Ten Reasons Why You Need a Strong Business Plan

A business plan is the cornerstone of starting a business as well as a significant tool for monitoring the progress and growth of your company. Below are 10 key reasons why you should have a business plan.

1. To Attract Investors. Before investors can decide whether or not to back your business financially, they will need to know as much as possible about how the business will operate and how their investment will be spent.

2. To See If Your Business Ideas Will Work. By having a business plan that outlines each aspect of your business, you can determine if your idea is actually viable.

3. To Outline Each Area of the Business. A business plan will provide an overview of all aspects of the business. You will be able to detail the who, what, where, when, and why of your day-to-day business operations, costs, and projected profitability.

4. To Set Up Milestones. By forecasting where your business will be in six months, one year, or five years, you are not only letting potential investors know your plans, but also setting up realistic milestones for yourself and your employees.

5. To Learn About the Market. Researching, analyzing, and writing about the market not only provides you with an overview for the business plan, but gives you greater insight into the overall market.

6. To Secure Additional Funding or Loans. Your business plan can demonstrate that you have met goals and illustrate the company’s growth and need for additional funding.

7. To Determine Your Financial Needs. The process of determining your financial needs in your business plan will force you to analyze your financial picture for your business.

8. To Attract Top-Level People. Your business plan will give talented people an overview of your business.

9. To Monitor Your Business. A business plan should serve as an ongoing business tool that you can use to monitor your progress.

10. To Devise Contingency Plans. While business plans often include some contingency plans, by virtue of having the document available, you can see how and where you can make such changes relatively quickly if, and when, necessary.

What's an Angel Investor?

If you're a cash-strapped entrepreneur looking for an infusion of capital, you may be curious about angel investors. Very few start-ups will receive an investment from an angel—in 2007, fewer than sixty thousand companies received angel funding, a relatively small figure considering more than ten times that many businesses are started each year. But for the right small business, this type of capital can fill the gap between that money you've gotten from friends and family and the venture capital that you hope to secure down the road.



So who is an angel exactly? An angel is a wealthy individual willing to invest in a company at its earlier stages in exchange for an ownership stake, often in the form of preferred stock or convertible debt. Angels are considered one of the oldest sources of capital for start-up entrepreneurs; the term itself, by most accounts, comes from the affluent patrons who used to finance Broadway plays in the early twentieth century. In 2007, angels invested $26 billion in 57,120 ventures, which breaks down to about $450,000 a deal, according to the Center for Venture Research at the University of New Hampshire in Durham. That makes angels a potentially powerful resource for newbie entrepreneurs with promising young companies.


But little is known or understood about the angel market, largely because it consists of individuals who make investments quietly. That is slowly changing, thanks in part to two organizations, the Angel Capital Association in Vienna, Virginia, which was founded in 2004, and its affiliate, the Angel Capital Education Foundation, which bring together angel groups to share best practices and provide basic information to entrepreneurs.

Whether you decide to seek an angel investment depends on your personal management style and the long-term plans for your company. Unlike a bank loan or other types of debt financing, equity capital (whether it's an angel investment or venture capital) gives someone else an ownership interest in your company. Many angels are successful entrepreneurs who have cashed out and now want to help others just starting out. While their expertise may be welcome, you need to ask yourself—especially if you're used to being in control—whether you want someone looking over your shoulder and making decisions for your company.

Keep in mind that an angel makes an investment in a highrisk opportunity (such as your fledging company) only when a return is expected. Angels typically look for "scalable" businesses that have the potential for great growth and a clear path toward profitability. In recent memory, angels (much like venture capitalists) have been attracted to hot start-ups in fields such as technology or life sciences, although increasingly angels are branching out into other sectors and in niche, mission-based areas.

If your business—say, a corner deli or gift shop—has no great plans to expand or enter new markets, an angel investor simply won't be interested. Because angels hope to make money by taking equity—usually preferred stock—in your company and realizing a large gain when the company is sold or goes public, they generally don't invest in "lifestyle" companies—that is, small consulting firms, local restaurants, retail shops or any businesses with limited earnings potential.

Source: Colleen Debaise, adapted from "The Wall Street Journal Complete Small Business Guidebook" (Three Rivers Press).

Forming an S Corporation

The following article is very informative, it was written by Colleen Debaise, adapted from "The Wall Street Journal Complete Small Business Guidebook" (Three Rivers Press).

