Getting Started


Financing Strategies

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:

Take yourself lightly, while taking the job seriously, Novick says, noting that he tells business owners to imagine how innovators like Bugs Bunny or Bart Simpson might solve a problem. If the idea seems fanciful, Novick points to Albert Einstein, who imagined himself traveling on a cloud in space to develop the theory of relativity.

Accept and revel in paradox. "Too many managers see good and bad, black and white," he complains. "If you see the reverse, or perverse side of a problem -- like a comedian -- the intractable becomes solvable."

Make humor a paradigm of the business environment. "Make it part of the daily ritual, because then it habitually encourages innovation without increasing pressure," he notes.

Call 609-396-7246 for Small Business Week including $30 tickets to the luncheon, $40 reservations for Tuesday, with $50 the walk-in price.

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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:

Are you happy with the work you're doing? "I start my presentation with a slide that asks, `Do you enjoy begging your boss for a raise? Does it bother you that new hires are hired to do same job you're doing but they're paying them more money?' Down at the bottom of the slide it says, `If you answered yes to any of these questions don't even think even about going into business.'"

Are you sure that you can put in all the time that it takes? This, he feels, is one of the biggest surprises experienced by entrepreneurs after they put out their shingle. "It's never a nine-to-five job."

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.'"

Will you have the finances in place to handle a start-up? First, entrepreneurs need to have enough money to support themselves during the time the business is developing.

Walfish, 74, taught at FIT from 1964 until 1990, retiring as a full professor and chairman of his department. Next month Walfish finishes his term as chairman of SCORE chapter 631. "We know Princeton is very over-seminared and over-workshopped and some of the prices that they charge for some of these seminars and workshops are outlandish. But once you're finished with that seminar you're finished with the people giving it to you. We're a little different. They can come to us for advice for as long as they want, and there's no charge."

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."

Reach Walfish or sign up for the $15 SCORE workshops ($50 for the series) at 609-520-1776.

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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:

Use more of your own money than you think you will need. Harmon advises entrepreneurs to set limits on how far they should leverage their personal finances, but also reports that the rule of thumb for tapping personal accounts calls for a modicum of strain. "How much of your own money is enough? The general rule of thumb is `enough so it hurts,'" he says.

Tap your credit cards. This sounds cliched, but for a good reason. "If carefully managed, credit cards can be a source of up to $50,000 to $75,000 in financing when no one else will give it to you." He also warns entrepreneurs to apply for new credit cards before they quit their day job. It will be easier to qualify.

Borrow from friends and family. Because unpaid debts can do wonders to relationships, do not let them lend too much and commit all loans to paper. "Entrepreneurs should not let friends and family invest beyond what they know the investor can afford to lose." Also, if entrepreneurs seek investors outside the state then securities laws may become applicable.

Form strategic alliances. Look for partners with capabilities or resources that you don't have. "The best prospective partners can be those companies which are producing similar but non-competing products, utilizing similar manufacturing technology, and selling those products to the same customers that you have targeted."

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.

Choose a cheap location. Trump's Axiom (location, location, location) applies to retail stores and casinos, but for a technology start-up, choosing an attractive location may not be the best move. Instead, use your home, a shared space, or a business incubator. Wait until your successful IPO before you move into a Class A building.

Harmon also suggests accepting the imminence of Murphy's Law (that what could go wrong will go wrong). "If entrepreneurs have a viable worst-case-scenario commercialization strategy," he says, "they reduce the risk of failure. Bootstrapping is often an entrepreneur's only viable strategy and many successful entrepreneurs both launch and continue to build their business that way."

Harmon is available at 800-432-1832 and Frawley at 609-924-6000. For New Jersey State Bar Association call 732-249-5000.

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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:

Level the playing field by hiring good professional advice. Reinfeldt says bankers shy away from dealing with entrepreneurs who are not getting good advice on such matters as taxation, liability insurance, real estate, capital leases, and contracts they will enter into. Often it seems as if the naive entrepreneur is trying to talk to the loan officer in another language or dialect. Only when the message is translated by a professional will it be understood.

Get a proper financial statement. One of the most ignored items, it should list assets and liabilities and show "a complete understanding of the business they are getting into, with realistic projects not based on guestimates but on facts, obtained not only through hard work but verified by an accountant, preferably by a CPA," says Reinfeldt.

Go for the long-term banking relationship. "I always tell them it is easy to make a loan and hard to have a relationship, but that I am not interested in one transaction. A computer can tell me if they are qualified for X dollars, but it takes a detailed risk assessment to have the borrower `rent' money from me and come back for a larger amount.

"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."

Separate your personal business from your professional endeavors , he warns. Maxing out your credit cards may seem like a good idea at the time, but that diminishes your personal credit window for the future. And consumer credit does not give you the tax advantages that business credit will allow.

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."

Reinfeldt can be reached at 609-987-3200. Register for $15 at 609-520-1776.

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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:

A corporation can live forever. An LLC must dissolve on or before the 30 year mark.

A corporation has centralized management. One person is in charge. It has a comptroller and an unlimited number of shareholders, and the shareholders do not control the company. In an LLC, members are in some way responsible, and no one person manages the entire company.

A corporation is transferable without anyone else's permission. For an LLC, transferability of interest is done only with the permission of other members.

A corporation has limited liability.

Other possible business forms are certain kinds of partnerships, but these can get complicated. A general partner is personally liable in the case of a lawsuit, like a corporation. A limited partnership can be insulated from liability, says Natelli, "but you sacrifice control of the business and your ability to get to some of the profits. Limited partnerships are generally not attractive to one or two persons setting up a business."

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."

Register for Tuesday workshops for $40 at 609-396-7246. Natelli can be reached at 609-252-0300.

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