Nonprofit Board Members – Choose Wisely

This post is taken from The Foundation Group's web site and was written by Greg McRay. The Foundation Group periodically posts very useful information regarding the creation and management of tax exempt organizations. They also offer their services on a fee paid basis. I can not speak to the services provided by The Foundation Group, although I believe that their postings often share valuable information.


Nonprofit Board Members – Choose Wisely











Photo by The Foundation Group

Shared via AddThis

Required Provisions for Organizing Documents When Seeking 501(c)(3) status

[The IRS has specific requirements for the structure of organizations seeking tax-exempt status. Below are two paragraphs from the IRS web site that provides instruction and information about creating tax-exempt organizations. Reviewing this information before filing organizing documents with your appropriate state authority may save you a lot of time and headache further down the road.]

"A charity's organizing document must limit the organization's purposes to one or more of the exempt purposes set forth in section 501(c)(3) and must not expressly empower it to engage, other than as an insubstantial part of its activities, in activities that are not in furtherance of one or more of those purposes. This requirement may be met if the purposes stated in the organizing document are limited in some way by reference to section 501(c)(3). In addition, assets of an organization must be permanently dedicated to an exempt purpose. This means that should an organization dissolve, its assets must be distributed for an exempt purpose described in section 501(c)(3), or to the federal government or to a state or local government for a public purpose. To establish that an organization's assets will be permanently dedicated to an exempt purpose, the organizing document should contain a provision insuring their distribution for an exempt purpose in the event of dissolution. Although reliance may be placed upon state law to establish permanent dedication of assets for exempt purposes, an organization's application can be processed by the IRS more rapidly if its organizing document includes a provision insuring permanent dedication of assets for exempt purposes. For examples of provisions that meet these requirements, see Sample Articles. [which may be found through the link provided at the IRS web site]

"If the organizing document does not contain these provisions, an organization should amend it before submitting its exemption application. State officials can provide more information about how to amend organizing documents."

[FOR MORE INFORMATION VISIT THE RELEVANT IRS WEB SITE]

All of the Blog Posts so far have dealt with for-profit organizations. At this point I want to have a few discussions about non-profit orgnizations, and particularly about tax-exempt organizations.

Creating a non-profit organization is not "Rocket Science." And because it is so easy, a lot of people start off on their own, only to find out later that not every non-profit organization will qualify for tax-exempt status from the IRS.

I often have people come to me after they have incorporated a non-profit corporation but can not get tax-exempt status because the corporation was not structured properly and the Articles of Incorporation and the By-Laws do not pass muster with the Department of the Treasury.

Creating a tax-exempt is not Rocket Science either, but it does take patience and attention to detail. The IRS will provide you with all of the information that you need if you will take the time to read what they have available, think about what they are telling you and follow their instructions.

Below, I have exerpted sections from a few of their web sites that can help with creatting an tax-exempt organization. at the end of each section I have the link to the corresponding IRS web page.

These exerpts are from three seperate pages:

1. Life Cycle of an Exempt Organization
2. Life Cycle of a Public Charity/Private Foundation
3. Life Cycle of a Public Charity

Reading these pages and following their various links will hopefully helpe you decide whether you can create a tax-exempt organization on your own, or whether you think you will need the help of an attorney. Since most people want their non-profit organization to be a "Public Charity" (A term that is defined in the IRS web site) I have provided a course of sites that lead to that area. In later posts I will post information about Private Foundations.

----------------------------

Life Cycle of an Exempt Organization

Organizations that meet the requirements of Internal Revenue Code section 501(a) are exempt from federal income taxation. In addition, charitable contributions
made to some section 501(a) organizations by individuals and corporations are deductible under Code section 170. This website provides information about points of intersection between organizations and the IRS. The content includes explanatory information, and links to forms that an organization may need to file with the IRS. The materials cover five stages in an organization's life cycle:

http://www.irs.gov/charities/article/0,,id=169727,00.html

--------------------

Life Cycle of a Public Charity/Private Foundation

Organizations that meet the requirements of Internal Revenue Code section 501(c)(3) are exempt from federal income tax as charitable organizations. In addition, contributions made to charitable organizations by individuals and corporations are deductible under Code section 170. Every exempt charitable organization is classified as either a public charity or a private foundation. Generally, organizations that are classified as public charities are those that (i) are churches, hospitals, qualified medical research organizations affiliated with hospitals, schools, colleges and universities, (ii) have an active program of fundraising and receive contributions from many sources, including the general public, governmental agencies, corporations, private foundations or other public charities, (iii) receive income from the conduct of activities in furtherance of the organization’s exempt purposes, or (iv) actively function in a supporting relationship to one or more existing public charities. Private foundations, in contrast, typically have a single major source of funding (usually gifts from one family or corporation rather than funding from many sources) and most have as their primary activity the making of grants to other charitable organizations and to individuals, rather than the direct operation of charitable programs.

http://www.irs.gov/charities/charitable/article/0,,id=136459,00.html

-------------------

Life Cycle of a Public Charity

During its existence, a public charity has numerous interactions with the IRS – from filing an application for recognition of tax-exempt status, to filing the required annual information returns, to making changes in its mission and purpose. The IRS provides information, explanations, guides, forms and publications on all of these subjects – they are available through this IRS Web site. The illustration below provides an easy-to-use way of linking to the documents most charities will need as they proceed though the phases of their “life cycle.”