Some business owners prefer to set up an S corporation, which provides liability protection while allowing profits to pass through to the owners' personal tax returns. This special tax status (its letter refers to subchapter S of the Internal Revenue Code) prevents the double taxation scenario created under a C corporation.

Owners of S corporations can reduce their overall tax bill by paying themselves a salary, subject to payroll taxes (Social Security and Medicare taxes), and then taking a dividend, which is distributed free of employment taxes (and, again, isn't subject to the corporate tax rate). There's a catch, though: that salary must be reasonable, which can be determined by researching salaries in similar industries in the same geographic region. The IRS is well aware that many owners of S corporations are tempted to underreport salary to avoid paying payroll taxes, while taking a hefty payroll-tax-free dividend. To avoid trouble with the IRS, set your salary at a reasonable level based on salaries for comparable positions— and keep careful records in the event of an IRS audit.

To set up an S corporation, you follow the same steps for setting up a regular corporation but take the extra step of electing S status via a special IRS form. To qualify for S corporation status, you must meet certain rules, such as having fewer than one hundred shareholders and issuing only one class of stock (preferred shares aren't allowed).

Forming a C Corporation

The following article is very informative, it was written by Colleen Debaise, adapted from "The Wall Street Journal Complete Small Business Guidebook" (Three Rivers Press).

The regular or C corporation is considered a legal entity that's completely separate from the owner or owners who create and manage its operations. The most common reason for setting one up is to protect your personal assets (such as your home, investments or retirement accounts) from any business-related liabilities; if the corporation goes belly-up, owners (called shareholders) lose their investment but won't be held liable for any debt owed to the company's creditors. Also, each owner is responsible for his or her own personal negligence or misdeeds but not that of co-owners.

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Corporations issue stock and are run by a board of directors (or, in smaller companies, a single director) who oversee major decisions and operating procedures. The issuance of stock makes it easier to attract investors and high-caliber employees, who may be motivated by the chance to own a piece of the company.

A drawback to forming a C corporation is the so-called double taxation of corporate profits. Because it's a separate entity, the corporation pays taxes at the corporate rate on all income that's left after business expenses (including salaries) are paid. That income is taxed again when it's distributed as dividends to owners (shareholders) at their own individual income tax rate. To avoid double taxation, some owners prefer to set up an S corporation. The C corporation does provide some tax advantages, however. For instance, if you want to keep profits within the company for growth or expansion, rather than paying them out, the money may be taxed at a lower corporate rate than what you would pay as an individual.

Corporations take time and money to set up, and it's best to consult a lawyer familiar with the formalities of creating and maintaining such an entity. You'll need to pay a filing fee (which varies by state) and prepare a document called the articles of incorporation. Check the website of your state's secretary of state for a fill-in-the-blank form. Generally, you need to adopt bylaws, appoint officers and directors and hold annual meetings, although many states allow smaller corporations to operate in a less formal manner.

Forming a Partnership

The following article is very informative, it was written by Colleen Debaise, adapted from "The Wall Street Journal Complete Small Business Guidebook" (Three Rivers Press).

When two or more people (not spouses) start a business together, a sole proprietorship isn't an option. Instead, the owners may form a general partnership, which is much like the sole proprietorship in that it can be established easily and requires minimal cost or paperwork (some states might require a basic partnership certificate stating the partners' names, aside from other business licenses). The profits from a partnership flow through to the partners' personal income tax returns. Partners may split profits equally, or decide one or more partners deserve a greater share for contributing either more assets or work hours to the business. Each partner then pays self- employment taxes on his or her share.

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Also like a sole proprietorship, a general partnership doesn't protect against personal liability— and in addition, partners are held responsible for the actions of the other partners. But perhaps the greatest risk with a partnership is the possibility of disagreement and, along with that, disappointment and frustration that can threaten the livelihood of the business. When two or more people start a company together, it's wise (but not legally required) for them to craft a written, carefully thought- out partnership agreement. Much like a prenuptial agreement, the partnership agreement spells out who brings what to the relationship, such as cash or property, and outlines what happens if either partner wants out, dies, becomes disabled or stops performing. Options such as a buyout or sale of the partner's interest should be included in a buy- sell clause or, if complex, in a separate agreement.

