2nd edition Wow! I’m in Business A Crash Course in Business Basics by Richard Stim and Lisa Guerin SECOND EDITION JULY 2008 Editor LISA GUERIN Cover & Book Design SUSAN PUTNEY Proofreading SUSAN CARLSON GREENE Index SONGBIRD INDEXING Printing DELTA PRINTING SOLUTIONS, INC. Stim, Richard Wow! I’m in Business : a crash course in business basics / by Richard Stim and Lisa Guerin. 2nd ed. p. cm. Rev. ed. of: Whoops! I’m in business. 1st ed. 2005. Includes index. ISBN-13: 978-1-4133-0215-8 (pbk.) ISBN-10: 1-4133-0215-7 (pbk.) 1. New business enterprises. 2. Success in business. 3. Home-based businesses. I. Guerin, Lisa, 1964- II. Stim, Richard. Whoops! I’m in business. III. Title. HD62.5.S753 2008 658.1'1 dc22 2008001607 Copyright © 2008 by Nolo. ALL RIGHTS RESERVED. PRINTED IN THE U.S.A. 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Table of Contents Your Business Companion 1 1 Is is the Right Business for You? 3 Do You Love What You Do? 4 Are You Good at It? 7 Is ere a Market Demand? 8 If It’s Not the Right Business 10 2 Managing Your Money 11 Record Keeping and Bookkeeping 12 Accounting Method 14 What Is Cash Flow and Why Is It Essential? 16 What Accounting Principles Do You Need To Know? 19 What Is Forecasting? 22 What Are Ratios and Why Do ey Matter? 25 Separate Business and Personal 27 3 Should You Incorporate or Form an LLC? 29 What Are You? Sole Proprietorship or Partnership? 30 What’s the Difference? LLC vs. Corporation 33 How to Convert to an LLC or a Corporation 38 An Interview With LLC and Corporations Expert Anthony Mancuso 41 4 Insurance 47 Basic Coverage 49 Consider a Package Deal 54 What You Need If You Have Employees 54 Getting Group Insurance rough an Association 56 Tips for Saving Money on Insurance 58 5 Raising Money for Your Business 65 What’s the Difference? Equity vs. Debt Financing 66 Borrowing With Credit Cards 68 Signature Loans 69 Bank Loans 70 What Motivates a Bank to Lend Money? 71 SBA Loans 73 State Lending Assistance 74 Borrowing From Family and Friends 75 Social Lending Networks 75 Angel Investing 76 What People With Money Want to Know About Your Business 80 Venture Capital 82 Selling Stock to the Public 82 6 Do You Need a Business Plan? 83 How to Create a Business Plan in 24 Hours 84 e Elements of a Business Plan 93 7 Getting Paid 97 Invoiced Accounts 98 Checks 100 Credit Cards 100 Collections 102 8 Hiring Help 107 What’s the Difference? Employee vs. Independent Contractor 109 Should You Hire an IC or an Employee? 113 Finding the Right Person 116 Legal and Paperwork Requirements: ICs 119 Legal and Paperwork Requirements: Employees 120 9 Working With or Bringing in Family Members 125 What’s the Difference? Family Business vs. Nonfamily 126 A Few Pointers for Family Businesses 127 Avoiding Problems If You Ever Divorce 129 Incorporate the Family Business 132 10 Who’s Afraid of Contracts? 135 Check ‘Em Out 137 Oral Agreements: Legal But … 138 Using Form Agreements 138 Find the Bias 139 Drafting and Formatting Your Agreement 140 Who Signs the Agreement? 142 Common Contract Provisions 142 Boilerplate 145 Dispute Resolution 147 When You Have to Review a Contract 149 Maintaining Paperwork 150 Do You Have a Fear of Negotiating Contracts? 151 11 Protecting Business Ideas 153 Four Steps to Protect Your Ideas 154 What Ideas Have You Got? 156 Ensuring Rights: Registration and Other Measures 158 Chasing People Who Rip Off Your Ideas 162 Licensing or Selling Your Rights 163 What If You Copy Somebody Else’s Ideas? 163 Ideas Your Employees or Contractors Come Up With 165 Two Companies at Made Money From Great Ideas 166 12 Using Names and Trademarks 167 What’s the Difference? Legal Name vs. Trademark 168 Choosing or Changing a Name 168 Perform a Simple “Knockout” Search 170 Federally Registering a Trademark 170 Staying Out of Trouble 174 13 Licenses, Permits, and Other Paperwork 179 Basic Registration Requirements 180 Register Your Fictitious Business Name 183 If You Sell Goods, Get a Seller’s Permit 184 Permits and Licenses for Specialized Fields 186 14 Marketing Basics 187 What’s the Difference? Marketing vs. Advertising 190 Ten Marketing Tips 190 Your Marketing Toolbox 196 Do You Need a Marketing Plan? 204 15 Shipping and Returns 207 What’s the Difference? Drop Shipping vs. Traditional Shipping 208 Shipping and Delays 209 Returns and Refunds 210 16 Working From Home 213 Best Businesses to Run From Home 215 Self-Assessment: Should I Keep Working at Home? 216 Tips for Maximum Home Office Efficiency 224 17 Leasing Space 229 What’s the Difference? Commercial vs. Residential 230 What to Ask When You Look at the Space 232 When You Talk About the Rent 233 ings to Consider When You Negotiate Your Lease 234 Subleasing 236 Interview with Attorney Janet Portman 237 18 Taking Your Business Online 243 How to Get a Site Up Tomorrow 244 Driving Traffic to Your Site 249 19 Should You Quit Your Day Job? 255 Go Part-Time, Flextime, or Telecommute 256 ree Reasons to Keep Your Day Job 259 How Do You Know When to Quit Your Day Job? 259 20 Hobby or Business: How It Affects Taxes 263 What’s the Difference? Hobby vs. Business 264 How the IRS Judges Your Business 264 Use Depreciation to Show a Profit 265 Proving a Profit Motive 266 If You’re Audited 268 Classic Hobby Loss Abuse 269 21 Paying Your Taxes 271 Audit Flags: Who’s More Likely to Get Audited? 272 How Businesses Are Taxed 273 What Taxes Your Business Will Have to Pay 275 Paying Estimated Taxes 276 Preparing Your Taxes 279 Keeping Records for the IRS 282 22 Tax Deductions 285 What’s a Tax Deduction Worth? 286 Tax Deduction Basics 290 Deducting Home Office Expenses 292 Qualifying for the Home Office Deduction 292 What You Can Deduct 295 Deducting Long-Term Assets 297 Section 179 298 Depreciation 299 Deducting Vehicle Expenses 300 Deducting Travel Expenses 301 Deducting Meals and Entertainment 303 An Interview with Attorney Stephen Fishman 304 Index 309 Your Business Companion I f you never took a business course, never mastered spreadsheets, and never read Who Moved My Cheese?, then this book is for you. If your hobby has grown into a small-scale enterprise, or your idea—installing ergonomic office equipment or selling fabrics made in Singapore—has become more popular than you expected, this book is also for you. In other words, this book is for people who “fell” into business. Are there really that many people who stumble into business this way? Well, there’s a woman who started making wedding favors for friends and soon got calls from strangers who’d seen her products and wanted to buy them. And there’s someone who began helping an Alzheimer’s patient and quickly found her services in demand and well paid. And there’s a man, unable to find a quality yo-yo, who began creating them himself and soon received orders from around the world. And then there’s me. I love audiobooks and have experience in sound recording—and I fell into business myself when I somehow talked my way into producing an audiobook for a large publisher. Caught up in the entrepreneurial euphoria of landing a big contract, I forgot for a moment that I already had a full-time job as an editor and a small legal practice on the side. A few days after signing the contract, the magnitude of my task hit me—I had to produce four audio disks consisting of about 60 separate segments read by six different narrators along with about 70 musical cues. My mood went from an incredibly unfounded confidence—the type often exhibited by reality show contestants right before they are kicked off the island—to teeth-clenching wide-awake-at-3-a.m. despair. Surely, other small business owners had found themselves in the same position as me. ere must be plenty of advice on how to manage small business anxiety. I looked through the resources I’d gathered and 2 | WOW! I’M IN BUSINESS skimmed a few of the business books I had purchased. No help. Nothing spoke directly to the overwhelming angst of people who fell into business. We “accidental businesspeople” need more than the stories and fables found in popular business books like the E-Myth Revisited. What we need—besides a daily neck massage and a renewable prescription for Zoloft—is some reassurance that this confusing state of affairs is both normal and temporary. And that became my mission for this book. I wanted to provide the type of practical guidance that I was not finding in other start-up guides—the reassurance and guidance that I hoped would reduce my own small-business anxiety. Following some of my own advice, one of the first things I did was get some help writing this book. Working with coauthor Lisa Guerin helped me benefit from her experience counseling small business owners. She made the book more concise, organized, and practical. Looking back, I think we succeeded in our mission. at’s not to say that you can read this book and stop worrying about your business. But the material in this book should, at a minimum, help you separate those things worth worrying about from those that aren’t. You may be surprised at how much you don’t need to freak out about. —Rich Stim [...]