Mission #2-7 Considering Your Business Format

Objectives:

• Sometimes, two heads are better than one.
• Ask owners their sale or retirement plans.
• Limited partners are silent.
• Incorporation protects a name.
• Businesses can take unexpected directions.

Background:

One of the best reasons for an Action Principles^® Champion to choose entrepreneurship is independence. You're your own boss. You call the shots. You win and lose by virtue of your own hard work and mistakes.

You should like this idea. So, why would you ever consider a partnership? The honest answer is that you probably wouldn't unless two heads and/or two wallets are better than one.

In Ana's story, Ana's partnership with Sheila certainly worked. Presumably, Ana was able to accomplish a lot more with a partner than she would have been able to do alone. Certainly, Ana was able to able to move her plans along more quickly.

On our last mission, you saw three people starting landscaping, sewing/design, and used car sales' businesses. Each of these businesses could be started small on a shoestring budget. The entrepreneurs didn't necessarily need a partner's help.

But, what if your business concept needs more, maybe a lot more money or a lot more experience? Let's say that your entrepreneurial dream is to start a yacht charter service. Without a lot of experience, contacts or deep pockets, you could meet a lifetime of frustration trying to raise the millions to get this venture off the ground and into the water. Obviously, you'll need a lot of money to purchase a yacht. Even if you lease the yacht, you'll probably need substantial financial backing to stay afloat until the clients start lining up at the dock and your booking secretary is able to say,

"Sorry, we book well in advance. Call us again in 18 - 24 months."

Bottom line, if you want to be in the yacht chartering business, you will probably need a well-connected or well-heeled partner or partners.

Other business start-ups may also need significant capitalization, a lot of money. For example, if you wanted to open a Laundromat, a theater, a hair styling salon or a service station, the financial backing of a partner would make life easier.

There are two major types of partnerships: general and limited.

A general partnership consists of two or more partners where each partner assumes total liability for the other partners.

Let's say you start a business with Joe, a friend from college. Joe has a few problems but overall he's a good guy. You have a 50/50 general partnership. In the beginning, the partnership seems to be working. But, after a while, the long hours start to take a toll on Joe and you suspect that his drinking problem may be back. Joe starts doing a lot less than half the work. He claims to be having family problems. Then, you find out that Joe has been buying expensive gifts for his girlfriend using the assets of the business as collateral. You confront Joe. Joe quits the partnership. You are responsible for all the debts including those gifts for Joe's girlfriend.

Let's try again.

You start a 50/50 partnership with your friend Alicia. You both work very hard. Then, Alicia's boyfriend, Marcus, loses his job and Alicia insists that you and she hire poor Marcus. But, when Marcus comes on board, he thinks that he runs the place. Marcus starts doing his own thing and Alicia just giggles and smiles. You protest in vain. Marcus and Alicia start acting like they have two votes against your one. This new arrangement makes the working environment very uncomfortable for you. Marcus and Alicia suggest that YOU quit the partnership.

Blood is thicker than water. You don't want to be in a business relationship where a partner must choose between you and a relative. Likewise, you don't want to be the odd man out in affairs of the heart. Business is business means that business is business.

Here's a general partnership, which did work:

Discovery Flower Boutique

Christine wants to be a florist. In doing her research, she meets Darlene who owns and operates Discovery Flower Boutique. They hit it off. Discovery is just the kind of business that Christine is interested in owning, so she asks Darlene if she would be interested in selling. Darlene says that she intends to work for at least another five years until her husband retires and her last son graduates from college.

Christine has an idea. Rather than being competitors, perhaps, they can be partners. They agree on a value for the business of $40,000. They agree that each year for five years that Christine will give Darlene $8,000 and that in consideration she will get 20% of the business. After five years, Christine will be an experienced owner of the business and Darlene will have achieved her objective and can retire or become an employee of Christine's. This is a win/win partnership.

As you do your research, if you find an existing business you might like to own, it certainly makes sense to ask the owner about his or her future plans. The answer could be a pleasant and workable surprise.

In forming a general partnership, you should have a partnership agreement drafted by an attorney. That agreement will cover such topics as:

• A description of the business.
• The duties of the partners.
• Description of powers to vote and borrow.
• The contribution and percentage interest of each partner.
• How and when profits and benefits will be divided.
• How partners can withdraw and new partners be added.
• Insurance and survivorship benefits.

