FAQ

1. First Steps

  1. Should I start a small business?
  2. If I can’t find a job or have been laid off, should I start a business?
  3. What business should I choose?
  4. What basic skills do I need to run a business?
  5. What do I need to do to start my business?
  6. Can I operate a small business from my home?
  7. How long will it take to start a small business?
  8. Where can I get help in starting a small business?
  9. I have an idea for an invention. What should I do first?

2. Business Plan

  1. What is a business plan? Do I need to write one?
  2. How long will it take to write a business plan?
  3. What do I need to include in my business plan?
  4. Who should write my business plan?
  5. What is a feasibility study?
  6. How do I find a list of firms in an area for a particular industry?

FUNDING A BUSINESS

3. Basics

  1. How much money do I need?
  2. What is equity?
  3. What is debt?
  4. What are grants?
  5. Does the Wharton SBDC offer grants or loans?
  6. Are there any grants for start-up businesses? For established businesses?

4. Equity

  1. Should I raise equity?
  2. Who can I raise equity from?
  3. What are angel investors?
  4. Who are the active angel investors in the region?
  5. How do I get venture capital money?

5. Debt

  1. Who should I go to for a business loan?
  2. What do I need to qualify for a business loan?
  3. What documentation do I need to get a loan?
  4. Can I get a loan if my personal credit rating is low?
  5. What are some modes of financing when your credit rating is reduced and you need temporary sources of capital to stay out of bankruptcy?
  6. What is a Small Business Administration (SBA) loan? Where can I apply for one?
  7. What are the interest rates and other terms of SBA loans?
  8. How long will it take to get a loan?
  9. Are there loans for minority-owned businesses?
  10. Are there loans for women-owned businesses?
  11. Are there loans for veterans?
  12. If I need funds that will help to develop lower income neighborhoods of Philadelphia, what is the cheapest source of funds?
  13. How does a lender evaluate my application?
  14. What are non-bank lenders?

LEGAL AND TAX IMPLICATIONS FOR BUSINESS

6. Business Form

  1. What is a sole proprietorship?
  2. What is a general partnership?
  3. What is a limited partnership?
  4. What is a limited liability partnership (LLP)?
  5. What is a limited liability company (LLC)?
  6. What is an S corporation?
  7. What is a C corporation?
  8. Which form of business organization should I pick?

7. Insurance

  1. What type of insurance coverage should I obtain for my business?

8. Legal Issues

  1. What are patents?
  2. What are trademarks and service marks?
  3. What is a copyright?
  4. Do I need a lawyer to start a business?
  5. Do I need a sales agreement to buy a building?

9. Taxation

  1. What are my federal, state and local tax responsibilities?
  2. Do I need a Federal Employer Identification Number (FEIN) or tax number? If so, how can I obtain one?

10. Permits and Licensing

  1. Do I need any registrations, permits or business licenses? How do I obtain them?

11. Business Names

  1. Can I use my own name as my business name?
  2. What is a fictitious name? Why do I have to register a fictitious name?
  3. Must I register a fictitious name if I am only going to use the name I incorporated under?
  4. How should I pick a name for my new business?
  5. What should I do if someone else is already using the name I want to use?
  6. How different does my business name have to be?
  7. How do I find out whether the name of my potential business is already taken?

MISCELLANEOUS

12. Buying a Business

  1. Should I buy a franchised business to start?
  2. Should I buy an existing business to start?
  3. How do I keep the current owner from starting a new business and stealing my customers?
  4. The business is already profitable. Why does my banker want a full business plan?
  5. The current owner is making money, so I will make money too, right?
  6. Why do I need the current owner’s schedule C or corporate returns for the business?
  7. How do I know how much the business is really worth?

13. Government Contracts

  1. How do I sell my product or services to the government?

14. Other Questions

  1. How do I create a website?
  2. How do I sell on the Internet?
  3. Who needs environmental management?
  4. What is the Occupational Safety and Health Administration (OSHA)?
  5. How can the SBDC help my international business?
  6. What are SIC and NAICS codes?
  7. Can a new corporation issue an intangible asset for the costs of establishing the business?
  8. I want to pay someone for professional services? Does the SBDC have a list of approved law firms, marketing firms, accountants, etc.?
  9. What other organizations might be able to help me?

1. First Steps

A. Should I start a small business?

Starting a small business usually requires a substantial commitment of resources, including time and money. Generally speaking, you should only consider starting a small business if you feel that you have a great idea that you feel passionately about and you have evaluated the opportunity rigorously. Making a business successful requires a lot of work, and most entrepreneurs find that they devote more time to their new businesses than they did to their previous jobs. If you are giving up a job, given the additional risk, you should consider a business only if the prospects suggest that you will at least double your income – within 2 to 3 years. For more information on evaluating a new business opportunity and the process of starting a business, take a look at the workshops we offer – especially “The First Step”.

