Whether you are the sole employee of your enterprise or you have several employees, incorporation can bring legal and tax protection for you as its owner, but can also bring tax burden, additional cost and paperwork. So it’s important to understand the implications of the business structure you choose for you business.

Outlined below are some of the benefits and disadvantages of incorporating your business as well as links to available government resources that can help you decide which business structure is right for you.

Benefits of Incorporation

Here are some of the benefits you can realize if you decide to incorporate your business:

• Personal liability protection – An incorporated company is an entirely separate entity from you and your personal assets. It affords protection from any personal liability for your business debts and obligations. For example, if someone sues your company they can only go after your company’s assets, not your own.
• Tax benefits - If you incorporate you may gain tax benefits, although only under certain circumstances. This is one area to discuss with an accountant, as the marginal tax rates for corporations with taxable incomes in some cases can be higher than those for an individual in the same scale. Read more about the tax implications of incorporating on Scott Allen’s Entrepreneurs’ blog here or get tax information from the government here.
• Corporate identity – Incorporating can give a great sense of credibility to your business.
• Raising capital - You can raise capital more easily through the sale of stock and securities if your business is incorporated.
• Unlimited life - Your corporation can have an indefinite life and outlive you. Do note that LLCs have a limited duration. Get more information on business structure differences from the SBA.

Disadvantages of Incorporation

Some of the disadvantages of incorporation, particularly for the small business owner, include:

• Paperwork – You’ll need to file two tax returns (one for you one for your business) and maintain detailed business records and formalities.
• Cost – The fees associated with initial incorporation and ongoing maintenance can put a strain on the small business owner. LLCs, however, can be a more economic alternative to full blown incorporation.
• Liability may not be as limited as you think – The main advantage of incorporating, limited liability, may be challenged by personal guarantees and/or credit agreements. When a corporation has insufficient assets to secure a loan, banks often insist on personal guarantees from the business owner. This can result in you being personally liable if your corporation can’t meet its repayment obligations.

How to Incorporate

If after careful planning and consideration you have chosen to incorporate your company, you will need to pursue the process directly with your state. In fact, you are required by law to register your business with the state whether you choose to be a corporation, non-profit, LLC, or a partnership.

Typically, if you only operate in one state, you should incorporate in that state. If you operate in multiple states, you should determine which state is the friendliest to corporations and incorporate in that state.

Find out how to incorporate in your chosen state by following the state-by-state links here.

Other Resources

Save the expense of calling your accountant and take advantage of the freely available expertise of a network of government and other small business experts over the Web, the phone or in person:

• Get help and advice from small business development experts.
• Understand the tax implications of incorporation or other business structure options.

Now may not be the time when small business owners give the 2008 tax season too much thought. But a little tax preparation now – in the midst of the holiday season – can pay dividends down the line.

Consider some basic strategies for taking control of your taxes now, before they take control of you:

1. Get Your Ducks in a Row

Take control, get organized, and gather all the necessary records and documents that help support the numbers filed on your tax return. Records include W-2s, 1099s, expense receipts, bank statements, etc.

2. Look into Available Tax Preparation Resources

While there are many tax preparation software options available on the market, as a small business owner you may want to consider using a professional tax advisor or accountant. Not only can these professionals keep your stress levels low, they can help you navigate the ever-changing landscape of small business tax deductions.

As a rule of thumb, professional help becomes a must if you have accrued significant capital from stocks or the sale of assets, or have income from several sources (e.g. consulting, other business interests, etc.) and/or overseas markets.

Be sure to shop around for the right professional – preferably someone with experience in your field of business and within your budget – and don’t forget to get recommendations from friends, co-workers, or clients.

3. Stay Abreast of Tax Requirements

You don’t need to be an expert, but life is a lot easier if you are aware of the basic tax laws that apply to your business. Even if you don’t handle your own preparation and filing, it helps to have a better idea of what to expect as a small business owner.

