Texas Roadmap

to Starting a Business

The Feasibility Study

The Business Plan
Cash Flow Requirements
Legal Issues
Permits
Employee & Contract Labor
Financing Options
Tax Responsibilities
 TEXAS ROAD MAP TO STARTING A BUSINESS
The Texas Road Map to Starting a Business contains directions to get your business off the
ground and help strengthen our state economy along the way. This booklet covers eight steps to
starting a new business:

TABLE OF CONTENTS

CHAPTER 1: THE FEASIBILITY STUDY ................................................................................ PAGE 2

CHAPTER 2: THE BUSINESS PLAN ................................................................................... PAGE 17

CHAPTER 3: CASH FLOW REQUIREMENTS ........................................................................ PAGE 28

CHAPTER 4: LEGAL ISSUES ............................................................................................. PAGE 32

CHAPTER 5: PERMITS ..................................................................................................... PAGE 37

CHAPTER 6: EMPLOYEE AND CONTRACT LABOR ............................................................... PAGE 40

CHAPTER 7: FINANCING OPTIONS .................................................................................... PAGE 43

CHAPTER 8: TAX RESPONSIBILITIES ................................................................................. PAGE 47

It is important that you follow the directions found on the first page. Start at the begin-
ning and work your way from chapter to chapter. Do not jump ahead or skip chapters. When
you finish, you will have completed the background work necessary for starting a business.

While every effort has been made to ensure the reliability of the information presented in
this publication, the publisher does not guarantee the accuracy of the data contained herein.
Errors brought to the attention of the publisher and verified to the satisfaction of the publisher
will be corrected in the future editions.

1
 Chapter 1: The Feasibility Study
Chapter 1: The Feasibility Study
The first step on your road to starting a business information, you will be able to decide if your idea
is the feasibility study. This first step helps you, the is worthy of more time and money.
prospective business owner, determine the practi-
cality and viability of your business idea. After Overview—The Feasibility Study
completing the feasibility study, you will have an
indication of market opportunity and growth The feasibility study helps you examine your
potential. You want this information now, before ideas objectively from several viewpoints. The flow
you risk valuable time and money. chart below indicates the process you will follow.

The feasibility study can help you analyze the Every feasibility study begins with an idea. This
possible risks and rewards of your concept and idea can be for a product or service. A market
increase the probability of your success. During analysis, which thoroughly investigates the indus-
this exercise you will gather information on current try, competition, economic environment and target
economic conditions and the state of the industry markets, will help you decide if the idea can
in which you want to start a business. You will become a profitable business. This exercise also
conduct a detailed analysis of your competitors and helps you make an informed decision by identify-
potential customers. After you have gathered this ing the requirements for starting a particular

The Feasibility Process

Idea Market Analysis Requirements Decision Go Business Plan

Definition Industry Experience/Knowledge No

Competition
Objectives Market Time Re-evaluate
Legal
Financing

2
business, such as experience, time, and legal and occupation, marital status and lifestyle. What
funding issues. needs will your product or service satisfy? What
benefits will your customers gain from using
A feasibility study can take weeks or even your product or service? What results will your
months to complete, but the process puts you at an customers achieve from having purchased your
advantage and increases your chances for success. If product or service?
you move forward and start your business, the
feasibility study will serve as the basis from which Remember, customers buy based on
to develop a comprehensive business plan. If you benefits and results, not product specifications—
decide to put your venture plans on hold, you can for example, a specification of a life insurance
apply the knowledge to other possible ventures, or policy is that it is term or whole life. A benefit is
it could prompt you to adjust or re-evaluate your that it pays a sum of money upon your death,
original idea. but you purchase life insurance for the results—
peace of mind that your survivors will be taken
Your Idea: Defining Your Business care of financially.

Your first step is to define your business idea and Competitive Edge: Define your product’s or
the opportunity you envision. Include a descrip- service’s unique qualities. What stands out about
tion of the product or service you will provide, your product or service to entice buyers to buy
your reasons for starting the venture and the type from you? Is it quality, price, convenience or
of business you plan to establish (for example, expertise that makes your product or service
manufacturing, wholesaling, retailing, exporting/ preferred by consumers?
importing or service). Consider these areas, when
writing a working definition of your business. Personal and Business Objectives

Customer Viewpoint: You must adopt your Defining your short- and long-term business
customers’ viewpoint because if you fail to and personal goals establishes the criteria for
satisfy your customers’ needs, your business will judging the feasibility of your idea. Ultimately,
fail. Briefly describe the products/services you your decision to start a business should be based on
will sell and how customers will use them. whether it can achieve your business and personal
goals.
Ask potential customers, how they would
define your product or service. Their perspective Personal Goals: List the goals that satisfy your
can give you important insight into how your personal needs. Why are you starting this
product or service will actually be used. Keep an business? What motivates you? What do you
open mind. If someone uses your product/ want to accomplish? Are you more interested in
service in a new way, it may be a benefit you can a lifestyle change than in monetary reward? A
add to your marketing strategy. person starting a part-time business may have
different personal goals than someone who views
Product/Service: Specify the line of product or the business venture as a primary income source.
service you will offer and look for secondary
opportunities. For example, are there services Business Objectives: Where do you want your
you can provide in association with your prod- business to be in the next few years? What are
uct, or are there products that result from the your financial objectives? State these goals in
service you will provide? such terms as annual sales volume, market share,
growth rate, personal income, etc.
Customers: Describe your typical customer in
terms such as age, sex, income, education, Now review the two lists and describe in 25
words or less how your business will satisfy your
3
business and personal goals. This becomes your channel? For example, are you a manufacturer
mission statement. Do your personal and business selling to a wholesaler, to a retailer, or to the
objectives match? Is there a good fit with your enduser?
business idea? If not, you may need to re-evaluate
your venture. Otherwise, you’re ready to start your Who holds the power in the distribution chan-
market analysis. nel?

Market Analysis: Is Your Idea Identify and evaluate how significant changes in
the following conditions could affect your business:
a Market Opportunity?
Social or lifestyle changes
Begin your market analysis by examining trends
in your industry and collecting information about Economic changes
the size of your market segment and target market.
Your research can help you identify and learn about Political and/or legal changes
your primary customers and major competitors.
Analysis of the information you gather will reveal Technological changes
marketing strategies for successfully selling your
Population (demographic) changes
product or service.
Any other change in the business environment
Your business will exist in a world constantly
reshaped by changing social and cultural values, Conducting Your Research
economic conditions, political and legal restric-
tions, competitive strategies and advances in You can gather your information from existing
technology. You must keep alert to these trends and data (secondary sources) or from new data (primary
determine how they influence your business. research).
Your research will also lend a more complete To access secondary sources, start at your local
understanding of established business practices, library. Many public and private organizations
competitive developments and industry perfor- collect and publish data on population and indus-
mance standards. tries, which is often available at public or college
libraries. For example, trade associations maintain
Here are some questions to consider as you industry statistics and projections. Federal, state,
conduct your industry analysis. county and city governments also gather data. Just
about every regulated industry has an agency that
What is your industry, type of business and
collects data on it. Don’t forget that the Internet is
general product or service category?
also a good source.
Is your industry growing? Maturing? Declining?
Another resource is real estate agents—they can
Stable?
supply information for specific locations in terms
What are the current trends and outlook for of competitors, suppliers, demographics, zoning
your industry? regulations, local economic outlook, rental space
and costs. Banking and financial offices can some-
Does your industry have any special characteris- times provide relevant financial data about your
tics? Is it seasonal? Is it cyclical? industry. Additionally, local radio and television
stations can provide valuable information about the
Who are the key players in the industry? average customer, purchasing patterns and use of
media.
Where are you positioned in the distribution
4
 Be inquisitive. Investigate any resource that firms, market research firms and labor unions. You
might offer pertinent information. You’d be sur- can also gain insight by inspecting public filings,
prised at the information you can gather by talking classified ads and buyers guides.
with former employees of competitors, consulting

Secondary Research Sources Small Business Development Centers

Libraries Local radio and television stations and newspapers

Public
Sources of Business and Marketing Information
Colleges/Universities
Books on How to Conduct Research
TradeAssociations
Competitor Intelligence—How to Get It, How to
Industry information, statistics, projection
Use It by Leonard M. Fuld. Deals with ways to
Trade publications
gather information on competition. Covers sec-
Tradeshows
ondary sources, corporate intelligence, statistical
Chambers of Commerce and Area Economic sources, trade and business magazines and data-
Development Organizations bases. Also includes a section on gaining access to
Associations foreign intelligence from U.S. sources and provides
Businesses listings of many directories and source books.
Resources Published by John Wiley & Sons, 1994

Federal Departments and Agencies How You Can Buy a Business Without Overpaying
Small Business Administration by Eugene Merfield and Gary Schine. Published by
Service Corps of Retired Executives Consultant Press, 1991
Congressional offices
Your Texas Business by RichardAlderman and
Regulatory agencies: FDA, OSHA, EPA, etc.
Tom Oldham. Published by Gulf Publishing,
State Departments andAgencies 1993.
Texas Department of Economic Development
The Start-up Guide by David Bangs. Published
Congressional offices
by Upstart Publishing, 1998
State Comptroller’s office
State regulatory agencies: Texas Railroad Starting and Operating a Business in Texas by
Commission, Texas Employment Michael Jenkins and Donald Sexton. Published by
Commission, Texas Education Agency, etc. Oasis Press, 1991
City and County Government Demographic Know-How edited by Penelope
City, county and regional planning commissions Wickham. Covers how to find, analyze and use
Regional information and communication demographic information. Details approximately
exchanges 600 resources. Authorities in the market research
County Clerk’s office field discuss how demographic information can
impact a business’ bottom line. Published by
Banks and Financial Institutions
American Demographics, 1988.
Realtors

Local and Regional Utility Commissions

5
Guides and Company Information Statistics and Financial and Operating Ratios.
Industry statistics are listed under the subject,
Business Information, by Michael Lavin statistics, in library catalogs, and under Standard
Business Information Sources, by Lorna Daniels Industrial Classification (SIC) code numbers in
Directory of Corporate Affiliations publications (see the Standard Industrial Classifica-
Directory of Industry Data Sources, by Harfax tion Manual). Such information can also be ob-
Directory of U.S. Exporters tained from trade associations. There are also
Dun & Bradstreet Billion Dollar Directory; guides to statistics, general collections of industry
America’s Corporate Families statistics, and sources of composite financial and
Dun & Bradstreet Business Information Reports operating ratios such as:
Dun & Bradstreet Million Dollar Directory Almanac of Business and Industrial Financial
Dun & Bradstreet Principal International Ratios, published by Prentice-Hall
Businesses American Statistics Index
Encyclopedia of Business Information Sources, Analysts Handbook, Standard & Poor’s Corp.
edited by Paul Wasserman Annual Statement Studies, Robert Morris
EncyclopediaofSmallBusinessResources, byDavid Associates
E. Gumpert and Jeffry A. Timmons PredicastsBasebook
Financial Analyst’s Handbook, by Sumner Levine Competitive assessments of certain industries in
MacMillan Directory of Leading Private Compa- the United States by the U.S. International
nies Trade Administration
Moody’s Manuals, such as Moody’s Industrial County Business Patterns, U.S. Bureau of the
Manual Census
Standard & Poor’s Corporation Records Economic Indicators
Standard & Poor’s Register of Corporations, Encyclopedia of Business Information Sources,
Directors and Executives edited by Paul Wasserman
Thomas Register of American Manufacturers Index to International Statistics
Value Line Investment Survey Industry Norms and Key Business Ratios, Dun &
Ward’s Business Directory of U.S. Private and Bradstreet Corp.
Public Companies Market Share Reporter
World Almanac Statistical Abstract of the United States, U.S.
Overviews and General Industry Information Bureau of the Census
Census Information, U.S. Department of Statistical Reference Index
Commerce Statistical Service, Standard & Poor’s Corp.
County Business Patterns, U.S. Department of Statistics Sources
Commerce Studies of media and markets
Current Industrial Reports, U.S. Department of by Simmons Market Research Bureau Inc.
Commerce (New York, N.Y.)
Forbes Annual Report on American Industry Summary of Trade and Tariff Information, U.S.
Industry Surveys, Standard & Poor’s Corp. International Trade Administration
Inside U.S. Business, by Philip Mattera U.S. Bureau of the Census publications on
Moody’s Investors Industrial Review certain industries
Standard & Poor’s Industry Surveys
U.S. Industrial Outlook, U.S. Department of Projections and Forecasts. Listed under the subject
Commerce in library catalogs and publications, such as:
The Wall Street Transcript Predicasts F&S Index

6
Market Data. An overall guide to sources of data as:
on consumer and industrial markets can be found Applied Science and Technology Index
in such publications as: BusinessPeriodicalsIndex
The Directory of Directories
PredicastsBasebook EncyclopediaofBusinessInformationSources
Data Sources for Business & MarketAnalysis, Guide to Special Issues and Indexes of Periodicals
ScarecrowPress New York Times Index
Findex (Cambridge Information Gap) Predicasts F&S Index
Public Affairs Information Service Bulletin
Consumer Expenditures Data Standard Periodical Directory
Editor & Publisher Market Guide The Wall Street Journal Index
Survey of Buying Power, published by Sales
Management Inc. Internet Resources
U.S. Census Reports (Business, Housing, etc.)
[Link]
Market Studies of particular industries and prod-
ucts available from such companies as: [Link]

