Frequently Asked Questions About Small Businesses (FAQ)
Getting started
What do you need to succeed in a small business?
Do I have what it takes to own and manage a small business?
What have some SCORE clients done to launch their businesses successfully?
Where can I get general information on starting a business in New York?
Form of business
How should I structure my business? (Sole Proprietorship, Partnership
Corporation "S" Corporation, Limited Liability Company)
Would having a partner make it easier to be successful?
How do I register a business name in New York?
Business plans
What is a business plan?
Do I really need a business plan?
Will SCORE help me write and complete my business plan?
Raising money
How much money do I need to get started?
How much of my own money will I need to invest in order to obtain a loan?
What sources of funds are available? (Banks, SBA, personal loans, owner financing, home equity loans,
venture capital, factoring)
How do I get a government grant?
How can I raise money through investors?
How can I get a minority (or woman-owned) business grant or loan?
Taxes, Legal & Permits
What tax numbers and licenses do I need to operate my business?
What is an Employer Identification Number (EIN)?
Is an EIN the same as a tax ID number?
As a sole proprietor, do I need an EIN?
How do I apply for an EIN?
Getting started
What do you need to succeed in small business?
There are four basic needs for success:
Sound management practices
Industry experience
Technical support
Planning ability
Few people start a business with all of these bases covered. Honestly assess your own experience and capabilities and then look for partners or key employees who can provide abilities that you don't have or in which you are not strong.
What do you need to succeed in small business?
Do I have what it takes to own and manage a small business?
You will be your most important asset so an objective appraisal of your particular strengths and weaknesses is an essential element in starting a business.
To determine if you have what it takes to succeed, ask yourself some of the following questions and be brutally honest with your answers.
Am I a self-starter? How well do I get along with a variety of personalities? How good am I at making decisions? Do I have the physical and emotional stamina to run a business? How well do I plan and organize? Are my attitudes and drive strong enough to maintain motivation? How will the business affect my family?
When you have answered those questions, ask someone who knows you well and will provide honest replies to answer those questions about you – and then compare results. If the answers differ, re-consider your decision.
What have some SCORE clients done to launch their businesses successfully?
Schedule a first counseling session with a SCORE counselor.
Begin writing your business plan.
Attend one or more SCORE workshops.
Continue meeting with your SCORE counselor(s) as your business evolves.
Where can I get general information on starting a business in New York?
Go to Getting Started on this web site.
Also go to www.state.ny.us/. Click on “Business”.
Form of business
How should I structure my business: sole proprietor, corporation, etc?
Most new businesses should probably organize as sole proprietorships because of the simplicity and low initial cost. Review your business plan with a SCORE business counselor to discuss various business structures and determine which best suits your business. If more than one individual will own the business, a business attorney and accountant should be consulted from the beginning, so necessary legal documents can be prepared and filed for your partnership or corporation.
Sole Proprietorship
A sole proprietorship is an unincorporated business that is owned by one individual. It is the simplest form of business organization to start and maintain. The business has no existence apart from you, the owner. Its liabilities are your personal liabilities. You undertake the risks of the business for all assets owned, whether used in the business or personally owned. You include the income and expenses of the business on your own tax return.
Many businesses operate as sole proprietorships. This is the simplest form of organization with the greatest freedom from regulation and paperwork.
Advantages include: It is easy to form, You are in full charge regarding all decision-makings, Offers the most flexibility, Simpler taxes, Less bureaucratic restrictions.
Disadvantages include: Owner has unlimited personal liability for debts of the business, Difficult to raise capital and financing, Depends on the singular ability of the owner, Less professional in appearance, The business terminates with or upon the death of the owner
Partnership
An association of two or more persons to carry on a business.
Co-ownership of assets.
The need for a Written Articles of Partnership.
Mutual agency: share of management and profits.
Advantages include: Easy to form, Direct rewards, Combined efforts, Easier to attract capital, Flexible.
Disadvantages include: Unlimited liability of at least one of the partners, Dependent on the other partner, Dependent on the judgment of the partners as an agent, Difficult to dissolve, Death of a partner terminates the business, Any one of the partners can commit the firm to obligations.
Corporation
A distinct legal entity existing on its own
Advantages include: Liability is limited to the amount the owners have paid for their shares of stock together with undistributed profits, Continuity is unaffected by the death or transfer of shares by any of the owners. Better image, suggests more professionalism..
