Starting a Business: A Guide from the Michigan SBDC PDF

CHAPTER 1 — STAR TI NG A BUS I NESS Welcome Helping businesses launch and grow is a focus of the Michigan Economic Development Corporation (MEDC), state government, and all of us here at the Michigan Small Business Development Center (MI-SBDC). At the Michigan SBDC, we provide small business assista...

CHAPTER 1 — STAR TI NG A BUS I NESS Welcome Helping businesses launch and grow is a focus of the Michigan Economic Development Corporation (MEDC), state government, and all of us here at the Michigan Small Business Development Center (MI-SBDC). At the Michigan SBDC, we provide small business assistance across the state, including counseling, training, and research to help small businesses launch, grow, transition, and innovate. This guide outlines many of the steps, responsibilities, issues, and challenges facing entrepreneurs, and it seeks to answer your most common questions. Information included in this guide is both general and Michigan-specific. It covers topics such as: The steps for starting a business Different ways to organize your business Key elements of a business plan Complying with federal, state, and local tax obligations Basics related to management, hiring, and marketing And more! Though this guide is not a substitute for legal or financial counsel, it is an informational resource designed to make the process of starting and operating a business in Michigan a little less overwhelming. The information in this guide was accurate at the time of publication, but it is subject to change due to revisions in law and administrative policies. Between published revisions, an online version is updated periodically if significant changes occur. The online version can be accessed at: michigansbdc.org/not-yet-in-business/guidetostarting In addition to this guide and the talented professionals at the Michigan SBDC, other resources are available for starting and operating a business in Michigan: U.S. Small Business Administration (SBA) Michigan Economic Development Corporation (MEDC) Assistance from local economic development organizations, trade associations, chambers of commerce, schools, community colleges, universities and public libraries The Michigan SBDC is ready to help! For more information or to contact any of our offices located around the state, visit: michigansbdc.org 6 | Michigan Small Business Development Center CHAPTER 1 — STAR TI NG A BUS I NESS Personal Assessment Are You Ready to Start a Business? Being your own boss is an exciting idea, but self-employment isn’t for everyone. If you’re thinking about starting a business, you’ll want to consider whether you’re suited for it, both personally and professionally. This self-evaluation is designed to help you think through your personal, professional, and financial readiness for self-employment. It will help you: Assess your reasons and qualifications for going into business Set personal and business goals Consider if this is the right time to start a business Determine if you have the freedom, flexibility, and resources to start a business Evaluate your health and stamina Plan how you will balance family and business obligations There are no right or wrong answers to these questions. Bring the answers to this assessment to your Michigan SBDC consulting sessions. It will provide insights about you and your business readiness to help make the most of your time with us. To self-assess, ask yourself the following questions and answer as honestly and in as much detail as possible. S T E P 1: 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Self-Assessment: Are You Ready to Start a Business? Why do you want to start (or continue growing) a business? What kind of business do you want to launch or expand? Why do you think you can make this type of business work? Why do you think this type of business is sustainable? Do you have the necessary education, skills, and experience to succeed in this industry? Are there additional qualifications you should obtain before you start your business, and how can you achieve them? What is the true purpose and/or goal you hope to accomplish with this business? What is the financial goal you are seeking to achieve? Will you need financing, and do you have the high credit score, assets, collateral and financial history to be eligible for financing? What are your personal and professional strengths? What are your personal and professional weaknesses? How would you describe your physical, mental, and emotional health and stamina? What knowledge and skills do you have to start and manage the day-to-day operations of a business? Do you know and understand the technology necessary to be competitive in this industry? Do you generally have good judgment in people and ideas? What sacrifices and risks are you willing to take to be successful? How will you balance your personal life and business demands? michigansbdc.org | 7 CHAPTER 1 — STAR TI NG A BUS I NESS Steps to Starting a Small Business Once you have completed a self-assessment, you have already completed the first step toward launching