B. If I can’t find a job or have been laid off, should I start a business?

Starting a business involves much more than creating a job for yourself. You must make a commitment to paperwork, record keeping, financing, marketing, planning and a host of other issues involved in operating a business. In addition, revenues may or may not come quickly. And ultimately, of course, you must have a product or service about which you feel passionately and which you can deliver. In some cases, starting a business may be a good alternative if you cannot find other employment, but lack of employment alone is not a good reason to start a business.

C. What business should I choose?

Choosing the right business is extremely important. There should be a match between your talents, interests and capabilities and the competition and market demand for your products and/or services. Do not fall prey to an “if I build it they will come” mentality. Many otherwise good businesses have failed because they simply did not have an adequate market or the competition was too strong. Ask yourself: “How will I win? What is competitive advantage?” If you can not come up with compelling answers, then you should probably choose another business. It is also valuable to consult others when choosing a business. You may want to visit and talk with similar businesses outside your service area. Talk with professionals such as attorneys, lawyers, marketing professionals, and bankers. Ask family and friends for their thoughts. If you don’t already have experience in the field you are considering, you may even want to work for a similar business before venturing out on your own. In short, do your homework before you jump in.

D. What basic skills do I need to run a business?

Basic skills involved in running a business include knowledge of record-keeping, accounting, financial management, human resources management, marketing, legal issues, tax issues, and knowledge about your product and/or service. Although no one can be an expert in all of these areas, it is important to “know what you don’t know” so that you can engage the help of professionals in these areas when necessary.

E. What do I need to do to start my business?

Starting a business involves research, planning, and logistical issues. Generally speaking, you should do market research to determine issues such as the potential size of your market, pricing, etc. You should construct a written business plan which explains/tells your company’s story, including its organizational, financial and market-related details. Finally, you will have to go through the process of setting up your company, including its legal form, its tax identification numbers, it permits and/or licenses and so forth.

Every business in Philadelphia must have a business privilege license, and some require other local or state licenses. Entrepreneurs outside of Philadelphia should contact their municipal government office where they plan to open their business to determine licensing requirements. In Philadelphia, call the Department of Licenses and Inspections at 215-686-2490.

Another step in opening your business enterprise will be to acquire a federal tax identification number. This process makes you liable for federal unemployment, withholding, social security, and corporation/company income tax. If you are in Philadelphia, contact the Internal Revenue Service at 215-574-9900.

NewPA has an excellent downloadable guide called “The Entrepreneur’s Guide — Starting and Growing a Business in Pennsylvania” which outlines many of these details. You can also call the PA Department of State at 717-787-1057 for more information.

F. Can I operate a small business from my home?

It depends. For example, if your business involves customers coming to your premises, such as with a retail store, then there may be zoning restrictions that prohibit such activity in a residential area. Most businesses that are contained entirely within a home and are non-disruptive to surrounding residential areas will be okay. If in doubt, check with your local business license or zoning officials.

G. How long will it take to start a small business?

Speed is not always best when starting a small business. While many businesses are started within a matter of weeks, some of the best businesses take several months to a year or more to start. The time frame is driven by your commitment and energy, as well as by how much time and effort you put in to research and planning. Whatever your time frame, we recommend that you make the commitment to research and plan your business in advance. Even after a business is “started,” it may be some time before the businesses generates a profit. Many startup companies are not profitable in the first couple of years.

H. Where can I get help in starting a small business?

The Wharton SBDC can help with many issues related to starting your business. In some cases, you may want to engage our consultants for help. A great place to start, however, is with our courses. Our workshop “The First Step” outlines the planning process for starting a new business. There are also many other resources in the Philadelphia region. Check out the links at Innovation Philadelphia for a list of other organizations that may be able to help.

I. I have an idea for an invention. What should I do first?

Ideally, if you have a unique invention, you could file for a patent with the U.S. Patent and Trademark Office, and perhaps with patent offices abroad. Unfortunately, this can be an expensive and time-consuming process that generally requires the use of an attorney. You can also file a provisional patent, which recognizes the date of your invention and provides you with one year to undertake the full patent process. Before undergoing the patent process, however, you should consider whether or not there is a real market for your product. The expense may not be worth the return. You should also consider whether you should pursue your invention on your own or whether you should license your intellectual property to another organization.

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2. Business Plan

A. What is a business plan? Do I need to write one?

A business plan is a “road map” for the direction of your business. It will contain information such as the history and development of your business, an explanation of the products and/ or services you offer, your marketing strategy, your legal and ownership structure, your management team, your human resources plan, and your financial projections. If you seek financing, you will almost certainly need one. Lenders such as banks, angel investors or venture capitalists will almost always require a business plan. One of the most important reasons to write such a plan, however, is that you, as an entrepreneur, will have to engage in a systematic process of thinking through and planning your business.

B. How long will it take to write a business plan?

The time frame is based on the complexity of the business and its markets, and on your commitment to the process. A simple plan could be completed in a matter of weeks, while a well-researched and well-constructed plan could take several months to a year.

