a better deal with another franchiser. An accountant can help you to evaluate this information.

Restrictions: Your franchiser may restrict how you operate your outlet. The disclosure document tells you if the franchiser limits:

•  The supplier of goods from whom you may purchase

•  The goods or services you may offer for sale

•  The customers to whom you can offer goods or services

•  The territory in which you can sell goods or services

•  Understand that restrictions such as these may significantly limit your ability to exercise your own business judgment in operating your outlet

Terminations: The disclosure document tells you the conditions under which the franchiser may terminate your franchise and your obligations to the franchiser after termination. It also tells you the conditions under which you can renew, sell, or assign your franchise to other parties.

Training and other assistance: The disclosure document will explain the franchiser’s training and assistance program. Make sure you understand the level of training offered. The following checklist will help you ask the right questions.

√  How many employees are eligible for training?

√  Can new employees receive training and, if so, is there any additional cost?

√  How long are the training sessions?

√  How much time is spent on technical training, business management training, and marketing?

√  Who teaches the training courses and what are their qualifications?

√  What type of ongoing training does the company offer and at what cost?

√  To whom can you speak if problems arise?

√  How many support personnel are assigned to your area?

√  How many franchisees will the support personnel service?

√  Will someone be available to come to your franchised outlet to provide more individual assistance?

The level of training you need depends on your own business experience and knowledge of the franchiser's goods and services. Keep in mind that a primary reason for investing in the franchise, as opposed to starting your own business, is training and assistance. If you have doubts that the training might be insufficient to handle day-to-day business operations, consider another franchise opportunity more suited to your background.

Advertising: You often must contribute a percentage of your income to an advertising fund even if you disagree with how these funds are used. The disclosure document provides information on advertising costs. The following checklist will help you assess whether the franchiser’s advertising will benefit you.

√  How much of the advertising fund is spent on administrative costs?

√  Are there other expenses paid from the advertising fund?

√  Do franchisees have any control over how the advertising dollars are spent?

√  What advertising promotions has the company already engaged in?

√  What advertising developments are expected in the near future?

√  How much of the fund is spent on national advertising?

√  How much of the fund is spent on advertising in your area?

√  How much of the fund is spent on selling more franchises?

√  Do all franchisees contribute equally to the advertising fund?

√  Do you need the franchiser’s consent to conduct your own advertising?

√  Are  there rebates or advertising contribution discounts if you conduct your own advertising?

√  Does the franchiser receive any commissions or rebates when it places advertisements? Do franchisees benefit from such commissions or rebates, or does the franchiser profit from them?

Current and former franchisees: The disclosure document provides important information about current and former franchisees. Determine how many franchises are currently operating; a large number of franchisees in your area may mean increased competition. Pay attention to the number of terminated franchisees; a large number of terminated, canceled, or non-renewed franchises may indicate problems. Be aware that some companies may try to conceal the number of failed franchisees by repurchasing failed outlets and then listing them as company-owned outlets. If you buy an existing outlet, ask the franchiser how many owners operated that outlet and over what period of time. A number of different owners over a short period of time may indicate that the location is not a profitable one or that the franchiser has not supported that outlet with promised services.

The disclosure document gives you the names and addresses of current franchisees who have left the system within the last year. Speaking with current and former franchisees is probably the most reliable way to verify the franchiser’s claims. Visit or phone as many of the current and former franchisees as possible; ask them about their experiences. See for yourself the volume and type of business being done.

The following checklist will help you ask current and former franchisees such questions as:

√  How long has the franchisee operated the franchise?

√  Where is the franchise located?

√  What was their total investment?

√  Were there any hidden or unexpected costs?

√  How long did it take them to cover operating costs and earn a reasonable income?

√  Are they satisfied with the cost, delivery, and quality of the goods or services sold?

√  What were their backgrounds prior to becoming a franchisee?

√  Was the franchiser’s training adequate?

√  What ongoing assistance does the franchiser provide?

√  Are they satisfied with the franchiser’s advertising program?

√  Does the franchiser fulfill its contractual obligations?