[Link]/soho_links.htm
Arthur D. Little Inc. (Cambridge, Mass.)
Business Communications Co. (Stamford, [Link]/
Conn.) starting_business/index/php
Frost & Sullivan Inc. (New York, N.Y.)
Morton Research Corp. (Merrick, N.Y.) [Link]/vol18/scratch/htm
Predicasts (Cleveland, Ohio)
Simmons Market Research Bureau (New York, [Link]
N.Y.)
Theta Technology Corp. (Wethersfield, Conn.) [Link]

Data Services and Databases [Link]

CompuServe Information Service Co. (Colum- [Link]

bus, Ohio)
[Link]
Dialog Information Service Inc. (Knight-Ridder
Inc.) [Link]
Dow Jones News/Retrieval Service (Dow Jones
& Co.) Other Sources
Lexis, Nexis, Mesis (Reed Elsevier)
AOL (Vienna, VA) Ayer Directory of Newspapers, Magazines and
Newsnet (Bryn Maw, PA) Trade Publications
Prodigy (Medford, MA) Books and other material listed in library
Data Star (Night Ridder, Inc.) catalogues under the industry name
Internet Brokerage house reports
Magazine and Newspaper Articles published by CIRR: Company & Industry Research Reports
trade associations, government agencies and Congressional Information Service
commercial publishers. Lists can be found by EncyclopediaofTradeAssociations
consulting periodical indexes and directories, such Financial Studies of the Small Business

7
 Library of Congress—suggested headings: small
business management, new business enter-
prise, entrepreneurship, entrepreneurs,
management, marketing strategy, business
ethics, and corporations.
NASA Industrial Applications Centers and
several universities, such as Southeastern
Oklahoma State University, the University of
New Mexico, the University of Southern
California, and the University of Pittsburgh
provide technically oriented reports, studies
and literature searches
National Trade and Professional Associations of
the United States and Canada and Labor
Unions
Small Business Sourcebook
The Source Book of Demographics and Buying
Power for Every Zip Code in the U.S.A.
The Sourcebook of Zip Code Demographics
YellowPages
Biographical
Dun & Bradstreet Reference Book of Corpora-
tion Managements
Standard & Poor’s Register of Corporations,
Directors and Executives
Who’s Who directories
Source: New Venture Creation, Entrepreneurship in
the 1990s, by Jeffry A. Timmons with Leonard E.
Smollen and Alexander L.M. Dingee Jr. Published
by Irwin.

8
 Generally, secondary research sources do not What are their target markets? How do they reach
provide all the information you need, and you will these markets? Describe their strengths and weak-
have to collect new data. Primary sources range nesses, and rate their performance in critical
from networking to formal surveys. They include competitive categories. Is their business growing or
customer and supplier surveys, networking, focus declining?
group discussions and interviews with customers,
competitors and suppliers. Talking to competitors, Learn all you can about your competition. You
suppliers, and customers also constitutes primary can use many of the same secondary resources
research. Primary research is particularly necessary listed on page 5 - 9. Review financial ratios for the
when trying to determine your target market and industry as discussed in Robert MorrisAssociates
in developing client profiles. Also, primary research Annual Statement Studies, pricing strategies and
helps you learn about your customers’ buying revenues of similar [Link] the role of a
habits and opinions of your product or service. potential customer and “shop” your competition. If
this is difficult for you, send a friend. Interview the
You don’t need a degree in market research to owner of a similar business in another city or trade
succeed in collecting primary data. Consult these area. Talk to your competitors’ customers and
recommended publications for information on suppliers.
conducting primary research.
Compile a competitor profile using the informa-
Practical Marketing Research by Jeffrey [Link] tion you’ve gathered. Who are they? How long
excellent introductory resource for conducting have they been in business? Where are they lo-
primary research. Discusses various research cated? What is their product or service? What are
methods, writing a questionnaire and interview- their prices? What is the quality level of their
ing guidelines. Also includes a section on solving product or service? When are they open?
specific marketing problems, including new
product research, advertising research, simulated You also want to investigate significant substi-
sales testing and product positioning research. tutes for your product or service. Customers may
prefer to satisfy their needs in other ways with
Published by AMA COM, a division of the other types of products.
American Management Association, 1993.
Use the grid on the following page to help you
Mail and Telephone Surveys—The Total Design organize your data.
Method by Don A. Dillman.
Your Competitive Strategy
Provides step-by-step instructions to conducting
and implementing mail and telephone sur- Now that you’ve learned about your competi-
veys. Also includes a section on developing tion, compare how your operation differs from
effective cover letters and increasing response theirs. Develop strategies for gaining your share of
rates. Published by John Wiley & Sons, 1978. the existing market by answering the following
questions.

What market niche will you fill?

Your Competitors How will your product or service be different
and better than your competition?
The next step in your market analysis is to
identify your direct competition. Describe the How do you plan to compete? How will you
differences and similarities between your opera- defend against your competitors’ strengths?
tions and theirs. Discuss their business concept.
9
 How are you going to price your product or Your first step is to define your trade area, the
service compared to your competitors? geographic area that your business will serve. Is
yours a neighborhood business that operates in a
How will you gain market share? local area with one or a few zip codes? Or do you
plan to service a city, county or several counties?
How will you take advantage of your competi- Do you require a statewide or national market?
tors’weaknesses?
Describe the current business conditions in your
Your Suppliers trade area. Is your trade area in a growth pattern
with existing businesses expanding, new businesses
Knowing your suppliers and how they can
growing, and commercial and residential construc-
deliver is critical to your competitive strategy. If
tion booming? Or is your trade area experiencing a
one or two suppliers dominate the market it may
contraction with employees losing jobs and con-
affect your ability to negotiate favorable terms. It is
struction equipment idle?
important to know about unreliable suppliers or
those that face a financially precarious situation. A key question is whether or not your product
or service is already available in your trade area.
You can investigate your future suppliers by
This could signify a good market opportunity, or it
calling the Better Business Bureau, performing a
could be a warning flag that others have tried your
credit check, collecting information sheets from
idea and found the area unsuitable for lack of
such companies as Dun & Bradstreet, or asking
market demand, political reasons or legal issues.
other entrepreneurs who have used them how they
would rate the supplier. By performing this due Your next step is to define your target market,
diligence on your supplier, you will be able to the market segment that offers the most opportu-
answer the following questions. nity for your product or service.
How big are they? A typical business makes 80 percent of its sales
to 20 percent of its customers. By identifying that
How long have they been in business?
critical 20 percent, you can focus your efforts and
Where are they located? expenditures on the consumer group that will give
you the most return on your investment. In re-
What are their hours? searching this target market, you will learn about
your primary customers’ needs and how to satisfy
What is the company’s reputation? Who are them. You should also study this group’s buying
their customers? habits to learn how to reach them with your
promotional message.
Do they work with small businesses? Are they
interested in working with you? Customer profile. Describe your selected cus-
tomer market in terms of physical characteristics,
Your Market needs and lifestyle. Place a face on your typical
customer. What specific benefits does he or she
To be successful, your business cannot be every- seek? What personal needs or results will your
thing to all consumers. You must identify those product satisfy?
markets that can most value your products or
services. Your market can be segmented based on You also need to know about the individuals
demographics, geographics, buying history, per- who make buying decisions. The person who buys
sonal characteristics, or almost anything that ties a your product and the one who uses it may be
group together. different. A good example: Adults buy breakfast
10
 Comparative Competitor Analysis

Product/ Quality Price Service Location Marketing Other

Service Program

Your
Business

Competitor
#1

Competitor
#2

Competitor
#3

cereal, but children eat it and thereby may control What is their age range?
the buying decision.
Where are they located?
If you are selling a product or service to a
consumer, the following are typical questions to ask What is their profession or industry?
in developing a customer profile.
Target Market Preferences. Most consumers
Who is your primary customer? Male? Female? make purchasing decisions based on how they
Both? Business? GovernmentAgency? etc. value convenience, service, quality, price or exper-
tise.
Why do they buy?
Most small businesses stand out because the
How do they buy? Cash? Credit? Charge? owner gives personal service. Customers value
someone who makes a courteous and personal
When do they buy? Daily? Weekly? Monthly? effort to provide special items or timely service.
Occasionally? Small businesses have an advantage here because
often they can provide this more efficiently than
What customer services do they value most? large companies.
How much do they buy? It may be difficult for small businesses to com-
pete on price because larger, established competi-
Why will they buy from you?
tors usually have economies of scale and deeper
What is their income or revenue? pockets. Large businesses can typically outlast the
11
new entrant in a price war. It is also hard for a new information you’ve gathered and the marketing
business to successfully offer products or services at mix framework.
the highest price levels because this requires an
established reputation to qualify the “status” or Marketing Mix: The Four P’s
“value” of the offering. Most small business owners Product
find it easier to compete on a medium price level. Price
Look at your situation carefully and select the Promotion
preference that your potential clients consider the Place
most important.
These elements must be “right” for your business
Market Demand. Determining market demand to be successful. That is, you must offer the right
is critical because if demand is lacking, you need to product or service at the right price using the right
reevaluate your business idea. To estimate the total promotional efforts at the right place and time.
demand for your product or service, consider the
current sales volume and growth potential for your Price. To pinpoint the right price, you need a
product or service. Knowing the answers to the combination of experience, market knowledge and
following questions will help you determine market good judgment. Study your competitors’ pricing
demand for your product or service. and estimate your costs. Can you price your
product or service competitively and still cover
How many competing firms are located in your costs?
trade area and how much business do they
do? Consider the following factors to determine the
best price for your product or service.
What are their sizes?
Are prices in your industry stable or do they
Are these businesses stable? Growing? Shrinking? fluctuate?

What are the population characteristics of your Must your clients buy from you or is it just as
designated trade area? easy to buy from your competitors?

How many consumers are there? How much are your potential customers willing
to pay?
What is their buying capacity?
Remember, your customers ultimately determine
What is their need for your product or service? pricing. They will be willing to buy from you
within a specific price range. If your costs exceed
What percent of the market will you have? this price range, don’t assume that you can pass the
difference onto your customers.
What is your market’s growth potential?
Place. How will you distribute your product or
Your research may show that the market is too
service? Will it be direct or through wholesalers or
small to support another business or it is shrinking
other intermediaries? Where will your business be
or growing faster than you thought. You may need
located? What are the traffic counts at the location,
to readjust your strategies.
and is this important for your business?
The Marketing Mix
For some businesses, location is all-important,
From time to time, review your original business and the wrong location can undermine an other-
definition. It may need refining based on the wise sound business. On the other hand some

12
businesses don’t need a fancy, expensive location if factors might be:
customers buy from distributors or other outlets
and never see the office. If location is critical to Quality Capital Precise product or
your business, invest the time and effort to find the Service Technology service identification
best location you can afford. Realtors know about Price Advertising Precise market
commercial property, but they may be unfamiliar Expertise Suppliers identification
with your business needs, so don’t rely on their Location Distribution
recommendations alone. Talk to other advisors.
Consider these questions: Where are your custom- Personal Skills Analysis
ers located? How will they get to your place of
business? What are the traffic and pedestrian Your next task is to define the many resources
counts for the location? you may need to start your venture. These range
from particular technical skills or management
Promotional Strategy. Your advertising and experience to legal requirements and start-up costs
promotional strategy affects both your ability to to sources of funding.
sell and your business or cost structure. You don’t
need a full blown promotional plan now, but it Technical Skills. These skills are unique to each
would be helpful to review the following questions. type of business. For example, printers need to
know how to operate a printing press, and oil well
How will you tell your customers about your drillers need to understand geology. Do you have
product or service? the skills to produce the product or render the
service? Businesses are often founded on an
Will you need to educate your customers about entrepreneur’s technical strengths.
the benefits of your product or service?
Experience and Knowledge. Describe three
Based on your target market’s demographics and critical skills or knowledge areas necessary to run
buying habits, what are the best ways to reach your business. How much experience do you have
them? in this type of venture? Do you have the experience
and ability necessary to make good operating
What will gain your customers’ interest and
decisions?
hold their attention?
Every successful business needs a complex mix of
Which advertising media will maximize the
management skills in many business areas, includ-
return per dollar spent?
ing marketing, financial analysis, operations,
How do your competitors promote their prod- purchasing and personnel. Do you have the man-
uct or service? agement skills to successfully lead a business
venture? Keep in mind that no one can be a perfect
What are the pros and cons of their methods? manager, but most new businesses fail because of
poor management so it’s important to be honest
How much promotion can you afford and for with yourself. Consider your management
how long? strengths and weaknesses, then decide if you need
to gain additional experience or knowledge or
Key Success Factors. Many businesses, although should hire someone whose strengths balance your
founded on good ideas and sound objectives, fail weaknesses.
because they lack critical success factors necessary
to survive in their market segment. These factors People make the difference in a company’s
vary in each industry and market segment. What performance. Good employees can make a mar-
does it take to make it in your market? Some key ginal business better, and poor employees can
13
destroy an excellent business. Financing Needs
Time Commitment. Owning a business can be Your next task in the feasibility study is to
a wonderful opportunity to be your own boss, to determine how much money you will need to start
take charge of your financial future and to work and operate your business until it is profitable.
seven days-a-week for nearly 24-hours-a-day with Begin by estimating your start-up costs and how
no one to hand you a paycheck at the end of the much money you need to operate your business for
week. Are you prepared for the personal demands a year. Make a list of special equipment needed and
and sacrifices of running your own business? Use the cost to buy or lease it. Also list one-time
the following questions to decide if this is a good start-up costs, including real estate purchase,
time to become a business owner. furniture, fixtures, equipment, starting inventory,
utility and lease deposits, equipment installation
Are you willing to work long hours and sacrifice
charges and grand opening promotions. Don’t
leisure time?
forget to include your insurance expenses as well.
How much time will the business require? (Most Insurance needs to be discussed with an insurance
business owners work at least 60 hours a professional with specific industry knowledge.
week.)
Insurance Options
How much time can you spend on your busi- Mandatory: Automobile
ness? Essential: Liability, fire, product liability, and
workers compensation
How long before you make a profit? Desirable: Crime, health, business interrup-
tion, key personnel, disability and
How long before you draw a salary? bonding