A limited partnership is different. In a limited partnership, there are general partners and limited partners. The general partners run the business. The general partners make all of the business decisions. Limited partners are silent partners and do not run the business. Being silent means that limited partners have no say in how the business is run. The general partners assume the full liability of the business and the liability of the limited partners is limited to their monetary contribution to the business. If Richard invests $10,000 in your business as a limited partner, he can lose only his $10,000. You, as the general partner, have full financial liability.

Sole Proprietorship

A majority of small businesses are sole proprietorships. In most cases, you will be starting your small business as a sole proprietorship. With a sole proprietorship, you make all the decisions for your business. You are the only person responsible for the profits and losses of the business. Also, in borrowing money for the business, you must personally guarantee the repayment of all loans. Your liability in a sole proprietorship is unlimited.

Corporation

The main appeal of a corporate form of business ownership is that it reduces personal risk. The federal and state governments treat a corporation as a separate and distinct person under the law. If a corporation piles up debts, it is the corporation and not the corporate owners who are responsible for repayment.

A corporation is owned by shareholders and run by a Board of Directors who hire a chief executive officer (CEO). It is possible to sell stock in a corporation. It is possible for a corporation, by itself, to borrow money. A corporation has a life of its own beyond the life of its shareholders.

A disadvantage of a corporate business format is that the profits may be subject to double taxation. In other words, taxes would first be paid by the corporation and then by the shareholders. However, there is a corporate form designed for small companies called the Subchapter S corporation. The Subchapter S corporation can offer liability protection and the profit flow through benefits of a sole proprietorship or general partnership but there are restrictions on the sale of stock and the number of stockholders.

Limited Liability Company (LLC)

A limited liability company (LLC) is a business entity created by statute. It has some characteristics of a partnership and some characteristics of a corporation. A LLC has the tax advantages of a partnership and the limited liability advantages of a corporation. Properly structured it is taxed like a partnership or an "S" corporation. If the LLC is not properly structured, it is taxed like a "C" corporation. Forming a LLC is more complex than forming a partnership, but less complex than forming and operating a corporation. The LLC is quickly becoming the form of choice for many small businesses.

Naming Your Business

In most locales, if you operate a sole proprietorship, you must register the name of your business with the town clerk's office. You will ask for a "Doing Business As" (DBA) form. For example, this will put on the public record that "Cheryl's Catering Service" is actually owned by Cheryl Donofski at 131 Plain Street in Newton.

You should be aware that registering a sole proprietorship via a DBA form with the town clerk does not usually protect a business's name. In most states, if ten different Cheryls want to open "Cheryl's Catering Services," they can. Obviously, one bad Cheryl can hurt nine good Cheryls even though the nine have nothing to do with the one.

However, incorporation does protect a name. If Cheryl forms a corporation, "Cheryl's Catering Services, Inc.," then, no one else in the state can use that name. Even if for many years some other poor Cheryl had been using the name, "Cheryl's Catering Services" as a sole proprietorship, that Cheryl is out and must stop using the name. The Cheryl who has the right to use the name is the Cheryl who owns the Cheryl corporation.

Any type of corporation, a regular corporation or a Subchapter S corporation, will do the job of name protection for your state.

The best method for protecting a name across the globe and forever is to own the dot-com domain name. It would be a mistake to start any business unless you can register the name as a dot-com.

Story:

A Conversation with Ana

At the Lopez Goff gallery, Alex Darby spoke with Ana about twenty months after the opening of her gallery. Alex has read Ana's story.

AD: "Ana, how is the gallery doing?"

A: "Very well, thank you, Mr. Darby. Our first year gross was over $350,000 and we're on target to double that figure this year."

AD: "Has the gallery evolved as you thought it would?"

A: "Actually, I had thought that we would have had a 50/50 mix of new artist paintings and established artist limited edition prints. As things have worked out, our business is about 40% autographed posters, 30% limited edition prints, 20% paintings and 10% framing."

AD: "The autographed posters, then, have become much more than just a hook to bring in business for the other works."