--------------------
[Bloger's Note: Below are the topics to which the site links for further information.]
--------------------

• Starting Out Organizing Documents
• Required Provisions
• Sample Organizing Documents
• Governance and related topics
• Bylaws
• State law requirements
• Employer Identification Number
• Application Form
• Online EIN Application
• Charitable Solicitation
• Initial State Registration
• Periodic State Reporting
• State Charity Offices
• Help from the IRS
• Applying to IRS
• Requirements for Exemption
• Application Forms
• Exemption Application
• Group exemption
• User Fee
• Power of Attorney
• Disclosure of Applications
• IRS Processing
• While You Wait
• Rulings and Determination Letters
• Advance Rulings - Publicly Supported Organizations
• Help from the IRS
• Application Process Step by Step
• Customer Account Services
• Publication 4220, Applying for 501(c)(3) Tax-Exempt Status
• Publication 557, Tax-Exempt Status for Your Organization

http://www.irs.gov/charities/charitable/article/0,,id=122670,00.html


Tax Information for Charities & Other Non-Profits

TAKE A NUMBER

Do you have employees? Do you operate your business as a corporation or a partnership? Do you file any Employment, Excise, or Alcohol, Tobacco and Firearms tax returns:?

If the answer to any of these questions is “Yes,” then you need an Employer ID Number [EIN] from the Internal Revenue Service. Most business people know what an EIN is and how it functions, yet many small business owners do not bother to get one. Operating much like a personal “Social Security Number” it is a means by which the federal government keeps track of the revenues of interest that passes through your business.

The brief list of conditions that make an EIN is not exhaustive. The IRS requires you to have an EIN If you withhold taxes on income, other than wages, paid to a non-resident alien or if you have a Keogh plan.

Also, your business is required to have an EIN if it is involved with Trusts[ except certain grantor-owned revocable trusts], IRAs, Exempt Organization Business Income Tax Returns, Estates, Real estate mortgage investment conduits, Non-profit organizations, Farmers' cooperatives or Plan administrators.

This link will take you the SBA’s site on EINs for a fuller briefing on who needs an EIN and when. It will also tell you how to apply for an EIN and how to close out an account with the IRS and discontinue your EIN.

MARKETING PLANS

[Below are some tips from the SBA on Developing a Market Plan]


A sound marketing plan is key to the success of your business. It should include your market research, location, the customer group you have targeted, competition, positioning, the product or service you are selling, pricing, advertising, and promotion.

"You're in business to serve a customer need," says Derek Hansen, founder of American Capital Access. "If you're not sensitive to customers, don't know who your customers are, how to reach them, and, most of all, what will convince them to buy your product or service, get help."

Effective marketing, planning, and promotion begins with current information about the marketplace. Visit your local library, talk to customers, study the advertising of other businesses in your community, and consult with any relevant industry associations. This interactive tool will help you assess your marketing strengths and weaknesses.

Once you have all the necessary information, write down your plan:

1. Define your business:
Your product or service
Your geographic marketing area - neighborhood, regional, or national
Your competitionHow you differ from the competition - what makes you special
Your price
The competition's promotion methodsYour promotion methods
Your distribution methods or business location

2. Define your customers:
Your current customer base - age, sex, income, and neighborhood
How your customers learn about your product or service - advertising, direct mail, word of mouth, Yellow Pages
Patterns or habits your customers and potential customers share - where they shop, what they read, watch, and listen to
Qualities your customers value most about your product or service - selection, convenience, service, reliability, availability, and affordability
Qualities your customers like least about your product or service - can they be adjusted to serve your customers better?; prospective customers whom you aren't currently reaching

3. Define your plan and budget:
Previous marketing methods you have used to communicate to your customers
Methods that have been most effective
Cost compared to sales
Cost per customer
Possible future marketing methods to attract new customers
Percentage of profits you can allocate to your marketing campaign
Marketing tools you can implement within your budget - newspaper, magazine, Yellow Pages, radio or television advertising, direct mail, telemarketing, and public relations activities such as community involvement, sponsorship, or press releases
Methods of testing your marketing ideas
Methods for measuring results of your marketing campaign
The marketing tool you can implement immediately

The final component in your marketing plan should be your overall promotional objectives: to communicate your message, create an awareness of your product or service, motivate customers to buy and increase sales, or other specific targets. Objectives make it easier to design an effective campaign and help you keep that campaign on the right track. Once you have defined your objectives, it is easier to choose the method that will be most effective.

Learn more at the SBA Marketing Site for Small Businesses

[In its efforts to help small businesses become successes, the SBA has provided some valuable lessons in “Target Marketing. Below is a segment taken directly from an essay on that topic.”]
-------------------------------------------------

Target Marketing

It's important to remember that the focus of marketing is people. If you're concentrating your efforts on your product or profit only, you'll miss the mark. The term target market is used because that market - that group of people - is the bull's eye at which you aim all your marketing efforts.

So, don't forget that a market is people - people with common characteristics that set them apart as a group. The more statistics you have about a target market, the more precisely you can develop your strategy. The table below shows some examples of market segments (or groups).

To read the SBA’s entire essay on Target Marketing, go to that segment of their “Market and Price” series of essays.

TARGET MARKETING

WHEN IS THE PRICE RIGHT?

[This is an excerpt from the SBA’s web page “Understanding Marketing” In its "Market and Price" Section. The entire essay can be found using the link at the bottom of the page. If you are in business, you are in business to sell something, be it a product or a service. Knowing what the market is willing to pay for that product or service can be the key to your business survival.]
-------------------------------------------------


What Is Marketing?


General Definition

In plain and simple terms, marketing activities and strategies result in making products available that satisfy customers while making profits for the companies that offer those products. That's it in a nutshell!