Do you have personal family circumstances that Consider the pros and cons of purchasing all or
would prevent you from totally focusing on part of an existing business. Sometimes, this
your business now? alternative can make some aspects of starting a
business easier or less expensive.
In answering these questions, you might find
that you’re not ready to start a business. Don’t be Sales/Revenues. Forecast your estimated sales/
discouraged. Although the time may be wrong revenues for each month during the first year. You
now, you might be prepared in six months or a must forecast sales, costs and profits using assump-
year. tions drawn from your market research. Put these
assumptions in writing.
Legal Issues. You must consider numerous legal
issues when starting a business. You may need Break-Even Analysis. Use the following formula
licenses, permits or certifications. Do you have to calculate the amount of sales and/or revenue
what you need? If not, can you meet the require- needed to cover your business’ total fixed and
ments to get them? variable costs for the first year. The break-even
point is where there is no profit and no loss.
You’ll have to decide how to structure your
business (sole proprietorship, partnership, corpora- Break Even = Fixed Costs
tion, etc.). Additionally, you should secure protec- Selling Price - Variable Costs (per unit)
tion for proprietary products or services, such as or
patents, trademarks and copyrights. For detailed Revenue - Costs & Expenses = $0
information about legal issues, see Chapter 4 of
this workbook.
14
 Fixed costs are those costs that must be met banks are cautious and consider start-up ven-
regardless of the sales level. They include such tures risky. Others usually require at least
items as rent or mortgage payments and mainte- one-third equity investment plus additional
nance expenses; utilities and telephone; salaries, collateral to cover the loan balance. If you have
benefits and payroll taxes; insurance payments; the required equity, some banks may consider
licenses; legal and accounting fees; office supplies; offering you a loan guaranteed by the U.S. Small
and depreciation and interest payments. Business Administration.

Variable costs fluctuate with sales and include Venture Capital Firms. These firms are usually
such costs as sales commissions, advertising and not interested in start-up situations. However,
marketing expenses, and raw materials. start-ups that have the market potential to grow
to $25 million to $50 million in five to seven
Using the figures you’ve gathered, calculate your years have been known to receive venture capital
company’s break-even point and when it will be financing. Such arrangements will normally
reached. require you to give up an ownership percentage
to the venture capital firm.
Cash Flow Analysis. Aschedule showing re-
ceipts, disbursements and net cash for your com- Private investors. Some individuals will invest in
pany over a specified period of time could be start-up businesses, especially if they are knowl-
helpful at this point. A cash flow analysis estimates edgeable about the industry.
by month how much cash your business will need
for expenses (when you pay your bills) and fore- Your Decision
casts when cash will come into your business
(payments from customers ). Keep in mind, more It’s now time for you to examine your completed
businesses fail because of poor cash flow than for feasibility study to determine if this business
lack of sales. For detailed instructions on preparing venture can be profitable. Review your mission
a cash flow analysis see Chapter 3. statement. Does your market analysis, competitive
analysis, personal skills analysis and financing
Financing Your Business. Finding funding is a needs indicate that your idea could be profitable?
challenge for every new business owner, but there Will these analysis factors allow you to achieve
are several sources to consider. your mission statement?
Personal Savings: Most new businesses get 90 to A “Go” Decision. If all these analyses are posi-
95 percent of their cash from personal savings tive, then start organizing your business. Turn to
and family and friends. Chapter 2 and begin by compiling your market
and industry information into a business plan.
Continued Employment. Some businesses start on
a part-time basis, permitting the owner to A “No” Decision. If one or more of your analy-
continue working full-time for another company ses displays negative results, your idea is not fea-
until the new business becomes profitable. sible at this time. Various conditions cause a
negative decision. For example, a market may not
Friends and Relatives. Many entrepreneurs look
exist or is too small. Perhaps the costs are greater
to private sources such as friends and family
than projected revenues. It is also possible that
when starting a business. The money is often
there is too much competition for your product or
loaned at low interest, which can be beneficial
service or that profitability may be difficult to
when getting started.
accomplish.
Banks and Credit Unions. Most commercial
You might feel disappointed with a “no” decision
15
but it is much better to learn this now before you
spend additional money and time on an idea that
won’t be profitable for you.

Time to reevaluate. Your analysis might show

that your idea is not feasible, but only temporarily.
Perhaps you don’t qualify for a needed license, but
you could get the permit with additional special-
ized training.

Be careful when you reevaluate. It’s your money

at risk. If the projected financial picture looks
bleak, the real one won’t be any better. Successful
business people know when to walk away. Look for
other opportunities or modify your current idea.

16
 Chapter 2: The Business Plan
Chapter 2: The Business Plan
After you complete your feasibility study and Keep in mind, a small business owner’s planning
decide to proceed with your business opportunity, responsibility is to maintain control over the
your next step is to develop a sound business plan. direction of the plan and, ultimately, the business.
Before you start, however, keep in mind the follow- A business plan should reflect your vision of a
ing general principles. market opportunity and serve as a blueprint for the
future.
First, your goal in writing a business plan is to
create an organized view of your business ideas—a Fourth, consider these guidelines for brainstorm-
road map to follow. The length of your business ing sessions.
plan itself is inconsequential. The key is quality,
not quantity. By formalizing your ideas on paper, • Follow an agenda with time constraints, and
you often identify weaknesses to be considered and limit interruptions.
anticipated. Most important, the business plan
guides you to your company’s future and lends • Don’t grasp the first idea that comes to mind,
focus and direction to your ideas. but generate a long list of possibilities.

Second, although the final document can be • Don’t let anyone dominate the planning session.
used to generate investment interest and financing, Involve the entire management team and create
the business planning process is primarily an an environment for the free exchange of ideas.
exercise to help you conceptualize your business
and set reasonable and achievable goals and objec- • Conduct the sessions in an informal, relaxed
tives. Theodore Roosevelt once said, “If you aim at setting.
nothing, you’ll hit it every time.” The business plan
• Don’t rely solely on past experiences for ideas.
helps you visualize your target and guides you in
Stretch your imagination.
hitting your mark.
• Don’t be timid or self-conscious about your
Third, allocate time to think about the various
ideas. Encourage spontaneity and withhold
issues you should consider during the planning
judgment or criticism of ideas until later.
process. Ask others to brainstorm with you, too. If
you have a management team, get them involved.
17
 Fifth, don’t be discouraged if you meet unex- oughly stepping through the planning process, you
pected obstacles. In fact, obstacles are the one thing can identify the strengths and weaknesses of your
to count on. Put yourself and your business at an operation. This should allow you to take advantage
advantage by anticipating and planning for diver- of your strong points, while giving you the oppor-
sions. When outsiders like prospective bankers and tunity to gather resources to counterbalance your
private investors read your plan, they consider your weakareas.
aptitude as a small business owner. You will earn
credibility by candidly identifying obstacles and With all this in mind, let’s get started.
your strategies for overcoming them.
Section I: Table of Contents
Finally, your business plan is a dynamic docu-
ment that you should review regularly to determine A table of contents is essential if you intend to
whether or not you are meeting your goals and use your business plan to seek financing. Each
objectives. It should be adjusted as market condi- investor or banker will read the text from the
tions change. The plan is not something you write perspective of their background and experience.
once and file away. Follow market conditions and Number the pages of your business plan and
revise your business plan accordingly. include a table of contents to make it easier for
readers to find what interests them. This will
Content increase the chance that they will read your plan.

Section II: Executive Summary

The length of a business plan varies from com-
pany to company depending on the type of busi- The Executive Summary should capture the
ness and market it serves. What is more important reader’s attention and entice them to read further.
than length is the clarity and substance of the ideas It should be limited to two pages and summarize
set down on the pages. Your business plan must the business plan’s key points. Although the Execu-
express various issues in a relatively straightforward tive Summary appears at the front of your business
and logical manner. Use the following components plan, it should be the last section you write. The
as a guide. Executive Summary must reflect your complete
understanding of your business idea. You won’t
I. Table of Contents
achieve this understanding until you’ve written the
II. Executive Summary document’s main body. If the reader questions a
broad statement made within this summary, the
III. Introduction detail of subsequent sections should provide the
necessary support.
IV. Environmental Analysis
Your summary should include, but not be
V. Market Analysis limited to, the following components.