√  Would the franchisee invest in another outlet?

√  Would the franchisee recommend the investment to someone with your goals, income requirements, and background?

Be aware that some franchisers may give you a separate reference list of selected franchisees to contact. Those on the list may be individuals who are paid by the franchiser to give a good opinion of the company.

Earnings potential: you may want to know how much money you can make if you invest in a particular franchise system. Be careful; earnings projections can be misleading. Insist upon written substantiation for any earnings projections or suggestions about your potential income or sales.

Franchisers are not required to make earnings claims, but if they do, the FTC’s Franchise Rule requires franchisers to have a reasonable basis for these claims and to provide you with a document that substantiates them. This substantiation includes the bases and assumptions upon which these claims are made. Make sure you get and review the earnings claims document. Consider the following in reviewing any earnings claims.

•  Sample size: A franchiser may claim that franchisees in its system earned, for example, $50,000 last year. This claim may be deceptive, however, if      only a few franchisees earned that income and it does not represent the typical earnings of franchisees. Ask how many franchisees were included in the number.

•  Average incomes: A franchiser may claim that the franchisees in its system earn an average income of, for example, $75,000 a year. Average figures      like this tell you very little about how each individual franchisee performs. Remember, a few very successful franchisees can inflate the average. An average figure may make the overall franchise system look more successful than it actually is.

•  Gross sales: Some franchisers provide figures for the gross sales revenues of their franchisees. These figures, however, do not tell you anything about the franchisees' actual costs or profits. An outlet with a high gross sales revenue on paper actually may be losing money because of high overhead, rent, and other expenses.

•  Net profits: Franchisers often do not have data on the net profits of their franchisees. If you do receive net profit statements, ask whether they provide information about company-owned outlets. Company-owned outlets might have lower costs because they can buy equipment, inventory,  and other items in larger quantities, or may own, rather than lease, their property.

•  Geographic relevance: Earnings may vary in different parts of the country. An ice cream store franchise in a southern state, such as Florida, may expect to earn more income than a similar franchise in a northern state, such as Minnesota. If you hear that a franchisee earned a particular income, ask where that franchisee is located.

•  Franchisee's background: Keep in mind that franchisees have varying levels of skills and educational backgrounds. Franchisees with advanced technical or  business backgrounds can succeed in instances where more typical franchisees cannot. The success of some franchisees is no guarantee that you will be equally successful.

Financial history: The disclosure document provides you with important information about the company’s financial status, including audited financial statements. Be aware that investing in a financially unstable franchiser is a significant risk; the company may go out of business or into bankruptcy after you have invested your money.

Hire a lawyer or an accountant to review the franchiser’s financial statements. Do not attempt to extract this important information from the disclosure document unless you have considerable background in these matters. Your lawyer or accountant can help you understand the following.

•  Does the franchiser have steady growth?

•  Does the franchiser have a growth plan?

•  Does the franchiser make most of its income from the sale of franchises or from continuing royalties?

•  Does the franchiser devote sufficient funds to support its franchise system?

The Big Question

No matter what, owning a business doesn’t exactly mean you are your own boss, because you will always have to answer to your customers.  However, with a franchise you will also have to answer to the franchisor and likely give them a percentage of the profits you worked so hard for.  So the big or obvious question you need to ask is:   Do you want that type of structured environment, and do you mind answering to someone other than your customers?

When it’s all said and done, owning a franchise is a great way to learn how to run a business.  Furthermore, just because you start with a franchise, doesn’t mean you can’t choose a different entrepreneurial path down the road.  Only the next time, you will have a much better understanding of business operations, financing, marketing, etc.

**Veteran Tip—Franchises are well suited for Veterans.

Franchises are very well suited not only for first-time business owners but also for veterans.  As a veteran you are used to a structured environment and qualified to manage a franchise based on the leadership experience you likely gained while serving.  However, if one of the reasons you want to start a business is to be able to come up with your own structure and your own way of doing things, then franchising might not be your cup of tea.   