Marketing produces a win-win situation because:

Customers have a product that meets their needs and
Healthy profits are achieved for the company. (These profits allow the company to continue to do business in order to meet the needs of future customers.)

Stated another way, focus on what the customer wants is essential to successful marketing efforts. This customer-orientation must also be balanced with the company's objective of maintaining a profitable volume of sales in order for the company to continue to do business. Marketing is a creative, ever-changing orchestration of all the activities needed to accomplish both these objectives.

How Are The Customer And Business Objectives Met?

The American Marketing Association's definition of marketing is: the process of planning and executing the conception, pricing, promotion, and distribution of ideas, goods, and services to create exchanges that satisfy individual and organizational objectives.

You see in the above definition that the process of marketing begins with discovering what products customers want to buy. Providing the features and quality customers want is a critical first step in marketing. You'll be facing an uphill battle if you provide something you want to produce and then try to convince someone to buy it.

The marketing process continues with setting a price, letting potential customers know about your product, and making it available to them.

Read More about “Market and Price”

TARP Money Headed To The SBA

[There has been a lot of Buzz this week about TARP money headef for small businesses. Below is a Press Release from the SBA that can sets out the facts straight from the horses mouth. The original press release can be found at: http://www.sba.gov/idc/groups/public/documents/ca_fresno/ca_fresno_opedra.pdf ]

----------------------------------------

Op-Ed . . . Recovery Act

Recovery Act Gives SBA Tools to Boost Small Businesses: By Carlos G. Mendoza, Fresno District Director

The Administration is taking actions to make a big dent in the small business credit crunchby offering new incentives to small business borrowers and lenders through the AmericanRecovery and Reinvestment Act and Department of Treasury actions.

With tax incentives and steps to encourage lending, the Recovery Act recognizes that small businesses are part of the solution to getting our economy moving again. The bill’s primary goals for the U.S. Small Business Administration are jump-starting job creation, re-starting lending, and promoting investment in small businesses.

The Recovery Act provides entrepreneurs and lenders financial relief from the currenteconomic crisis that will help encourage borrowing and lending to all small businesses,including start-ups.

For small businesses, the Recovery Act temporarily eliminates SBA guaranteed 7(a) and 504 loan fees and offers tax credits. For lenders, it temporarily eliminates 504 loan fees. The fee eliminations are retroactive to February 17, the day the Recovery Act was signed. SBA is developing a mechanism for refunding fees paid on loans since then.

The Act also supports guarantees of up to 90 percent on most types of 7(a) loans toqualified small businesses. The temporary loan fee eliminations and 90 percentguarantee provisions will apply to approximately $8.7 billion in 7(a) loans and $3.6billion in 504 loans. SBA estimates this will cover lending in both programs throughcalendar year 2009.

In addition, the Treasury Department will commit up to $15 billion in TARP funds to help unfreeze the small business lending market, which will particularly benefit community banks, credit unions and other small lenders. Treasury will purchase existing and new SBA-backed loans made by banks, freeing up more capital so these banks can restart SBA-backed lending to local small businesses. This is yet another step in President Obama’s plan to assist small businesses during this economic crisis.

SBA staff is working hard to implement the rest of the Recovery Act’s programs for small businesses. There are a lot of moving parts, but our aim is put these programs in place as quickly and effectively as we can so they have the broadest and most rapid effect possible on small business credit markets.

The Act provides SBA with $730 million in total funding. This includes $375 million tocover the costs of temporarily eliminating loan fees and raising guarantee limits on someloans; extra funding for SBA-backed Microlenders; and $255 million for a new loanprogram to help viable small businesses with immediate economic hardship make payments on existing loans.

The Recovery Act also authorizes SBA to use its 504 program to refinance existing loans for fixed assets as part of a business expansion project; to use its guarantee authority to establish a secondary market for bank loans made under the 504 loan program; and to make loans to broker-dealers who buy SBA-backed loans from lenders and pool them for sale to investors on the secondary loan market.

Also under the Act, small businesses that need surety bonds to compete for construction and service contracts can qualify for SBA-backed surety bonds of up to $5 million, more than double the previous $2 million maximum.

Another element of the Recovery Act that is already in place is SBA’s Microloan program. These non-profit, community-based lenders make loans of up to $35,000 to small businesses and start-ups. Because this program is already operating, you can go to a Microlender today and apply for a loan. The Act funds $50 million in new loans by these Microlenders, plus $24 million to help pay for the technical assistance and training they provide to loan applicants.

We have already seen significant interest in a new program, America’s Recovery Capital, or ARC Stabilization Loans, by lenders and small businesses alike. Once in place, this temporary new program will offer deferred-payment loans of up to $35,000 to viable small businesses that need help making payments on an existing, qualifying loan for up to six months. These loans will be 100 percent guaranteed by SBA. Repayment would not have to begin until 12 months after the loan is fully disbursed, giving small businesses time to refocus their business plans in order to succeed in the long run.

The bill helps SBA-licensed Small Business Investment Companies by raising the level of SBA funding they can receive to make venture capital investments in small businesses. It also raises the percentage of their investments that must be made in smaller businesses from 20 percent to 25 percent.

Finally, I want to emphasize that all of SBA’s existing programs are open for business – we are backing loans, and providing technical assistance, training, and contract help to entrepreneurs every day.

In short, SBA is working overtime to get these provisions in place to begin knocking down the obstacles that are keeping credit from flowing to small business entrepreneurs, whose proven ability to create new jobs and commerce is second to none, and in whose hands the next phase of our economic recovery rests.