C. What do I need to include in my business plan?

There is no universally accepted format for a business plan. A good plan might include the following elements:

  • Executive Summary – A clear and exciting overview
  • Company Products and Services – Describes company and services in terms of customer functions, segments, technologies, distribution channels, features, benefits, current stage of development, proprietary position
  • Customer and Market Analysis – Customer description, market analysis, competitor analysis
  • Strategy Analysis – Justified overall strategy and competitive advantage
  • Marketing and Operations – Plans for marketing and sales, production/delivery of product or services, product costs, operating complexity, required resources
  • Management and Organization – Backgrounds of key individuals, your ability to execute strategy and personnel needs, type of business, summaries of staffing requirements, organizational chart
  • Milestone Events and Key Risks – Realistic schedule of events, their anticipated timing and interrelationships between the major events necessary to launch and grow the venture; critical events and their impact on your plan; and outline of your contingency plan
  • Financials – Capitalization plan, uses of funds, pro forma financials and cash flow projections, current financials
  • Appendix – Supplementary supporting materials.

About 25 pages, not including the Appendix, is a good rule of thumb for length. Be clear, concise, and non-repetitive.

D. Who should write my business plan?

You, the entrepreneur, should write your business plan. It should reflect your character and style. While this might seem a daunting task, the process that you will go through to produce this information is invaluable. It will help you to understand your own business better and therefore to better explain it to lenders, investors, customers, and others. It is appropriate, however, to seek guidance and feedback on your business plan. While the Wharton SBDC will not write your business plan for you, our consultants can provide this type of guidance and feedback.

E. What is a feasibility study?

A feasibility study is a precursor to a business plan. In some cases it is a formal written analysis, and in some cases it is a less formal assessment process. In either case, the feasibility study involves a process of gathering, analyzing and evaluating information in order to determine whether or not you should go into a particular business. If the answer is yes, you should proceed with a business plan.

F. How do I find a list of firms in an area for a particular industry?

You can research local competitors and suppliers by visiting www.thomasregister.com. Also, you can try the local yellow pages.

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FUNDING A BUSINESS

3. Basics

A. How much money do I need?

There is no easy answer to this question. As part of your planning process, you should construct pro-forma financials statements, based on anticipated revenues, expenses, and sources of funding. Part of this process will involve thinking through a line-item budget for your business, which is broken down over a period of months and/or years. By analyzing these numbers, you should be able to determine how much money you will need. Be realistic in your budget and allow some extra for unanticipated expenses. However, most successful entrepreneurs are frugal in their spending habits, for example, they will may buy used equipment. Review your financial plan with individuals who have experience in small business to help ensure that you do not miss important costs. Generally, in businesses where growth is expected to be not very fast, the sources of funds tend to be one’s own savings and collateral and those of owners’ friends and family (only take what you and your family and friends can afford to lose). Bank loans are likely here too. For businesses that will only be viable with fast growth, there is a need to tap outside funds, and the promise there is big returns to the outsiders. This is the context in which we consider outside equity.

B. What is equity?

Equity is the value of anything that is owned, such as a business or a house, less any outstanding debt. If your business is worth $100,000 and you owe $70,000 in business loans to your bank, then you have $30,000 worth of equity in the business. Businesses can be financed with equity and/or debt. If a business is financed with equity, then the provider of equity receives an ownership stake in the business. For example, your company may sell shares of stock (equity) to raise money. The value of equity in a business changes over time as the value of the business itself changes. Please see Section 4 below.

C. What is debt?

Debt is a promise to pay some amount in the future. Examples include business loans and mortgages. Debt does not imply ownership of an asset, although assets are sometimes promised as collateral to help guarantee payment. If a business if financed with debt, then the business is obligated to repay that debt, usually with interest and fees. Please see Section 5 below.

D. What are grants?

Grants are like gifts. They do not have to be repaid, and they do not require ownership of an asset. In some cases, however, grants may be contingent on your meeting certain criteria. Grants are rare and are not a typical source of funding for small businesses.

E. Does the Wharton SBDC offer grants or loans?

The Wharton SBDC is not involved in any way in providing grants, SBA loans or any other type of loan.

F. Are there any grants for start-up businesses? For established businesses?

There are no SBA grants, and almost no other grants, which are available to start or expand a business. Two exceptions are the Small Business Innovation Research Program (SBIR) and the Small Business Technology Transfer Program (STTR). Don’t get your hopes up, however. These programs are highly competitive, merit-based awards for serious Research and Development activities. The SBA does maintain a list of links to grants, but few if any of them would apply to a typical small business.

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4. Equity

A. Should I raise equity?

Raising money through the sale of equity is a very popular technique. The advantage is that there is no requirement that equity be repaid. The disadvantage is that you are giving up a share of your business, and thus also, you may be giving up some control. In many cases, it is easier to raise equity than acquire debt.

B. Who can I raise equity from?

You can raise equity from anyone you choose, including friends, family, angel investors, venture capitalists or other companies. If you raise funds using equity, it is advisable to have the assistance of an attorney who is familiar with these types of transactions. With certain business forms, there can be tax implications of raising equity from certain sources. Also, raising equity from unqualified investors or raising equity in an improper way could compromise your ability to seek further rounds of financing.