VI. Marketing Strategy • Description of your business idea and prod-

uct or service, explaining how it stands out
VII. Operations from the competition.
VIII. Management Plan • Generic discussion of the target market and
the competitive environment.
IX. Financial Data
• Review of the management team and key
Remember, you are the business owner and the personnel, emphasizing their credentials and
plan must reflect your ideas and goals. By thor- specific functions.
18
 • Identification of capital requirements needed at reasonable wages. On the other hand, low
and the general use of these funds. unemployment could make it difficult to attract
personnel. A new business owner may have trouble
• Summary of potential financial results. competing against larger, established firms that
have the financial resources to compensate their
Section III: Introduction employees.
The introduction should give a detailed descrip- Do not overlook international market trends
tion of your product or service. The information that might affect your industry. For example,
you developed and refined during your feasibility although you plan to sell your product or service
study will be useful as you write this section. locally, you could encounter competition from
international sources. Be aware of these factors and
In the introduction bring up any distinctions or
plan for them.
unique qualities of your product or service, such as
a more convenient location or better service. Several resources could help you identify and
Additionally, outline any proprietary positions that follow these trends. The National Trade Data Bank
give you a competitive edge. These can be patents, of the Bureau of Census lists all overseas imports
copyrights or trademarks. If your product has any by commodity. Individual competitors can be
sensitive or critical characteristics—such as fire investigated by reviewing annual reports or check-
resistant treatment—list these attributes. Your ing with such firms as Dun & Bradstreet.
readers will also be interested in learning about
features that can positively influence the results of Industry Analysis. By completing the feasibility
your marketing strategy. Be sure to also include study in Chapter 1, you gained an in depth under-
your experience, special expertise or knowledge of standing of your industry and market. This section
the product or service. of your business plan should focus on the results of
your investigative efforts. Your research and analy-
Section IV: Environmental Analysis sis will provide you with the necessary tools to
make informed decisions on market opportunity,
The environmental analysis should include three
to analyze industry trends and to understand their
key components: 1) a discussion of current busi-
influence on your business.
ness conditions in the area where you plan to do
business, 2) an industry analysis, and 3) an evalua- Competition. During your feasibility study, you
tion of your competitors. conducted a thorough examination of your compe-
tition. You learned about their strengths, weak-
Economic Conditions—International, Na-
nesses and performance in competitive categories.
tional, Regional, Local. You don’t have to be an
You identified their target markets, market share
economist to run a business, but you should be
and strategies, and prepared a comparative com-
mindful of key economic indicators that can affect
petitive appraisal using key characteristics. Recount
your company’s ability to conduct business. Reces-
your findings in this section of your business plan.
sion trends, high interest rates, declines in retail
sales and high unemployment are a few of the Identify your key direct competitors and provide
factors to consider when starting a new business. a profile of each. The goal is to demonstrate that
you analyzed the competitive environment and
Examine the economy to spot events or trends
have developed defensive strategies. Explain your
that could influence your business decisions.
market niche, your competitive strategies and the
Concentrate on local business conditions and
tactics you will use to capture market share.
identify key opportunities and threats to your
company. For instance, a large skilled local labor
pool could provide you with high quality personnel
19
 Additionally, you must address your competi- Target Market. Review your market analysis
tors’ reaction to your entry into the market. You performed in Section V. Your target market will
also should consider how other entrants could consist of those individuals who will most likely
affect your business. buy your product or service. Keep in mind—you
can’t be all things to all people. This translates into
Section V: Market Analysis focus. Your marketing plan must focus on your
target market and the strategies you will use to
This section should provide a description of the reach these potential customers.
current market and future opportunities. Your
research during the feasibility study phase should These strategies should reflect the habits and
have provided you with the data to support your lifestyle of your customers.
business endeavor. Include-this information as well
as a discussion of the following. Sales Organization. Outline your sales strategy.
Do you plan to use a professional sales force? Will
Geographical Trade Area. Discuss your primary you use internal sales, outside sales or both? Will
trade area. State whether you will operate locally or you sell through a retail operation, a wholesale
plan to compete within your state, nationally or operation or through mail order catalogs?
internationally.
Design your compensation scheme. Will you
Customer Identification. This section should pay commissions, salary or a combination of both?
describe your selected customer market. Who are Or will you utilize bonuses or some other form of
you targeting? Develop a customer profile that incentive compensation?
illustrates their physical characteristics, needs and
lifestyle. What is their buying capacity, habits and Promotion. Discuss how you will generate
decisions for buying? What do they value? Discuss potential customers’ attention. What will capture
the need for your product or service. In this section their interest? What benefits does the customer
you must prove that a market exists in your se- gain from buying from you? What attractive
lected geographic area and show the number of customer service or conveniences will you offer?
people in the area that match your customer For example, you might offer free delivery, free
profile. alterations or discounts on first purchases or certain
dollar amounts.
Competitive Position. Discuss your competitive
advantage. Why will customers buy from you? Marketing/Advertising. As part of your market-
What is unique about your product or service? List ing efforts, you can implement various advertising
at least three key advantages you have over your activities. Advertising consists of any activity that
competitors and describe how you plan to capital- attracts attention for your product, service or
ize on them. You must also recognize your weak- company.
nesses and how to compensate for them. List three
disadvantages and discuss the strategies to secure There are a range of advertising options to
your company’s competitive position. consider. Some advertising has direct costs, such as
printing or production costs, postage or the cost to
Section VI: Marketing Strategy purchase space in a magazine. The most common
forms of advertising include:
The marketing plan is one of the most impor-
tant sections of the business plan. It outlines • Direct mail, such as flyers
strategies for selling your product or service. Your
goals and benchmarks for the operation should • Brochures, handbills
reflect a realistic, credible guide supported by your
marketing analysis. • Ads in magazines, newspapers, yellow pages,
20
 trade publications or on radio and television. customer’s mind you should address customer
needs with consistency and frequency. Check
• Trade shows, exhibitions industry norms for averages and use the data as a
foundation. You may have to do a great deal of
• Samplegiveaways estimating in this part, and it’s not unusual for you
to change your strategy often, especially in the
You should also consider other public relations
beginning.
activities. These include:
Keep in mind that the easiest and most recogniz-
• Publicity, such as press releases and articles
able forms of advertising—television, newspaper
sent to newspapers, radio and television, trade
and radio—are the most expensive. Select these
journals or magazines
media only if it’s appropriate for your product/
• Networking service and your target market. If you are compet-
ing with existing successful companies, you must
• Seminars,speeches,classes make up in elbow grease what they can do with
money.
• Civic involvement
When preparing a marketing/advertising plan,
• Contacts/referrals list the various activities you plan to use and
estimate their costs for the next 12 months. Again,
Advertising activities can offer short- and long- the cost of the plan must be reasonable compared
term benefits. Discuss your advertising approach to the income it produces. For example, it is
and strategies to achieve specific marketing objec- seldom reasonable to spend $10,000 on an ad that
tives. You want to confine your efforts to your generates $5,000 in sales.
target market. Select media that will most likely
reach your target markets. These could be newspa- When you’re ready to implement your market-
pers, trade journals, television or radio. Set an ing/advertising plan, purchase a notebook or
advertising budget based on how much you can organizer to hold a calendar. Chart your market-
afford and how much income you expect the ads to ing/advertising schedule, list the chosen medium
generate. and note how, when and where you plan to adver-
tise. Include information about every ad you
To decide which medium to use, compare the intend to place, speeches you will give or network-
cost to use a specific medium with the sales results ing events you will attend. Keep daily statistics of
you expect it to generate. Keep your target market your sales by product line, the number of custom-
in mind and how often that target market uses that ers that walk through your doors and other relevant
particular medium. information. Track customer response to ads and
promotional activities by asking them where they
An advertising plan should be developed within learned about your company, product or service.
your budget constraints. For an existing business, These accumulated facts will help you make
this amount can be a percentage of sales—for effective decisions for your future marketing/
example, five to 10 percent of sales. If you are a advertising plans.
start-up business, your advertising dollars will be a
combination of a percent of potential sales and Pricing Strategy and Sales [Link] discussed
earmarked start-up capital. in the feasibility study, correct pricing is essential.
How do you plan to price your products or ser-
You must commit to some form of advertising vices? Your strategy should reflect the cost to
when introducing a new product or attracting the produce your products or to provide your services as
customer’s attention. To develop a position in the well as your overall financial goals and objectives.
21
 What industry markup, discounts or other Are prices in your industry stable or erratic?
methods will you use? How will your price struc-
ture compare to the market? Why is it different? How do your sales policies and terms compare
Will you give trade credit or any other induce- to industry practices? For example, do you
ments to attract new customers? Will you accept deliver?
customer credit cards?
How do the features and benefits of your prod-
Your business’ revenue equals the unit price ucts/services compare to those offered by your
multiplied by the unit volume of products sold or competitors?
services provided (Revenue = Price x Volume).
Price, particularly the “right price,” is therefore an Can you reduce unit costs as unit volume
essential component of your financial strategy. increases, or are your costs fixed?

To arrive at the “right price,” you need a combi- Do your clients have to buy from you or could
nation of experience, market knowledge and good they just as easily buy from one of your
judgment. As a starting point, calculate the cost to competitors?
produce your product or service. This is your
Who needs your product or service? How many
minimum price. To calculate your maximum price,
potential customers? Who are they? Where
add an amount to the minimum price that reflects
are they located?
consumer demand and your competition’s pricing.
The “right price” falls between your minimum and How much are these potential customers willing
maximum price. to pay?
Prices for most products and services are market Are these customers generally aware of the
driven. That is, the maximum price you can charge “going prices” for products and services such
is determined by what typical buyers might pay for asyours?
a like product or service at that time and place and
under similar circumstances. Prices are said to be Is there a distinctive aspect of your product or
market driven because the market for products or service that will induce customers to pay a
services is based on the amount potential custom- higher price?
ers are willing to pay, not necessarily the price that
you might like to set. Are these customers motivated by price, product
quality, service, a combination of each or by
To determine the right price, you must consider price alone?
various characteristics related to your product/
service and your business and personal goals as How do these customers view your firm com-
outlined during the feasibility study. These factors pared with your competitors? What might
can relate to your target market position and way cause them to shift their loyalties?
of doing business, your competitors, your clients,
the current and forecast market, distribution What size quantities or contracts do these
channels, regulations and state of the economy. customers usually purchase? What are the
average annual purchases of these customers?
You should also consider how your answers to
the following questions could affect the price you Do these customers commonly “shop” or
establish. request bids to find the best price?

Does your firm lead pricing decisions or follow How do you sell your products or services?
competitors? What distribution channels do you use?

22
 Do you incur different costs for different cus- applications and used in a range of circum-
tomers because of their size, type or location? stances usually hold a lower unit price than
products that cover narrow areas and have less
Do you have a single product/service or do you competition.
offer a range of complementary or allied
products or other inducements to attract Desired Market Share. Selling at a lower price
buyers? than competitors is one way to increase
overall market share, but at the expense of a
How will your competition react to changes in lower margin. On the other hand, you could
prices? charge a higher unit price if market share is
not a concern and you’re targeting a larger
What is the general availability of similar prod- margin.
ucts or services from your competitors?
Stage of Market Development. Prices tend to be
Are there any unique factors in the market? For lower in a mature market with established
example, must you provide delivery or is competition and maximum economies of
credit expected? scale. Prices tend to be higher in a new or
declining market where volumes are not
Your answers to these questions can help you
established or are declining.
identify some of the internal and external forces
that could affect the prices you establish. Related Services. Product prices tend to be lower
if sold without any additional services, such as
Characteristics related specifically to your
delivery, training, installation, maintenance
products or services can also help you pinpoint the
and repair.
right price.
Product Turnover. Products with a fast turnover
Product type. Consider a lower price if you are
can be sold at a lower price, compared with
selling a commodity readily available from
products with a low turnover.
your competitors. Charge a higher price only
if your product is patented, unique or custom Marketing Expense. Some products and services
designed. require a high degree of advertising, sales
promotion and other marketing expenses.
Production type. If your product is
These could warrant a high price.
mass-produced with lower costs for higher
volumes, you might charge a lower price than Profit Potential. Prices tend to be lower if the
for products that are individually product or service brings a short-term profit
custom-built or require a great deal of special or if the profit can be made over a long period
expertise. of time.
Product Life. Products with a short life may sell How do you know if your price is too high or
at a lower price than a similar product with a too low? Prices may be too high if:
longer life.
• No one buys the product or service and the
Distribution Channel. Products or services sold sales volume is low or nonexistent.
directly to the end user or consumer could
have a lower price than the same product or • Your competition offers comparable goods or
service sold through distributors. services (based on an objective opinion) at a
lower price.
Market Coverage. Products or services with broad
23
 • A slight price reduction significantly increases setting your price, either adding or subtracting
sales. from theirs based on any differences in product/
service characteristics or functions.
Prices may be too low if:
For identical products/services the price should
• You’re easily selling 100 percent of your be close to those of competitive products or ser-
capacity or output and your clients/customers vices. The exception is if there is something special
would pay more. about your product that supports a higher price.
• Your price is below your cost. An exception Discounts
to this is when you have deliberately priced
low as a loss leader to attract more people and Business owners often use discounts to induce
expose them to your other products. customers to buy. For example, some sellers base
discounts on cost savings they realized on high
New products or services can bring up another volume purchases. Others may offer a discount for
set of considerations. When pinpointing a price for early payment. In some industries, discounts are
new products or services, ask yourself the following common and it would obviously hurt sales if other
questions. Is this a totally unique product or service sellers did not follow suit.
for which there is no current competition? Is the
product or service new to you, but similar to Cash Discounts. Cash discounts are most often
something already offered by others? Is it identical given to customers who pay within a certain period
to products or services already on the market? of time—a savings of two percent, for example, for
payments made within 10 days. The discount
New or unique products and services are diffi- should be large enough to encourage buyers to pay
cult to price for several reasons. No competitive early or at least earlier than payables without a
information is generally available for price com- discount.
parison. There may be no industry information,
trade association, established terms of sale or Cash discounts could bring about two results.
established market. In a situation like this, deter- First, the average customer might not take advan-
mine how consumers currently achieve the results tage of the discount. In these cases, the discount
of the new product or service. Then, determine may not be effective or is set too low to encourage
what it costs them to achieve these results now. payment. Second, some customers may take the
Can you provide consumers with the same results discount, even if they don’t pay within the qualify-
at a competitive price? ing payment period. For example, you decide to
offer a two percent savings on payments received in
When introducing new products, you may incur 10 days. The customer, however, pays in 30 days
higher marketing and promotional costs and may and takes the discount anyway. If this happens, you
want to set a higher price to allow you to rapidly must decide to either allow the discount or ask the
recover those costs. If this strategy doesn’t work, customer for full payment.
you can easily and rapidly lower prices.
Volume Discounts. Volume discounts are based
Another school of thought suggests that you can on the unit quantity purchased and are offered to
set a lower price to gain rapid attention for a new encourage larger purchases. For example, a tire
product or service, then raise the price as market supplier may choose to sell two tires at $50 each or
share grows. four tires at $40 each. Volume discounts can be
offered as a normal business practice or for limited
Some products or services might be new to you periods.
or to a market but compete with similar items. You
could use the similar product/service as a guide for
24
 Volume discounts have several advantages. First, subcontractors. Additionally, include a complete
large orders can reduce associated marketing costs list of necessary equipment and the cost of each.
for selling, shipping, packaging and delivery. These
costs can then be passed on or shared with the Cost and Inventory Controls. Develop and
customer. Second, if a seller offers a range of explain inventory control procedures in this sec-
products, discounts on the entire range can encour- tion. How will you track the flow of goods from
age sale and turnover of less popular products. raw materials to finished product? Have you clearly
Third, special discounts can reduce stocks of slow identified the costs associated with your inventory
moving, low turnover inventory. Fourth, sellers levels? Do you have alternative suppliers for critical
may take advantage of the discount and purchase materials? If some materials are price sensitive,
larger quantities. what is the projected impact on costs to produce
thegoods?
Volume discounts can present problems, which
can be remedied with advance planning. For Invoicing and Collections. Produce a policies
instance, customers may ask for a discount even and procedures manual for invoicing customers
though their purchase falls below the qualifying and collecting payments. Outline methods for
discount level. Another situation may arise where establishing the credit worthiness of customers,
customers purchase a large quantity at the last invoicing for goods delivered or services rendered,
minute, which causes inventory shortages or and collecting payments.
production scheduling problems.
Personnel Requirements. Discuss your staffing
Trade Discounts. Trade discounts also may be requirements. Clearly outline job descriptions,
common in some industries. For example, distribu- specific training needs, salary schedules and perfor-
tors may receive five percent off a manufacturer’s mance evaluations. Develop a personnel policies
list price or some other published price list. Trade manual that clearly addresses issues related to your
discounts also may be combined with volume business’ daily operations, such as absenteeism,
discounts. overtime, vacation and smoking.