your business! Now, you may be wondering what your next steps are. There is a logical sequence of actions for starting a business that includes 10 steps in the following order: 8 | 1 2 3 4 Perform a Self-Assessment Select a Business Idea Perform Market Research Refine or Reconsider Your Business Idea 5 6 7 8 Analyze Your Startup Costs Refine or Reconsider Your Business Idea Write Your Business Plan Complete the Startup Checklist 9 10 Secure Financing for Your Business Start Your Business! Michigan Small Business Development Center In the sections that follow, each step after the first is outlined in detail. The convenient checklist at the end of this chapter summarizes all of them to help you stay on track, manage the various steps and consider all the essentials. CHAPTER 1 EP 4 2 :: SSTT E — STAR TI NG A BUS I NESS Select a Business Idea You first need to decide what type of business to start. Ask yourself the following questions: What are you good at? What do you love to do? What skills do you have that you can capitalize on? What problems do people have that you can help solve? What unmet needs do you see and how can you help address them? Don’t assume the first business idea you have is your best one. Try to make a list of 5–10 distinct business ideas and evaluate which ones fit with the personal assessment you just created. Then, you can determine the greatest opportunities for your business ideas through market research. michigansbdc.org | 9 CHAPTER 1 STEP 3: — STAR TI NG A BUS I NESS Perform Market Research The first and most important task you need to accomplish before you start your business is determining if your idea is feasible. Market research is the process of gathering facts and statistics to make an informed decision about the market potential for your business. It also helps you understand the prospects for success and the direction your business should take. Market research is crucial both at the start of your business and as your business evolves. You’ll also need to decide, broadly, who your primary customer is going to be. Businesses typically fall into two general categories: Business-to-Consumer (B2C) Companies B2C companies primarily sell products and services directly to consumers. Any time you purchase something for yourself, you’re likely buying from a B2C company of some kind. Grocery stores, art galleries, hardware stores, lawn service providers, and pizza parlors are all examples of B2C organizations. Business-to-Business (B2B) Companies B2B companies primarily sell products and services to other businesses. Suppliers, parts manufacturers, marketing agencies, technology companies, and many others fall into the B2B category. Some businesses may do a bit of both. A farm, for example, might sell their produce to a restaurant (B2B) and sell it directly to individuals at a farmers market (B2C). You can determine the greatest opportunities for your initial business idea through market research. Did You Know? Michigan SBDC Consultants can help you access secondary research at no cost to you! 10 | Michigan Small Business Development Center CHAPTER 1 — STAR TI NG A BUS I NESS Industry Research Industry research will help you understand the big picture of what’s happening in relation to your type of business. For example, a pizza palor may look for answers to questions like: How many pizzas get sold in the U.S., Michigan or your local area each year? Have pizza sales been increasing or decreasing in recent years? What trends exist related to specialty pizzas, healthier alternatives, changes in sizes, packaging, etc.? Are more pizza parlors going in (or out of) business in recent years? In other words, what does the big picture look like for the pizza world? Researching Market Size and Customers The market includes the total population of consumers or businesses that may be interested in buying your product or service; meanwhile, customers are those who actually do buy. Within a market, there will be specific groups of customers who will represent the greatest percentage of your sales, and you can generally define them by a common set of characteristics. These groups of customers who share common characteristics are called market segments. Questions to answer when performing market research for market size and customers include: How many people and businesses are buying food in the area or location you’re considering? (This is the total market size.) How often do they buy food? Which segments are most likely to buy and how big are they? If you multiply the number of likely customers by their purchasing frequency and by the price of their purchases, it will give you some idea of the market potential for your product or service. For example, if you have 100 potential customers near your business who each order 20 pizzas per year, and if you charge an average of $15 for a pizza, you would be looking at $30,000 in potential revenue (100 customers * 20 pizzas per year * $15 = $30,000 per year). Competition Research Your competition includes two types of businesses. Direct competitors sell a product or service that is