For additional information please contact the SBA at (559) 487-5791.

SBA Demographics on Minority Small Businesses

[Here are some statistics from an executive summary of an SBA report that may help minorities considering creating their own businesses. There are taken from the SBA Small Business web site found at the link below. The data is a bit dated and examines a comparison of growth rates between 1997 and 2002. However, the information can be very useful and the full report is 49 pages long and relatively through.]
---------------------------------------

Minorities in Business: A Demographic Review of Minority Business Ownership

• In 2002, minorities owned approximately 18 percent of the 23 million U.S. firms.
• Using a proxy for measuring minority business growth, Black-owned firms had the highest growth rate for several measures between 1997 and 2002:
45.4 percent for the number of firms; 24.5 percent of total receipts for the group; and 16.7 percent for employer firm receipts.

Asians also experienced growth in the number of employer firms, at 12.6 percent, and in annual payroll, 25.3 percent. The number of American Indian and Native Alaskan businesses grew 2.1 percent.

• Hispanics or Latinos constituted the largest minority business community and owned 6.6 percent of all U.S. firms, 3.7 percent of employer firms, and 7.4 percent of nonemployer firms.

• Blacks owned 5.0 percent of all U.S. firms, 1.8 percent of employer firms, and 5.9 percent of nonemployer firms. Asians and Islanders owned 4.7 percent of all U.S. firms, 6.1 percent of employer firms, and 4.3 percent of nonemployer firms. For comparison purposes, the percentages for Whites are 82.9, 88.0, and 81.4 respectively.

• Percentages of minority women owning businesses rose from 1997 to 2002: 29 percent of Black employer firms and 47 percent of Black nonemployer firms were women-owned in 2002. In contrast, women owned 17 percent of White employer firms and 31 percent of White nonemployer firms.

• More than half of Black-owned businesses had less than $10,000 in business receipts in 2002, compared with one-third of White-owned firms and 28.8 percent of Asian-owned firms.

• On average, for every dollar that a White-owned firm made, Pacific Islander-owned firms made about 59 cents, Hispanic-, Native American-, and Asianowned businesses made 56 cents, and Black-owned businesses made 43 cents.

• The distribution of firms varied by industry and race or ethnicity. For example, 16 percent of Native American-owned firms operated in construction; 20.5 percent of Black-owned firms were in health care and social assistance. Hispanic-owned businesses were concentrated in administrative and support, waste management, and remediation services, 13.2 percent, as were Islander-owned businesses, 11.6 percent.

• All minority-owned business categories had higher proportions than the non-minority-owned businesses in “other services,” such as personal services and repair and maintenance. Of Black-owned firms, 17.6 percent were in other services; for Asians, the share was 17.1 percent; for Hispanics, 15.8 percent;
and for Native Americans, 13.2 percent.

• The ethnicities of Asian business owners were identified as Asian Indian, Chinese, Filipino, Japanese, Korean, Vietnamese, and other Asian. Among this group, Asian Indians had the highest ratio of employer firms to total firms (37 percent), followed by Koreans (36 percent), and Chinese (31 percent). Asian Indians also had the highest average receipts per nonemployer firm, $56,792 followed by Koreans, $56,320. Japanese had the highest receipts per employer firm, $1,256,646, followed by Chinese, $1,075,029. Asian Indians once again had the highest average annual payroll per employee, $28,779, followed by Japanese at $28,141.

• The ethnicities of Hispanic business owners were identified as Mexican, Mexican American, and Chicano; Puerto Rican; Cuban; and other Spanish/ Hispanic/Latino. Among this group, Cubans had the highest ratio of employer firms to total firms, 18 percent; the highest average receipts per nonemployer firm, $36,692; the highest receipts per employer firm, $1,108,998; and the highest average annual payroll per employee, $28,769. Mexicans, Mexican Americans, and Chicanos had the highest average number of employees per employer firm, 8.1, followed by other Spanish/Hispanic/Latino, 7.5.

• Of nonemployers, 58.3 percent were homebased, compared with 22.1 percent of employers. Home-based business rates decline sharply with firm employment size. Twenty-nine percent of all respondent employer firms with one to four employees were home-based and 0.2 percent of those with 500 or more employees.

• Home-based rates varied by ethnic and racial characteristic, a fact that may also be related to the industries in which these firms are concentrated. More than two-thirds of Asian business owners reported that they conducted business from nonresidential locations. Hispanics had a relatively smaller share of firms with one to four employees that were home-based, but a relatively large share—5.6 percent— of large firms based in the home.

• Owners use a variety of sources of capital to start or acquire businesses. Nonemployer firm owners generally use a less varied array of financing sources than owners of firms with employees. Higher percentages of male/female equally owned, male-owned, and White-owned employer firms than of other firm groups financed their startups or acquisitions through business loans from banks. Higher percentages of Black- and Native American-owned employer businesses, as well as equally men- and women-owned employer firms used business loans from the government or government-guaranteed bank loans. More than all other groups, Islander employers used personal and business credit cards to finance their startups and acquisitions.

• The majority of Asians and Hispanics in the U.S. labor force are immigrants, either naturalized or not. Among self-employed Asians, 80.8 percent are immigrants, compared with 67.9 percent of Islanders and 56.8 percent of Hispanics. Asians tended to have the highest shares of naturalized citizens in all work categories (labor force, self-employment, professional, and moonlighter) and vied with Hispanics for the highest shares of non-U.S. citizens.

