Business Growth: Establishing a C-Corp

This continues our series on establishing the best legal entity for your business. I am not attorney. Consult with a legal expert.

Investors’ Guide defines a corporation

“Corporations are remarkably different from other forms of businesses in the sense that it is an independent legal entity that is separate from the people who own, control and manage it. Due to this recognition as an individual entity, it is viewed as a legal "person" in the view of tax laws, and can thus be engaged in business and contracts, can initiate lawsuits and itself be sued. It also must pay taxes.”

Definition of a C-Corp

Once again from Investors’ Guide

“A C corporation is a business term that is used to distinguish this type of entity from others, as its profits are taxed separately from its owners under subchapter C of the Internal Revenue Code.

A C corporation is owned by shareholders, who must elect a board of directors that make business decisions and oversee policies. In most cases, a C corporation is required to report its financial operations to the state attorney general. Because a corporation is treated as an independent entity, a C corporation does not cease to exist when its owners or shareholders change or die.

Another major advantage of a C corporation is that its owners have limited liability. Thus, they do not stand personally liable for debts incurred by the corporation. They cannot be sued individually for corporate wrongdoings.”

Benefits of a C-Corp

“Corporations are usually at a lower risk of being audited by the government

Owners and shareholders of a C corporation have a limited liability towards business debts

C corporation can deduct the cost of benefit as a business expense

Can be used to split the corporate profit amongst the owners and the corporation 

In a C corporation, there can be an unlimited number of stockholders

Additional funds can be raised by a C corporation by the way of sale of stocks

Foreign nationals have a right to own or invest in a C corporation

Greater number of diverse investors participate in the business”

Carefully discuss the advantages of a C-Corp with your legal counsel to see if it is appropriate for you.

Join me on Thursday when we explore the advantages of an S-Corp for your business

Business Growth: Establishing a Partnership Entity

This continues establishing the right legal entity for your business. I am not a lawyer. I encourage you to consult an attorney to establish the best legal entity.

The IRS says “A partnership is the relationship existing between two or more persons who join to carry on a trade or business. Each person contributes money, property, labor or skill, and expects to share in the profits and losses of the business.

The IRS says “A partnership must file an annual information return to report the income, deductions, gains, losses, etc., from its operations, but it does not pay income tax. Instead, it "passes through" any profits or losses to its partners. Each partner includes his or her share of the partnership's income or loss on his or her tax return.”

The IRS offers great charts to “help you determine some of the forms you may be required to file”.

Advantages of a Partnership

How-to-Start-a-Business.com and Inc. Magazine describe advantages of working in a partnership:

• Partnerships are relatively easy to establish
• Ability to raise money may increase if both partners can contribute more funds
• May attract better prospective employees with the offer of a partnership
• Two people may complement skills and attributes that enhance business success
• Increases cost-effectiveness as each partner focuses on areas of expertise
• Provides moral support and creative brainstorming
• Pass through taxes that apply to partners not the corporation make filing easier

Disadvantages of a Partnership

Partnerships also create possible disadvantages:

• Dissolving a partnership, especially if your partner is a close friend, can be messy
• All partners carry the risk and liability of one another
• Partners share the profits according to the written (if they are smart) agreement
• Shared decision making also creates shared disagreements
• Partnerships can dissolve upon death, disagreement, one partner not carrying a load

Many people experience satisfying business partnerships. Many encounter problems,  dissolved friendships and lawsuits. Consult an attorney to draw up a general or limited liability partnership. Include sections on liability, protections, disagreement, dissolution, and division of assets.

Come back Tuesday to explore how a C-Corp may help your business—if you qualify

Business Growth: LLCs and Related Legal Entities

This continues our series on establishing the right legal entity for your business. I am not a legal expert. I encourage you to consult with an attorney.

The IRS defines a Limited Liability Company (LLC) in the following terms,

“A Limited Liability Company (LLC) is a business structure allowed by state statute. LLCs are popular because, similar to a corporation, owners have limited personal liability for the debts and actions of the LLC. Other features of LLCs are more like a partnership, providing management flexibility and the benefit of pass-through taxation.”

Benefits of an LLC

Incorporate.com lists several advantages to an LLC:

“This business structure has many advantages, including:

• Owners have limited liability from business debts and obligations.
• Owners can report their share of profit and loss on their individual tax returns without filing a separate corporate tax return.
• Owners do not need to be U.S. citizens or permanent residents.
• LLCs do not need to hold annual meetings or record meeting minutes (though we recommend it).
• LLCs can be owned by individuals or other companies.
• LLCs do not have the same corporate formalities as a corporation.”

You can establish an LLC quickly and inexpensively for each endeavor.

Disadvantages of an LLC

The IRS states “The federal government does not recognize an LLC as a classification for federal tax purposes. An LLC business entity must file a corporation, partnership or sole proprietorship tax return.”

The Limited Liability Company Center outlines disadvantages to an LLC:

• Earnings are subject to self-employment tax
• Terminates if 50+% of capital and profit interests are sold or transferred within 12 months
• May lose ability to use the cash method of accounting in certain situations
• If treated as a partnership cannot take advantage of certain stock options
• A lack of uniformity in LLC statutes may confuse entities working in multiple states
• Some states do not tax partnerships but do tax LLCs

Consult an attorney to determine if an LLC would offer the benefits you desire without the disadvantages.

Saturday we will discuss the advantages and disadvantages of a partnership

Business Growth: Establishing the Legal Entity for Your Business

This begins a series about how to legally protect yourself and your business. I am not a legal expert. I strongly encourage you consult with an attorney for better direction.

You may have already established a legal entity for your business. You may, however, use a schedule on your income tax to operate as a sole proprietor. You worry that an attorney will cost too much. You may think you don’t need one. You were able to register your business with your state’s Department of Commerce and get a business license. You may think that you don’t need more. You would also open yourself to risk and losing all you own: your home, your cars, your children’s education funds, and more.

Reasons to Establish a Legal Entity

Attorneys can list a number of reasons to establish a legal entity. I list just a few:

• Personal protection: Without the right legal entity, your personal assets remain at risk. Someone may sue you for a variety of reasons: bad advice, injury at your business or from a product you sold, discrimination, or more. If someone sues your business, and you don’t have the right protection, they could lose everything you own.
• Professional protection: Not only do you remain at risk personally without a legal entity, you could also suffer professional risk. The chance of lawsuits runs both ways. Your child hits a car and injures a passenger. You could lose your business in the lawsuit.
• Reduce the Tax Burden: The right legal entity will reduce your self-employment and other taxes and compensate you in the best manner. A professional can guide you through the labyrinthine tax codes.

Types of Entities You May Establish

We will examine the benefits and guidelines for each of these over the next few posts:

• LLC, LPC, et al
• Partnership
• 501(c)3 (non-profit)
• C-Corporation
• S-Corporation
• Trust

I am not a legal expert. I strongly encourage you to consult with a small-business legal expert to determine the protections, structures, and benefits that best suit your business.

Join me Thursday to learn more about LLCs and their related entities

Business Growth: Recognizing the Power of Your Toolbox

This concludes our series on tools to help grow your business

For the past several months we reviewed and analyzed tools to help you grow your business. You can use some of the tools immediately to assess your current business. You will use other tools to take your business to the next level. You will use still other tools—in the future—when your business reaches a certain size, revenues, and structure. Today’s post will help you inventory the tools you have in your toolbox.

Tools That Provide You Support and Training

First, we’ll review the organizations and programs that will provide training, problem solving, and support. You may find them in the blog archive on the right side of the page:

• Service Corps of Retired Executives (SCORE)
• Small Business Development Centers (SBDC)
• Small Business Administration (SBA)
• City & State Economic Development Councils (EDC)
• Chambers of Commerce
• university centers for entrepreneurship
• business consulting firms
• Your marketing team
• Your mastermind team

Tools That Help You Analyze and Plan for Future Growth

Second, we’ll review the tools any business of any size can use to assess and plan growth:

• The 7 Pillars of Successful Marketing (market research, the right message, strategy, campaigns, methods & vehicles, sales, client retention)
• Trend analysis to discover and evaluate industry trends
• Stakeholder Salience Model (identify and prioritize the stakeholders who have power, legitimacy, and urgency in your business)

• SWOT Analysis (Strengths, Weaknesses, Opportunities, Threats)

• RACI Analysis (Responsibility, Accountability, Consulted, Informed)
• PROACT Decision Making Model (PRoblem, Objectives, Alternatives, Consequences, Trade-offs)
• Structure Analysis (should you structure along product, function, or matrix lines of authority?)
• Impact Analysis (to analyze the consequences of changes)
• Year-end checklists (tax preparation, closing books, client remembrance)

Tools That Help Improve Your Leadership Abilities

Third, I also examined tools that can enhance your leadership skills. You may find them in my other blog www.LarryOnCareers.blogspot.com. You can find them in the blog archives for November 2011-January 2012.

• Novations Leadership (how to move from apprentice to director if you want to)
• Authentic or True North Leadership
• Reflected Best Self Exercise
• Kurt Lewin’s 3 leadership styles

I hope you realize the tools you have in your toolbox if you have followed this blog for the past few months. I wanted to summarize the tools for you. Use them to help grow your business. Teach them to others, that will improve your skills to use them more effectively.

I’ll keep adding to your toolbox in the future. I hope it helps you grow your business.

Join me on Tuesday when we begin exploring the various ways to legally establish your business

Business Growth: Impact Analysis

This continues our series on tools to help grow your business

I talked about change with a good friend of mine. We discussed proposed changes one organization contemplated making in policy and procedures. We contemplated the affect of making decisions without considering all the consequences or impact.

Two sister organizations made similar decisions based on the same model. Flaws in their decision making process became apparent as they implemented the previous changes. The flaws occurred because they only considered the positive impact of their decisions. They neglected to consider many of the negative consequences.

Purpose of an Impact Analysis

The International Council on Monuments and Sites discussed differences between effects and impacts. They define a purpose of an impact analysis.

"An effect is brought about by a causal element e.g. visiting an historic site
gives satisfaction. The impact of that effect is that this satisfaction induces
one to buy some books about the site, to come back another time, or to visit
other similar sites. Thus contained in the word "impact" is the power to
produce change. We could say that an impact is the "effect of an effect", or in
other terms again, that the effect is an action while the impact is a reaction.
It is this reaction that impact analysis wants to capture."

Mindtools says

"Impact Analysis is a technique designed to unearth the "unexpected" negative effects of a change on an organization.

It provides a structured approach for looking at a proposed change, so that you can identify as many of the negative impacts or consequences of the change as possible."

How to Conduct an Impact Analysis

Hank Marquis outlined Impact Assessment in 5 Simple Steps (links go to articles other than Hank Marquis'):

1. Define the extent of the change proposed
2. Determine key differences in the changed state (proposed) from a point of reference or the original state
3. Focus on the possible effects of the key differences from step #2
4. Sort and prioritize the possible effects (#3) from the key differences (#2) based on risk and possibility (Consider Marquis' 10 Steps to Doing it Yourself CRAMM)
5. Make a decision using the results

Come back on Saturday to assemble the tools we've discussed into a coherent toolbox

Business Growth: Structure Analysis

This continues our series exploring strategic tools that can help you grow your business

Today’s post applies to larger companies rather than smaller ones. Since most of our readers own small- or home-based businesses, I will make this a short post. I want to share how a structural analysis can grow and streamline your business. Your business currently might benefit from structural transition, or it may in the future. Understanding business structures now, however, can help you structure it for greater growth. So, read this for your current and future business.

Three Business Structures

Businesses may adopt one of three structures:

Product Structure organizes based on divisions or product lines. For example, a large company with various brands may build divisions that include accounting, human resources, marketing, sales, and  IT staff for each brand.

Functional Structure organizes the company grouping functions together to provide services to multiple operations. For example, one human resource function services the entire company, one marketing group sells all products for the company, one accounting group processes all financial reports, and one manufacturing group produces all the product.