C. What are angel investors?

Angel investors are most often wealthy individuals who are willing to take a risk on a small company. There are many of these individuals out there, and a large percentage of early-stage companies receive money from these types of individuals. The process with angel investors is often less formal than with traditional lenders or venture capital firms. They usually provide smaller rounds of financing (typically $10,000 – $500,000) than venture capital firms would. Angel investors usually look for equity in return for their investment. In addition to being a source of money, angel investors can be a source of great advice. You can find these types of individuals through your own contacts or through angel networks. It is important to be well prepared with a solid business plan and with the terms of the financing you seek before contacting angel investors.

D. Who are the active angel investors in the region?

The majority of angel investors are found through contacts and the initiative of the entrepreneur. The Angel Capital Network maintains an active list of angel investors.

E. How do I get venture capital money?

Venture Capitalists are generally interested in bigger deals (typically $500,000 and above) than angel investors. Many VCs are involved in venture capital firms, and they are professionals in this field. To receive VC funding, you must convince VCs that you have a strong management team, a good product or service with strong revenue potential, and a good plan. A written business plan that is well thought-out is vital. VCs are not usually the first place to seek funding. They often come in with larger investments after a company has received startup funding from other sources. There is an organized VC group in the Philadelphia area called the Greater Philadelphia Venture Group. You can also check out a list of funding sources maintained by Ben Franklin Technology Partners. It is important to be well prepared with a solid business plan and with the terms of the financing you seek before contacting venture capitalists.

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5. Debt

A. Who should I go to for a business loan?

Most traditional banks and many other lenders offer business loans. A good place to start is with your own bank where you have already established accounts and a history. You can also approach friends, family, and others for loans. (Be careful, though, when you borrow from those close to you. Remember that you are putting other peoples’ money at risk. Make sure that they are prepared for that fact!) In addition, the state of Pennsylvania has Funding and Program Finder on NewPA.com.

B. What do I need to qualify for a business loan?

If you seek financing from a typical bank or commercial lender, you will need reasonably good credit, proper paperwork, and probably some form of collateral. Because most lenders such as banks are governed by federal lending guidelines, they are limited in their ability to provide non-collateralized loans. If you have equity in real estate, automobiles, stocks, or something else that you can promise as security, then your chances of receiving a loan will be greatly improved.

C. What documentation do I need to get a loan?

Different lenders will require different paperwork. You can expect to be asked for a business plan – especially the financials portion. Also, you will likely be asked for verification of your income and assets, including past tax returns, W-2s, bank statements, etc. They may also have certain application forms that they will want you to fill out. Contact each individual lender for its requirements.

D. Can I get a loan if my credit rating is low?

As the quality of your credit record and personal history declines, so do your chances of getting a loan – especially if you do not have good collateral. It is important to clear up your credit history and any other outstanding legal issues to the extent that you can. With a shaky history, you may have more success borrowing from individuals than from institutions.

E. What are some modes of financing when your credit rating is reduced and you need temporary sources of capital to stay out of bankruptcy?

Sell your accounts receivable to a bank or a credit collection agency for cash, pledge firm assets for a loan from a bank, pledge personal assets of the owners of the business for a loan from a bank, or squeeze your accounts receivable to get more cash on hand.

F. What is a Small Business Administration (SBA) loan? Where can I apply for one?

The SBA offers a series of loan guarantee programs tailored to various situations. Generally, these programs are intended for small businesses that could not obtain this type of financing under normal circumstances. SBA loans are administered by private sector lenders, such as traditional banks and some non-bank lenders. Most lenders will be familiar with the process, and you should contact them directly for further information and assistance. The Wharton SBDC is not involved in any way in providing SBA loans or any other type of loan.

G. What are the interest rates and other terms of SBA loans?

Interest rates and other terms of the loans are subject to negotiation between you and your lender, subject to certain limitations by the SBA. The SBA simply guarantees the loan, and charges the lender certain fees to do so. These charges will be built in to your terms by the lender.

H. How long will it take to get a loan?

Depending on the policies of your lender and the type and size of the loan you seek, it could take from a few days to several weeks to process a business loan after all materials have been submitted.

I. Are there loans for minority-owned businesses?

The Pennsylvania Minority Business Development authority (PMBDA) provides low-interest financing to businesses owned and operated by ethnic minorities. The federal government does not offer any guaranteed loans specifically for minorities. However, through the Women and Minorities Pre-Qualification Loan Program, the SBA pre-qualifies women and minority business owners in certain regions of the U.S. for loans of up to $250,000 before they even apply to a lender. The program focuses on the character, credit, experience and reliability of an applicant, not just their collateral.

J. Are there loans for women-owned businesses?

The federal government does not offer any guaranteed loans specifically for women. However, through the Women and Minorities Pre-Qualification Loan Program, the SBA pre-qualifies women and minority business owners in certain regions of the U.S. for loans of up to $250,000 before they even apply to a lender. The program focuses on the character, credit, experience and reliability of an applicant, not just their collateral.For more information on resources available for women entrepreneurs, see the SBA’s Office of Women’s Business Ownership website.