READ THE ENTIRE REPORT AT:

Minorities in Business: A Demographic Review of Minority Business Ownership

Acquiring an Employer Identification Number

Many small businesses fail to get a seperate Employer Identification Number (also called an "EIN" or a Tax Identification Number - "TIN). And that is a BIG MISTAKE! Your business should be seperate from you as an individual, and as such, it should have its own identification for IRS purposes. The Small Business Administration has a web page that takes you through the process of getting an EIN and explaining why (and if) you need one.
-------------------------------------------------------------

"An Employer Identification Number (EIN) is also known as a Federal Tax Identification Number, and is used to identify a business entity. Generally, businesses need an EIN. You may apply for an EIN in various ways, and now you may apply online. This is a free service offered by the Internal Revenue Service. You must check with your state to make sure you need a state number or charter.

Do You Need an EIN?
Do You Need a New EIN?
How to Apply for an EIN
Apply for an EIN Online
How Long Will it Take to Get a Number?
Misplaced Your EIN?
How EINs are Assigned and Valid EIN Prefixes
Canceling an EIN – Closing Your Account
Apply for an EIN Online

Check out our Interview-style online EIN application. No need to file a Form SS-4! We ask you the questions and you give us the answers. The application includes embedded help topics and hyperlinked keywords and definitions so separate instructions aren’t needed. After all validations are done you will get your EIN immediately upon completion. You can then download, save, and print your confirmation notice. It’s fast, free, and user-friendly!

Change of Ownership or Structure Generally, businesses need a new EIN when their ownership or structure has changed. Refer to "Do You Need a New EIN?" to determine if this applies to your business."

-------------------------------------------

This information can be found at the SBA web site: here.

GETTING STARTED ON THAT BUSINESS PLAN

If you have been following this Blog and you are planning on starting or expanding your small business, hopefully you have visited the SBA website that I mentioned in my post on May 12th, 2009.

One of the worst pitfalls for the small business person is “Over-Eagerness” and this causes a person to skip very important steps in preparing oneself for the unforgiving world of business. And the world of business is definitely unforgiving – Just ask G.M.

I have also mentioned earlier that one of the keys to success in starting a small business is to HAVE A GOOD BUSINESS PLAN. And the SBA can help you with this. If you take a moment to go to their “Small Business Planner” that explains how to write a Business Plan, you will find some invaluable information.

I don’t believe in wasting time, and one of the biggest wastes of time is “re-inventing the wheel.” So, I am not going to recite what the SBA has already made available to you (Your tax dollars at work – really!) At this page, if you are willing to put in the time, you really can learn how to put together a very effective Business Plan. And effective Business Plans can help to capture financing.

In its introduction, the SBA gives some very helpful tips, like:

“A business plan should be a work-in-progress. Even successful, growing
businesses should maintain a current business plan.”

“[K]now
everything you can about your products or services in order to persuade someone
to buy them.”

“To become an expert (or to fine-tune your knowledge
if you already believe you are one), you must be willing to roll up your sleeves
and begin digging through information.”

And then the site provide links to the various elements of the Business Plan so as to walk you through, step by step. These elements include:

Executive Summary
Market Analysis
Company Description
Organization
& Management
Marketing & Sales Management
Service or Product
Line
Funding Request
Financials
Appendix

Yes, that’s right, the “Appendix.” That one might have gotten under your radar but if you read the SBA website – that you paid for with your hard earned tax dollars – you will learn why the Appendix is an important part of any business plan.

So, enough for now, and I’ll see you on the other side of the SBA’s guide on how to write an effective Business Plan - found at this link.

SORRY – NO FREE LUNCH

Free money from the Government to start or expand your business? NOT!!!

There are plenty of adds in magazines and on the web proclaiming that for a small fee the advertiser will help you to obtain a Federal Grant to start or expand your business. Well, here is what the Federal Government has to say about that:

'The federal government does not provide grants for starting and expanding a business.

“Grants from the federal government are only available to non-commercial organizations, such as non-profits and educational institutions in areas such as, medicine, education, scientific research and technology development. The federal government also provides grants to state and local governments to assist them with economic development.

Some business grants are available through state and local programs, non-profit organizations and other groups. For example, some states provide grants for expanding child care centers; creating energy efficient technology; and developing marketing campaigns for tourism. These grants are not necessarily free money, and usually require the recipient to match funds or combine the grant with other forms of financing such as a loan.

If you are not one of these specialized businesses, both federal and state government agencies provide financial assistance programs that help small business owners obtain low-interest loans and venture capital financing from commercial lenders.”

Business.Gov (Small Business Grants)


So, before you and over your hard earned cash to someone who guarantees to get you federal grant money for your business, ask them if they are talking about getting money for a commercial venture or for a non-commercial organization.

If you are looking for funding for a qualifying organization, then you may wish to take a look at the Federal Government’s grant webpage: Grants.Gov.

I’M FROM THE GOVERNMENT AND I’M HERE TO HELP YOU?

Most people cringe when they hear that phrase, because when the “Feds” get in involved, things often go badly wrong.

But not always.

If you read my previous post, you will recall that I closed by saying the before you went scouting around for financing, you needed to have a BUSINESS PLAN. The term Business Plan can give an entrepreneur a pain more annoying than a tooth ache. But Business Plans are a reality in the world of finance. It’s Simple, when you deal with banks and professional lenders – No Plan = No Loan.

But take heart, a Business Plan is not rocket science and it can be done without a great deal of pain. AND HERE’S THE GOOD PART: The Federal Government Really Can Help You With This!