BLOG: Choosing your Entrepreneurial Path: Government Contracting

In a previous blog post, we talkedabout some of the different entrepreneurial paths one could choose.  Today, we are going to give you a brief overview of Government Contracting and whether this path might suit you.  As we explore the different paths we will start with some of the reasons why a particular path might suit you in regards to your military experience and the advantages that come with being a veteran.

**Veteran Tip—Military Experience and Veterans Advantage for Federal Contracting
Case for Veterans -As a veteran you have already worked for or with many federal contractors.  You understand how the government works and likely have the skills to build a profitable business based on the needs of the government. 
Veterans Benefits - There are many federal agencies that want to contract their work to veterans, but finding and verifying these veteran-owned businesses can be difficult. To help solve this challenge veteran business owners can take advantage of the VA’s “Vets First Contracting Program” ( Along with training on how to work with the federal government, this program helps Service Disabled Veteran-Owned Small Businesses (SDVOSB) and Veteran-Owned Small Businesses (VOSB) become “verified” as a veteran-owned business.  As a verified SDVOSB/VOSB your business can be listed in the VA’s Vendor Information pages, called VETBiz/VIP (, a database that federal agencies and private businesses use to find and work with veteran-owned businesses. 
**Special Note:  Verification is not a simple process.  In 2012, approximately 58% of applications have been denied, mostly because of misunderstanding about the verification process.  If you choose this path, be sure to check out the Verification Assistance Program at    

Contracting Overview

If you are brand new to the concept of government contracting, then I suggest you check out these two posts written by Bill Gormely, the president and CEO of Washington Management Group:

•  "Your First Five Steps in Government Contracting":

•  "Government Contracting: Explaining the Process in 5 Steps":

**Veteran Tip
As a veteran, you probably remember the logistical nightmare of trying to get a project contracted out while serving in the military.  Most likely that experience has left you with the thought that doing business with the government is too complicated. However, as a veteran, there are many advantages to becoming a government contractor.To get started, visit the VA’s Veteran Entrepreneur Portal at  

The rest of this blog will cover a high-level view of government contracting to help you decide if it's right for you. In future posts we will dive into more detail, but as a veteran, there are plenty of special training opportunities you can take advantage of.

Myths about Government Contracting

Government contracts can provide significant revenue. But some think it is too hard to accomplish, so let's first dispel some of the biggest myths about doing business with the government:

Myth: Doing business with the government is too complicated, involves too much red tape, and it takes forever to get paid.

Reality: The government uses many commercial and business-friendly practices, such as buying off-the-shelf items and paying by credit card. Payments are generally received within 30 days after submitting an invoice.

Myth: There's no one I can turn to in trying to obtain government contracts.

Reality: SBA and its network of resource partners have programs and hands-on assistance for small businesses contemplating selling to the federal marketplace.

Myth: I must compete head-to-head against large businesses and multinational corporations to win contracts.

Reality: The government has many categories of contract opportunities reserved exclusively for small businesses to level the playing field.

Myth: All I need to do is register in the Central Contractor Registration (CCR) system and the contracts will come rolling in.

Reality: Although CCR is the primary way federal agencies learn about prospective vendors, it's up to you to aggressively market your firm to those agencies that buy your products and services. Remember, agencies don't buy, people do.

Myth: The low offer always wins the contract.

Reality: While price is always a consideration, the government increasingly awards contracts for goods and services based on "best value," in which both technical and cost factors are weighed in the final assessment.

Even understanding the reality, you will need to determine if government contracting is right for your business. Here are some basic issues you need to consider:


Are you positive your business can financially support the execution of a government contract that may involve significant start-up costs?

Your company's financial situation is very important in your decision to pursue doing business with the government. Your business must be stable and financially sound, and you cannot have any major cash flow issues. If you have minor issues, you will need to speak with your banker to arrange a loan or line of credit. The government will not finance your contract up front, nor will it guarantee your success or bail you out.

If you are just starting out and short on cash, or having problems with payroll and other payments, government contracting is not for you. In fact, a contract might push you over the edge and put you completely out of business if you cannot fulfill its requirements.