Disadvantages include: Extensive record keeping; Activities limited by the charter. Extensive government regulations, .Double taxation. More complicated to form, could require legal assistance.
However, some of the disadvantages are eliminated under a “Chapter S” election which the IRS recognizes for the benefit of certain small corporations.
"S" Corporation
The S Corporation is a corporation, for which an election has been made with the Internal Revenue Service for the income to pass through and be taxed directly to the stockholders on a pro-rata basis, avoiding double taxation on profits and dividends. It allows the stockholders to offset business losses against their personal income according to certain IRS regulations.
The S Corporation must have seventy-five or fewer shareholders.
The corporation can have only one class of stock.
All shareholders must consent to the election.
Can not have alien, non-resident shareholders.
The corporation can not own more than 80% of another corporation.
At least 75% of the receipts must be generated by business.
Limited Liability Company
Limited Liability Companies (LLC) and Limited Liability Partnerships (LLP) are relatively new business forms. They combine some of the advantages of a Chapter S corporation with those of a partnership. They have the limited liability advantages of a corporation, but operate with the flexibility and tax obligations of a partnership, a corporation or a sole proprietorship.
An LLC is an entity formed under state law by filing articles of organization as an LLC. Unlike a partnership, none of the members of an LLC are personally liable for its debts. An LLC may be classified for Federal income tax purposes as if it were a sole proprietorship (referred to as an entity to be disregarded as separate from its owner), a partnership or a corporation.
For any form of organization beyond a sole proprietorship, it is best to consult with legal counsel.
Would having a partner make it easier to be successful?
Having a business partner will not guarantee success. However, if you require additional management skills or star-up capital, engaging a partner may be your best decision. The ultimate success of a partnership depends upon the personality and character of the partners. Successful partnerships usually result when partners compliment each other so that a weakness in one is a strength in the other. If you decide to have a partner, make sure that each of you has a clear understanding, in writing, of the responsibilities and rights of each partner.
How do I register a business name in New York?
On the local level, registering your business name, after doing a search to make sure that it is not already in use, protects you from others who might be using the same name. This is called a DBA (Doing Business As). For more information contact the County Clerk in the county in which your business is based. A corporation must be registered with the state of New York. For more information, go to Getting Started on this web site
Business plans
What is a business plan?
A business plan is a written summary of what you hope to accomplish by being in business and how you plan to organize your resources to meet your goals. It is a vehicle to describe your business and your product or services and is a road map for operating your business and measuring progress along the way. The plan describes in writing, the market, the industry, customers and competitors, your products/services, your marketing plans and your operations along with sales and cash flow forecasts. The business plan is a document that should change as your business grows.
Most lenders will require it and it is easier to do the plan once then to do it for every lender. It will help you discover other aspects of your venture that you might not have considered.
Lenders, and other readers, appreciate short concise plans. Three to four pages of text plus five pages of financials does the job for many loan applicants.
Do I really need a business plan?
Absolutely. A pilot does not fly a risky mission without a detailed, well-researched flight plan. Trying to operate a business without a well-researched business plan is no less a hazard for you and your family than flying a mission in a small plane. By committing your plans to paper, your overall ability to manage the business will improve. You will be able to concentrate your efforts on the deviations from plan before conditions become critical. You will also have time to look ahead and avoid problems before they arise. This will require a great deal of thought as to the risks and benefits of proceeding. It will generate a lot of questions that you may not consider without this effort.
A business plan is the foundation of good business. Even if you are not seeking financing for your business, it is still essential since it serves as a guide for you in the management of the business and provides milestones to gauge your success along the way.
Will SCORE help me write and complete my business plan?
We will take you through the steps outlining the procedures to prepare the plan. However, it is important that you put your own thoughts in detail on paper of how you plan to structure and operate your business. This will help you walk through your thoughts and ideas about your business. When you have completed your draft, we can then go over it with you to "fine tune" it if it is necessary. For additional help, attend a SCORE workshop about writing a Business Plan
Raising money
How much money do I need to get started?
One of the leading causes of business failure is insufficient start-up capital. After you have determined how much you need for equipment, stocks and facilities, make sure you have enough money set aside to cover your operating expenses (fixed and variable) for at least one year. Be sure to include sufficient funds to repay any loans you may have taken out and your salary as an owner. Some successful businesses have started with less, but many more have failed for lack of sufficient start-up funds.