Let me introduce you to the SBA’s “Small Business Planner.” This is a series of web sites that can take the small business owner from “Soup to Nuts” in planning and running his business.

In my last post, I think I may have gotten your attention with an article about financing your business. Now that I have gotten your attention, let me bring you back to reality. Financing will do you no good, if you do not have a sound business plan. A fool and his money are soon parted, and if you go into business without a plan, you may just be that fool.

And even before you try to write your business plan, you need to know what you are doing and why. The SBA has plenty of helpful information that can guide you along the path to establishing your small business and their Small Business Planner is a great place to start. It has everything from start to finish with a small business. And remember, at some point there will be a "finish." And whether you will be around to see it or not, you should plan for it.

Here is a list of the topics covered by the SBA Small Business Planner:

Plan Your Business
Get Ready
Write a Business Plan

Start Your Business
Find a Mentor
Finance Start-Up
Buy a Business
Buy a Franchise
Name Your Business
Choose a Structure
Protect Your Ideas
Get Licenses and Permits
Pick a Location
Lease Equipment

Manage Your Business
Lead
Make Decisions
Manage Employees
Market and Price
Market and Sell
Understand Fair Practice
Pay Taxes
Get Insurance
Handle Legal Concerns
Forecast
Advocate and Stay Informed
Use Technology
Finance Growth

Getting Out
Plan Your Exit
Sell Your Business
Transfer Ownership
Liquidate Assets
File Bankruptcy
Close Officially

As you can see, the list is quite extensive; but for now, we are only going to focus on the section titled "Plan your Business" and we will use the SBA website as a guide while looking at other helpful sites to simplify or fill in the gaps.

A COUPLE OF FINAL NOTES FOR THIS POST

Before you get too far into the Small Business Planner, you should take a moment to look at the
SBA Business Assessment Tool. Being an entrepreneur is not for everyone, and this Assessment Tool can help you to decide if being a small business person is for you. You don’t want to go through all of the trouble to start a business, and get it funded only to find out that you don’t like it. This Assessment Tool is pretty straight forward, and is well worth the effort it takes to complete it.

Finally, there is a SBA Business Plan Tutorial and a SBA Business Plan Template available for you provided by the SBA using these two sites helps you to understand what you are doing and why you are doing it (in terms of a Business Plan); and the Template helps keeping you from having to reinvent the wheel.

There is plenty to explore in the SBA’s Small Business Planner, and in future posts I will explore some the specific items.

START-UP CAPITAL FOR YOUR SMALL BUSINESS

So you know what type of business you want to go into and you know what type of business structure your business will have. Regardless of whether you want to go into business with a Sub S corporation or a LLC or some other entity, you will need money to get it off the ground.

What we are talking about is “START-UP CAPITAL”

The U.S. Government’s Small Business Administration offers the following advice:

“Before seeking financial assistance, ask yourself the following:

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

How do you define your need? Do you need money to expand or as a cushion against risk?

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

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

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

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

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.

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.

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

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. All capital sources will want to see your business plan for the start-up and growth of your business.

The also want the reader to know:

Not All Money Is the Same
There are two types of financing: equity and debt financing. 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 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
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 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.

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 the main disadvantages of equity financing.


Debt Financing
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. For most borrowers this is a burden, but also a necessity

This information can be found at the following SBA website on start up capital


How Stuff Works has a very useful web site that explains in greater detail HOW START UP CAPITAL WORKS . This How Stuff Works website is a cluster of multiple web pages that walks the reader through start-up financing, as well as having a Glossary. Capital Needs, Types of Capital, Using Personal Funds, Borrowing from Friends and Family and Getting a Business Loan are just some of the topics covered at this website.

Inc. Magazine also has an on-line article on Start-Up Financing that cover quite a bit of ground. The language in the Inc. Magazine article is a little more sophisticated than that in the How Stuff Works article, and it may be more suitable for individuals with a higher degree of experience in business.

Lastly, I would like to mention the Entrepreneur Website . It is short and concise and gives a quick overview of the topic and reading this may be helpful for understanding the other articles.


Money is the life’s blood of any business and if you do not have it to start your business then nothing will happen. You should not be deterred by the perceived obstacles to obtaining the necessary capital to start your business; you just need to know where to go for expert advice and then have the discipline to follow it.

Finally, I would like to direct your attention to a statement by the SBA that I quoted earlier in this article:
”Perhaps most importantly, how does your need for financing mesh with your business plan?”

Before you can finalize your decisions about your start-up financing, you need to have A BUSINESS PLAN

Most sources of financing will not even consider investing in your business if you do not have an intelligent Business Plan. And Business Plans will be the topic of my next Post. So until then, Keep Up the Entrepreneurial Spirit!

Don't Think That You DON'T Need Insurance For Your Small Business

One of the most neglected aspects of small business ownership is Risk Management. And the easiest way to manage risk is through insurance

Boiled down to its simplest terms for a small business; insurance is value paid to protect against the loss of a much greater value.

When a small business is on a tight budget, owners consider “getting by” without insurance because it is often not required. But disasters can happen: natural or man made. Some people are more tolerant of risk than others, but if you decide to accept certain risk, you, as a small business owner should understand that you are doing just that: Accepting Risk!

FOUR important types of insurance to consider are:

Business Property Insurance
Business Disability Insurance
Business Liability Insurance
Errors and Omissions Insurance



Business Property Insurance is the most commonly held insurance and is acquired to protect your company's assets from hazards, theft, etc.

Business Disability Insurance protects both the business owner and the business in case someone vital to the operation of the business becomes incapacitated. It provides a source of income to the business so that the business does not have to be shuttered while the operation is shut down.