A: "Yes, the autographed poster business has really taken off. We do the charity work as mentioned in the story but we have also been able to buy in bulk from individual galleries on a direct basis. We also are building an inventory and selling individual posters of significance, such as those by Picasso who, obviously, is no longer available to sign any more posters.

"About half of our poster business comes from online sales and we are building a database of collectors. We are also wholesaling the posters to other galleries."

"In addition to the autographed posters, we are also finding a market in early 20th Century unsigned Deco posters and also advertising posters."

Remember, it is not what you want; it is what the customer wants. You might like fine art but if the customers want to buy posters that you're smart to specialize in selling posters. When you are rich, in twenty years or less, you are free to do whatever you want because you are rich!

AD: "Is the young man you mentioned in the story still handling the poster business?"

A: "Actually, the young man, David Hendricks, made a personal decision to devote his time to his painting. So, although he is still associated with the gallery, we have hired another full time person with two part time assistants to handle our poster division."

AD: "You've really come a long way. Any other immediate plans?"

A: "Sheila feels that we can do more with paintings. She, as you know, orchestrates the painting shows. She is pushing for us to lease a Sturgess Avenue storefront devoted exclusively to paintings."

AD: "You'd close this basement gallery, then?"

A: "Absolutely not. This space would stay for the poster/print business and the new space would be a satellite of this operation. Up until now, the posters are where the money has been made."

AD: "Did you ever work out a buy-back agreement with Sheila?"

A: "We've talked about it on and off, but really not seriously. We need each other too much. Our skills mesh very well. Our accountant has told us that the business is worth about $200,000 at this point. At that figure, to buy out Sheila would cost me $80,000 and I really don't want to be in a debt position again if I can help it. The business has paid her back the original $25,000 loan."

AD: "The buy-back is gone then?"

A: "Well, I would like to own this business outright, but I'm not pushing the point. Sheila and I do have a provision that in the event that one of us wishes to retire or is deceased that the other partner has the first right-of-refusal to buy the other partner's interest."

AD: "And, you're still in your early thirties. And, Sheila is..."

A: "And, Sheila is quite a bit older, yes."

AD: "So, in about two years, you have gone from a low salaried job to owning your own business and you have equity of about $120,000."

A: "Yes, but pardon the pun, that $120,000 is paper profit if I were to sell and I doubt that I will ever sell."

AD: "You're satisfied then?"

A: "I'm satisfied that I'm working in a field I love. That I'm my own boss. And, that my future earnings are limited only by my own creativity and willingness to work hard."

AD: "Are you spending any of your new found fortune on luxuries?"

A: "Not really. Early on Sheila and I made a decision to put most of our net earnings back into inventory. So, at this point, rather than trying to sell under the 90 day time frame, we are purchasing most of our inventory directly."

AD: "I'm curious are the margins in the art business really 100% to 500%?"

A: "Well, let's say that our wholesale/retail margins are consistent with the industry and with antiques, stamps, coins, oriental rugs, etc."

AD: "I think you learned that answer from your friend, Sandy."

A: "I did."

AD: "Ana, if you were advising others about starting in business, what would you say to them?"

A: "I would say find a business you love and are willing to work hard at. It could be anything from sporting goods store to a bookshop. It doesn't matter. Read everything you can about the business and never stop wanting to learn more. Find people who are already successful in the business. These are people that you'll want to talk with. Just keep plugging, I guess. Nobody is telling you that you can't do something but yourself."

AD: "Initially, did you find encouragement for your venture?"

A: "Well, if you talk with people who are already successful in your field, then they can empathize with what you're trying to do because they were there once themselves. Successful people understand people who want to be a success. I had confidence and gained more confidence by talking and working with people like Sandy and Sheila.

"If you're asking me what would have happened if I had spoken to unsuccessful people or people satisfied with their jobs or other people who think that you have to wait 20 or 30 years to accomplish something, then, yes, I suppose that they would have told me that it couldn't be done. That I was crazy."

AD: "One final question. I know that a lot of people are going to think that your success rested with your association with Sheila Goff and her contacts. How would you respond to that?"