[Link] allowances Section VIII: Management Plan

are promotional discounts that suppliers offer in
return for some action by the buyer. An example of A management plan is critical to your business
this is when a manufacturer offers a retailer a five plan because it gives you a clear understanding of
percent discount in exchange for a specified type your management team’s strengths and weaknesses.
and amount of advertising. The bottom line is that “people make the differ-
ence.” Your management team needs the skills,
Section VII: Operations experience and chemistry to successfully and
profitably guide your business. Review your team’s
Discuss operational activities in this section of expertise. Determine if they lack key management
the business plan. Address these key points if they traits and outline plans to acquire the missing
apply to your particular business. expertise.

Plan Capacity and Production Scheduling. In Organizational Structure. Draw an organization

this section, manufacturing concerns should chart outlining all full-time personnel and their job
discuss the range of their facilities, including titles. This section should also include job descrip-
production strengths and weaknesses. Also, include tions, qualifications and compensation for all
a diagram of the shop floor, develop a production positions.
schedule and identify capacity on a unit basis.
Indicate if you plan to subcontract any portion or Key Managers and Functions. Describe the
all of your work and describe how you will select duties and responsibilities of key personnel and
25
management executives. Include detailed resumes • Develop pro forma financial statements and
that explain pertinent business experience and prepare balance sheets for at least three years.
expertise. Also include a salary schedule and pay Complete income statements (also known as
periods. Summarize the strengths and weaknesses profit and loss statements) operating and cash
of the management team. If appropriate, list the flow projections on a monthly basis for the
board of directors and explain their level of in- first year, quarterly for the next two years and
volvement and contribution. annually thereafter.

Section IX: Financial Data • Review the break-even analysis you con-
ducted in your feasibility study to determine
The final section of your business plan will be how much you must sell to cover your ex-
financial statements for your business. These penses or costs with no profit or loss.
financial statements integrate all your research into
reasonable, realistic numbers. You must demon- • Calculate key business ratios based on ex-
strate that you have fully tested the numbers based pected performance.
on the assumptions and data you’ve collected. The
statements you develop will demonstrate how To develop your scenarios, you need to under-
thoroughly you have examined and researched your stand income statements, cash flow statements and
ideas. The focus of this section is to put together breakeven analyses (also discussed in Chapter 1:
pro forma numbers (projections) that directly reflect The Feasibility Study). Each serves a different
the market demands for your product or service purpose.
and your costs to deliver it to the market.
An income statement shows money transactions
You may want to develop three different finan- over a definite period of time, one month or one
cial statement scenarios to illustrate your forecast year for example. It shows how much money came
performance: the best case, worst case and mostly in (revenues) and how much money was paid out
likely case. Follow these guidelines to compose (expenses).
each scenario (see Chapter 3: Cash Flow Require-
ments for more information on calculating financial Acash flow statement presents a business’cash
data): position by showing when money is collected and
spent. The form Monthly Cash Flow Projection,
• Prepare your financial projections based on produced by the U.S. Small Business Administra-
realistic and credible assumptions. These tion (SBA Form 1100, 3-93), is an excellent tool. A
could include sales forecasts based on your copy of this form is included in the back of the
marketing plan and materials costs and book.
expenses, such as advertising, taxes and
insurance. A break-even analysis determines the point where
sales and expenses are equal. It identifies the sales
• Discuss funding requirements to start your level or the volume of units you must sell to cover
business, the sources of these funds and how your fixed and variable costs. If you exceed your
the proceeds will be used. These costs are in break-even point, then you are “in the money,”
addition to operating costs. They are not whereas if you fall below your forecast break-even,
deductible but are usually amortized over a you are in a loss position.
five year period.
The balance sheet gives a snapshot of the firm’s
• List the equipment you plan to purchase and financial position. It shows your assets (what you
the cost for each. own), your liabilities (what you owe) and your

26
owner’s equity (your investment in the business). Final Considerations
At any given time, your total assets should equal
the sum of the total liabilities and owners’ equity. When packaging your business plan, you may
That is: want to include a cover sheet and cover letter.
Every business plan should begin with the business’
Total Assets = Total Liabilities + Owner’s Equity and owner’s name, address and telephone number.
If you intend to mail the plan to someone—to a
Key business ratios give insight into the prospective investor, for example—prepare an
company’s financial health. Ratios provide you accompanying cover letter. The letter should be
with data to evaluate your business’ liquidity or short, state your purpose and identify the results
solvency, activity efficiency and profitability. The you desire.
current ratio measures the business’ ability to meet
its current obligations. It is calculated by dividing You should also consider visual aids. Charts and
current assets by current liabilities. For example, a graphs will make your business plan visually
current ratio of 2.0 means that there is $2 in appealing and easier to read.
current assets for every $1 in current liabilities—or
to say it another way, you have $2 available for
every $1 you owe.

Key business ratios also can be used for compari-

son. You can evaluate the financial performance of
your firm against its past performance, compare
your financial data with that of similar firms or
measure your company’s performance against
industry norms.

If you have thoroughly estimated your sales and

expenses, you should be comfortable with the
results derived from your scenarios. If your bottom
line says that your business will be unprofitable,
then re-check your figures. If, after re-evaluating
them, the numbers still reflect problems, then
consider this a warning signal. Remember, it’s your
money at stake. If the projected financial picture
doesn’t make sense on paper, more than likely the
real one won’t be any better. That doesn’t mean you
should abandon your quest to run your own
business, but you ought to back away from the
current idea and look for other opportunities.
Remember these words from the wise and experi-
enced:Tobesuccessful,newentrepreneursmust
develop one essential skill—knowing when to walk
away.

27
 Chapter 3: Cash Flow Requirements
Chapter 3: Cash Flow Requirements
Now that you’ve identified your product or of the cash flow form in the back of the book. It
service, assessed your customers and competition, will be your guide.
and established sales goals using a marketing/
advertising plan, it’s time to test these ideas by This form, SBA Form 1100 (3-93) Monthly
converting them into numbers. The test is called a Cash Flow Projection is handy because it has a
cash flow analysis. spreadsheet on one side and a complete set of
guidelines for completing the form on the reverse
The cash flow analysis helps you determine side. You can get additional copies from your local
whether your business will generate enough cash to Small Business Administration office.
pay its daily, monthly and yearly expenses. It’s
important for this exercise to produce a positive Cash as used here refers to actual currency or
financial outlook. If your planned numbers don’t money in your bank account on which you can
present a favorable outlook, most likely the actual write a check. It does not include accounts receiv-
ones won’t either. able (products or services sold, but unpaid).

The cash flow analysis is a planning tool. It helps Your first task is to identify all your sources of
you decide how much capital you need to launch, cash. For a start-up business, this usually includes
expand and maintain your business. The cash flow sales, the owners’ investment (equity), bank loans
analysis is commonly used to take snapshots of and loans from owners or lenders. For existing
where a business is headed financially. Even the businesses, funding sources may also include
smallest business needs to know how well it is collection of accounts receivable, sales of assets and
faring at any given moment. Many businesses have refunds from suppliers or vendors.
a great deal of cash, yet may still be in financial
trouble. Others may be making a terrific profit, but Completing the Form
can be cash poor. The cash flow analysis alerts you
to these and other financial conditions. Find line 1 under Pre-Start-Up and enter any
cash your business has on hand. Now, in either the
To see how a cash flow analysis can work as a PreStart-Up position or under the appropriate
planning tool for your business, pull out the copy month, enter the amount of cash you think you
28
will receive on lines 1, 2(a), 2(b) or 2(c). days, you must pay full price. Managing accounts
payable is extremely important in order to receive
For instance, if you plan to invest $20,000 in quality merchandise in a timely way. Planning for
your business and make this money available to your inventory needs also allows you to obtain
your business in the first month of operation, then volume discounts. For example, you can achieve a
put $20,000 under month 1 on line 2(c). If you $15.25 cost savings by purchasing 100 units at $10
plan to have cash sales in the second month of each versus purchasing 101 units at $9.75 each. If
$8,000, then put $8,000 under month 2 on line you are selling services to the public, planning your
2(a), and so on. time and developing a personnel schedule allows
you to minimize payroll expenses and taxes, while
Note: The first time you perform this exercise, still having the ability to generate sales. For each
don’t include the money you plan to borrow. This type of service your company offers, estimate how
exercise helps you determine what amount, if any, many man-hours are required to perform quality
you should borrow. work. Multiply man-hours by hourly wage or
salary to calculate gross payroll. Payroll taxes are
After you have identified all sources of existing
calculated based on federal and state percentages of
and incoming cash and placed the amount in the
gross payroll. Variable expenses like cost of inven-
appropriate columns, add and complete lines 3 and
tory and payroll expenses are the largest cost of
4 to show Total Cash Receipts and Total Cash
doing business, therefore estimating carefully will
Available. At this point, you should know how
increase your chances of profitability and success.
much cash you plan to have in each of the 12
months from all sources. You’ll also know the total Other expenditures are your final type of cash
receipts expected from each source. outlay for consideration. These occur on a more
infrequent basis than fixed or variable expenses and
The next job is to identify how you plan to
should be entered on lines 5(s) through 5(w).
spend this money. Under Cash Paid Out (Item 5 in
Other expenditures include such items as deposits,
the description area), write each category of expen-
installation charges, leasehold improvements, office
diture on the appropriate lines. Start with the items
furniture and equipment.
that remain the same each month. These are your
fixed expenses and should be entered in Items 5(a) Monthly fixed and variable expenses can offer
through (q). Fixed expenses include rent, wages, clues to many of these other expenses. As an
loan payments and insurance. example, think about your office or store front.
Although there is a monthly rent or lease associated
Next fill in the expenses that will vary directly
with occupying this space, you will probably be
with sales revenues (variable expenses). For a retail,
charged a deposit and may need some additional
manufacturing, or wholesale company, inventory
money for leasehold improvements.
planning is most important. For service companies,
payroll expenses, payroll tax expenses, and em- The telephone is another example of how one
ployee benefits are most important. Consider item carries many cash requirements. There are
contacting numerous suppliers of your inventory. seven basic costs associated with using this required
Discuss payment terms (accounts payable), early business tool:
payment discounts, and volume discounts. For
example, 2% discount before 10 days; net 30 days 1) Line costs (fixed monthly cost)
discount can substantially lower your cost of
inventory, thus increasing your bottom line profit- 2) Long-distance costs (variable monthly cost)
ability. 2/10 N 30 means that if you pay your
suppliers within 10 days, your save 2% of the cost 3) Telephone equipment rental, lease or pur-
of the inventory, but if you pay between 11 and 30 chase (could be a fixed monthly cost or a
one-time expenditure)
29
 4) Initial service deposit (one-time expenditure) the ending cash position of one month becomes
the Cash-On-Hand (Item 1) for the following
5) Line installation costs (one-time expenditure) month.
6) Wiring costs (one-time expenditure) After you calculate the amount for each column,
look at the line titled Cash Position (Item 7). If the
7) Name listing costs in yellow pages, etc. (fixed numbers are all positive, then you’ll have enough
monthly cost) cash on hand to pay your expected obligations for
the year. If any of the numbers are negative, then
The cash flow analysis helps you examine your
you plan to spend cash you don’t have, and you’ll
business idea and determine associated costs. Most
need additional capital to stay open for business.
people can identify the cash that comes into the
Consider this negative number as the minimum
business, but some people overlook the many ways
funding amount, because rarely are reality and your
cash is spent. To make the cash flow statement a
cash flow statement identical. Additionally, many
useful management tool, be thorough in gathering
businesses cannot sustain a cash flow great enough
this information.
to pay their own way within the first year, so it
If you don’t know what to expect, call a few would be wise to evaluate years two and three as
people. For example, call the telephone company well.
and ask what costs you can expect. From this
Next, build a reasonable cushion of funds in case
conversation, you can easily determine the line
your plan doesn’t work as expected. By combining
costs, required deposits, an estimate of your instal-
this cushion—the minimum funding amount and
lation and wiring costs, your listings and yellow
any cash shortfall in years two and three—you can
pages costs, and the various options available
identify the additional investment or borrowed
regarding telephone equipment. Once you have
finances you need to give your business a fighting
this information, you can decide to either rent,
chance. Most banks will allow you to add a 3% to
lease or purchase the telephone equipment.
5% cushion to your minimum funding require-
Finally, some guesswork is necessary to estimate ment.
your monthly variable costs, such as long distance
This exercise may seem complicated, but you
charges. Remember, as your business grows, some
need to work through it alone. If you need some
of your expenses will also grow. Don’t estimate that
help, contact your local Small Business Develop-
your business will double its volume while keeping
ment Center or see a certified public accountant.
variable expenses constant. This not only consti-
But do the work yourself.
tutes poor planning, but doesn’t reflect well when
someone—like a banker—reviews your cash flow Why is it important for you to complete the
statement. cash flow statement on your own? First, it’s your
business and this tool helps you better understand
After you’ve identified your cash outlays (fixed,
your financial position. You need to learn the cash
variable and other expenditures) and placed the
flow statement inside and out. Review the cash
amounts in the appropriate columns, complete
flow statement at least twice each month. It should
Item 6 Total Cash Paid Out. Add your expenditures
be reviewed at the beginning of each month to see
for each month, and don’t forget the 14th column
the goal. Then it should be reviewed at mid-month
Total. Add the numbers in each row to create a
to determine if you are on target with the projec-
total for each expense type.
tion. Update and use it constantly. It allows you to
Next, subtract the Total Cash Paid Out (Item 6) see your business’ future while you still have time
from Total Cash Available (Item 4) to arrive at Cash to change it.
Position (Item 7). Do this from left to right because
30
 Second, as a small business owner, you need to
get used to doing things on your own. Until your
business becomes profitable, you must be conserva-
tive about how you spend your money. This
means, at least for a while, you’ll have to wear the
hat of president, planner, accountant, operations
manager, sales executive, delivery person and
almost every other job in your company.