An easy way to start staying on top of your records is to maintain a tax calendar throughout the year. The IRS can help with this and has put together a Small Business Tax Calendar that lists everything you need to know about staying on top of tax deadlines and requirements throughout the year. It can also be imported into Microsoft Outlook.

If you need more general help, this online portal brings together SBA and IRS tax guidance and resources specifically for small businesses.

The U.S. Government also provides online tax training, workshops and more to help small business owners get a better handle on their business taxes.

Lest early talk of taxes dampen your holiday season, I found a quote by Nancie J. Carmody that puts it all in context (well, somewhat):  “I am thankful for the taxes I pay because it means that I’m employed.”

Requirements vs. Reality

Most businesses are not required to have business insurance (unless you are an employer – see below). If your business is an LLC or a corporation your personal assets are protected from business liabilities. Without insurance, however, your business assets are unprotected.  Business is inherently unpredictable; nobody expects the unexpected. Business insurance protects your business by minimizing financial risks associated with unexpected events – a lawsuit, a natural disaster, death, etc. Protection is good.

Insurance Choices

There are five different types of business insurance you can invest in, depending on your unique business risks:

• General liability insurance
• Product liability insurance
• Professional Liability insurance
• Commercial Property insurance
• Home-based Business insurance

The Small Business Administration’s Business.gov provides details on each of these on its ‘Types of Business Insurance‘ page.

Insurance Tips

Business.gov also dedicates a page on its website to discussing the following Five Tips for Buying Business Insurance:

1.      Asses your risks – be sure you fully understand underwriting, premiums, and deductibles and how these all apply to your business

2.      Shop around – there may be ‘specialist brokers’ that cater to your particular type of business

3.      Consider a business owner’s policy – a BOP can save you money; and, make sure you understand how much it does, and does not, cover

4.      Find a reputable, licensed agent – make sure your agent is state-approved

5.      Assess your insurance coverage on an annual basis – as your business grows and changes, make sure your insurance coverage reflects that

On this Five Tips for Buying Business Insurance page Busines.gov provides advice in each of these areas, as well as additional insurance resources – such as a state-by-state listing of insurance offices. I highly recommend spending some quality time going through these pages and getting educated.

Insurance requirements: Employees = Insurance

As I touched on at the start of this entry, businesses with employees are required to pay for insurance: workers’ compensation insurance, unemployment insurance, and disability insurance (depending on where your business is located).

• For more information on workers’ compensation insurance, go to this state-by-state listing of agencies and information.
• For more information on unemployment insurance, go to this state-by-state listing of unemployment tax and insurance information.

You are only required to purchase disability insurance if you do business in one of the following locations: California, Hawaii, New Jersey, New York, Puerto Rico, Long Island. Visit Business.gov’s Insurance Requirement for Employers page for links directly to each of these and their unique requirements.

In the end …

… insurance may well be your business’ necessary evil. But, ‘necessary’ is the key word here. Take the time to get smart before you buy. As I said at the start of this post, it may be easier – and cheaper – than you think.

Intellectual property is a term used to describe trade secrets, patents, trademarks, and copyright. Protecting your intellectual property is an important part of your business, particularly if you are looking to trademark your business’ name, symbol, motto etc., or if your business is based on an invention or involves writing and producing original written works, music, or video content.

Government Resources – Intellectual Property

According to the U.S. Patent and Trademark Offices (USPTO), small businesses may often lack the familiarity with the process of protecting their intellectual property. They can often find themselves at a particular disadvantage because they often lack the resources and expertise available to larger corporations. Research conducted in spring 2005 by the USPTO indicates that only 15 percent of small businesses that do business overseas are aware that their IP protection in the U.S. does not travel – that is, that a U.S. patent or trademark provides protection only in the United States. To help address this problem, the USPTO has launched a nationwide program to encourage small businesses to recognize and consider the benefits of strong IP protection-both domestically and abroad.