Make sure that you can financially support the contract, and don't forget to take into account any start-up costs for the job that may be required.


Are you willing to do ongoing, detailed market research to find procurement opportunities and then take time to prepare and present offers?

Getting registered is just the beginning. Next you will need to do relentless marketing in order to find the procurement opportunities. It involves looking at the CCR ( and VIP ( databases regularly and often. It involves networking with everyone. It involves having contacts with the contract managers at the agencies you have targeted to allow them to get to know you. It involves being familiar with the supplier diversity managers and OSDBU ( managers in the companies and agencies that you have targeted.

Marketing takes time and persistence so be prepared to be committed to the process.

One thing to know that will help is this: If you submit a proposal and you are not awarded the contract, you can ask for a review from the contracting manager. In the review, you will be told exactly why you did not win the award. This information will be very useful to you when you write the next proposal.

Subcontracting and Teaming

Are you willing to be a subcontractor to companies that are prime contractors?

Some small businesses will partner with others to win government contracts or find the prime contractor of a major project and subcontract their services. This allows smaller companies who may lack certain resources to pursue opportunities they otherwise could not do on their own. Partnering can also help spread the workload and ensure that you are not taking on more than you can handle. In addition, experience gained from being a subcontractor can help you become a prime contractor.

Subcontracting opportunities can be found at SUB-Net, SBA's searchable database that prime contractors use to post subcontracting opportunities ( The website is also used by federal agencies, state and local governments, nonprofit organizations, colleges and universities, and even foreign governments.


Are you prepared to learn and follow the rules relating to federal acquisition?

Chief among the rules is having your business be capable of doing business using an approved electronic commerce (e-commerce) or electronic procurement (e-procurement) protocol. This is a mandate of the Government Paperwork Elimination Act of 1995, requiring the government to use electronic means to issue and award small business contracts, specifically those between $25,000 and $100,000. In a continuous effort to streamline the procurement process, government buyers are using new options in making purchases, such as multiple-award schedules, purchase cards, reverse auctions, etc., almost all of them technology-based.

Many small businesses are still coming up to speed with computer technology and online purchasing. E-procurement takes many forms — portals, web-based forms, electronic document management systems and so on — so be ready to do business electronically. This type of requirement is not unique to the government, as almost all major corporations now require this type of system from their vendors and suppliers.

**Veteran Tip-The Big Question
After years of serving in the military, probably the biggest question you need to ask yourself is whether you want to continue working in the government sector?  As a veteran, there are many advantages and you likely have some sort of expertise that you can tap into. However, if you’re looking for something new, Government Contracting is only one of many entrepreneurial paths you could explore. If you’re still unsure which path is right for you, stay tuned as we explore other types of business endeavors that might peak your interest.
BLOG: Choosing your Entrepreneurial Path: Buying a Business

Many find the idea of running a small business appealing, but they lose their motivation after realizing, as they develop their business plans, talk with investors, and research the legal issues associated with startups, that it can be a big risk. For those disheartened by such risky undertakings, buying an existing business is often a simpler and safer alternative.

Advantages & Disadvantages of Buying a Business

Advantages:The main reason to buy an existing business is the drastic reduction in startup costs of time, money, and energy. In addition, cash flow may start immediately, thanks to existing inventory and receivables. Other benefits include preexisting customer goodwill and easier financing opportunities, if the business has a positive track record.

Disadvantages:  The biggest block to buying a small business outright is the initial purchasing cost. As the business concept, customer base, brands, and other fundamental work have already been done and therefore are considered assets, the financial costs of acquiring an existing business is usually greater then starting one without these assets. Other possible disadvantages include hidden problems associated with the business, such as receivables that are part of the assets at the time of purchase, but later turn out to be uncollectable. Good research is the key to avoiding these problems.