exactly like yours. Indirect competitors sell products or services that are similar or alternative to yours. Questions about your competitors might include: Where are other pizza shops located? What are they like? What other foods and alternative food options exist, and where are they located? Why would prospective customers buy your pizza and not choose other options? Is there an unmet need where you are hoping to establish your business? Are you offering something totally unique in this space? Are potential customers dissatisfied with other choices for a reason that you can improve upon? michigansbdc.org | 11 CHAPTER 1 — STAR TI NG A BUS I NESS Where can you find this type of information? Unfortunately, it’s rarely all in one place. Instead, you will probably need to invest some meaningful time and energy into the research phase of your business venture. Some useful sources, tools, and resources for market research include the following: The Library Often, the best source for market research is still the library. Many locations have Business-specific Librarians and space dedicated to business reference materials. Wherever possible, look for information in sources and references related to your type of business. Some publications in which you might find information include: Trade association publications Trade journals and industry publications The Encyclopedia of American Industries The Encyclopedia of Global Industries Economic census reports such as the Census of Retail Trade, Census of Wholesale Trade or Census of Service Industries Other governmental statistic sources published by federal, state, and local agencies Annual Statement Studies from the Risk Management Association (RMA) The Internet You may also be able to find helpful tools and resources on the internet. To get the most out of internet searches, try to define your search terms as precisely as possible and use other online research strategies: Make a list of all the keywords and strings of keywords associated with your type of business. Keep track of which searches you have performed already so you don’t end up duplicating your efforts later. Save time by visually scanning search results to see if a site contains potentially significant information. If a site has good information, print out the materials so you can refer to them later and cite the source in your business plan. Start by using trusted websites that can provide insight into competitors: mel.org thomasnet.com Primary Sources You may also need to hit the pavement and do some research with primary sources. Examples include: Industry Experts and Successful Business Owners Talk to people in the industry. You can gain valuable insights about opportunities and challenges by speaking to people who know the industry from the inside. You may also consider finding a mentor. A good mentor could be someone who owns a successful business like the one you want to start. Ideally, they won’t be a direct competitor, and they will operate outside the geography of your intended area. Surveys Build and conduct a survey or focus group to gather information from businesses or potential customers. 12 | Michigan Small Business Development Center CHAPTER 1 — STAR TI NG A BUS I NESS Visit Potential Competitors Observe your closest competitors from the perspective of a customer. This will help you gain insights about what matters most when customers are purchasing a product or service. Analyze your competition’s business model to identify their strengths, which you’ll have to work hard to overcome, and weaknesses, which you can turn into opportunities for your business. Similarly, you may want to investigate competitors’ websites, marketing efforts, and advertising. Study what they do, the image they present, and the style of their marketing to get a sense of what you can do to distinguish yourself. Paid or Hired Research Many companies will conduct market research for a fee and can easily be found online — along with reviews of their work. Keep in mind that high-quality research typically costs a lot. If you are looking for a cheaper option and live near a school that offers business courses, you may be able to find instructors who are looking for “real world” projects for their students. You can identify professors teaching those courses at nearby schools and contact them directly, or you can ask your Michigan SBDC Consultant if they might introduce you. Timing may be an issue because they may need to plan your market research project into their course, and it might take several months before that could happen. Regardless of where or how you get your information, becoming a good market researcher is a valuable business skill for you to acquire. Market research is the basis for evaluating potential opportunities and analyzing the ever-changing factors affecting your business at its start and as you grow. michigansbdc.org | 13 CHAPTER 1 — STAR TI NG A BUS I NESS Market Research Checklist Industry Research Size of the industry Growth potential of the industry Historical trends in growth or losses Seasonal or economic trends Professional