The cash flow statement can also be converted

into a break-even analysis by playing some what if
games with the revenues and variable expenses. By
manipulating these numbers to make your
year-end additional cash required total close to
zero, you can define your company’s minimum
survival level.

The cash flow statement can also double as a

budget. By continually comparing what actually
happened to what you expected, you not only
improve your ability to predict the future, but you
also gain insight into those areas that are “out of
control.”

If you have additional questions about the cash

flow statement, check the guidelines on the reverse
side of the SBA Form 1100. If you need extra
copies, check the Miscellaneous section at the end
of this booklet for the SBA office nearest you.

31
 Chapter 4: Legal Issues
Chapter 4: Legal Issues
The next step in starting your business is to etor owns of value (with some exceptions) is up for
select the best legal form for your new business grabs against outstanding debts and other liabili-
venture. The choices include sole proprietorship, ties.
partnership, limited liability partnership, C Corpora-
tion, S Corporation and limited liability company. Partnership
Sole Proprietorship The next step up the ladder of complexity and
expense is the partnership or general partnership. A
Most new businesses are sole proprietorships for partnership can exist when two or more people or
several reasons: 1) It’s normally the easiest and least businesses join together to operate a business. This
costly way to organize, 2) It does not require business form may be more costly than a sole
formal legal papers, and 3) It does not require a proprietorship if the partners require a written
separate tax return (profit and loss are reported on partnership agreement.
a separate schedule within your personal tax
return). The partnership agreement’s sole purpose is to
establish the rules and regulations by which the
In many cases, a sole proprietorship is a good partners can conduct business. Although it is not
way to get started—but this business form has mandatory, an attorney’s help in this endeavor may
serious drawbacks. Under a sole proprietorship, be useful. The agreement does not determine
business ownership is nontransferable and the life whether a partnership actually exists, but common
of the proprietorship is limited to the lifetime of law and the IRS asserts that if a business looks,
the proprietor. Additionally, this business form smells and feels like a partnership, then it probably
makes no legal distinction between your personal is one.
and business debts.
Besides the additional costs of establishing a
The latter point can be financially devastating. partnership, you should carefully consider the
Without legal separation, the business’ assets and concern of unlimited liability. Under the general
liabilities are also the proprietor’s personal assets partnership a separate business entity does exist,
and liabilities. Consequently, anything the propri- but creditors can still look to the general partners’
32
personal assets for satisfaction. And even worse, in also provide other necessary documentation.
some cases, a claim against one general partner may
be satisfied with the personal assets of the other Remember, you must keep a corporation in good
general partner. standing every year by submitting the required
minimum documentation and fees. If not, your
Limited Liability Partnership corporate shield can be stripped away, leaving you
individually vulnerable.
The limited liability partnership is an alternative
business form. It is attractive for certain profes- From a taxation standpoint, you need to con-
sional businesses because of the concern over sider several points regarding corporations. There
unlimited liability for all partners in a general are two corporate forms to consider: 1) C Corpora-
partnership. The limited liability partnership is tions and 2) S Corporations.
similar to the general partnership, but each
The original corporation business form is a
partner’s unlimited liability may exclude obliga-
Corporation. A few of its characteristics are:
tions resulting from the professional mistakes made
by or malpractice actions against the partners. The • Its maximum tax rate is significantly lower
partners are generally responsible for all claims and than for an individual.
liabilities resulting from all other partnership
activities. • The shareholders (owners) are not taxed
personally for profits, nor do they benefit
To ensure that all legal requirements are satis- from any losses.
fied, it’s a good idea to consult an attorney to
organize this type of partnership and prepare the • The owners pay personal taxes on any salaries
appropriate documents. and dividends. The bad news is that divi-
dends are taxed twice—once to the corpora-
Corporation tion and again to the individual.

The corporation is the most complicated and Many small businesses solve this dividend
costly business form. Yet, the expense, complexity problem by electing to be an S Corporation. The
and extra work are often well worth the effort. The characteristics of this business form include:
primary advantage of incorporating lies in the area
of liability—a corporation has its own legal iden- • Profits and losses are treated as if it were a
tity,—one completely separate from its owners. The partnership.
corporation safeguards the business owner’s per-
sonal assets, and this protection alone justifies the • Distributions to share holders are generally
additional expense and paperwork. free of tax.

The corporation does have some negative • There is no added cost to the incorporation
aspects, however. First, it is more costly, partially process or filing of Tax Form 2553.
because it is wise to seek guidance from an attor-
The S Corporation allows you the protection of
ney. Second, you must obtain a charter (approval)
a corporation with some of the financial flexibility
from your state to operate a corporation. Addition-
of a partnership. The election is relatively simple to
ally, the owners must deal with numerous local,
make, but it needs to be timely, otherwise your
state and federal regulations and reports during
pocketbook may be hit seriously. If you think
daily business operations.
someone is handling this for you, here are a few
An attorney normally files the forms required by words of warning: Don’t rest easy until you actually
the state to obtain your charter. Your attorney can see both the election request and a letter from the
33
IRS authorizing the S Corporation. And don’t clerk’s office and ask for How to Register Your
forget to include both your signature and that of Business Name in Texas, produced by the Texas
your spouses’ on the election form. Department of Commerce. It not only tells you
how to proceed, but also answers many commonly
In the long run, the key to your decision is the asked questions.
additional cost and paperwork burden of incorpo-
rating in comparison to the liability and separate The IRS requires an SS-4 form, which issues
entity issues of other business forms. your business a tax identification number. You will
find an explanation of the requirements and the
Limited Liability Company use of this form in IRS Publication 583. After
completing the form, you can expedite the process
The Texas Legislature recently created a new by calling the IRS in Austin. An IRS agent will ask
legal form, the Limited Liability Company (LLC). for the information over the phone. If the informa-
This business form provides owners with the tion is complete and you are an authorized agent of
liability protection of a corporation and, if properly the business, an identification number will be
established and operated, the federal income tax issued immediately.
benefits of a partnership.
Note: If you need a copy of other IRS forms, call
The LLC is formed in a similar manner as a 800/829-3676 or drop by any IRS location.
corporation. The owners must file articles of
organization with the Texas Secretary of State and License and Permits
pay the required filing fee. The name of the com-
pany must include the words Limited, L.C., LLC, Your business may also require certain profes-
or Ltd. The company’s owners are called members, sional or occupational licenses to operate. For
not shareholders, and the directors are called information on those that may apply to your
managers. business, contact the Texas Marketplace, Business
Information and Referral Specialists at 800/
The major advantage of the LLC is that the 888-0511. Ask for a free copy of A Guide to Texas
individual member or manager is usually not BusinessLicensesandPermits.
personally liable for the LLC’s debts, obligations or
liabilities. The LLC, like the corporation, is always Patents
subject to attempts to pierce the liability shield and
hold the individual member or manager personally A patent is a right of ownership granted by a
liable. government to an inventor. In the United States, it
excludes others from making, using or selling the
To ensure that you satisfy all legal requirements, patented invention or name for a limited period of
hire an attorney to organize the LLC and prepare time. Existing patents may restrict those rights. If
the appropriate documents. patent protection is desired in other countries, the
invention must be patented in each of those
Additional Legal Paperwork countries.
Regardless of the legal business form you select, Besides having the right to exclude others from
you must complete and file IRS Form SS-4. making, using or selling the invention, the U.S.
patent owner has other rights, such as granting
The Assumed Name Certificate legally permits licenses of the patent right to others, filing a
you to conduct business under a unique name lawsuit to enforce the patent rights, assigning or
other than your birth name or your corporate selling the patent and transferring the patent to a
name. To obtain the certificate, go to your county beneficiary under a will.
34
 In the U.S., there are three different types of Trademarks and Service Marks
patents: utility, design and plant patents. The most
common is the utility patent, which grants a The field of trademarks and service marks is a
17-year exclusionary right for new and useful narrow area of the law that is frequently overlooked
inventions. Design patents cover new, original and and often plagued by popular misconceptions.
ornamental designs. Plant patents are directed
toward distinct and new plant varieties. Any person It is commonly believed that filing an “assumed
who invents or discovers any new and useful name” or “d/b/a/” with the county clerk will
products, machine or composition of matter, or reserve and protect a trademark or a service mark.
any new and useful improvements thereof, may It is also generally assumed that incorporation of a
obtain a U.S. utility patent. A patent may also be business with the secretary of state protects a trade
obtained for the conception of an invention. name. These acts performed by the county clerk
and secretary of state are irrelevant to the trade-
Obtaining a U.S. patent is a two-step process. mark protection. A trademark cannot be reserved;
First, a search should be made to see if the inven- trademark rights can only be acquired through
tion is patentable. Second, a formal patent applica- actual use.
tion must be submitted. The search, if performed
well, will indicate patentability, reveal conflicting Without exception, every business uses some
situations, help plan the scope of the patent protec- kind of brand name or logo design as a means of
tion sought and, in general, be critical to drafting identification, even though these words and sym-
the patent application itself. This need for an bols may not be formally recognized as a trademark
expertly done search suggests the inventor should or service mark. Trademarks, also called brand
seek a patent attorney. names, are used by merchants and manufacturers
to identify goods.
Some inventors may wish to make a preliminary
search of patents already granted to see if someone Service marks identify services rather than
else has patented what they are considering before goods. If a business is not manufacturing a prod-
seeking expert legal advice. A system of Patent uct, it will typically be offering some type of
Depository libraries throughout the U.S. facilitates service.
such searches. Information, forms and fees related
to the submittal of a patent application and other The law that protects trademarks and service
information about patents and patent publications marks is designed to prevent customer confusion,
can be obtained by writing the U.S. Department of and to prevent unfair competition by a competitor
Commerce, Patent and Trademark Office, Wash- who capitalizes on the goodwill and reputation of
ington, D.C. 20231. another.

There is filing fee for a basic utility patent If a federal registration has been issued by the
application. Additional charges are made for United States Patent and Trademark Office, the
claims, depending on the number in the applica- letter R enclosed-within-a-circle should appear as a
tion, and for patent application revisions. A utility superscript adjacent to the mark to obtain the full
patent issuing fee is required when the patent is measure of federal protection. It is possible to
granted. In addition, maintenance fees are due in 3 register a mark under the trademark laws of each of
1/2, 7 1/2 and 11 1/2 years, respectively, after the the 50 states. However, state registration alone does
utility patent is issued to keep it in force. Nearly all not confer the right to use the R-within-a-circle
these fees are reduced by 50 percent when the symbol. The superscripts TM and SM serves as a
application is a small entity, such as an indepen- warning to others that the user considers the mark
dent inventor or a small business. to be exclusively his or hers.

35
 A Texas trademark registration and a federal
registration are constructive notice of the
registrant’s claim of ownership. A federal registra-
tion provides coast-to-coast protection. A Texas
registration only provides protection within the
state. Federal registration improves with age; if a
trademark has been in continuous use for five
consecutive years after issuance and if the appropri-
ate affidavits have been filed, the mark becomes
incontestable as a matter of law.

If a mark is registered and a third party is think-

ing of using a similar mark, the third party will
typically locate the registered mark during its initial
trademark search. Selection of a new trademark is
an exciting, but sometimes frustrating, experience.
In most situations, several potential marks will be
under consideration for ultimate selection as the
new trademark.

In Texas, a trademark application will typically

be examined within 30-90 days after it is received
in the secretary of state’s office. The examiner will
conduct their own search to determine if there is
any conflict. It currently takes an average of 13
months to get a federal registration.

For more information on trademarks in Texas,

contact:

Secretary of State
State of Texas
Corporate Section
P.O. Box 13697
Austin, TX 78711
Phone 512/463-5770
[Link]

For more information on federal trademark

registration, contact:

The Public Service Center at the Patent and

Trademark Office
Phone 800/786-9199
[Link]

36
 Chapter 5: Permits
Chapter 5: Permits
During your feasibility study you considered the is designed for businesses requiring multiple
various licenses and permits you may require to applications for Texas licenses or permits. It
operate your business. The Texas Marketplace, targets the agencies the applicant needs to
Business Information and Referral Specialists at the contact and the type of information required
Texas Department of Economic Development can to process the application.
assist you in obtaining the appropriate permits to
operate within Texas. Operating in Texas
The State of Texas defines a permit as “any A non-Texas company currently doing business
license, certificate, registration, permit or other in other states may obtain the right to transact
form of authorization required by law or by state business in Texas by contacting the Office of the
agency rules to be obtained by a person in order to Secretary of State. Companies have the option of
engage in a particular business but does not include filing domestic incorporation papers or obtaining a
a permit or license issued in connection with any Certificate of Authority. For more information
form of gaming or gambling.” contact:

Specifically, the Business Information and Office of the Secretary of State

Referral Specialists: P.O. Box 12697
Austin, Texas 78711-2697
• Refer you to appropriate federal, state and Phone 512/463-5770
local agencies. It can also facilitate contact Fax 512/475-2761
between you and state agencies responsible for [Link]
processing and awarding permits.
A Texas business that chooses not to incorporate
• Provide a research library of resources on
must file a fictitious name statement or
state agency regulatory procedures.
doing-business form with the county of record
• Furnish a 25-day turnaround permit package where the business is conducted.
through the comprehensive application. This
Here are some of the other available permits,
37
examples of their applications and offices to contact. Municipal Solid Waste Div.
12100 Park 35 Circle
Agricultural Permits Austin, Texas 78753
These vary depending on each specific business Mailing Address:
activity and industry. If you plan to produce seed, P.O. Box 13087
contact: Austin, TX 78711-3087
Phone 512/239-1000
Texas Department of Agriculture Fax 512/239-6717
Seed Quality Office [Link]
P.O. Box 629
Giddings, Texas 78942 If you need a construction permit for a facility
Phone 409/542-3691 that emits air contaminates, contact:
[Link]
Texas Natural Resource Conservation Commis-
BusinessPermits sion Operating Permit Division
If you are in the debt collection business, contact
12100 Park 35 Circle
Federal Trade Commission Austin, Texas 78753
Dallas Regional Office Mailing Address:
1999 Bryan St. Suite 2150 P.O. Box 13087
Dallas, Texas 75201-6808 Austin, TX 78711-3087
Phone 214/979-0213 Phone 512/239-1334
[Link] Fax 512/239-1070
[Link]
If you need to register your weight or measuring
device, contact: For a brewer’s permit, distiller’s license for
alcoholic beverages, rectifier’s permit or
Texas Department of Agriculture manufacturer’s permit, contact:
Metrology Labs / Weights and Measures
119 Cumberland Rd. TexasAlcoholic Beverage Commission
Austin, Texas 78704 Licensing Permits Division
Phone 512/462-1441 P.O. Box 13127
Fax 512/475-1642 Austin, Texas 78711-3127
Phone 512/206-3333
A GuidetoTexasBusinessLicensesandPermits Fax 512/206-3399
produced by the Texas Department of Economic [Link]
Development offers detailed information about
business permits. ProfessionalPermits
There are a large number of professional permits
Environmental, Industrial, Manufacturing and issued by an equally large number of agencies. For
Commercial Permits example, to obtain a permit as a licensed dietitian,
There are certain permits necessary to operate contact:
manufacturing, industrial and commercial busi-
nesses. For instance, to obtain a registration for a Texas State Board of Examiners of Dietitians
recycling facility contact: Texas Dept. of Health Dietitians Licensing
1100 W. 49th St.
Texas Natural Resource Conservation Austin, Texas 78756-3183
Commission Phone 512/834-6601
38
 Fax 512/834-6677 Business Information and Referral Specialists
[Link]/yellow/[Link] P.O. Box 12728
Austin, Texas 78711
To obtain a social worker certificate, you can Phone 512/936-0082
apply by first contacting: Fax 512/936-0440
Phone 800/888-0511
Texas State Board of Social Workers Examiners [Link]
1100 West 49th Street
Austin, Texas 78756-3183
Phone 512/719-3521
Fax 512/834-6677
[Link]/yellow/[Link]

Transportation Permits
There are numerous offices to contact for
transportation permits, depending on the specific
permit you need. For a specialized motor carrier
certificate, a commercial vehicle registration
(including all tow trucks) or a broker’s license,
contact:

Texas Department of Transportation

Motor Carrier Division
P.O. Box 12984
Austin, TX 78711-2984
Phone 512/463-8585
Fax 512/465-3521
[Link]

For a permit to transport used and scrap tire

contact:

TNRCC
Municipal Solid Waste Management Div.
12015 Park 35 Circle
Austin, TX 78753
Mailing Address:
P.O. Box 13087
Austin, Texas 78711 -3087
Phone 512/239-1000
Fax 512/239-6717

There are many more permits required for

businesses. Refer to Texas Department of Eco-
nomic Development, or Business Information and
Referral Specialists at:

Texas Department of Economic Development

39
 Chapter 6: Employee and Contract Labor
Chapter 6: Employee and Contract Labor
When your business begins to grow, you may • Employer pays expenses incurred on the job
need to expand your staff. Your first questions will
be: Do you hire full- or part-time employees or do • No risk of loss is applicable to the worker.
you hire subcontractors to perform specific projects (This refers to the recourse an employer has
on an as- needed basis? regarding work performance. While an
employer can fire an employee for inadequate
Contract labor requires less paperwork, but keep work performance, an employer can’t legally
in mind, there are important distinctions between force an employee to work without pay. With
contract labor and employees. If you incorrectly a contractor, if the work is not performed
classify your workers, you may end up paying some according to specification, the contractor
big dollars to the IRS and the Texas Workforce could face legal action for breach of contract.)
Commission (TWC).
Most jobs are categorized as employer/employee
Employee/employer relations typically display relationships. From TWC’s perspective, anyone
one or more of these traits: who provides services for a business is presumed to
be an employee until proven otherwise. Therefore,
• Job training is necessary when you classify someone as contract labor, you
are almost guilty of misclassification until proven
• Employer holds supervision and payroll innocent. The following guidelines can help you
responsibilities substantiate that your workers are independent
contractors.
• Employer sets work hours
A contractor usually:
• Workplace is restricted (that is, employee
must work on site) • works by the project
• Employer defines employee’s work priorities • determines the tasks to be accomplished and
the order in which they will be accomplished
• Wages are paid by the hour or some type of
salary arrangement
40
 • establishes work hours • TWC Forms C-1 and C-3

• also works for others • IRS Form W-4 for each employee

• has own trade or business name • INS Form I-9

• is responsible for paying taxes resulting from • IRS Forms 941, 8109, 940 and W-2
compensation.
TWC Form C-1
Besides these rules, answering this question TWC uses the Employer Status Report to
should help you distinguish a contract laborer: determine if your business has incurred liability
Does an employee within the company perform the under the Texas Unemployment Compensation
same job? If the answer is yes, then the worker is Act. Every person or employing unit that operates
most likely an employee. It is irrelevant that a business organization in Texas must file an initial
someone only works part-time or that the job only C-1. TEC requires subsequent filings if the busi-
lasts for a specific period (such as six weeks). For ness entity significantly changes its legal structure.
example, if a female employee is on maternity leave It is a fairly easy form to complete. Keep a copy
and someone is hired to fill-in during her absence, handy because much of the information will be
that person is an employee, not a contract worker. requested on other forms.
You can’t have two people doing the same work
and classify them differently. TWC Form C-3
This quarterly report notifies TWC of the
As you can see, the distinction between being an amount of taxable wages for each employee and the
employee or a contractor is not black or white. total state unemployment taxes due. This tax
Additionally, it’s not the theoretical relationship payment is made payable to TWC and is sent with
described on paper that determines the correct the completed form. To fill out the form, you will
status (employee or contractor), but the actual need each employee’s name, social security number
day-to-day practice of the work. and total wages paid during the quarter.

It’s not a good idea to classify independent Form W-4

contractors as employees to avoid risk. And it’s an Ask all your employees to sign a completed and
equally bad idea to classify employees as indepen- dated W-4. Keep these with your personnel files as
dent contractors to avoid paperwork. If the TWC a record of each employee’s proper name, address
and IRS determine that your contractors are and social security number. The W-4 also tells the
employees, both agencies will quickly beat a path employer how many exemptions to consider when
to your door to assess applicable back taxes, penal- withholding federal income tax. This form is also
ties and interest. helpful should there be a dispute with the IRS or
the employee.
You can file Form SS-8 with the IRS, and they
will classify the individuals in question. INS Form I-9
Another item for the personnel file is the Immi-
Forms gration and Naturalization Services Form I-9. This
paperwork ensures that employers do not hire
For contract labor you must complete IRS Form illegal aliens. The form is not difficult to fill out,
1099-MISC. Refer to IRS Form XX for a descrip- but it must be completed within three working
tion of contract labor. days after the employee begins work. Additionally,
if you cannot obtain all the necessary documenta-
If you decide to hire full- or part-time employee tion on the hire date, it must be submitted within
the forms you will complete and file include:
41
21 days. This information can include any one of total year’s federal unemployment tax (FUTA)
the following. liability for your company’s payroll. It differs from
the TWC report in that wages are submitted in
INS Support Documentation total, not per employee. Payment for FUTA is
U.S. Citizen made to your bank using IRS Form 8109. Gener-
United States Passport ally, you can take a credit against the FUTA tax for
OR amounts you have paid into the state unemploy-
Certificate of citizenship ment fund, but this credit is limited to 5.4 percent
OR of taxable wages.
Certificate of Naturalization
OR IRS Form W-2
State issued driver’s license, ID or other official You’ve probably been on the receiving end of
document with a photo this form. As an employer it is now your responsi-
PLUS bility to report payroll information annually to the
—original social security card Social Security Administration and to your em-
OR ployees.
—birth certificate with seal.
NOTE: Owners of sole proprietorships and
Foreign Nationals partnerships cannot be classified as employees.
Alien Registration card with photo Owners of corporations can, however, and you
OR should send these forms at the end of the year to
Unexpired foreign passport with attached the Social Security Administration, not the IRS.
authorization
OR Other IRS Forms
Unexpired INS Employment Authorization, PLUS If you need copies of other IRS forms, call 800/
—a state issued driver’s license 829-3676 or visit the IRS website at http://
OR [Link] and if you need tax assistance
—ID or other official document with photo. call 800/829-1040. For hearing impaired call 800/
829-4059. To order a CD ROM with current year
The penalties for failing to comply with this and prior year tax forms call 212/512-1800 or visit
requirement are high. The possibility of incurring [Link]
thousands of dollars in fines certainly justifies the
extra trouble of compliance.

IRS Form 941

This quarterly report details the wages, federal
income tax and social security tax applicable to
your company’s payroll. It tells the IRS what your
payroll tax liability was for the quarter and when it
was due for payment.

NOTE: Your payroll deposits should be made

payable to your bank using IRS Form 8109. You
will find the schedule for making these deposits on
the back of IRS Form 941.

IRS Form 940

This annual report to the IRS computes the
42
 Chapter 7: Financing Options
Chapter 7: Financing Options
As discussed in Chapter 2, after preparing a pro What this means is that if your business needs
forma income statement and filling out a cash flow $50,000 in start-up capital, a financial institution
statement, you should know if you need additional expects you to invest at least $25,000. That way
funding to pay your business bills. the lender knows that you have a great deal to lose
if the business fails.
Additional capital can come from private inves-
tors or loans. Friends and relatives are also a pos- Assuming that you and your investors/partners
sible source for funding because they know and can come up with at least 50 percent of the money,
believe in you and can be convinced of the worthi- you must then satisfy some common loan criteria.
ness of your idea. If you still need money after They are known as the Five C’s: Capacity, Collat-
exhausting this avenue, the two possible sources of eral, Credit, Character and Conditions.
capital are:
Capacity represents the customer’s ability to
• A traditional commercial loan, or repay the loan based on the business’ cash flow.
Capacity should be demonstrated on a historical
• A bank loan guaranteed by the Small Busi- (financial statements, tax returns, etc.) and pro-
ness Administration. spective (projections) basis. (Start-up businesses
obviously don’t have historical information to
Working with your Financial consider.) Other areas can influence capacity as
Institution well, such as the state of the current economy,
industry trends and any anticipated industry
Before you get excited about borrowing money, growth. These factors give credence or add skepti-
realize that financial institutions are not in the cism to the projection viability.
business of taking risks; consequently, they have
some conservative and basic guidelines. For ex- Collateral is a familiar term. As defined by
ample, a general rule about how much money a Webster’s, it is “property pledged by a borrower to
financial institution lends is: the owners/investors protect the interests of the lender.” This covers the
must supply one-half of the needed capital. gamut from your business’ operational assets (such
as accounts receivable, inventory and equipment)
43
to certificates of deposit (CDs)—all of which may nanced with short term debt. Assets such as equip-
be used as security against borrowed money. ment, vehicles, and real estate should be financed
with long term debt. A term note is most often 1
Credit answers the question: Does and will the to 7 years of length and requires monthly payments
customer pay bills on time. Lenders normally of principle and interest. Financing cash and
investigate both the company’s and the owner’s past inventory with long term debt increases your
credit history. Both need to be spotless. If there are interest expense, and financing high dollar amount
blemishes, lessen the impact by warning the loan equipment on a line of credit makes your monthly
officer and giving a logical, defendable explanation payments of principle and interest very large. To
up-front. No one likes to be surprised with this give a logical reason for making the loan, describe
kind of information. how you will use the loan proceeds.
Character may be the most subjective ingredient The Loan Request Package
within the formula. It encompasses the lender’s
perceptions and analysis of the borrower’s reputa- Your loan request should also describe how you
tion and integrity, background and experience, and will repay the lender. This is best illustrated with
financial sophistication, involvement and persis- current financial statements and projections. Your
tence. loan request package should include balance sheets
and income statements for the past three years,
Here’s one formula you can count on: Loans are company tax returns and your personal financial
more likely to be made even on marginal transac- statement.
tions if the lender believes in the customer.
If you are starting a business, you should create
Conditions are the terms of the loan and include: pro forma financial statements (projected balance
sheet and income statements) for at least three full
• loan amount, amortization and renewal date years of operation. When forecasting a pro forma
if you are seeking a revolving or short-term financial statement for an existing company or a
loan projection for a new company, you should show
the business’ breakeven point (as discussed in
• interest rate (if floating, based on what and
Chapter 2).
adjusted when)
Your request can also gain credibility if you
• credit policies established by the financial
prepare best- and worst-case scenarios. This shows
institution. For example, advances on ac-
the lender that you have considered all aspects of
counts receivable may not exceed 75 percent
your loan request. Supporting documentation for
of the current amount receivables balance
the pro forma financial statement or projections
(those less than 60 days old).
will also help.
To help the lender evaluate your Five C’s, you
Your loan request should also include:
should prepare a loan request that builds an objec-
tive case as to why your business will succeed. It • articles of incorporation, bylaws, corporate
should also offer a logical reason as to why the resolutions, partnership agreements and/or
lender should make the loan. assumed name certificates
Your business plan is a good starting place. It • resumes of business’owners and managers
gives an in-depth explanation of your business and
why it will be successful. Discuss the type or types • business plan
of financing you need. Assets such as cash, ac-
counts receivable, and inventory should be fi- • current financial statements for the past 90
44
 days and the past three fiscal years After you assemble the supporting paperwork,
tie the loan package together with a cover letter.
• tax returns for the past three years This letter should be a synopsis of the loan request
and basically propose the transaction to the lender.
• a clear description of the loan’s intended Clearly state your plans and how this loan will
purpose allow you to succeed.
• a list of the company’s assets and debts and a Now you are ready to make appointments with
list of assets that can be used as collateral financial institutions. Don’t choose just one lender.
Talk to several. Remember, when selecting your
• current financial statements of any related
lender, you are also selecting your banker. You want
businesses in which the business owners are
to choose a banker you are comfortable with and
involved
who has the products and services you need for
• owner’s financial statements and those of your business.
anyone who is guaranteeing the loan
Don’t be discouraged if the first banker turns
• list of the top three major customers or you down. If you have a start-up business or a
prospective customers young company, many lenders may be uncomfort-
able with your loan proposal. Most likely, you will
• list of at least three current suppliers and have to contact several lenders before you find one
three current creditors or credit references that meets your needs.

• appraisals on fixed assets and real estate SBA Guaranteed Loans

• photographs of the operating facility and A bank loan guaranteed by the U.S. Small
major equipment Business Administration is similar to a traditional
commercial loan. Both loans are processed and
• copies of current contracts funded by and repaid to financial institutions, but
they differ in that the government guarantees
• accounts receivable aging for all accounts
repayment of some percentage of an SBA loan. If
receivable, noting any potential bad debts
the debtor defaults on an SBA loan, the govern-
• listing and valuation of any inventory listed ment pays the guaranteed portion after liquidating
on financial statements. the assets you pledged.

NOTE: The less information the lender must An SBA loan gives the bank a second source of
ask for, the more “character” (Five C’s) you earn. repayment. However, the financial institution often
uses the same or similar loan criteria for both SBA
Environmental issues are a growing concern, and loans and traditional commercial bank loans.
many financial institutions expect you to address
the disposal of environmentally sensitive products A financial institution avoids making loans
or waste. This is especially true when real estate is without collateral. The borrower must have a good
involved. If you default on the loan and the lender idea, good credit and a demonstrated ability to
takes over property, the lender may not only repay the loan. With an SBA loan, however, a
become responsible for its clean-up, but also may financial institution may relax some portion of its
be held liable for damages associated with the lending criteria. For example, the financial institu-
contamination. tion may offer a longer term for an SBA guaran-
teed loan.

45
 A financial institution may recommend a loan to Mailing Address:
the SBA if the business has had an irregular earning P.O. Box 12847
pattern. An SBA loan may also be recommended Austin, TX 78711
when a business’ collateral differs from what the [Link]
institution normally lends against or if the amount Type of Program: Linked Deposit Program,
of equity in the company is less than the lending Young Farmer Loan Guarantee Program,
institution’s typical criteria for granting the re- Farm and Ranch Program, Rural Develop-
quested loan amount. ment Finance Program and the Rural Devel-
opment Finance Program: Municipal Finance
An SBA guaranteed loan is advantageous for the Option.
financial institution because it does not count
against its reserve requirement. As a result, the EX-IM BANK
financial institution can make more SBA loans Southwest
than traditional commercial loans. 1880 South Dairy Ashford II, Suite 585
Houston, TX 77077
It is important to understand, SBA guaranteed Phone 281/721-0465
loans are not government grants or giveaway Fax 281/679-0156
programs. Financial institutions recommend the [Link]
loans and the SBA approves them. Two approvals
must be received before the SBA loan can close— Type of Program: Export-related working capital
one from the financial institution and one from the loans
SBA.
Venture Capital
Other Financing Resources There are several directories of institutional
venture capital firms in the United States and the
Many counties and cities in Texas have funding types of investments they seek. One or more of
sources that may be available to you. Your eligibil- these may be available at your local library. Ex-
ity for these funds depends on many variables, such amples of these are Pratt’s Venture Capital Guide
as your business’ size, industry and the products published by Venture Economics Inc. and the
you produce or services you provide. For more Venture Capital Directory published by Online
information, contact your local county or city Publishing.
officials or the local chamber of commerce.
PrivateInvestors
Lists of sources of capital The network listed below provides a
U.S. Small Business Administration cost-effective method for small businesses to gain
Regional Office Phone: 800/827-5722 exposure for their business investment opportuni-
ties. It is composed of investors seeking opportuni-
Department of Agriculture ties in small businesses in Texas.
Phone: 202/720/2791
1400 IndependenceAve. SW The Capital Network
Washington, DC 20250 3925 West Braker Ln., Suite 406
[Link] Austin, Texas 78759
[Link] Phone 512/305-0826
[Link]/[Link] Fax 512/305-0826
[Link]
Texas Department of Agriculture
Texas Agricultural Finance Authority
Phone 877/428/7848
46
 Chapter 8: Tax Responsibilities
Chapter 8: Tax Responsibilities
One of the responsibilities of starting or operat- Federal Employment [Link] business that
ing a business is determining the type of taxes your has employees usually pays these taxes. They
business should pay. Many federal, state and local include federal income tax withholding, social
taxing authorities exist and you should consult security (FICA), Medicare taxes and federal unem-
with several agencies to obtain complete informa- ployment taxes (FUTA). The IRS has specific rules,
tion. This booklet cannot present an entire list of regulations and guidelines regarding the collection
potential taxes, but a summary of major state and and payment of these taxes. When contacting the
federal organizations and key taxes is presented IRS, ask for Publication 15, Circular E (Employer’s
below. Local taxes are not addressed because each Tax Guide) and Publication 15-A Employer’s
locale holds different taxing requirements. To Supplemental Tax Guide.
clearly understand your tax liabilities, call taxing
authorities in your area. Federal Excise Taxes. These taxes are collected
from manufacturers and sellers of certain products.
Federal Several common taxes include environmental taxes
on crude, petroleum products and certain chemi-
Federal Income Tax. Every business must file an cals; taxes on telephone communications and air
annual return with the Internal Revenue Service. transportation; fuel taxes on gasoline, diesel and
Separate forms or schedules apply depending on gasohol; and taxes on certain luxury items, alcohol,
the type of business. The IRS has excellent, easy to tobacco and guns. Ask the IRS for a complete list
read publications to help you understand the tax of excise taxes and specific information and litera-
system. For more information call the local offices ture.
listed in your phone book or 800/829-1040.
Tax identification number. Each business
Federal Self-Employment Tax. This tax applies requires a tax identification number. This number
to self-employed workers and is their contribution should appear on all federal business tax returns.
to Social Security. It is generally paid by sole Instructions for acquiring a tax identification
proprietors, self-employed farmers and members of number are given in Chapter 4 under the heading
a partnership. Explanatory publications are avail- of “Additional Legal Paperwork.”
able from the IRS.
47
State with bookkeeping services to ensure that you pay
the lowest required income and payroll taxes.
State Sales Tax. Most products and many Businesses that have difficulties paying taxes can
services are subject to sales tax. Each business must receive expert, professional advice on how to
collect the tax and file a sales tax return on a become current on tax liabilities. Based on your
regular basis. To obtain a sales tax permit and filing business plan, CPA’s can estimate your future
information, contact: payroll and income taxes, as well as your personal
tax liability. Taxes affect your cash flow significantly
Comptroller of Public Accounts and thus to truly control your business finances,
LBJ State Office Building tax planning is very important.
111 East 17th Street
Austin, Texas 78714 IRS Workshops
The comptroller also has offices in major cities In addition to assistance from its local office, the
Call 800/ 252-5555 for more information. IRS sponsors tax workshops to help the
self-employed and the small business owner. The
State Franchise Tax.A state franchise tax applies workshops explain how federal taxes relate to
to all corporations with representation in Texas. individual businesses.
The tax is calculated based on taxable capital assets
and taxable earned surplus, paying the greater of Topics include:
the two. To obtain information, contact the comp-
troller of public accounts listed above. • an overview of the IRS and the kinds of
information and help it provides small busi-
Unemployment Tax. Most businesses in Texas nesses.
are liable for state and federal unemployment tax • an orientation to business taxes and how to
based on a formula that uses employee wages as a identify the relationship between business
key factor. Start-up entrepreneurs should contact organizations and federal taxes.
the TWC for state reporting requirements and the • a discussion of record keeping with an
Internal Revenue Service for federal information. emphasis on the importance of tracing
business income and expenses.
Local • an in-depth review of the employer’s respon-
sibility for withholding income, social secu-
All business owners, regardless of the company’s rity and federal unemployment taxes, and a
legal form, should contact their local County discussion of the appropriate tax returns.
Appraisal District soon after beginning operations. • how to deposit federal taxes using Federal Tax
Most businesses will be liable for taxes on both Deposit Coupons.
personal and real property. The taxes are assessed • employer-employee relationship.
by individual taxing units (county, city, school
district, etc.) based on information maintained by For more information regarding these work-
the appraisal district. If your county does not have shops, call or write the office below:
an appraisal district, contact various local taxing
units. Houston
8701 S. Gessner
Independent Certified PublicAccountants Stop 6610H-AL
Assistance A certified public accountant can be a Houston, Texas 77074
great resource to the small business person. CPA’s Phone 281/721-7070
can prepare all federal, state, and local tax returns or 800/829-3676
required by the government. CPA’s can also help
48
Directory of Services 5 Brazosport College SBDC, 11 Lone Star College System SBDC
1 University of Houston Lake Jackson 832/813-6673
Small Business 979/230-3380 [Link]
Development Center [Link]
713/752-8400 12 Sam Houston State University
[Link] 6 Galveston County SBDC SBDC, Huntsville
409/933-1414 936/294-3737
SPECIALTY ASSISTANCE [Link] [Link]/~sbd_www/
Government Procurement
Procurement Technical Assistance Center 7 Lamar University SBDC, Beaumont 13 San Jacinto College SBDC,
713/752-8477 409/880-2367 East Harris and Northern
[Link]/sbdc Brazoria Counties
SBDC Network
281/485-5214
2 Angelina College SBDC, 8 Lamar State College SBDC, [Link]/sbdc
Lufkin Port Arthur
936/633-5400 409/984-6531 14 University of Houston
[Link]/sbdc/cs [Link]/sbdc Fort Bend SBDC
281/499-9787
3 Blinn College SBDC, Brenham 9 Lee College SBDC, Baytown
979/830-4137 281/425-6309 15 Prairie View A&M University
[Link]/sbdc [Link]/sbdc SBDC
936/261-9242
4 Brazos Valley SBDC, Bryan/ 10 University of Houston [Link]
College Station Coastal Plains SBDC
979/260-5222 Matagorda and Wharton Counties
[Link] 979/244-8466

The UH SBDC Network serves 32 counties in Southeast Texas. The UH SBDC Network is a program of the UH CT Bauer College of
Business and a resource partner of the US Small Business Administration. Funded in part through a cooperative agreement with the U.S.
Small Business Administration. All opinions, conclusions or recommendations expressed are those of the author(s) and do not necessarily
reflect the views of the SBA. SBDC programs are nondiscriminatory and available to individuals with disabilities. The University of Houston
is an EEO/AA institution. Reasonable accommodations for persons with disabilities will be made if requested at least two weeks in advance.