The USPTO has developed a website to help small businesses better identify and address their IP protection needs. The USPTO is also working with organizations like the U.S. Chamber of Commerce and the National Association of Manufacturers to help spread the word about the benefits of filing for IP protection. Free informational materials, which can be downloaded from this Web site, will help guide small businesses through the often-complicated world of intellectual property protection. There’s also a great FAQ available.

Government Resources – Patents, Trademarks, & Copyrights

Patents, Trademarks, and Copyrights are three types of intellectual property protection. They are all different and serve different purposes. Patents protect inventions, and improvements to existing inventions. Trademarks include any word, name, symbol, or device, or any combination, used, or intended to be used in commerce to identify and distinguish the goods of one manufacturer or seller from goods manufactured or sold by others, and to indicate the source of the goods. Service marks include any word, name, symbol, device, or any combination, used, or intended to be used, in commerce, to identify and distinguish the services of one provider from services provided by others, and to indicate the source of the services. Copyrights protect literary, artistic, and musical works. For general information on copyright, visit http://www.copyright.gov.

To patent an invention or register a trademark, you’ll need to fill out an application with the USPTO. There’s a lot of consolidated information on this topic here and an easy-to-use/simple FAQ that is really helpful on finding simple definitions and the forms you need.

Other Helpful Forums

• Check out Business.gov for a lot of fundamentals that the small business owner needs to know. As always, government resources are free. No site will ever ask you for credit card information or to login.

• Sole Proprietorship - A business owned and managed by one individual who is personally liable for all business debts and obligations.
• Partnership – Two or more people share ownership of a single business.
• Corporation – A legal entity owned by shareholders.
• S Corporation – A special type of corporation created through a tax election. An eligible domestic corporation can avoid double taxation (once to the shareholders and again to the corporation) by electing to be treated as an S corporation.
• Limited Liability Company (LLC) – A relatively new, hybrid-type of legal structure that provides the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership
• Non-Profit – An organization engaged in activities of public or private interest that are motivated by making a profit. Some non-profits are exempt from paying federal taxes.
• Cooperative – A business or organization owned by and operated for the benefit of those using its services. Cooperatives are not a legal structure.

Don’t fret – your initial choice of a business type is not permanent. You can start out as one type and change to another. If this happens, just follow the IRS’s instructions for Changes in Ownership or Organization. You will also need to file new documents with your state government, may also need to obtain new business licenses (depending on your state).

The government can assist with determining which type is best for you. Check out this great resource page provided by the SBA that can help you decide which of the above business types is right for your needs. The site also has information to help you get started. Believe it or not, the government provides tools to help you name your business, choose a location, register your business by state (many states have specific filing requirements for individual businesses), etc. We’ll discuss these basics in a little more detail below.

What’s in a Name?

There is more to naming your business than just coming up with something that sounds good or something that rhymes with your cat’s nickname. Thought needs to be given to state and local requirements for using “assumed” trade names and making sure you don’t accidentally steal someone else’s business name. The following guides provide information on selecting and registering a business name:

• How to name a business: Your business’ name will shape its identity. Have several options and research your ideas to make sure the name is legally available. Use a name database. The Thomas Register is a free, unregistered trademark database. Federally registered trademarks can be found on the U.S. Patent and Trademark Office’s database.
• Business name registration: The legal name of a business is the name of the person or entity that owns a business. If you are the sole owner, its legal name is your full name. If your business is a partnership, the legal name is the name given in your partnership agreement or the last names of the partners. For limited liability corporations (LLCs) and corporations, the business’ legal name is the one that was registered with the state government. Your business’ legal name is required on all government forms and applications, including your application for employer tax IDs, licenses and permits. However, if you want to open a shop or sell your products under a different name, then you may have to file a “fictitious name” registration form with your government agency. This chart provides the requirements for fictitious name filing in all 50 states and territories.