K. Are there loans for veterans?

The SBA provides special consideration for veterans in processing and administering SBA loans, but there is no government-backed business loan program specifically targeted to veterans. Please see the SBA website for more information on opportunities for veterans.

L. If I need funds that will help to develop lower income neighborhoods of Philadelphia, what is the cheapest source of funds?

The City of Philadelphia has several programs to improve access to non-traditional sources of capital. For manufacturing and industrial firms, you may apply to the Philadelphia Industrial Development Corporation by calling 215-496-8020. Another possibility is the Philadelphia Commercial Development Corporation at 215-790-2200. Another good source of funding is the Enterprise Zone Program (EZP), which provides grants and loans to assist financially disadvantaged communities to prepare and implement business development strategies within local enterprise zones. For more information about this program and other programs like it (e.g. Opportunity Grant Program, Community Economic Development Loan Program), call the PA Department of Community and Economic Development at 717-787-4305.

M. How does a lender evaluate my application?

Traditional lenders, such as banks, evaluate on the basis of creditworthiness, collateral, financial strength of those involved, assessment of the business (from the business plan and financials) and to a lesser extent on their history with and sense of trust of an individual.

N. What are non-bank lenders?

Some lenders do not qualify as banks in a traditional sense, but yet provide some similar services such as SBA-guaranteed loans. An example is a finance company.

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LEGAL AND TAX IMPLICATIONS FOR BUSINESS

6. Business Form

A. What is a sole proprietorship?

A sole proprietorship is the simplest form of business organization. It has only one owner, and that owner reports all profits and losses as personal income on his or her personal income tax forms. The primary disadvantages are: unlimited personal liability for all debts and legal liabilities of the business, difficulty in raising capital, and discontinuation of the business upon the owner’s death. While most small businesses are sole proprietorships, this would not be an appropriate form if you intend to grow to any substantial size.

B. What is a general partnership?

A general partnership is like a sole proprietorship with multiple owners. All profits and losses are reported as personal income on the individual partners’ income tax forms, according to the partner’s pro-rata share of ownership. A general partnership is easy to establish. The partners need only form an agreement among themselves. It is advisable that this agreement is in writing. No state filing is required, with the possible exception of a fictitious name registration. The primary disadvantages are: unlimited personal liability for the partnership’s debts and legal liabilities, difficulty in raising capital, discontinuation of the partnership upon the death of a partner, and the fact that any partner can commit the firm (and thus other partners) to legal obligations. This would not be an appropriate form if you intend to grow to any substantial size.

C. What is a limited partnership?

A limited partnership is a fairly simple business form in which there are one or more general partners and one or more limited partners. General partners are generally those involved in day-to-day decision making or operations. Limited partners are not involved in day-to-day operations and are most often just investors. All profits and losses flow through to partners according to their partnership agreement, which should be written. Limited partners have limited exposure to liability. The primary disadvantages are: general partners face unlimited liability for the firm’s debts and legal liabilities, discontinuation of the partnership upon the death of a partner, and the fact that any general partner can commit the partnership (and thus other general partners) to legal obligations.

D. What is a limited liability partnership (LLP)?

A limited liability partnership (LLP) is formed when an existing partnership (see above) files an election with the Corporations Bureau of the Pennsylvania Department of State, claiming this status. Once this status is claimed, all partners, including general partners, are provided additional protection against unlimited future liability. Income still flows through to individual partners’ income tax forms, and the partnership still terminates on the death of a partner.

E. What is a limited liability company (LLC)?

A limited liability company (LLC) is a sort of hybrid form between a partnership and an S corporation – it has the liability protection of a corporation, with the advantage of being treated as a partnership. All profits and losses flow through to the individual owners’ income tax forms. An LLC is simpler to establish and maintain than a corporation. A Certificate of Organization and a docketing statement must be filed with the state. This is a popular form for many new small businesses.

F. What is an S corporation?

An S corporation is a fairly complex business form, where the owners all hold shares of stock. Nevertheless, all profits and losses flow through to the individual shareholders according to their ownership interest, and there is no corporate income tax. To establish a corporation, Articles of Incorporation must be drawn up and filed with the state, along with a docketing statement. An S corporation election must be filed with the IRS and with the state Department of Revenue. (If you do not file this election, you will be considered a C corporation!) All owners have limited exposure to liability, and the business can continue upon the death of a shareholder or the transfer of ownership of shares. The primary disadvantages of an S corporation are: the relative complexity of the paperwork involved, and the fact that there may be no more than 75 shareholders. It is advisable to have an attorney handle the setup of a corporation. This is a great form for businesses that plan to grow large.