Business Liability Insurance is a safeguard against financial disaster in the course of an unfortunate incident for which the business or one of its agents is responsible. Even if you have an LLC or a corporation, you may not be personally insulated from liability – and the business certainly is not.

Errors and Omissions Insurance is most often used to protect board members and other decision makers within a business structure. Poor decisions on the part of board members may not always result in personal liability, but Errors and Omissions Insurance protects you when it does.

All of these types of insurance and more can be found at the The About.Com web site; “Insurance Needs for Small Business.”

The health of your small business will depend upon a good risk management plan, and insurance should be an important part of that plan.

WRECKING YOUR SMALL BUSINESS: TRAGIC COMEDY IN FIVE ACTS

So, you have a business and you have created either a corporation or a limited liability company to be the business entity to conduct that business; and you think that you are protected.

ACT ONE: You open the doors to your new business Business Interests Group and yourr very first client or customer walks through the door [or contacts you online] to buy your product or hire your services. “How shall I make out the check?” the client asks. “Make it out to me, ‘John Q Businessman,” you reply happily.

WRONG!

You have just made one of the many common errors committed by the small business owner. You go through all of the trouble to create a business entity to protect you from liability and then you prevent it from protecting you. It is just as if you have put on shin guards to go out and play in traffic!

It is fine to be proud of your individual accomplishment in starting and running a good business, but you can not let your ego get in the way of having your business entity protect you. Your business entity is a separate legal person. That is why you created it – so that this separate legal person can absorb the liability and you do not have to.

If you have your personal name on the business checks and invoices the customer or client may reasonably have the right to believe that he is doing business with you and not your business entity. The exact name of the corporation or LLC should be on all of the businesses' contracts, checks, invoices and business cards that you give to your employees.

ACT TWO: Your business is doing well and you want to move to a larger office and obtain a higher quality web site. You find the right site and a web site provider that is compatible with your business. You prepare the company check to make the deposit and first payment and you sign the contract in your own name.

WRONG!

The business should own the lease and the web site, not you. By signing the contracts in your own name, you have just jumped out in traffic again thinking that your shin pads will protect you. When you created your business entity, you most likely gave yourself a position (such as President, Secretary, Treasurer or Chairman of the Board). When you sign contracts, YOU SHOULD SIGN ON BEHALF OF THE BUSINESS ENTITY AND IN THE CAPACITY OF YOUR POSITION. For example the contract could be signed: “Business Interests Group by: John Q. Business, President.” This way, you are not incurring any personal liability by simply signing a document, and it is clear that it is Business Interests Group that is entering into the contract.

ACT THREE: Several months after you have expanded your business, you fear that you have not chosen a business name wisely. Your regular customers call your business by its initials “BIG” which has become a catchy nickname. The word spreads about “BIG” and business grows. You go with the flow and hang a new sign over your door and change the name of the web site to “BIG” and you simply start doing business as “BIG.”

WRONG!

Unless you register your new name with the appropriate authorities, the resulting confusion could lead to liability for you. Just because you say that Business Interests Group is “BIG” that does not mean that “BIG” exists as a legal entity. And worse still, what if the name “BIG” is owned by someone else? Registering the fictitious name will ensure that is not the case, but a name check will be required before it will be approved. Another possible mistake in using a fictitious name is in registering the name with you being the owner of that name and not the business entity. If you own the fictitious name “BIG” your business entity does not own it, it can fairly be assumed that it is you who is conducting the business and not your business entity.

ACT FOUR: You have been in business for over a year and you are approached by a local business woman about entering into a joint venture. The business is owned by more individuals than your self (these could be stockholders and/or board members in a corporation or members in a LLC) but you have to act fast in order to take advantage of this fleeting opportunity. You decide to do the deal and enter into a contract with your new joint venture partner without getting the permission of the other members, board members or stockholders as required in the business entity’s By-Laws. But since you are the President (i.e. “Top Dog”) and the person who runs the business anyway, you figure that this is not a problem.

WRONG!

When the deal with the joint venture partner goes sour and both your companies are sued, your members, board members or stockholders whose approval was required for the deal my refuse to let their investment be jeopardized and require you to absorb the liability personally. And if you entering into the joint venture was unauthorized – GUESS WHAT? – You probably are personally liable. You must follow the rules of the business entity as they are set out in the formative documents and By-Laws if you expect to be protected.

ACT FIVE: The office building down the street is up for foreclosure sale and you can snatch it up at a great price. You take the Business Interests Group’s books down to the bank and apply for a loan under Business Interests Group’s name. The bank likes the deal but Business Interests Group is not credit worthy enough on its own. Your banker tells you that they will do the deal if you give them your Personal Guarantee, and in fact he assures you that the loan will go through if you give your guarantee. It feels good to be so well thought of by your banker and beaming with pride you sign the guarantee.

WRONG!

You’ve done it again! What is the use of having a separate business entity if you are still put your personal assets on the line? In all fairness it might be such a great deal that sticking your neck out may be worth it. BUT YOU MUST UNDERSTAND THAT WHEN YOU SIGN A PERSONAL GUARANTEE, IT IS JUST THAT, A GUARANTEE THAT YOU PERSONAL ASSETS WILL BACK UP THE DEAL. If you must give your guarantee for the business entity, you should look into receiving some benefit in return, and this could be discussed with the members, board members or stock holders of the business entity.

This was a short dramatization in Five Acts to illustrate how your actions can defeat the very purpose of doing business using a corporation or LLC. The Ezine Articles web site has a host of articles on various topics relative to using corporations and LLCs with which to operate your small business. Perhaps you might like to take a look at some of them.