... a few of the resources listed below internet link You can find links for all the resources in this book at www.nolo com/wowbusiness Accounting and Bookkeeping What’s the difference between accounting and bookkeeping? Accounting is the process of managing and forecasting a business s finances An accountant advises a business and prepares financial reports Bookkeeping is part of the accounting program;... is the same: to report your cash on hand and enable you to forecast your cash in the future But is a cash flow statement really as helpful as it sounds? A cash flow statement summarizes all the cash coming in and going out of a business during a specific period by analyzing cash in three classes: operations (sales and operating expenses), financing activities (loans and equity), and investing activities... just a matter of a few mouse clicks (For example, in QuickBooks, you click “Reports, Accountant & Taxes,” and then “Trial Balance.”) A balance sheet adds up the assets and liabilities in two separate columns As the name implies, the columns must balance—that is, they should equal each other An example of a balance sheet is provided, below 20 | wow! I’m in business Looking at a Balance Sheet A balance... Assets and liabilities figure into several financial reports, but are most prominent on the balance sheet a snapshot of your business at a given time A balance sheet is commonly required when you seek funding or loans It also gives you a snapshot of your business at any particular moment—think of it as taking your business s blood pressure If you use a software accounting program, generating a balance sheet... carrying large expenses during the rest of the year A business that relies on an insurer for payments What could be worse than waiting 120 days for payment from an insurer? How about if your invoice is also reduced by one-third? In order to stay open, a business 18 | wow! I’m in business that relies on insurance income needs to carefully manage billings and, if possible, to add noninsured billings into... probably headed for a problem Back in the 1980s, business guru Michael Phillips analyzed a group of 650 San Francisco Bay Area businesses informally linked as the Briarpatch Network These businesses included the full gamut of product and service providers and were linked by a loose set of principles—for example, to operate openly, honestly, and in a manner that was dedicated to serving customers and... was never among the primary reasons for starting a business Most of the Briarpatch business owners were content to earn a reasonable salary and to own the business When Phillips surveyed non-Briarpatch business owners, profit was always one of the top three reasons for starting a business The failure rate for these other small businesses during their first three years: 80% Phillips concluded that having... diversification is making sure the new products are central and complementary to the existing business The Three Keys to Managing Cash Flow The three tasks (or strategies) for managing cash flow are: Be prepared You can never completely avoid cash flow problems— unpredictable and catastrophic events can overtake any small business owner But smart financial strategies—for example, not relying on a single... service business, manufacturing chapter 2 | managing your money | 23 or wholesale business, or a project development business (such as real estate rehabilitation, in which you work on one house at a time) Forecasting is always easier if you’ve been in business for a little while, because you have months (or years) of actual revenue and expenses upon which to base your forecasts If you haven’t got any history,... not be able to deposit checks made out to your business in your personal account If you have a joint account with anyone other than a coowner in your business, that person could be dragged into a business audit He or she will also have access to all of your business funds, which could be a problem if, for example, you have to pay a large bill for your business on the same day that your joint account . PUTNEY Proofreading SUSAN CARLSON GREENE Index SONGBIRD INDEXING Printing DELTA PRINTING SOLUTIONS, INC. Stim, Richard Wow! I’m in Business : a crash course in business basics / by Richard Stim and Lisa. 1980s, business guru Michael Phillips analyzed a group of 650 San Francisco Bay Area businesses informally linked as the Briarpatch Network. ese businesses included the full gamut of product and. business, you will have a hard time sustaining it. 6 | WOW! I’M IN BUSINESS If you have fallen out of love with your business, there are ways to rekindle the feeling. How to Run a riving Business,