Business Q & A
One of the benefits of writing a business column for USA TODAY as I do is that I hear from a lot of small business owners. They make comments, have suggestions, and yes, ask questions. So in this blog and the next, what I would like to do is tackle some of the most common questions I receive. In this installment, we look at common business questions, and in the next, legal ones.
Q: Why do I need a business plan?
A: There are two reasons for writing a business plan:
First, a well written business plan – one that is clear and realistic – is necessary if you anticipate establishing a credit line with a bank or if you are looking for investors. The plan needs to detail how the money will further your business' goals and how it will be used.
Second, a business plan is an essential small business tool since it will keep you on target; it is basically a blueprint for starting, running, operating, and managing your business.
Q: How can we find investors for our business without giving away our idea?
A: I hear this question often, and basically my answer is always the same: Yes, people do steal ideas sometimes, but not very often. Begin with that premise. And anyway, the fact is, there is no way to fully protect yourself because ideas alone re not really protectable. If you have a prototype product, you can patent it. That is protection. And you can trademark and copyright other intellectual property. But ideas? Not really protected.
That said, what you can do is get people to sign a confidentiality agreement (a nondisclosure agreement, or NDA) before you tell them your idea. That is a measure of protection and also can act in a prophylactic way, as a warning to people that you consider your idea a protected trade secret of sorts.
Q: Do I have what it takes to own my own small business?
A: Not everyone is an entrepreneur. Some people are artists, others are dancers. Some people like to work for themselves and others like to work for others. To see if you might like to own your own business, ask yourself these questions:
- Am I a self-starter?
- Am I a risk-taker?
- Can I live without structure?
- Am I organized?
- Does my family support this idea?
- Can I handle the emotional aspects of being self-employed?
- Can I live without a paycheck and benefits?
- Am I highly motivated to undertake this endeavor?
- Am I willing to put in the necessary hours?
(For more help with self-employment, visit TheSelfEmployed.com.)
Q: How do I go about dissolving a business?
A: A sole proprietor can just shut the business down, pay off the creditors and call it a day. The closing of a partnership is usually done in accordance with the partnership agreement.
Corporations can be dissolved wither through a voluntary or involuntary process. A voluntary proceeding is begun either by the shareholders or by the board of directors. Upon approval, a certificate of dissolution is filed with the state. After that, the directors wind up the corporation's affairs – selling assets, paying off debts, that sort of thing. In an involuntary dissolution, shareholders can petition a court to dissolve the corporation, and if approved, the company's affairs are wound down thereafter.
Legal Q & A
In my last blog, we looked at common business questions I receive from readers. In this blog, I would like to share some more common questions, this time of the legal variety.
Q: I'm starting a new business. What tax considerations should I be aware of?
A: First let me say that my friends here at Greatland are tops when it comes to tax issues, so spend some time on this site.
Beyond that, the type of corporation you form will affect your taxes most significantly. The main difference between an S and C corporation is how they are taxed. An S corporation's income passes through to the owner's tax return, and as such, an S corporation does not pay federal tax as a general rule. Similarly, the type of accounting method you choose – cash or accrual – may also have an affect on your taxes. Finally, you need to pick a fiscal year that fits your business cycle.
You also need to learn your state's sales tax and property tax laws, as well as payment regulations.
Working with you accountant can help with all of these things.
Q: Where do I go to get a federal tax I.D. number for my new business?
A: You need to fill out IRS Form SS4: Application for Employer Identification Number (EIN), which you can get from the IRS website. When you have completed the form, you can get your EIN number through either the mail or by phone. Since you are starting a new business, ask the IRS about, or download, these two booklets, Publication 583: Starting a Business and Keeping Records, and Publication 334: Tax Guide for Small Business.
Q: Is there anything in particular I need to be concerned about when firing an employee?
A: First of all, the general rule is that all employees are at-will, meaning they can be fired at any time without a reason – at your will. But even so, before you ever get to a firing, it is smart to have clear policies about what sorts of things are subject to discipline in your office (sexual harassment, tardiness, insubordination, etc.) These need top be communicated to employees in writing, and employees should acknowledge receipt of these policies in writing.
If you have a process for discipline, it is imperative that you follow it, and document everything throughout the process: Document verbal warnings, document discipline, document transgressions, document everything. The point of all this is to not only let employees know what is expected of them, but to protect you against any possible wrongful termination lawsuit.
Finally, understand that even at-will employees cannot be terminated for discriminatory reasons – their ethnicity, their religion, etc. These are completely irrelevant issues and cannot and should not be mentioned in any firing scenario.
Q: Is there any legal action required when you sell a business?