Consider A Limited Liability Company For Your Small Business

A Limited Liability Company is often considered to be a type of business organization that has both the insulation from liability afforded by a corporation combined with the tax pass-through advantages of a partnership.

The LLC permits a business to operate more like a regular partnership. Income is distributed to partners who report it on their individual income tax returns, while at the same time those individuals are protected from personal liability for the business's debts, in pretty much the same way as a corporation does. In general, unless the business owner establishes a separate corporation, the owner and partners (if any) assume complete liability for all debts of the business.

The LLC may seem to afford the same advantages and disadvantages as the subchapter S corporations; but there are some subtle differences. A subchapter S corporation can issue only one class of the company stock; but an LLC can offer several different classes of stock with different rights. And while S corporations are limited to a maximum of 75 individual shareholders (and all of these shareholders must be U.S. residents) an LLC can have an unlimited number of individuals, corporations, and partnerships who are participants in the LLC.

Another benefit that the LLC has over the limited partnership is that it provides significantly greater tax advantages. In a limited partnership a partner’s are considered passive losses and cannot be used as tax deductions to offset active income unless the partner is active. And active partners become liable for the firm's debt. And even though the owners of an LLC do not assume liability for the business' debt, any losses the LLC incurs can be used by the owners as tax deductions against active income.

It is important to note, however, that there is a "transferability restriction test" with LLCs and their ownership cannot be transferred without restrictions. But while this restriction may be a fatal flaw for large business organizations that need to transfer stock to raise money (such as on a stock exchange) it should not be a major problem for small businesses that seldom transfer ownership interests.

Entrepreneur.com has a very informative article on LLCs.

--------------------------------------------

Here is what the IRS says about LLCs:

Limited Liability Company (LLC)

A Limited Liability Company (LLC) is a relatively new business structure allowed by state statute.

LLCs are popular because, similar to a corporation, owners have limited personal liability for the debts and actions of the LLC. Other features of LLCs are more like a partnership, providing management flexibility and the benefit of pass-through taxation.
“Owners of an LLC are called members. Since most states do not restrict ownership, members may include individuals, corporations, other LLCs and foreign entities. There is no maximum number of members. Most states also permit “single member” LLCs, those having only one owner.

A few types of businesses generally cannot be LLCs, such as banks and insurance companies. Check your state’s requirements and the federal tax regulations for further information. There are special rules for foreign LLCs.

For additional information on the kinds of tax returns to file, how to handle employment taxes and possible pitfalls, refer to Publication 3402, Tax Issues for Limited Liability Companies (PDF).

You can read more at the IRS’s site.
------------------------------------------------------------------

Here is an excerpt from Find Law on how to form an LLC:

How to Form an LLC

Limited liability companies (LLCs) are easier to create than corporations -- and forming one may be the best thing you can do for your business.

Forming an LLC (limited liability company) is not as hard as most people think. Here are the steps you need to take to make your LLC a legal reality.

1. Choose an available business name that complies with your state's LLC rules.
2. File formal paperwork, usually called articles of organization, and pay the filing fee (ranging from about $100 to $800, depending on your state's rules).
3. Create an LLC operating agreement, which sets out the rights and responsibilities of the LLC members.
4. Publish a notice of your intent to form an LLC (required in only a few states).
5. Obtain licenses and permits that may be required for your business.

To read the entire Find Law article on how to start an LLC, you can click here.


This article is to designed to point you towards resources that can help you consider whether you would like to form an LLC and if it would meet your needs. This article does not contain any legal advice and should not be construed as such. In order to get legal advice, the reader should consult with an attorney.

Starting a Business with a Subchapter S Corporations

Entrepreneur at Entrepreneur,com defines a Subchapter S Corporation in the following way:

“Definition: A special form of corporation that allows the protection of limited liability but direct flow-through of profits and losses.”
The significance of this for the small business person is that it is possible to save on the costs of being taxed twice by the IRS on revenues that your business generates.

Here is what the IRS web site has to say about Subchapter S Corporations:

S Corporations

“An eligible domestic corporation can avoid double taxation (once to the shareholders and again to the corporation) by electing to be treated as an S corporation. Generally, an S corporation is exempt from federal income tax other than tax on certain capital gains and passive income. On their tax returns, the S corporation's shareholders include their share of the corporation's separately stated items of income, deduction, loss, and credit, and their share of nonseparately stated income or loss.”

If you create an S corporation you may nevertheless be liable for taxes such as: Income Tax, Estimated tax, Employment taxes and Excise Taxes. The: IRS web site can help you navigate the forms that you will need to file these taxes.

I do not believe in re-creating the wheel, and there are plenty of informative articles on the web about Subchapter S Corporations. One very good article is “Subchapter S: Some Myths, Realities and Practical Considerations”, which is one of a series of articles entitled: “Starting Up: Practical Advice for Entrepreneurs” by Joe Hadzima. This particular article is reprinted from the Boston Business Journal and posted by MIT at its website.

Entrepreneur also gives a very good run-down of some of the benefits and drawbacks of doing business as a Subchapter S Corporation .

And finally, for a brief overview of Subchapter S Corporations in very clear layman’s terms, you may wish to take a look at Wikipedia’s treatment of the issue.

We will return to the issue of Subchapter S Corporations and compare them to the other possible forms of business structures for the small business. But for now, this should provide plenty of reading for the Entrepreneur who is consider starting a small business and structuring it as a Subchapter S Corporation.