Matrix Structure combines product and functional structures. For example, the company may organize along product lines, but support staff within the groups report to both the product manager and their counterparts in human resource, accounting, or marketing.

Don’t miss out Thursday to learn more about how high impact analysis can grow your business

Business Growth: PROACT Decision Making Model

This continues our series exploring strategic tools that can help you grow your business

Business owners make decisions. You make decisions so frequently, you may not have considered how you make them. Perhaps someone taught you. You may have learned Benjamin Franklin’s famous T Form method where you draw a “T” on a piece of paper and list the Advantages/Benefits/Pros on one side and the Disadvantages/Consequences/Cons down the other side.

PROACT: A Stronger Decision Making Model

PROACT represents an acronym for each component of the model:

• PR=Problem: describe what requires the decision (hire a secretary/bookkeeper)
• O=Objective:  outline what you want (accurate letters, graphs & charts, Quickbooks)
• A=Alternatives: list each of the choices (Betty P, Bob S, Sharon W, Sally M)
• C=Consequences: assign a value for how well each alternative fills each objective
• T=Tradeoffs: weight each (Quickbooks is twice as important as graphs)

PROACT includes elements that T Form and other methods neglect. PROACT encourages you to outline your desired outcomes and determine which objective means more to you. Those elements provide better decision making.

Adolphson Excel Spreadsheet Tools (Free download)

Dr. Donald Adolphson recognized the ability of a spreadsheet to create a PROACT template. Andrew Heiss (Dr. Adolphson’s student) created a reusable template. He told me

“…It's free and open source!

It works in Excel 2007 and 2010. You can download it https://github.com/downloads/andrewheiss/AHP-Monte-Carlo/AHP%20Monte%20Carlo%201.0.zip

See the full documentation, file bug reports, etc. at the project's main page: https://github.com/andrewheiss/AHP-Monte-Carlo

Open "AHP Monte Carlo.xlsm" and you'll notice a new tab on the ribbon called "Decision Analysis" with 3 new buttons. Click on "Build full model" to walk through a full decision model, with any number of objectives and alternatives. The macro will build all the pairwise tables, data tables, and graphs you need. If you only want to build one pairwise table (like if you just want to get the relative weights for a set of objectives or alternatives), there's a button for that too.”

Business owners make big and little decisions. The PROACT model will enhance your big decisions.

Join me next Tuesday when examine the Structure Alignment Strategic tool

Business Growth: Downes’ Three New Competitive Forces

This continues our series on tools to help you make your business grow

Larry Downes published an article titled Beyond Porter in which he claimed that Porter’s Five Forces, while adequate for the 80s & 90s, did not work in the new millennium. He introduced three new forces that reflected the competitive nature of today’s economy. His theory initially brought criticism. More recently experts incorporate his three forces into Porter’s Five Forces to create a new 8 Forces Model.

Downes’ Three Forces

• Digitalization—Growing technology provides more access to information both as suppliers and consumers. He proposes that digitalization will create totally new business models which give people outside the industry power to pressure and change the industry. He cites an example of electronic shopping malls operated by credit cards and telecom companies (think apps stores for example).
• Globalization—Improvements in distribution and communications plunge even local distributors into global markets. Technology gives almost any customer the ability to identify and compare prices from vendors anywhere in the world. Downes assert that Porter’s suggestion to position oneself as the price- or quality-leader seems outmoded. Business must develop lasting relationships to an increasingly mobile and transitory audience to succeed.
• Deregulation—Decreased government oversight and regulation, claimed Downes, also changed the world Porter described. Technology accelerated, non-regulated opportunities changed the competitive environment. Collusion by competitors was long seen as a weakness of Porter’s framework. Deregulation allowed for even more collusion. We must remember, however, that Downes and his critics wrote their articles in the late 1990s and early 2000s. Their comments reflect the deregulation that typified those years up until the recent reaction to the excesses that led to the Great Recession.

