Legalities: Forming a New Business
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These articles by Peter J. Mladineo and Barbara Fox were published in U.S. 1 Newspaper on September 30, 1998. All rights reserved.
All Aboard for Business
One joke is better than 1,000 progress reports, says Joey Novick, because a wacky business is a productive one. "Companies that take steps to lighten the office mood see better teamwork, creative decision making, and hopefully bigger profits," he argues.
Novick speaks at the luncheon on Tuesday, October 6, at the Masonic Temple on Barracks Street in Trenton, part of a week-long celebration of entrepreneurism for Trenton Small Business Week. After the workshops on Tuesday there will be wine tasting evening and a "4 Sistah CEOs" panel presented by the Kimbrough Company. Free consulting sessions, particularly on financing, are scheduled all day on Wednesday, October 7, with a special financing presentation by Martin Abo at 5:30 p.m. Also on Wednesday, columnist Nancy Michaels will speak at the Staples store in the Lawrence Shopping Center at 7 p.m. The week ends with an awards ceremony at the New Jersey State Museum, on Thursday, October 6.
Not to be outdone, other organizations are celebrating Small Business Week too, everyone from John Punyko, who is holding meetings of his new Mastermind Networking Group on Alexander Road, to Al Warr's sessions of his Business Owners Institute in Bridgewater, to SCORE classes in Jamesburg. Even the New Jersey State Bar Association is getting into the act, scheduling attorney Robert D. Frawley and Randy Harmon of the Small Business Development Center to talk on how to start a small business.
Before we start rolling down that track, let's lighten up with Novick's tips:
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Getting Started
Are You Right for Your Own New or Existing Business?" That's the question asked by Jack Walfish, professor and retired chairman of the manufacturing management department at the Fashion Institute of Technology, who launches the SCORE small business workshop series on Tuesday, October 6, at 6:45 p.m. at the Summit Bank Training Center at 2 Centre Drive in Jamesburg. The session also features a discussion of business plans by Gerald J. Bose of G. Bose & Associates.
Here are some questions Walfish uses to challenge prospective entrepreneurs:
Related to this is the need to have the stamina to be able to keep up with the job. "And you have to have the fortitude to withstand the pitfalls, like, `Gee I've got to make payroll this week and I didn't sell anything.'"
And, Walfish adds, "there's a certain amount of personal satisfaction that I get giving back. One of the most important things that I get out of this is telling those people who shouldn't go into business that they're not right for business."
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Bootstrapping
Chances are, if you're a starting a business you're probably bootstrapping in one way or another. Randy Harmon, who is both director of technology commercialization for the New Jersey Small Business Development Center and director of the Technology Help Desk, has some ideas on modern day bootstrapping and will be speaking along with attorney Robert Frawley of Smith, Stratton at the New Jersey State Bar Foundation on Thursday, October 1, at 7 p.m. at the New Jersey Law Center in New Brunswick.
Harmon's advice for bootstrappers:
Licensing is a common form of alliance for technology start-ups. But remember not to negotiate your own licensing agreement, Harmon says. Hire an expert.
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Financing Strategies
People generally don't realize that they don't know enough about business to go into business," says Aavo Reinfeldt, vice president and senior region leader of Summit Bank, who will speak at the SCORE small business workshop series on Thursday, October 8, at 6:45 p.m., at the Summit Bank Training Center, 2 Centre Drive, Jamesburg. His topic: "How to Finance Your Business: What the Bank Looks For." He will be joined by Rachel Lilienthal Stark of Stark & Stark, who will cover "Legal and Risk Management."
"I try to be an educator. I tell them we are entering into a form of a partnership, and two other partners are very critical to the business' success -- an accountant and an attorney. It's not enough to be a great cook, have a great idea, or be tired of working for somebody else."