Location, location, location

Choosing the right location for your business can be a major factor in its success or failure. A good location may allow a struggling business to survive, but a weak location could mean trouble for even a very well-run business. Make sure you know all the legal restrictions of your place of business.

Tracy Johnson for Business.gov

You may have seen our post last week on market research performed by the government that you can leverage (for free) to build your business plans, monitor the market, and stay on top of the trends.  In that post, we focused on business data available on the market, the economy, and general information about your type of business and your location.  Now, let’s dig a little deeper.

So you have surveyed the market and are closely monitoring the economic landscape for your business type.  Now, you need to consider your customers.  Who are they?  Where are they? And how can you better target them to match up your goods and services with their needs?  The following demographic resources provided by the government can help you answer those questions.

There are three agencies that are the go-to agencies for free demographic info: The Census Bureau, the Department of Labor, and the Social Security Administration.

General Demographics

The U.S. Census Bureau provides information on population, housing, economics, and geographic data.  You can search information on groups by age, gender, education, disability, income, origin, race, ethnicity, etc. You can also obtain information specific to the state in which you do business.  The same type of inquiries can be made on this narrower level.

Identifying Consumer Behaviors

The Department of Labor’s Bureau of Labor Statistics provides data on specific demographic categories of the United States labor force.  Some of the categories available to search are consumer spending and injuries or illnesses.  You can even search data on the amount of time people spend doing various activities, such as paid work, childcare, volunteering, and even socializing!  This type of information can be incredibly helpful when trying to target to certain customer groups and understanding their behavior and lifestyle.

Earning Information

The Social Security Administration provides Fact Sheets by demographic groups listing income information for each group.  This information, when combined with the demographics above can help your business further target your ideal customer base.

Ready for the Big Leagues: Doing Your Own Research

The SBA has compiled a market research guide for small business owners to give an overview of the why market research is helpful, what kind of market research you may need, and points small business owners to additional resources for performing both primary and secondary research.

Similarly, the Missouri Small Business Development Center (SBDC) has produced a research workbook applicable for small business owners of any state, not just Missouri.  This workbook walks you through the necessary data you will need to compile a comprehensive business plan.  Good luck!

Tracy Johnson is a Senior Manager with ENC Marketing & Communications. She has the pleasure juggling a variety of clients from both the Information Technology and U.S. Government worlds. She brings a fresh perspective to problem solving for clients often integrating interactive marketing solutions with traditional communication methods. One of her top current clients is the Business Gateway Initiative, where she and the BG team provide marketing and outreach services for Business.gov.

Tracy Johnson for Business.gov

Any successful business owner will tell you marketing your small business begins with research.  The experts can direct you to the best methods for performing research and provide you with successful strategies for market research, but a lot of the statistics and demographic information you desire can be obtained, for free, from the government.

The government collects oodles of data that is public information.  The data can be immensely useful when pulling together your marketing plan and can help you cite accurate statistics without spending a ton of money on a custom market research engagement.  These tools certainly are not a substitute for quality market research such as surveys and focus groups, but rather provide helpful data to frame that research.  For a lot of start-ups; however, the research budget is minimal.  If that is the case for your business, these stats can be leveraged to build the framework of your marketing plan.

General government Statistics

Fed Stats gathers data across over 100 agencies, states, counties, congressional districts, and cities to provide a comprehensive purview by location or by topic.

The Statistical Abstract of the United States, published since 1878, is the authoritative and comprehensive summary of statistics on the social, political, and economic organization of the United States.  The abstract is prepared by the Census Bureau, but collects data from many Federal agencies.

The Census Bureau also releases reports for business owners called the Statistics of U.S. Businesses including detailed analysis of companies, establishments, employment, and annual payroll.

Another great resource for statistics specific to small businesses is the Small Business Administration’s Office of Economic Research.  Reports from this office include:

Entrepreneurship: The Foundation for Economic Renewal in the Gulf Coast Region [PDF file] – The proceedings from the 2006 New Orleans conference include; presentation summaries, powerpoint presentations, and conference participants.