associations within the industry Other related industries Distribution channels Opportunities Threats B2C Customer Research Size of the population Predominant gender Age(s) Ethnicity Education level Occupation or job title(s) Income level Average amount of debt Home ownership status Car ownership status Marital status Family status (number of children) Pets (type and number) Preferred media (magazines, newspapers, social media, television, radio, mobile phone, etc.) Purchase preferences (in person, internet, phone, catalog, etc.) Product or service characteristics that are valued most by the purchaser Payment preference (cash, credit, etc.) Frequency and quantity of purchase(s) Average dollars spent annually on this type of purchase Customer preferences and perceptions about quality, convenience, branding, image, exclusiveness, mass appeal, etc. 14 | Michigan Small Business Development Center CHAPTER 1 — STAR TI NG A BUS I NESS Market Research Best opportunity: businesses (B2B), consumers (B2C) or a combination of both? Total number of potential buyers Segments (groups with similar attributes) Segment(s) with the greatest need and/or demand Market trends: political, social, environmental, seasonal, etc. B2B Customer Research Industries, markets or segments Products or services Number of employees Length of time in business Geography and location(s) Purchasing patterns (how much, how often, etc.) Purchasing process Outsourcing patterns, policies, etc. Local, national or international purchaser Economic factors that influence the market Government policies that influence the market Competition Research Direct competitors Indirect competitors Potential future competitors Annual sales and revenue Marketing methods, advertising methods, and results of both Geography and location(s) Distribution channels Outsourcing patterns, policies, etc. Sources for production, services, inventory, etc. Strengths of your business’ competition Weaknesses of your business’ competition Opportunities (especially for differentiation) Other notes michigansbdc.org | 15 CHAPTER 1 STEP 4: — STAR TI NG A BUS I NESS Refine and Reevaluate Your Business Idea — Is It Viable? Once you’ve gathered and reviewed your market research, you can make data-driven decisions about your business. The important question to try and answer at this stage is this: Should you refine your business idea based on your market research? To answer that fundamental question, you’ll need to answer other questions such as: Is there a need or opportunity in the marketplace for your products or services? Who are your most valuable customers, and what problems do your products or services solve for them? What is your value proposition (definition on pg. 70)? Why would a customer buy from you instead of a competitor or alternative provider? If you can answer those questions confidently, then now is the time to start making some revenue projections for your business. To get started, create a pricing “menu” for all your company’s products and services. Make sure to include the expected margins for all products and your fee schedule for all services. As an example, let’s say you’re an electrician. You plan to charge $80 per hour each visit plus an additional $60 per hour after the first hour. If you expect 10 visits per month for the month of June, with 6 of those visits lasting 1 hour and 4 of them lasting 2 hours, your projected revenue for June would be: ($80 x 10 hours) + ($60 x 4 hours) = $800 + $240 = $1,040 Once you’ve created initial revenue projections, you’ll have some basis to decide whether your small business will generate enough sales to achieve your personal and business goals. As you evaluate your business idea, make sure you are considering the facts and making decisions based on what you know, not what you think or feel. 16 | Michigan Small Business Development Center CHAPTER 1 — STAR TI NG A BUS I NESS After market research and careful consideration, most entrepreneurs adjust their original concept in some way. Usually, they reduce the scale of their idea, especially when they allow for the possibility that sales will develop more slowly than expected. Lacking funds right now doesn’t mean you’ll never be able to start a business — it just means you need to rethink how you’ll start your business. STEP 5: Analyze Your Startup Costs Businesses commonly fail during the first year because they hit a financial wall before opening or soon after. Many different factors contribute to these failures, and most of them are related to financial planning. For example: Business owners may fail to estimate the true cost of starting the business they have in mind. Business owners discover that it will cost more money than they have in order to get the business open or keep the doors open. Business owners have unrealistic expectations about available resources. Grants, tax incentives and startup loans are typically scarce, competitive and difficult to obtain. Business owners have unrealistic expectations about how quickly they will start making money. Most businesses need sources of cash to stay afloat until they start making money. In order to avoid these common financial missteps, you need a well-researched estimate of what it will cost to start the business you have in mind. With an accurate analysis of your costs, you can align the reality of your available resources with your expectations about the feasibility of your business. Based on your financial situation, you may need to refine or reconsider your idea. Most businesses start by “bootstrapping”: using their existing resources to work toward a larger goal. Working on your business part-time, developing a group of loyal customers, and other strategies can help you build slowly but steadily until you can achieve your vision. Every large business started as a small business, and every business succeeds by growing one customer at a time. On the next page, we have included a startup cost analysis worksheet that you can use to estimate how much funding you will need to launch your business. michigansbdc.org | 17 CHAPTER 1 — STAR TI NG A BUS I NESS STARTUP COST ANALYSIS SUMMARY LAND AND BUILDINGS Down payment or lease costs Closing costs Remodeling or buildout Utility deposits Other EQUIPMENT Furniture Fixtures Production machinery or equipment Computers and software Telecommunications equipment Cash registers or POS systems Signage and installation Other M AT E R I A L S A N D S U P P L I E S Starting inventory Production materials and components Office supplies Other MARKETING , IMAGE AND BR ANDING Marketing and design assets Advertising budget Promotional items and activities Other O P E R AT I O N F E E S A N D E X P E N S E S Professional fees (accountant, lawyer, etc.) Patent and trademark fees Insurance (health, life, fire, liability, etc.) Licenses and permits Trade association memberships Other PERSONAL LIVING EXPENSES From last paycheck to opening day 3-6 months after opening day Moving expenses Other $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ CASH RESERVE AND CONTINGENCY FUNDS Opening expenses Wages, salaries, and taxes Other $ $ $ T O TA L $ 18 | Michigan Small Business Development Center Some of the following items may not apply to your business For each item on this list, you should have an accompanying list of itemized details CHAPTER 1 — STAR TI NG A BUS I NESS FUNDING YOUR BUSINESS Now that you’ve estimated your costs, it’s time to start figuring out how you will raise funding for your business. In the following section, we’ll discuss various options to secure small business funding. Personal Financial Resources Evaluating your personal finances and assets is a good way to start understanding your current financial situation. Common forms of personal financial resources include: Liquid cash in checking and savings accounts Financial potential from selling assets, like a vehicle Funds you could receive as a gift (or investment) from friends and family Home equity Credit cards Cash value of life insurance Cash value of retirement investments Income from a full-time or part-time job while you build your business Utilizing any of your personal financial resources carries risk. The more time and energy you invest into planning, analysis and refining your business idea, the easier it will be to thoughtfully consider the risks and potential benefits of investing your personal finances into your business. GRANTS Are you hoping for a grant? We’ve all seen infomercials, ads and websites telling us about “millions in free money” for startups and small businesses. The myth of “free money” has been around for decades, and clever scammers often extract a hefty fee without delivering the results you sought. Federal and state government grant programs exist, but grant funding rarely goes directly to businesses or individuals. Virtually all state or federal grant money flows to local governments, state agencies, and non-profits with highly restrictive eligibility requirements to help support regional or community programs. If you still want to look for grants, you can search at: grants.gov You can also search the U.S. Small Business Administration (SBA) grants section at sba.gov/funding-programs/grants However, keep in mind that government grants are funded by your tax dollars and, therefore, require very stringent compliance and reporting measures to ensure that the money is well spent. Some business grants are available through state and local programs, nonprofit organizations and other groups. These grants are not necessarily free money, and they usually require the recipient to match funds or combine the grant with other forms of financing, such as a loan. michigansbdc.org | 19 CHAPTER 1 — STAR TI NG A BUS I NESS LOANS Traditional and non-traditional lenders use specific criteria to qualify or reject business loan requests. The following are key lender considerations: Credit History Lenders and financiers are looking for reliable borrowers who have demonstrated responsibility and have a high credit score (typically 650 and above) over a period of at least 3-5 years. Cash Lenders expect you to be invested in your own business and pay 20%-30% of the total startup