A: "I would say, "Yes," and I would not try to minimize the benefit of Sheila as a partner. Did Sheila's contacts help? Yes, they did. At the same time, I would state that I was prepared to open by myself in East Bank, in the leather district or even from my own apartment. I would still have had my own museum contacts. I would have had the newsletters. I would have had the poster and print business. I would still have been looking for financial partners. I would still have been researching, studying and talking with successful people in the art world. I would still have had my dream and my willingness to work."

AD: "Thank you, Ana."

A: "Thank you, Mr. Darby."

Operational Limitations:

• Be careful. Your business is not a charity, a social service agency or a haven for the underemployed. Keep personal relationships at arm's length. Business is business.
• On the job romances in a small company almost always prove to be a mistake.
• Be aware. Partnerships can be good or very bad.

Seeds for thought:

• What help can partners be to a business?
• What does capitalization mean?
• Name several start-up businesses that may need significant capitalization.
• What is a general partnership?
• What is a limited partnership?
• Who should help you draft a general partnership agreement?
• What topics should a general partnership agreement cover?
• What do you think is a silent partner?
• What is a sole proprietorship?
• What are the advantages of a Subchapter S corporation?
• How can you protect the name of your business?
• What did Ana gain from her partnership with Sheila?
• Do you think that Ana could have still been successful without Sheila?
• What advice does Ana have for others starting a business?

Jargon:

Corporation - Form of business ownership involving stock and some personal protection with extra taxation.

General partnership - Form of business ownership in which two or more people share the profits and losses.

Going great guns - Everything working out well.

Hacker - Computer geek breaking into a supposedly secure computer network.

Hold someone's feet to the fire - Force someone to take a specific action.

Lay your cards on the table - Be honest.

Limited partnership - Form of business ownership in which a general partner keeps complete management control while assuming full liability. Limited partners loses are limited to the amount of their investments.

On your watch - You are the one responsible.

Sole proprietorship - Form of business ownership in which you are the man. You take all the gains and you absorb all of the loses.

We need it yesterday - A project or equipment delay, which must take immediate priority.

Questions and Answers:

You often seem to be putting down higher education and business schools. Don't you think that they offer any real benefits?

Of course they offer real benefits if your goal is to run General Motors or any big company. But, if your goal is to more modestly gain financial independence though ownership of your own small business, then spending 2 or 3 years in a business school may offer less benefit.

If you follow the three principles, you can make $70,000, or $80,000, or much more, next year and every year to follow, mowing lawns or painting houses.

If you go to business school and the result of your studies brings you to an appreciation of the three principles, then you've gotten your money's worth. If not, good luck.

I'm really ready to start my own small business right now. If I start your program, how long should I expect it to take?

If you want to open a sporting goods store, you want to be out visiting as many sporting goods stores as you can. You want to find the very best sporting goods stores in your area and compare and contrast what the best are doing as compared to the rest. Why are the best the best? Why are the also-rans the also-rans? You want to find the best suppliers and distributors. You will want to consider volunteering to work for several stores for a few days or a week each.

Start whenever you feel ready to put your business plan into action. As far as your researching and studying goes, for the best, it never ends.

How do you choose a super business location?

Some businesses need high visibility location and high foot traffic counts, while others don't need visibility or even a sign.

If you sell T-shirts that are sold by many other vendors, then you need high visibility and high traffic. On the other hand, if your business is violin restoration, then your customers will go out of their way to find you.

You really can't ask a commercial real estate broker where to open a jewelry store because the broker's advice is going to be slanted toward whatever space they have listed. You have to do your own investigating. As you do your initial research, you will find other jewelry stores, which you want to model your store after and which will give you a solid idea as to the type and amount and location of space that you will need to succeed.

Action Plan:

• Look in the Yellow Pages and find three businesses that you think are sole proprietorships, three that are partnerships, and three that are corporations.
• Prepare two stories. One story is about a small business partnership that worked. The other is a story about a small business partnership that didn't work. Give reasons for each success and failure.
• During your twenty minutes of quiet time, think of people you know who would make good partners and people who would be more trouble than they're worth.
• If you worked with a business partner, what complimentary skills would you look for?

Support:

• For small business resources from American Express
• For general business informations and advice
• For general business information - Yahoo Finance
• http://finance.yahoo.com/
• For stock market overview
• For personal finance and stock market education

Inspirational Insights: