Starting a business

The following information was discussed by Attorney Whitney Hughes on the August 19, 2008 edition of Legal Briefs on KDKA's Pittsburgh Today Live Show.

We’ve all thought it. “It would be so nice to be my own boss.”

But how do you do it?

There are three major instances in which people venture into owning their own business.

  1. Starting your own and building it from the ground up
  2. Buying an existing business
  3. Buying a franchise

Starting your own business:

The first step is to create a business plan. This is a document which states the aims and objectives of a business and proposals to achieve business goals.

Though part of your overall plan, you’ll need to select a location, decide on a business structure, and obtain the necessary licenses and permits.

The most important thing you will do is to determine the type of business structure you will follow:

Sole Proprietorship – owned by one person, usually the individual who has day-to-day responsibilities for running the business. Sole proprietors own all the business assets and are entitled to the profits generated by it. They also assume complete responsibility for any of its liabilities or debts. Both legally and in the eyes of the public, you and the business are one and the same.

Partnership – two or more people share ownership of a single business. Like proprietorships, the law does not distinguish between the business and its owners. The partners should have a legal agreement that sets forth how decisions will be made, profits will be shared, disputes will be resolved, how future partners will be admitted to the partnership, how partners can be bought out, and what steps will be taken to dissolve the partnership when needed. They also must decide up-front how much time and capital each will contribute, etc. The profits from the business flow directly through to the partners' personal tax returns. Partners are jointly and individually liable for the actions of the other partners.

Corporation – A corporation chartered by the state in which it is headquartered is considered by law to be a unique entity, separate and apart from those who own it. A corporation can be taxed, it can be sued, and it can enter into contractual agreements. The owners of a corporation are its shareholders. The shareholders elect a board of directors to oversee the major policies and decisions. The corporation has a life of its own and does not dissolve when ownership changes. Shareholders have limited liability for the corporation's debts or judgments against the corporations. Incorporating may result in higher overall taxes. Dividends paid to shareholders are not deductible from business income; thus it can be taxed twice.

Limited Liability Corporation - designed to provide the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership. Formation is more complex and formal than that of a general partnership.

Buying an existing business:

Starting a business from the ground up is quite an undertaking, and can be pretty overwhelming. Instead, many people decide to purchase an already existing business to alleviate some of the pressure and the risk.

Advantages The main reason to buy an existing business is the drastic reduction in startup costs of time, money, and energy. In addition to this, you may start generating income immediately thanks to existing inventory and receivables. Other benefits include preexisting customer goodwill and easier financing opportunities, if the business has a positive track record.

Disadvantages The biggest obstacle to buying a small business outright is the initial purchasing cost. As most of the fundamental work has already been done, the financial costs of acquiring an existing business is usually greater then starting one from nothing. Other possible disadvantages include hidden problems associated with the business. Good research is the key to avoiding these problems

Buying a franchise:

There are primarily two forms of franchising:

Product/trade name franchising - a franchiser owns the right to the name or trademark and sells that right to a franchisee

Business format franchising - the franchiser provides a full range of services, including site selection, training, product supply, marketing plans, and even assistance in obtaining financing.

How to select one:

Shopping at a franchise exposition This allows you to look at and compare a variety of franchise possibilities. Keep in mind that exhibitors at the exposition primarily want to sell their franchise systems. Be cautious of salespersons who are interested in selling a franchise that you are not interested in.

Before you attend, research what type of franchise best suits your investment limitations, experience, and goals. When you attend, comparison shop for the opportunity that best suits your needs and ask questions.

Know how much you can invest Consider the amount you feel comfortable investing and the maximum amount you can afford.

Know what type of business is right for you Only you can decide if a particular franchise is right for you. Don’t be swayed by exhibitors who try to convince you that an opportunity is perfect for you. Consider the industry that interests you before selecting a specific franchise system. Ask yourself the following questions:

- Is this something you have thought of doing before? - Is this something you can see yourself doing for the next several   decades? (It can take that long to recoup your initial investment.)

Ask questions

  • How long has the franchiser been in business?
  • How many franchised outlets currently exist?
  • Where are they located?
  • What is the initial franchise fee & additional startup costs? Continuing royalty payments?
  • What management, technical, and ongoing assistance does the franchiser offer?
  • What controls does the franchiser impose?

As always, for any questions regarding starting a business, or purchasing an existing business or a franchise, contact the Allegheny County Bar Association Lawyer Referral Service at 412-261-5555.