cost either as cash or cash plus equity investment. Collateral Lenders also expect you to pledge assets against the loan that have a net value greater than the loan amount. Note that “purchase value” isn’t the same as “resale value.” Banks and other lenders may discount the value of brand-new equipment to an amount they think they could get if they sold it to satisfy the debt. 20 | Michigan Small Business Development Center COMMUNITY DEVELOPMENT FINANCIAL INSTITUTIONS (CDFIS) Community development financial institutions (CDFIs) are private financial institutions that provide loans to small business owners, entrepreneurs and community organizations that might not qualify for traditional financing. Many CDFIs focus on serving low-income, disadvantaged and underserved communities. CDFIs are certified by the Community Development Financial Institutions Fund (CDFI Fund) at the U.S. Department of the Treasury, which provides funds to CDFIs through a variety of programs. SBA LOANS The SBA does not directly provide loans. However, a variety of loan guarantee and other support programs are available through commercial lenders and CDFIs. For more information, visit: sba.gov/funding-programs/loans CHAPTER 1 CROWDFUNDING Crowdfunding is a form of raising money to support ideas or projects. With crowdfunding, contributions or loans from individuals or interested parties are collected and distributed via a networked and publicly observable platform. It is being used to support artists and journalists, political campaigns, charitable causes, new inventions, entrepreneurship, scientific research and more. Various platforms offering this type of funding can be found on the internet. State and federal rules governing these kinds of solicitations and securities are always evolving. If you’re considering crowdfunding, make sure to seek professional advice from a qualified financial advisor. — STAR TI NG A BUS I NESS Three Primary Types of Crowdfunding Exist: 1 2 Donation-Based Crowdfunding Any crowdfunding where contributors receive no return could be considered donation-based crowdfunding. These campaigns are typically reserved for charities, disaster relief, helping people pay for medical bills, and similar causes. Rewards-Based Crowdfunding With rewards-based crowdfunding, contributors get a reward such as a product or service that the company receiving donations will be creating. By offering a reward, entrepreneurs can retain ownership of their business. However, it comes with some risks. Will you be able to fulfill all your reward commitments? Will the costs of fulfilling the rewards sink your business below the profitability threshold? Will your investors become repeat buyers? Again, more research, analysis and planning will help you accurately determine how much money you will need to raise and how feasible providing your rewards will be for the long-term health of your business. 3 Equity-Based Crowdfunding Equity-based crowdfunding (also known as ownership-based crowdfunding) allows investors to become part-owners of your business and receive a return on their investment as well as dividends or distributions based on a share of your business’ profits. Equity crowdfunding is still a complex work in progress at the federal level with the United States Securities and Exchange Commission (SEC). In Michigan, the state legislature passed legislation called the “Michigan Invests Locally Exemption” (MILE). This allows small businesses to raise capital by reaching out to Michigan residents to invest in their companies. Many regulations govern this type of funding, and serious consequences can come from violations of federal or state regulations. For more information on MILE and crowdfunding, visit the State of Michigan’s website at michigan.gov and search for “MILE crowdfunding.” Regardless of what type of crowdfunding you are considering, thoroughly research the advantages and disadvantages, and consult an attorney or finance professional who is knowledgeable and experienced in crowdfunding. In addition, it is extremely important to consult with a securities attorney for guidance before pursuing equity crowdfunding. michigansbdc.org | 21 CHAPTER 1 STEP 6: — STAR TI NG A BUS I NESS Refine and Reevaluate Your Business Idea — Is It Feasible? Again, after you’ve carefully reviewed and analyzed the costs associated with starting your business, you can make data-driven decisions about moving forward. The important question to try to answer at this stage is this: Should you refine your business idea based on your financial situation? In order to answer that fundamental question, you will need to answer other questions like: Will investing in your business idea put you in financial jeopardy? Can you justify the financial risk with the potential business value of your idea? Will you be able to generate enough sales in a reasonable amount of time to offset the costs of launching your business? After financial analysis and careful consideration, most business owners adjust their original concept. Usually, they reduce the scale of their idea, especially when they allow for the possibility that expenses will likely be higher than estimated. 