 **Veteran Tip—Military Experience and Veterans     Advantage for Buying a Business

Case for Veterans -- Similar to purchasing a franchise, when you buy an existing business, you are hopefully purchasing a proven system with guidelines to follow.  However, for the veterans who don’t always want to just follow the “regulations,” buying a business outright allows you to change those systems as you see fit.  For those who have served, there were times to follow the regulations and time to think “outside the box.”  Purchasing     a business might be very close to getting a new assignment in the military:  You enter into an already established environment to not only run the daily operations, but to find ways to make it better.

Veterans Advantage -- While we don’t have any particular knowledge of discounts or specific training for veterans buying an existing business, it could exist. You just need to do some web surfing to find out. Additionally, there is a large public support and many fellow veteran-business  owners, who would love to sell their business to another veteran. Start growing relationships with other business owners and look for a referral to an organization.

Purchase Research

Once you’ve found a business that you would like to buy, it’s important to conduct a hard, objective investigation. Look into every aspect of the business, verifying whether the owner’s stated reasons for selling are legitimate; double check every detail for accuracy.

Professional help: A qualified attorney should be enlisted to help review the legal and organizational documents of the business you are planning to purchase. And an accountant can help do a proper evaluation of the financial condition of the business.

Letter of intent:  A letter of intent usually creates a non-binding offer to purchase the business and is usually needed so that the seller can provide sensitive information about the business. It should spell out the proposed price, terms, and conditions for the sale of the business. The letter should also state that either side may revise or quit for any reason.

Confidentiality agreement:  Often required by the seller, a confidentiality agreement indicates that you won’t use the information about the seller’s business for any purpose other than making the decision to buy.

Contracts and leases: It’s important to discover all the obligations that the business is subject to. Also be aware that you may have to work with the current landlord to assume any existing lease on the business premises or negotiate a new lease. If you acquire an existing lease from another lessee, you may have to pay the previous lessee for the privilege. The cost of acquiring your lease may be amortized over the remaining term of the lease.

Financial statements: Examine the financial statements from the business for at least the past three years, preferably the last five years. Also make sure that the statements are accompanied by an audit letter from a reputable CPA firm. Don’t accept a simple financial review by the business itself.

Tax returns: Review the business’ tax returns from the past three-to-five years. This will help you determine the profitability of the business as well as whether any tax liability is outstanding.

Important documents: Numerous documents should be checked during an investigation. They include:

•  real and personal property documents
•  bank accounts
•  customer lists
•  sales records
•  supplier/purchaser list
•  contracts
•  advertisement materials
•  inventory receipts/lists
•  organization charts
•  payroll, benefits, and employee pension/profit sharing info
•  list of employees
•  certification by federal, state or local
•  list of owners

Determining Value

A realistic business valuation requires more than merely looking at last year’s financial statement; it requires a thorough analysis of several years of the business operation and an opinion about the future outlook of the industry, the economy, and how the subject company will compete. Most people believe that a business should be sold for Fair Market Value. The term Fair Market Value is defined by the IRS at Rev. Ruling 59-60 as follows:

“. . . the price at which the property would change hands between a willing buyer and willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.”

There are a number of different methods to determine a fair and equitable price for the sale of the business. The following lists a few methods to determine the price:

•  Capitalized earning approach: This method refers to the return on the investment that is expected by an investor.

•  Excess earning method: This method is similar to the capitalized earning method, except that it splits off return on assets from other earnings.

•  Cash flow method: This method is usually used when attempting to determine how much of a loan the cash flow of the business will support. The adjusted cash flow is used as a benchmark to measure the firm’s ability to service debt.

•  Tangible assets (balance sheet) method: This method values the business by the tangible assets.

•  Value of specific intangible assets method: This method is used when the buyer wants to purchase an intangible asset versus creating it, such as a brand name. This method also takes into consideration valuing the goodwill of the business.

Sales Agreement

The sales agreement is the key document in buying the business assets or stock of a corporation. It is important to make sure the agreement is accurate and contains all the terms of the purchase. Definitely have an attorney review this document. It is in this agreement that you should define everything that you intent to purchase of the business — its assets, customer lists, intellectual property, and goodwill.