G. What is a C corporation?

A C corporation is the most complex business form. This is the only business form that faces double taxation. That is, the corporation pays corporate tax on earnings, and then individual shareholders pay income tax again on dividends. To establish a corporation, Articles of Incorporation must be drawn up and filed with the state, along with a docketing statement. All owners have limited exposure to liability, and the business can continue upon the death of a shareholder or the transfer of ownership of shares. The primary disadvantages are: the relative complexity of the paperwork involved, and the issue of double taxation. It is advisable to have an attorney handle the setup of a corporation. Most very large companies are C corporations, although they often started with a simpler form.

H. Which form of business organization should I pick?

The answer depends on the balance you seek between complexity of the form, liability limits, the need to raise capital, the need for the business to continue after a death, the number of owners, and so on. If your business is a fairly risk-free “mom and pop” operation operated from your home, then a sole proprietorship or general partnership may be appropriate. For most businesses who plan to grow or engage in activities with risk, limited liability is an important issue. For these companies, an LLC, an LLP, or an S Corporation are probably good choices. Most small businesses would not want to start out as a C Corporation if they have 75 or fewer owners, because they would not want to face double taxation.

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7. Insurance

A. What type of insurance coverage should I obtain for my business?

Insurance needs vary by size of the business, number of employees, industry, property owned, and other factors. Most businesses should carry a general liability policy that protects against many general types of claims. In addition, you may want to consider property/casualty insurance, automobile insurance, health insurance, workers compensation insurance, disability insurance, key man insurance and others. Some of these may be required by law or required by your lenders, depending on your specific circumstances. It is a good idea to talk with a couple of insurance agents to understand what is appropriate for your circumstances.

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8. Legal Issues

A. What are patents?

Patents are protections for inventions and discoveries. A patent is a property right that grants the owner an exclusive right to exclude others for a period of time (usually 20 years) from making, using, offering, selling, or importing anything that utilizes the intellectual property contained in the patent without the permission of the patent owner. There are three types of patents: Utility patents may be granted to anyone who invents or discovers any new and useful process, machine, article of manufacture, or compositions of matters, or any new useful improvement thereof. Design patents may be granted to anyone who invents a new, original, and ornamental design for an article of manufacture. Plant patents may be granted to anyone who invents or discovers and asexually reproduces any distinct and new variety of plants. Patents are expensive to obtain and generally require the use of an attorney who specializes in this field. In the United States, patents are handled by the U.S. Patent and Trademark Office. Other countries have their own patent systems that apply within their borders. The Product Development Center at the Bucknell SBDC also assists inventors and entrepreneurs with product design, prototype construction, testing, and preliminary patent searching. The Product Development Center at the Bucknell SBDC also assists inventors and entrepreneurs with product design, prototype construction, testing, and preliminary patent searching for those entrepreneurs who have a business plan approved by the Wharton SBDC for referral.

B. What are trademarks and service marks?

Trademark and service mark registrations are protections for certain things that distinguish one source from another. This registration allows the holder to exclude others from using its mark, generally for as long as that mark remains in use by the owner. A trademark is a word, phrase, symbol or design, or a combination of words, phrases, symbols or designs, that identifies and distinguishes the source of the goods of one party from those of others. For example, “Coca-Cola” is a trademark of the Coca-Cola Company. Slogans are registered as service marks. This provides trademark protection to a slogan which uniquely identifies your company or service (e.g. Just Do It (Nike), The Real Thing (7-Up)). In essence, a service mark is the same as a trademark, except that it identifies and distinguishes the source of a service rather than a product. Trademark and service mark registrations are sometimes expensive to obtain and often require the use of an attorney who specializes in this field. In the United States, trademarks and service marks are handled by the U.S. Patent and Trademark Office. In Pennsylvania, call the Pennsylvania Corporation Bureau at 717-787-1057. They will check to see if the trademark has not already been issued and mail you the required forms and instructions. Other countries have their own mark protection systems that apply within their borders.

C. What is a copyright?

Copyright is a form of protection provided to the authors of “original works of authorship,” including literary, dramatic, musical, artistic, and certain other intellectual works. A copyright generally gives the owner, for a period of time (usually life of the author + 70 years, or up to 120 years for works for hire) the exclusive right to do and to authorize others to do the following: to reproduce the work, to prepare derivative works based upon the work; to distribute copies of the work to the public, to perform the work publicly, and to display the work publicly. A copyright exists immediately upon creation of a work, however, registering that copyright provides additional protections. Copyright registration is fairly inexpensive and easy to obtain. In the United States, copyright registration is handled by the U.S. Copyright Office. Other countries have their own copyright protection systems that apply within their borders.

D. Do I need a lawyer to start a business?

You do not necessarily need a lawyer to start a business, especially if you select one of the simpler business forms. Nevertheless, it often advisable to consult a lawyer as you start your venture, since you may overlook key issues. If you choose a corporate form of organization, you should certainly use a lawyer.

E. Do I need a sales agreement to buy a building?

You should always have a written sales agreement when purchasing real estate. The sales agreement should clearly spell out the price, terms, and exactly what is included and what is not included in the sale. The sales agreement is a legal document that gives you legal recourse if problems should arise after the sale.