22 | Michigan Small Business Development Center CHAPTER 1 S T E P 7: — STAR TI NG A BUS I NESS Write Your Business Plan GAIN FINANCING AND INVESTORS If you seek financing or investment, lenders and investors require a written business plan. A complete business plan provides information they need and clearly communicates your plan. Their decisions about investing in your business will be based on all the information in your business plan, not just the financials. Michigan SBDC Consultants have templates that can help with writing your business plan. To request business consulting and see a schedule of Michigan SBDC workshops and seminars about business planning, visit: CONSOLIDATE ALL YOUR INFORMATION Ideas and thoughts in your head aren’t a plan. The process of putting a business plan together helps you synthesize all of the information you have gathered and organize it in one place. Developing a comprehensive business plan forces you to see your business project in its entirety, including its strengths and shortcomings. In another chapter, we have provided a comprehensive outline of a standard business plan you can use to develop a draft that you can work from as you move closer to starting your own business! michigansbdc.org TEST YOUR IDEA Writing your business plan acts as a virtual simulation. Before you invest your time, energy and money, the business plan helps you understand the economic environment, envision different financial scenarios, identify and locate your markets, sort out the logistics of operations and management and much more. It also allows you to consider your idea in its entirety and adjust your business model for needs or opportunities. By writing a business plan, you reduce your risk and increase your chances for success! MANAGE YOUR BUSINESS AFTER LAUNCH Your written business plan is also a management tool. It provides benchmarks and milestones to help you measure your success. It communicates business goals and priorities to your team and keeps everyone heading in the same direction. Almost every entrepreneur needs help putting a business plan together, and that’s where your Michigan SBDC Consultant becomes your personal, confidential partner! Well-written brochures and books are also available at libraries and bookstores for guidance. Many large accounting firms have manuals available. Various legal and financial consultants can be found online along with reviews of their services. michigansbdc.org | 23 CHAPTER 1 EP 4 8 :: SSTT E — STAR TI NG A BUS I NESS Complete the Startup Checklist The following tasks are related to forming and finalizing your business structure and legal entity. You may have accomplished a few of these tasks already, and these tasks may be completed at any time in the startup process. However, we recommend first determining if there is a market opportunity for your business before moving forward. By investing in research and planning early in the process, you can avoid losing money and suffering through the complicated process of having to undo establishing and registering an entity, filing for an EIN (Employer Identification Number), and other registrations. Once you have completed your research and business plan, you can begin handling some of the logistics of starting your business. If Needed, Purchase an Existing Business If you are considering purchasing a business, it is important to understand what you are getting into before purchasing the business. You should require detailed information from the seller regarding business operations and finances. As the purchaser of even a portion of a business, you may be responsible for the previous owner’s liabilities regardless of any contractual language to the contrary. Make sure the seller provides proof that there are no existing or hidden liabilities. Before signing anything or establishing a closing date, make sure you have reviewed the seller’s tax clearance information. In order to receive this documentation, the seller needs to complete Form 5156: Request for Tax Clearance Application from the Michigan Department of Treasury. You can point them to the online resource available at michigan.gov/taxclearance. For further questions, you may contact the Michigan Department of Treasury, Tax Clearance Section, at (517) 636-5260. Develop Your Business’ Image and Branding A critical aspect of establishing and growing a business is your brand. Your branding will help you attract customers and communicate the character of your business. Plan it carefully and consider its staying power. Much of the value of a business accrues from the recognition of its brand and the reputation you achieve. Name and Legal Structure Selecting a name for your business and deciding on legal structure both need to be carefully considered. It is important to choose a name that is not already being used by another business, and there are many different forms of legal entities (which are not the same as a license to do business). Selection of your legal structure depends on the type of