Many partners, especially those starting retail or service businesses, will choose to establish a general partnership, although they might also consider forming an LLC or corporation to protect liability, receive different tax treatment or other reasons. In addition, two other but less common partnerships are outlined below.

Limited Partnership

A more formal and complex arrangement than a general partnership, the limited partnership has one or more general partners who make management decisions and one or more limited partners who are passive investors. While the general partners are personally liable for the debts of the venture, the limited partners are liable only to the extent of their investment. An LP may be appropriate for a small but growing business that wants to raise money by selling limited partnership interests in the company.

Limited Liability Partnership

With this vehicle, partners are liable for the company's business debts and for their own negligence, but not the negligence of other partners. The LLP is commonly used by doctors, lawyers and other professionals who want to establish a practice together.

Forming a Sole Proprietorship

The following article is very informative, it was written by Colleen Debaise, adapted from "The Wall Street Journal Complete Small Business Guidebook" (Three Rivers Press).

"Whether you're starting a business from home or opening a large-scale operation, you'll need to decide on the best legal structure for your new company. Don't underestimate the importance of your choice, as the legal entity you choose will affect how much personal liability you face, how much you pay in taxes and how in- depth your new company's record keeping will need to be. Your business structure can take one of five basic forms: the sole proprietorship, the partnership, the regular or C corporation, the S corporation, and the increasingly popular limited liability company or LLC."

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"The best entity for you will depend on the type of business you'll run, your potential exposure to lawsuits, the number of owners and whether you want the ability to raise capital or transfer shares. It's smart, and in many cases necessary, to consult a lawyer or accountant when making your choice."

Sole Proprietorships

The vast majority of small businesses start off as sole proprietorships, which are the simplest and least expensive vehicles to create and operate, according to the SBA. With a sole proprietorship, the owner and the business are essentially one and the same, meaning you have complete control, you can make decisions as you see fit and the profits from the business flow through to your personal tax return as Schedule C income. (If you don't have profits, you may be entitled to a business loss that can help offset other income.) To launch a sole proprietorship, you don't need to file legal forms or paperwork, such as articles of incorporation, but you might have to obtain a business license, depending on state law. A sole proprietorship can only be used by an individual who owns the company, unless it's a husband- and- wife team, in which case it can be shared.

The main drawback of setting up a sole proprietorship is that you have unlimited personal responsibility for all debts or judgments related to the business. That liability, in turn, may make it difficult to attract investors or raise funds for your business.

As a sole proprietor, you'll also be responsible for paying the full burden of Social Security and Medicare taxes— a cost normally split between employer and employee. For 2010, the first $106,800 of self- employment income is taxed at 12.4 percent for Social Security and 2.9 percent for Medicare. Any amount over $106,800 continues to be taxed at 2.9 percent for Medicare only.

(Entrepreneurs: As an alternative, if you are seeking to start-up your own business you can take advantage of Profit Sense Innovations services which include business registration and incorporation.)

Five Ways to Protect Personal Assets

The article below is important to consider as a small business owner in regards to your personal assets and how they can be protected...

Five Ways to Protect Personal Assets
By Tom Taulli, Business Week (Small Business Financing 1/29/2010)

A few years ago, you took out a $300,000 loan for your business because you anticipated continued growth. But the economy soon fell apart, and so did your business. You can no longer pay back the loan, and the lender has filed a lawsuit against your company and you personally, threatening to seize your home, car, and cash in the bank.

This is a common scenario for owners of small businesses, even those structured as corporations or limited liability companies, because they are not always as protected as they might think against determined creditors. In fact, a 2007 report from the U.S. Chamber Institute for Legal Reform, a nonprofit sponsored by the lobbying group, estimated 2005 tort liability costs were $98 billion for small businesses (defined as those with annual revenue of less than $10 million). Keep in mind the report found owners paid $20 billion out of pocket, as opposed to through insurance.

While this probably isn't too surprising, you may be personally exposed to plenty of other circumstances beyond nonpayment of loans—including nonpayment to suppliers, tax liabilities, malpractice, default on equipment financing, default on mortgages, negligent acts, fraud, legal action from employees (such as from sexual harassment or wrongful discharge), and liabilities for environmental damage.