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9. Taxation

A. What are my federal, state and local tax responsibilities?

Depending on your location and the nature of your business, you may be subject to: federal income tax, state income tax, local income or wage tax, sales tax, property tax, withholding taxes, unemployment insurance, various licenses and permits and taxes. It is advisable to seek the help of an accountant to help you determine which taxes you are subject to and how and when you should pay them. A great resource for more information on this is “Starting A Business in Pennsylvania” by the PA Department of Revenue, available on the PA Power Port.

B. Do I need a Federal Employer Identification Number (FEIN) or tax number? If so, how can I obtain one?

The FEIN is like a social security number for your business. All businesses with employees and all businesses that collect sales tax must have an FEIN. In some cases, sole proprietors with no employees and no sales tax can simply use their own social security number for tax purposes, but most businesses will need an FEIN. Often, your lawyer or accountant will handle this for you. You can apply by phone, fax, or mail. Adownloadable form (SS-4) is available on the IRS website.

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10. Permits and Licensing

A. Do I need any registrations, permits or business licenses? How do I obtain them?

Depending on your business form, you may have to register with the state by calling 717-787-1057. See “The Entrepreneur’s Guide — Starting and Growing a Business in Pennsylvania” available on the NewPA website for more information. In addition, business licenses are required for most businesses and are handled locally. Certain other licenses, permits or zoning approvals may be necessary, especially if your business relates to food, alcohol, health, safety, hazardous materials or other regulated industries. Some of these other licenses are explained on the Pennsylvania Department of Labor and Industry website. In general, you will need a business privilege license, a city tax number, a use registration permit, and a zoning permit, certificate, or variance. In Philadelphia, call the Department of Licenses and Inspections at 215-686-2490. Businesses outside of Philadelphia should contact their municipal government office where they plan to open their business to determine licensing requirements.

In addition, your business enterprise will need a federal tax identification number, which will make you liable for federal unemployment, withholding, social security, and corporation/company income tax. If you are in Philadelphia, contact the Internal Revenue Service at 215-861-1225.

The PA Power Port has an excellent downloadable guide called Starting a Business in Pennsylvania which outlines many of these details. You can also call the PA Department of State at 717-787-1057 for more information.

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11. Business Names

A. Can I use my own name as my business name?

Yes. This is fairly common.

B. What is a fictitious name? Why do I have to register a fictitious name?

A fictitious name is any business name you will use that is different than your name, or your corporation’s legal name. (There are some exceptions if all owners’ last names are included in the business name. For example, “Smith’s Appliance Service” could be okay if it was owned entirely by Smith.) If you plan to do business under any name other than your own last name or your corporation’s name then registration of the fictitious name is required by law. See The Entrepreneur’s Guide — Starting and Growing a Business in Pennsylvania available on the NewPA website for more information.

C. Must I register a fictitious name if I am only going to use the name I incorporated under?

No. If you are incorporated, then your corporation is a legal entity with its own name. As long as you use that name, you do not have to file a fictitious name for the corporation.

D. How should I pick a name for my new business?

You should pick one that fits with your marketing plan for the business. It should help customers identify you. Be careful not to use trademarked names or names of other firms in your area. You cannot incorporate under the same, or a very similar name, to another corporation in your state. If you choose a name that is the same or similar to another businesses – particularly one that is nearby – you risk a lawsuit.

E. What should I do if someone else is already using the name I want to use?

It may be difficult to find a name that is not used somewhere in the world. Nevertheless, you should certainly try to choose a name that is not too similar to one being used by any other business operating or registered in your state or metropolitan area. Never use a trademarked name and never use a trademark within your business name.

F. How different does my business name have to be?

At a minimum, it should be different enough to avoid confusion with other businesses.

G. How do I find out whether the name of my potential business is already taken?

Call the Pennsylvania Corporation Bureau at 717-787-1057. They will verify/register fictitious trademarks or trade names for callers.

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MISCELLANEOUS

12. Buying a Business

A. Should I buy a franchised business to start?

Starting a franchised business can provide you access to a known trademark and an established system of doing business. Generally you will have to pay an initial franchise fee and ongoing royalties, plus other start-up costs. In the best cases, you will get ongoing support in management, training, purchasing, advertising, research and other critical areas. In many cases, however, small franchises do not provide significant useful support. Most large, well known franchises are too expensive for many beginning entrepreneurs. Talk to other franchisees before making a decision. In some cases a franchise can be a good place to start, but it is no guarantee for success.

B. Should I buy an existing business to start?

By purchasing an existing business, you can potentially avoid the long lead times involved in launching an enterprise and building a customer base. There should be an established pattern of income and expenses that you can evaluate. Be careful, however. Many business owners want to sell because they anticipate changing or unfavorable conditions in the future or because there is some underlying trouble with the business. Make sure that you fully understand the business and the future market. If you do not have much business experience to begin with, then buying an existing business may be a larger first step than you are ready to take.