business, potential risks, liabilities, income taxes, investment needs, and other considerations. The decision about which legal structure to select may be very complicated. It is recommended that you consult an attorney and/or tax professional before deciding which structure is best for you. 24 | Michigan Small Business Development Center CHAPTER 1 — STAR TI NG A BUS I NESS Licensing Not every business is required to be licensed by the State of Michigan. Licenses are required for certain activities that may be conducted in the course of doing business. Local governments may also require certain business licenses. To find out if your business will require a state license or permit, visit michigan.gov/statelicensesearch. Keep in mind that legal entity registration is not a license. Food Business Licensing Food establishments are governed by the Michigan Food Law and the Michigan Modified FDA Food Code. Licenses are required for different categories of Michigan food service businesses. Examples include temporary, fixed, mobile, vending machine, seasonal, and special transitory. Food service establishments are licensed via local health departments that are empowered to set their own fees. For most questions related to licenses, contact your local health department. Make sure to contact the health department about licensing before making large capital purchases or starting on any construction activites. If you are thinking of starting off smaller, the Cottage Food Law allows individuals to make and store certain types of foods for sale in an unlicensed home kitchen. Specific rules and limitations apply to making, storing and selling foods under Cottage Law. A special checklist for starting a cottage food business can be viewed at: michigan.gov/documents/mda/A._Cottage_Foods_Checklist_353382_7.pdf For more detailed information about food business requirements and licensing, visit the Michigan Department of Agriculture and Rural Development website at: michigan.gov/mdard State and Federal Tax Registration For more information on how to access services for doing business in the Michigan, visit: michiganbusiness.org/services/business-assistance Employer Identification Number (EIN) and Taxpayer Identification Number An EIN identifies a business for federal and state tax purposes. Generally, an EIN is required by the IRS if the business will have employees and/or the business operates as a corporation or partnership. Zoning and Local Requirements Startups and expanding businesses need to make sure that the location of their space complies with all local laws and regulations. Although Michigan does not have a generic business license, check with your local governments (cities, townships, villages, etc.). They may require businesses to be licensed. Unforeseen costs could arise for items like change-of-use permits and architectural drawings, so make sure to check with your local municipality before you launch your business! michigansbdc.org | 25 CHAPTER 1 — STAR TI NG A BUS I NESS Employee Considerations If employees are hired, business owners have additional responsibilities at both the state and federal government levels. For more information, please reach out to your Business Consultant. Intellectual Property (IP): Patents, Trademarks, Service Marks, Copyrights, etc. A patent is a grant of an enforceable property right to the inventor, issued by the United States Patent and Trademark Office. A trademark is a word, phrase, symbol, device or any combination used to represent a company or product. A service mark is similar to a trademark and is used to identify and distinguish between services sold or advertised by a business from similar services of others. A copyright enables its owner to exclude others from reproducing certain kinds of works. For more information, please get in contact with your Business Consultant. Business Insurance Contact an insurance agent to determine the types of insurance your business should purchase. And make sure to shop around. Insurance rates and types of coverage vary greatly across insurance carriers. STEP 9: Secure Financing for Your Business If traditional lending is your financing path, begin visits to lenders as soon as the business plan is completed and before a site lease or purchase agreement is signed. Your Michigan SBDC Consultant can provide information about lenders in your area. S T E P 10: Start Your Business Congratulations! Your planning, persistence and determination have paid off. Now the journey and real hard work of running a business begins. If you’re starting a company that has a B2B sales component, another valuable resource is the Michigan Economic Development Corporation’s (MEDC’s) Pure Michigan Business Connect (PMBC). PMBC is a free service that connects Michigan goods and service suppliers with all levels of corporate purchasers. To find out more about how PMBC can help you forge partnerships and grow your business, connect with PMBC or sign up for one of their matchmaking events at: michiganbusiness.org/services/pure-michigan-business-connect 26 | Michigan Small Business Development Center