The harsh reality: 6 out of 10 businesses under $500,000 in size will be turned down for a bank loan. For firms with higher sales volume (more established, with a better chance to succeed), 7 out of 10 will get loan approval. Here are his tips:
"We want our money back," says Reinfeldt. "We are not an investor; we `rent money' and make a profit. We want the entrepreneur to invest it in furniture, people, and locations, and turn it into profit and come back for more."
Nothing is for free, he reports. Alternative forms of financing may be easier to get but they are generally more costly, as far as what you need to invest up front, than a traditional bank loan. "Borrowing money is never an event, it's a process that requires both the customer and the banker to be fully honest. Don't think you can just come and get it."
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Legalities: Forming a New Business
Take advantage of the new twist in the rules for limited liability corporations, urges Georgine Natelli. Until last month, LLCs had to have two owners. Now an LLC can have just one owner.
Natelli is a panelist for the Trenton Small Business Week conference on Tuesday, October 6, at 9:15 a.m. She will discuss the different ways that a business can be organized in New Jersey: as a sole proprietorship, a partnership, a corporation, and a limited liability corporation.
Natelli went to St. Peter's College, Class of 1976, and earned her law degree at Seton Hall. After working for the state attorney general, she raised two sons (ages 12 and 15 now) and founded a quarterly publication for professional mothers at home, "For Mothers Only." She has opened her own practice at 601 North Ewing Street and recently dropped her married name of DeAngelis.
Business owners used to have to choose between liability protection and tax advantages, basically, between a corporation and a sole proprietorship.
If you formed a corporation, you could insulate yourself from any kind of personal liability. "If someone sues you, they can only go after your corporate assets," says Natelli. "They can't take your house or your car." But both C and S kinds of corporations have disadvantages. If a C corporation has excess income, unless you can justify giving the owners bonuses during the fiscal year, any income remaining gets taxed that year on a corporate level by both federal and state governments. And when you take it out as a dividend, it is then taxed on your personal return.
For an S corporation any excess income is taxed only on your federal personal tax return and is not subject to self employment tax. It is, nevertheless, subject to corporate tax on a state level. An S corporation has certain other disadvantages; you cannot deduct the costs of health insurance for the owners.
The alternative: be a sole proprietor. "As a sole proprietor, you have no protection from liability if someone decides to turn around and sue you, but you are only taxed once," says Natelli. The requirements are simple: just open a bank account in the proprietor's name and get an employee identification number for your payroll.
Natelli's strong preference for most of her clients is the new kind of limited liability company (LLC) that can be formed with just one owner. "I like it because it insulates a person from liability, yet the person doesn't get taxed on two levels. The person gets taxed as if it were a partnership or sole proprietorship. The individual puts earning on a personal tax return but gets the same protection as a corporation."
Until several weeks ago, an LLC had to have two members. "Most people would bring their spouse in, with the spouse having a one percent interest." Now one person can form an LLC.
Some companies have more exposure to large lawsuits. A company that sends nannies out, for instance, needs more protection than a manuscript editing firm. Basically you are preparing yourself for something that may never happen, she says. "Like disability insurance, you may never use it."
If you form an incorporation or limited liability corporation you will pay the New Jersey State Department $100 to file a certificate of incorporation or formation, respectively. Each succeeding year, you pay $100 to file a report.
Forming an LLC requires more attorney time, because LLCs must have an operating agreement detailing the duties of all the different members and how the company is going to operate. "It can never look like it is a corporation," says Natelli. She cites these distinctions between an LLC and a corporation:
There are invisible hazards. If you draw up your papers to form a limited partnership but actually conduct your business like a general partnership, your opponent in a lawsuit might use this to his advantage. "If they can prove you were operating as a general partnership, they can go after you personally," she says. "In law school they called that `piercing the corporate veil.' You can't just say one thing and do another. You put yourself at great risk by doing that."
The bottom line: don't try to do it yourself, says Natelli: "Lawyers are supposed to think about the most horrible things that might happen. It sounds scary but you are insuring yourself against those possibilities."
This page is published by PrincetonInfo.com -- the web site for U.S. 1 Newspaper in Princeton, New Jersey.
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