Lack of Implementation Instructions

Larry Downes identified potential holes in Porter’s Five Force Framework. He failed to provide a decent, operational set of instructions to conduct a three forces analysis.

I suggest that you

• Incorporate Porter’s 5 Forces with Downes’ 3 Forces into the 8 Forces model pictured above.
• Use Porter’s instructions to identify and analyze all 8 competitive forces.

Join me on Saturday when we analyze the PROACT decision making model

Business Growth: Porters 5 Competitive Forces

This continues our examination of strategic tools that will help you grow your business

In 1979, Dr. Michael Porter, Harvard Business School, developed a model to analyze five forces that impact an industry’s competitive environment. His Five Competitive Forces analysis complements the SWOT analysis. Any business or industry can utilize Porter’s Five Forces structure.

Porter’s analysis helps business owners determine potential for profitability by determining if that industry’s competitive environment makes it attractive or unattractive.

• Low competitive forces provide attractive possibilities for profitability
• High competitive forces provide unattractive possibilities for profitability

How to Analyze Porter’s 5 Competitive Forces

Analyze each of the following five forces using questions and criteria found at the links listed as Other Sources of Information.

1. Bargaining power of suppliers—The number and strength of suppliers affects their ability to establish or negotiate costs to your company. Fewer suppliers limits negotiation. More suppliers allows greater negotiation.
2. Bargaining power of customers—The volume & concentration of customers affects how much they can impose pressure on your margins and volumes. High bargaining power forces you to lower margins. Low bargaining power reduces pressure.
3. Threat of new entrants—The facility of new competitors to enter the industry affects the number of competing companies. Reacting to new entrants can reduce profitability.
4. Threat of substitutes—How easily a competitor can substitute your product pressures you to lower prices. Think of the breakfast cereal market and Cheerios substitutes.
5. Intensity of competitive rivalry—Intensity of competition between existing players also affects profitability. High competition lowers prices. Low rivalry allows prices to adjust. Consider the rivalry among cell phone manufacturers and it's impact on margins.

Others Sources of Information

Discover how use statistical, dynamic, or visual methods to analyze your findings and change pressures:

• Dagmar Recklies lists excellent criteria for instructions how to analyze and reduce each of the forces
• WikiCFO provides an excellent article explaining how to determine potential profitability, what makes an industry attractive or unattractive, plus strengths and weaknesses of Porter’s framework
• Purdue University Extension offers a great tool to help you assess and try to influence a change in each of the 5 forces.

I suggest you analyze the forces the affect your profitability using Porter’s 5 Forces.

Join me Thursday when we share how Downes’ Three New Forces strengthen Porter’s 5

Business Growth: RACI Analysis

This continues our exploration of strategic tools you may use to grow your business

A RACI analysis can help improve your efficiency whether you 1) work alone, 2) hope to add employees later, or 3) already have employees working for you. A RACI analysis allows you to divide responsibilities appropriately within your organization.

RACI stands for

• R=Responsibility for a process or responsibility for improvement
• A=Accountability for the process
• C=Consulted prior to decisions about improvement in processes
• I=Informed after the decision about improvement in processes

How to Conduct a RACI Analysis

The following steps will help you analyze the division of responsibilities. (Refer to the graphic above to better understand these instructions). To conduct the analysis you will

1. List all the functions you wish to assign to others (either currently or in the future) down the left side of the table
2. List all the people (either current or in the future) you may assign tasks to perform along the top of the table
3. Compare each function with each employee
1. Record the appropriate score depending on the responsibility you wish to assign them: R, A, C, I
2. Leave the cell blank if the person has no assignment for that function
4. Evaluate your scores
1. Horizontally to verify that every function has someone responsible, accountable, consulted, and informed
2. Vertically to verify that nobody receives too many responsibilities and that responsibilities are not spread among your staff
3. Overall to enhance the number of people consulted and informed about decisions, identify changes in the division of responsibilities, and to ensure that someone is accountable for decisions
5. Make changes to improve your organization
1. Ensure you have the right people doing the right activities
2. Move people away from the activities they cannot perform well
3. Consult with the right people before making decisions

RACI analysis can help you even though you may be working alone. It can highlight potential problems if you try to do too much. It can ensure a better division of responsibilities. It can allow you to plan for future growth and employees.