Scary, huh? Well, you can take steps now to deal with the risks by engaging in asset protection. While the perception is this is just for wealthy individuals, small business owners can also benefit. Here are my suggestions of what you should consider doing now. Note, this is a broad overview. You should hire a specialist in asset protection for more advice.

1. Inventory everything. Make a complete list of your assets and debts. It's a good idea to do this on a regular basis (say, every six months or so). Remember to think broadly. For example, do you own a vacation home or have retirement assets? Do you hold stock in another company? These can have lots of value and may wind up being taken away in litigation.

2. Research exemptions and protective entities. A few of your assets may be exempt from creditor actions because of federal or state laws. These typically include your personal residence, your pension or retirement fund, and your life insurance policy. These should be the only ones in your name, according to Hillel Presser, a partner at the asset protection law firm Presser & Goldstein in Deerfield Beach, Fla. As for all other assets, consider setting up so-called protective entities, such as domestic trusts and offshore trusts. "You can layer the protection by using multiple entities. You can go even further and equity-strip the assets. This means taking loans against the assets or refinancing them. This makes the asset less attractive to creditors," says Presser.

3. Avoid personal guarantees. A personal guarantee is when you pledge to be personally responsible for a debt. The result is that you essentially lose the protection of your company's corporation status. True, a bank will likely require a personal guarantee (this is the case of loans guaranteed by the Small Business Administration). If so, try to minimize the impact. One approach is to put a time limit on it (say, for one year) or to specify a particular asset as collateral. Some suppliers will try to get a personal guarantee. Don't do it. Find another supplier.

4. Be wary of the contracts you sign. While your company's corporate structure may provide some protection, it may not be enough if there's a tort action or claim for fraud. In such cases, you may have personal liability. This is why it's important to provide liability protection in your contracts. This includes capping damages and even disallowing certain types of damages. Also, make sure you sign contracts on behalf of your company—not in your name, to avoid the chance the contract could later be considered a personal guarantee.

5. Buy insurance. While asset protection can be extremely helpful in avoiding personal liability, a creditor may still be determined to go after your assets. That's why it is important to have insurance protection. Liability insurance covers damages for personal injuries and property damages that other people cause (such as your employees). Property insurance covers your company's assets. You may even consider an umbrella policy to cover exposure that goes beyond property insurance. As should be no surprise, carriers try to avoid paying claims. To get the best coverage, it's a good idea to have an attorney look at the policy.

Which leads me to repeat: For any kind of asset protection, it's smart to get the advice of a qualified attorney or tax expert. You'll likely be dealing with complicated questions.

And the costs? Putting together a basic asset protection plan generally ranges from $2,000 to $10,000, at least for small businesses with revenues below $1 million and an owner with a net worth of less than $500,000. And the earlier you start, the better. The costs will be much lower, and the overall protection should be greater.

As you know, running a business is quite risky regardless of the economic environment. Even top companies fail. Spend the time now to look at your potential liability exposures and see how asset protection will help lower your risks.

Tom Taulli is a noted finance author and blogger.

Building trust online

Many consumers admit that they shop depending on trust which as a result instills loyalty. Customers are more likely to buy a product from a store where they can walk around and inspect the item before purchasing it. In that environment, they have the ability to look the seller / business owner in the eye and determine whether he or she is trustworthy. This is one of the biggest hurdles online businesses have to overcome. As difficult as that sounds, it is not impossible.

Things that customers look for while shopping online are safeguards in confidential information and purchase guarantees, something that Profit Sense Innovations offers to its clients. Customers need to be comforted in knowing that their information is secure and confidential when dealing with any business online. Customers are also more comfortable with reputable businesses because it is likely their order will be processed quickly and correctly. Also, if something should go wrong with the sale it is likely that the reputable business will stand by the customer. Your goal when dealing with your online business should be to make your prospective customer convinced that if they do business with you, they will not be disappointed. If you post quality content on the social networking sites such as Facebook, Twitter, Blogger this establishes your business as a credible source as long as it is done with integrity.

Remember that your offline actions will affect your online business no matter how great your product is. Therefore, it is a great idea to always conduct yourself with integrity. As a business owner it is your responsibility to mold the image and reputation of your company. Customers will keep coming back as long as they have a good sense that your business is legitimate. You must keep in mind that everything you do, especially in regards to your business should build a customer’s confidence in your product and business.