C. How do I keep the current owner from starting a new business and stealing my customers?

As part of the sales agreement for the business, you can include a “no compete” clause. Your lawyer will be able to draft the wording. In essence this should define what competition includes and what the current owner is prohibited from doing, where he or she is prohibited from doing it, and for how long.

D. The business is already profitable. Why does my banker want a full business plan?

Your banker will want to know that you have a viable plan for operating the business. The financials are especially important. By changing owners, you may be completely changing the financial structure of the business. Your banker will want to know that the business can be profitable under your scenario.

E. The current owner is making money, so I will make money too, right?

Not necessarily. A lot of things change when a business is acquired. Customers that were loyal to the previous owner may disappear. Employees may leave. Business conditions and markets may change. The financial structure of the business may change. In short, there are many critical factors which contribute to a business’s profitability that may change when you take over. Think through these carefully, and don’t assume that a profitable business will continue to make money when your assume ownership.

F. Why do I need the current owner’s schedule C or corporate returns for the business?

These tax documents are a good indication of what’s happening with the business, and its more difficult to “fudge” these past tax returns than current financial statements. Your lender will likely want to see these documents, and you should too. Take a look at the profitability trends of the business as reported to the government over a period of time.

G. How do I know how much the business is really worth?

There is no single accepted way to determine a “correct” value for a business. When it comes down to it, all reasonable methods rely on predictions of the future that may or may not be correct. One way commonly used is to project free cash flows into the future and discount these future cash flows back to the present using an interest rate, such as the cost of capital. Another way is to compare the business to other similar businesses that have been sold recently, making certain adjustments such as for size. Yet another way is to look at the book value or an appraised value of actual assets. If you do not have a background in business valuation, you may want to enlist the assistance of professionals to help you arrive at a reasonable estimate of worth.

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13. Government Contracts

A. How do I sell my product or services to the government?

There are a number of Procurement Technical Assistance Centers (PTACs) around the state of Pennsylvania. These centers can provide more information on doing business with the government. In the Philadelphia area, the Temple SBDC offers PTAC services.

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14. Other Questions

A. How do I create a website?

Although there are some sites on the Internet that provide free, “do-it-yourself” limited websites to individuals or businesses, most do not allow for your own separate domain name and most do not allow much flexibility on such factors as the size of your site. Your ability to advertise your site and to appear on search engines may be complicated if you use these free sites. On the other hand, these may be a good starting point if money is a concern. Most serious business websites, however, will register their own domain name and will have a professionally produced website which is maintained on the Internet by a web hosting company. These companies will also normally help you register your site with search engines and also maximize your chances of hits through careful design. You should be able to find a number of such services in your area that can help you accomplish all of these tasks by checking in the phone book or searching on the Internet.

B. How do I sell on the Internet?

Your Internet site can do many things. The simplest idea is to use your site as an advertisement to attract customers to your physical location. The next step might be to try to get customers to contact you by phone, fax, mail, email, or a basic on-line form to make orders. In this case, website design is fairly simple, and whoever creates your site will be able to provide contact information and online forms that visitors to your site can fill out. The most complicated way to do business on the Internet is through an interactive “shopping cart” site in which customers might be able to view your inventory, select items, and make online orders. This implies much more sophisticated software and planning and would require the use of site designers who are skilled in this type of setup.

C. Who needs environmental management?

Businesses in any industry, including the manufacturing, retail and service sectors, can benefit from improved efficiency through strategic environmental management. Pollution prevention and energy efficiency approaches may vary by sector, but the opportunities always exist. In Philadelphia, the Temple SBDC offers the Environmental Management Assistance Program (EMAP) to help your business address these issues.

D. What is the Occupational Safety and Health Administration (OSHA)?

The Occupational Safety and Health Administration is a department of the federal government that is responsible for enforcing a vast number of regulations which are primarily oriented toward safe working conditions. Many small business owners are unaware of the extent of OSHA regulations and what they need to do to comply. From time to time, SBDCs around the state of Pennsylvania host courses related to OSHA compliance. In the Philadelphia area, the Temple SBDC offers OSHA courses at various times during the year.

E. How can you help my international business?

At this moment we do not have an international trade specialist but we may be able to refer you to another SBDC.

F. What are SIC and NAICS codes?

SIC is an acronym for Standard Industrial Codes – an old and outdated system which has been replaced by the North American Industry Classification System (NAICS). These are numeric codes that correspond to almost every type of industry in which an organization might be engaged. Businesses are classified for statistical purposes under one or more of these industry codes.

G. Can a new corporation issue an intangible asset for the costs of establishing the business?

Yes, organization costs are frequently treated as intangible assets and amortized over a relatively short period of time in the early years of an enterprise’s life.

H. I want to pay someone for professional services. Does the SBDC have a list of approved law firms, marketing firms, accountants, etc.?

Though we do not recommend any professional services firms to our clients, we do have a list of these firms on file for your use. For more information, please contact us at 215-898-4861.

I. What other organizations might be able to help me?

In the Philadelphia region, there are a number of excellent resources.

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