The Impact of Regulatory Costs of Small Firms (Update) – Analyzes the cost of regulations on small and large firms. This study updates two earlier reports from 1995 and 2001.

Small Business Frequently Asked Questions (FAQ) – [HTML file] – Provides answers to basic questions about small business. [PDF file] – [Text file]

Research Resources – designed as a portal to direct faculty, students, and researchers to small business data and research.

The Small Business Economy: 2007 [Research Summary] – This is an annual reference source on small business’ performance in the economy. To obtain a printed copy, see the U.S.Government Online Bookstore . (Text synopsis version) (historical versions (1996-2001) (2002-2006).

You can also subscribe to the Department of Commerce’s Stat USA subscription for updated information on federal business, trade, and economics.

Additional Resources

www.business.gov/market-research

Read Part 2 of this Series: Free Market Research, Part II :: Demographics

Tracy Johnson is a Senior Manager with ENC Marketing & Communications. She has the pleasure juggling a variety of clients from both the Information Technology and U.S. Government worlds. She brings a fresh perspective to problem solving for clients often integrating interactive marketing solutions with traditional communication methods. One of her top current clients is the Business Gateway Initiative, where she and the BG team provide marketing and outreach services for Business.gov.

Buyer Beware

Everyone isn’t as honest as Mom. Recognizing and avoiding scams is key – do your research! The most common scam is known as the “pyramid scheme” or a multilevel marketing plan. This involves illegal practices where you are promised commissions for the amount of people that you recruit, not the amount of goods you sell as a distributor. Typically, only a very limited amount of people (those at the top of the pyramid) actually receive any money. Most states have outlawed pyramid schemes. The FCC provides a great resource on pyramid schemes and consumer alerts.

Franchise Benefits and Risks

Once you’ve assessed the opportunity clearly and eliminated the shysters out there, realize that that a great benefit about buying a franchise is instant name and brand recognition. People automatically know what to expect and have established loyalty in the business right away. There is established marketing and advertising, too – although with a price tag in most cases (paying a portion of your local advertising or promotions).

There are also varying fees associated with branded franchises. In exchange for the right to use a franchisor’s name for a set period of time, you will inevitably incur an initial franchise fee. The range for this fee can be hefty and usually includes: inventory, rent and equipment costs, operating licenses, and “grand opening” or promotion fee. Before you sign on the dotted line, make sure that you have the funds for the initial investment. In addition to this startup investment, most franchisors require frequent royalty payments, usually monthly. These royalty fees are usually a percentage of weekly or monthly income. Check out more information on the possible costs of starting a franchisee.

Tips for Selecting a Franchise

Now that you have information on avoiding scams and you’ve determined that you have the proper funds to invest, the next step is picking a franchise. Before you jump on an opportunity, you should always evaluate alternatives and ask yourself these two questions:

• Is there a demand for certain products or services in your area?
• What is the level of local competition?

Pick a franchise that is right for who you are: consider your schedule, goals, family, etc. Perhaps the most important step in selecting a franchise is to evaluate each one’s Disclosure Document. This document contains the company background, initial and ongoing franchisee costs, restrictions, training guidelines, advertising information, current and former franchisees in your area, earnings information, and other important information. However, even armed with this information and feeling confident, you should always visit (in person) at least three other franchisees. The reason that you should visit in person is to make sure that they are actually franchisees and not phony references (people that are paid to say certain things). Like with any other business venture, it pays to be careful and do your homework.

Other Resources

Franchise and Business Opportunity Guide

Tracy Johnson is a Senior Manager with ENC Marketing & Communications. She has the pleasure juggling a variety of clients from both the Information Technology and U.S. Government worlds. She brings a fresh perspective to problem solving for clients often integrating interactive marketing solutions with traditional communication methods. One of her top current clients is the Business Gateway Initiative, where she and the BG team provide marketing and outreach services for Business.gov.