The following is a checklist of items that should be addressed in the agreement:

Sales Agreement Checklist:

√  Names of seller, buyer, and business

√  Background information

√  Assets being sold

√ Purchase price and allocation of assets

√  Covenant not to compete

√  Any adjustments to be made

√  Terms of the agreement and payment terms

√  List of inventory included in the sale

√  Compliance with the bulk sales laws of the state

√  Any representation and warranties of the seller

√  Any representation and warranties of the buyer

√  Determination as to the access to any business information

√  Determination as to the running of the business prior to closing

√  Contingencies

√  Possibilities of having the seller continue as a consultant

√  Fees, including brokers fees

√  Date of closing

Due Diligence

Before entering into a sales agreement, you should ensure that the following issues are in order for the business:

Licenses and permits:  Most businesses need licenses and permits to operate. The type of license or permit you need depends on your industry and the state in which you are located. License and permit requirements also affect where you locate your business, how much you’ll have to spend for remodeling, and whether or not you’ll have to provide off-street parking.

Zoning requirements: It is important to check the zoning requirements for the area where you are acquiring your business. The zoning requirements may affect the type of business that you are intending to operate in a particular area.

Environmental concerns: If you are acquiring real property along with the acquisition of the business, it is important to check the environmental regulations in the area.

Closing Checklist

It is important during the closing to make sure that you have legal counsel available to review all documentation necessary for the transfer of the business. The following items should be addressed in a closing:

Closing Checklist:

√  Adjust purchase price: This would take care of prorated items such as rent, utilities, and inventory up to the time of closing.

√  Review documents required to be provided by the seller: These would be a corporate resolution approving the sale, evidence that a corporation is in good standing, and any tax releases that may be been promised by the seller. Check with your local department of corporations or Secretary of State.

√   Signing promissory note: In some cases, the seller will carry back financing, so have an attorney review any note documentation.

√   Security agreements: These documents may be necessary if you are going to finance your purchase. A security agreement lists the assets that will be used for security as a promise for payment of the loan.

√   UCC financing statements: These documents are recorded with the Secretary of State in the state you have purchased your business. Again, these documents are necessary if you are going to finance your business.

√   Lease: If you have agreed to assume an existing lease, you will be required to execute the assumption. Make sure that you have the landlord’s concurrence to assumption of the lease. You may have negotiated a new lease with the landlord instead of assuming the existing lease.

√   Vehicles: If the purchase includes vehicles, you may have to execute the transfer documents for the vehicles. You can check with your local Department of Motor Vehicles to determine the correct procedure and necessary forms.

√   Bill of sale: The bill of sale will be proof of the sale of the business and will transfer the ownership of the other tangible business assets not specifically transferred on their own.

√  Patents, trademarks, and copyrights: You may need to execute the necessary forms if intellectual property is part of the transaction.

√   Franchise: You may have to execute franchise documents, if the purchase of the business was a franchise.

√  Closing or settlement sheet: The closing or settlement sheet will list all financial aspects of the transaction. Everything listed on the settlement should have been negotiated prior to the closing, so there should be no surprises.

√  Covenant not to compete: It is a good idea to have the seller execute a non-compete agreement. This will help add to the success of your operation of the business without any interference from the previous owner.

√  Consultation/employment agreement: If the seller has agreed to remain on for an amount of time, this documentation would be necessary.

√ Complete IRS Form 8594, asset acquisition statement: This document will indicate how the purchase was allocated amount the various assets. It is very important for your tax return.

√  Bulk sale laws: Make sure that all bulk sale laws have been complied with in the transfer of the business assets.


BLOG: An Overview of Basic Business Structures

It is important to understand the different types of business structures that exist.  This is just a quick synopsis, but it is highly recommended that you continue conducting more in depth research and speak with your business attorney before determining the type of legal structure your business should fall under.

Types of Business Structures

  • Sole Proprietorship:  A sole proprietorship is a simple, informal structure that is inexpensive to form; it is usually owned by a single person or a marital community. The owner operates the business, is personally liable for all business debts, can freely transfer all or part of the business, and can report profit or loss on personal income tax returns.  The owner and business are considered one entity, and there is no legal protection of the individual if something goes wrong with the business.