How much of my own money will I need to invest in order to obtain a loan?
It varies, and your past credit history may affect this, but most banks like to see the owners holding at least 20 to 30% of the start-up investment. A retail or service business may require a lower percentage, while a food or liquor-related business will often demand the highest commitment of personal funds. And a lender will expect you to provide collateral to cover the amount of the loan.
What sources of funds are available?
There a several sources to consider when looking for funding. It is important that you explore all your options before making a decision. (See Sources of Funding) Included in these are the following:
Owner Financing
One can use his/her personal funds to finance the business. In this case he/she can charge the business with reasonable interest.
Personal Loans:
Loans from relatives or friends are another source of financing. Many people are reluctant to approach a friend or relative, not wanting to risk the relationship. But, if other alternatives are not available, by all means talk to your friends. They might be glad to help, but they will want some kind of assurance that they will get their money back. It is good policy to be professional, have all agreements in writing with clearly defined perimeters, as to the term of the loan, the method of repayment and possibly an amount or interest paid for the money.
Banks and the SBA
The most common source of funding, banks and credit unions, will provide a loan if you can show that your business plan is sound and meets their lending criteria. There are various ways to seek start up financing through conventional loans from banks. Banks will need to look at a great deal of financial information about your business; operating statements, tax returns and many other financial documents. They will want collateral in hard assets. They might loan against inventory and receivables, but they are usually concerned that those assets will go first if the business runs into difficulties.
The bank may require having all your banking done at that bank.
The SBA no longer makes direct loans, but it does provide a guarantee of a major percentage of the loan to the lending bank. The amount of guarantee varies; presently it is around 75 percent.
The SBA offers guarantees on loans to small businesses by working with and through more then 25 banks in the Greater Rochester area. More details on SBA programs.
Home Equity Loans.
If you have a sizable equity in your home, you might borrow against the equity and use the proceeds to operate your business.
You must indicate on the loan application that you intend to use the money for financing your own business. Failing to do so could be considered misleading and might result in charges of fraud.
Factoring
The factor will buy your receivables at a discounted price and will collect the money on your behalf. It is a relatively expensive way of obtaining working capital, but it can be a good way to obtain funds for a growing business. Once they bought your invoices, theoretically collection is their problem, however most of them will demand that under certain circumstances they can charge back the invoice.
How do I get a government grant?
Generally speaking, there are no grants or free money for profit making businesses. There may be exceptions when non-profit organizations and businesses are involved in seeking charitable grants
How can I raise money through investors?
Venture capital is the most expensive and demanding in conditions. One must be in a particular segment of the economy, able to show great earning capabilities and a relatively short period (around five years) of projected repay. Venture capitalists want to see a capable management team and the promise that, in a few years, the company will be successful enough either to go public or be taken over by a larger company. They risk a lot.
How can I get a minority (or woman-owned) business grant or loan?
While the SBA does encourage banks to lend to minority and woman-owned businesses, the requirements and rules for borrowing funds are the same for all applicants. The SBA does not provide any grants. See Sources of Funding.
Taxes, Legal & Permits
What tax numbers and licenses do I need to operate my business?
SCORE offices have a list of names and addresses of the various city, county, state and federal offices you will need to contact for licenses, permits and registration fees. Most cites, towns and counties require registration of your business with the county clerk's office. Depending on your business, certain state permits may also be required. To obtain a state sales tax number, you will need to contact the state sales tax bureau. If you plan to have employees, you'll need an Employer Identification Number (EIN). For more information, go to Getting Started on this web site
What is an Employer Identification Number EIN?
An Employer Identification Number (EIN) is a nine-digit number that the IRS assigns in the following format: 00-0000000. The IRS uses the number to identify taxpayers who are required to file various business tax returns. EIN's are used by employers, sole proprietors, corporations, partnerships, nonprofit associations, trusts, estates of decedents, government agencies, certain individuals, and other business entities.
Is an EIN the same as a tax ID number?
Yes, an Employer Identification Number, or EIN, is also known as a taxpayer identification number, or TIN.
As a sole proprietor, do I need an EIN?
A sole proprietor would need to obtain an EIN only if either of the following applies: (1) you pay wages to one or more employees or (2) you have a Keogh retirement plan. For more details go to: irs.gov/businesses
How do I apply for an EIN?
Use Form SS-4 to apply for an EIN either by mail or by telephone. See irs.gov/businesses