A: When selling a business, the most important thing is to be sure to disclose everything to the buyer. Share the books, all contracts, all leases, profits, losses, everything. Business sales can be derailed when the buyer later feels that the seller failed to disclose an important fact or facts, thereby constituting fraud. By making a complete and full disclosure, you protect yourself against any such allegation.
5 Advertising Mistakes to Avoid
In my last blog, I looked at common questions and answers regarding business law. Today I want to dive a little deeper into that subject, specifically as it relates to advertising because I think there is a misperception out there that goes something like this when it comes to advertising: "Anything goes!" After all, it is an ad, right?
The fact is, advertising is regulated by both federal and state law, and the general rule is that an ad is unlawful if it tends to mislead, deceive, or if it contains a false statement.
Let me give you an example: In Los Angeles, a used-car salesman once appeared in a television commercial with a chimpanzee and told viewers they could have one of the cars on his lot for "1,000 bananas!" When an enterprising young man drove up with a trailer of bananas, the dealer refused to sell him the car. The man sued, and won.
So consumer lawsuits are one problem with deceptive advertising. Another thing to be wary of is the feds. The Federal Trade Commission (FTC) is the main federal agency that regulates commercial advertising and over the years, the FTC has taken action against many businesses accused of engaging in deceptive advertising. The FTC can issue a cease-and-desist order, bring a civil lawsuit, or require you to run corrective ads admitting you lied and that your earlier ad was deceptive.
So you have to be careful what you say in your ads. Here are some rules to keep you safe:
- Be Accurate. Make sure your ads are factually correct. Do not deceive or mislead the public. Yes, "puffing" is OK ("We are the best dealer in Ohio!"), but lying is not (saying you were "voted the #1 dealer" when you in fact were not.)
- Treat Competitors Fairly. It is fine to compare your goods and services with those of other businesses, but when you do, make sure every statement in your ad is accurate. Lying about a competitor can lead to a nasty libel suit.
- Beware The Word "Free!" Yes, "free" is the most powerful word in all advertising and I am not telling you not to use it. But I am telling you that when you do use it, what you are advertising as free had better really be free.
- Stock Sufficient Quantities. Most states have laws that require merchants to stock an advertised product in quantities large enough to meet a reasonable demand, unless the ad says stock is limited. If you don't have enough supply, your state may require that you give customers a rain check if you run out of advertised goods.
- Be Careful When Describing Savings. You must be truthful about pricing as well. Avoid using doctored price comparisons between your regular cheap prices and another company's more expensive prices, unless it is consistently true.
Advertising is one of the best things you can do for your business. You can reap the most benefits when your ads are honest. Read on to my next blog to see the 5 advertising mistakes you should never make.
5 Advertising Mistakes to Avoid
In my last blog, we looked at legal mistakes when advertising. In this one, I want to look at advertising mistakes when advertising. Generally speaking, there are a few common mistakes that small business people tend to make when it comes to advertising.
Here is the Top 5:
- Not properly targeting the market. You have to know exactly whom you are trying to reach with your ads, and where you can reach them. Too many small businesses have a vague notion of who their customers are (age, income level, schooling, etc.) Without really knowing your customers, how can you ever expect to find the right media source with which to target them?
Are you customers affluent, or not? Young or old? Educated or uneducated? Online or offline? Knowing the answers to questions like these will help you pinpoint where what they listen to, watch, and read, and thereby know where to advertise.
- Creating a bad ad. Sure, its great to have some funny ad, but if it either 1) doesn't cause people to remember the name of your business, or 2) doesn't compel them to buy your service or product now, then it is a bad ad. You want your ad to be memorable and persuasive, not funny but forgettable. A good ad will capture someone's attention and get him or her to take some desired action.
- Lack of consistency and repetition. When it comes to advertising, repetition is the key, repetition is the key, repetition is the key. What is the key? See? Running a consistent ad time after time builds brand awareness. Even if someone vaguely notices your ad for months, it still might be registering. When he later needs what you offer, the name of your business will be remembered – if repetition has been the key.
- Bad headlines. "Donate that car or truck" the local ad reads. Big deal. Who cares? How many times have we seen that? If you want people to notice your ad, you better grab their attention, and quick. "Free vitamins for life!" or "The lazy man's way to riches" or "Old car demands that it be donated to worthy cause" are the sorts of headlines that stand out.
- No call to action. The best way to remember what makes for a good ad is something called the AIDA method: Attention, Interest, Desire, and Action. First you grab their attention, then you get them interested in what you are selling. Next, you create a desire on their part for what you are selling, and finally, you offer a call to action.
Too may ads fail to give potential customers a reason to act now. That is why expiring coupons, sales that are ending, "quantities are limited", or a free offer for calling now are so effective. They get the customer to act, and that's the whole idea.