  • Limited Liability Company (LLC):  An LLC is generally considered advantageous for small businesses, because it combines the limited personal liability feature of a corporation with the tax advantages of partnerships and sole proprietorships. Profits and losses can be passed through the company to its members, or the LLC can elect to be taxed like a corporation. LLCs do not have stock and are not required to observe corporate formalities. Owners are called members, and the LLC is managed by these members or by appointed managers.


  • General Partnership:  Partnerships are inexpensive to form; they require an agreement between two or more individuals or entities to jointly own and operate a business. Profit, loss, and managerial duties are shared among the partners, and each partner is personally liable for partnership debts. Partnerships do not pay taxes, but must file an informational return; individual partners report their share of profits and losses on their personal return. Short-term partnerships are also known as joint ventures. It is similar to a sole proprietorship but with more people (partners).


  • C Corporation (Inc. or Ltd.):  This is a complex business structure with more startup costs than many other forms. A corporation is a legal entity separate from its owners, who own shares of stock in the company. Corporations can be created for profit or nonprofit purposes and may be subject to increased licensing fees and government regulation than other structures. Profits are taxed both at the corporate level and again when distributed to shareholders.In more detail a C Corp is made up of shareholders.These shareholders are not personally liable for corporate obligations, and the separation between the corporation and the shareholders is called a “corporate veil.” When corporate formalities have not been observed, when there is malfeasance, or when other improprieties occur, the corporate veil may be ripped, which opens the shareholders to liability of the corporation’s debts and liabilities. Corporate formalities include:

Issuing stock certificate
Holding annual meetings
Recording the minutes of the meeting
Electing directors or ratifying the status of existing directors
Corporations should always be assisted by a qualified attorney

  • Sub Chapter S Corporation (Inc. or Ltd.):  This structure is identical to the C Corporation in many ways, but offers avoidance of double taxation. If a corporation qualifies for S status with the IRS, it is taxed like a partnership; the corporation is not taxed, but the income flows through to shareholders who report the income on their individual returns.


  • Limited Liability Partnership (LLP):  LLPs are organized to protect individual partners from personal liability for the negligent acts of other partners or employees not under their direct control. LLPs are not recognized by every state and those that do sometimes limit LLPs to organizations that provide a professional service, such as medicine or law, for which each partner is licensed. Partners report their share of profits and losses on their personal tax returns. Check with your Secretary of State’s office to see if your state recognizes LLPs and if so, which occupations qualify.


  • Professional Service Corporation (PS):  A PS must be organized for the sole purpose of providing a professional service for which each shareholder is licensed. The advantage here is limited personal liability for shareholders. This option is available to certain professionals, such as doctors, lawyers, and accountants. Check with your Secretary of State’s office to find out which occupations qualify.


  • Limited Partnership (LP):  LPs have complex formation requirements, and require at least one general partner who is fully responsible for partnership obligations and normal business operations. The LP also requires at least one limited partner, often an investor, who is not involved in everyday operations and is shielded from liability for partnership obligations beyond the amount of their investment. LPs do not pay tax, but must file a return for informational purposes; partners report their share of profits and losses on their personal returns.


  • Non-Profit Corporations:  These are formed for civic, educational, charitable, and religious purposes and enjoy tax-exempt status and limited personal liability. Non-profit corporations are managed by a board of directors or trustees. Assets must be transferred to another non-profit group if the corporation is dissolved.


Determining the right type of Legal Structure for your business

There are a number of factors to consider when determining the type of business structure you want to establish.  Some of these include your budget, the type of business you are establishing, investment requirements, potential liabilities, and of course the tax benefits.  For more help on choosing the business structure you want to establish the following articles published by Nolo provide a good place to start:

“Choosing the Best Ownership Structure for Your Business” --

“Chart: Ways to Organize Your Business” --

“Corporations vs. LLCs information” --




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