Join me on Tuesday when we explore the Porter 5 Influences test

Business Growth: SWOT Analysis

This continues our multi-part series on tools you may use to analyze your business (This post should have appeared on Thursday, February 2)

I suggest business owners perform a SWOT analysis at least once a year. SWOT represents the four elements the owner should evaluate: strengths, weaknesses, opportunities, and threats. Traditionally, analysts considered strengths and weaknesses internal to the business and opportunities and threats coming externally to the business. In recent times, however, the field recognizes that some opportunities and threats also arise from within the organization.

How to Conduct a SWOT Analysis

The following steps will help you conduct the analysis and act on your findings

1. Prepare a list of questions that will help you explore your strengths, weaknesses, opportunities, and threats. Develop additional questions to dig deeper the basics. (You may consider the list of questions on Rob Berman’s Blog on in the middle of Businessballs web site on SWOT):
• What are our strengths? Do well? Assets? Advantages? Capabilities?
• What are our weaknesses? Disadvantages? What do we do poorly?
• What are our opportunities? New markets or products? Trends? Market needs?
• What threatens our business? Competitors? Politics? Obstacles? Economics?
2. List the articles and studies you will study, and the people you will interview
• Associations and industry sources typically track opportunities and threats
• Ask yourself, high and medium priority stakeholders, staff, clients, competitors, and others
3. Conduct your analysis by gathering information from a variety of methods
• Email surveys using Survey Monkey, Constant Contact or other tools
• Phone or personal 1-on-1 interviews
• Focus groups
• Staff meetings (try this wonderful game)
4. Compile and analyze the answers
• Compile all the answers to each question
• Count similar answers and highlight frequent observations
• Diagram your findings using a simple 2x2 table or other diagraming tools
• Ponder the answers you received privately and discuss them as a staff
5. Prepare a plan to resolve major problems
• Emphasize your strengths
• Turn weaknesses into strengths
• Take advantage of opportunities
• Defend against threats

A yearly SWOT analysis can help you grow your business.

Join me Saturday to discover how a RACI assessment can help you divide responsibilities

Business Growth: Stakeholder Salience Model

This begins a multi-part series exploring tools to help you improve your business. (This post should have appeared on Tuesday, January 31)

Business owners use several tools and techniques to analyze their operations. Sometimes they have to hire consultants to conduct the analysis. I will share some of the tools that consultants use so you can perform them yourself. You may choose to use some of the tools immediately or in the future.

Today’s tool, the Stakeholder Salience Model, will help you recognize and prioritize the stakeholders affiliated with your business. In 1997 Doctors Agle, Mitchell, and Wood developed the Stakeholders Salience Model. The model recognizes your business may be responsible to more people than just you, the owner. They defined a stakeholders as any party who possesses at least one of three attributes:

• Power-to influence the organization or project deliverables (coercive, financial or material, brand or image)
• Legitimacy-of the relationship & actions in terms of desirability, properness, or appropriateness
• Urgency-of the requirements in terns of criticality and time sensitivity for the stakeholder

How to Use the Stakeholder Salience Model

The steps for managing your stakeholders include:

1. List all the possible stakeholders for your business
2. Assign them a priority, and give them attention, according to the diagram above. Assign them a
• 1, 2, or 3 if the only possess one attribute (low priority)
• 4, 5, or 6 if they possess two attributes (medium priority)
• 7 if they possess all three attributes (high priority)
• 8 if they possess none of the attributes (no priority)
3. Decide if you think you should help them change their stake by adding other attributes (for example, you may wish a stakeholder who only possesses legitimacy to become more involved, urgency; or you may wish a lender who has power and legitimacy to lose their power and legitimacy by closing the loan)

Try completing a stakeholder salience analysis of your business. It will help you recognize who possess a stake in your business, what kind of stake they possess, and how much attention you should give to their stake.

I will post later today Thursday’s article outlining the SWOT analysis