Entrepreneur's Toolkit

ENTREPRENEUR’S

TOOLKIT

Find access to capital, affordable space, counseling, education, marketing, minority support, recognition and more.

Index How to Begin Business Start-Up Checklist ..................................................................................................

Personal Evaluation ................................................................................................................

Training & Experience .............................................................................................................

Writing a Business Plan .........................................................................................................

Business Plan Outline .............................................................................................................

One-Page Business Plan Template & How-to .....................................................................

1 1 2 2 3 5

Start-Up Guidelines Legal Structure .............................................................................................................................

Licenses and Permits ..................................................................................................................

Accounting and Record Keeping ...............................................................................................

Insurance .....................................................................................................................................

7 9 10 12

Financing Overview ...................................................................................................................................

Savings, Friends & Relatives ....................................................................................................

Banks, Credit Unions and the SBA .............................................................................................

Unconventional Financing .........................................................................................................

13 13 13 14

Business Taxes Introduction ...............................................................................................................................

Income Taxes on the Business .................................................................................................

Sales and Use Tax ................................................................................................................

Employee-Related Taxes .........................................................................................................

Ad Valorem and other Taxes ..................................................................................................

17 17 18 18 19

Introduction Did you know that Montgomery has been ranked the nation’s 23rd best city to start a business?!?

The backbone of America's economy is small business, and the Montgomery Area Chamber of Commerce works to ensure that sector of our economy is strong and thriving.

It takes the right mix of tools, networking and know-how for entrepreneurs to succeed in today's competitive environment. The Montgomery Chamber Business Resource Center offers valuable integrative services to prospective and new business owners. We work holistically with resource and commercial partners throughout our ecosystem to provide • • • • • • • • • • • • •

Business Development and Support Coworking Incubation Domestic Soft Landing Minority Business Development Training Mentoring Counseling Advocacy Recognition Financing Resources Business Support Resource Referrals

Contact the Chamber Business Resource Center at 334-832-4790 or visit montgomerychamber.com When operating a business in the Montgomery area, city and county business licenses and certain privilege licenses are necessary for business operation and should be researched by contacting the appropriate agencies. Business owners must also consider taxes and licensing fees. These include city, county, and state sales tax, federal and state payroll taxes and social security withholdings, federal and state income taxes, and unemployment compensation taxes.

This toolkit contains basic information to help you start a small business in Montgomery. This is intended to serve as only a starter guide and does not attempt to answer all questions or provide all information that you need. Seek the advice and counsel of professionals in your planning process.

The involvement of a good accountant, attorney, and insurance agent is strongly recommended to assist you in making appropriate choices for your particular business venture.

How to Begin Business Start-Up Checklist

There are a number of steps to consider before starting a small business in the River Region. Each step will be highlighted throughout this guide. The following checklist is a reference to help budding entrepreneurs plan the steps needed to successfully own and operate a small business.

Assess your strengths & weaknesses Assess your financial resources Choose a name for your business Choose a legal structure Prepare a business plan with financial statements Obtain financing Retain an attorney, accountant and insurance agent Acquire necessary licenses and permits Obtain Federal Tax ID Number Send off for federal & state tax forms Select a location Inquire into zoning ordinances Arrange for utilities Get computers, phone, office furniture, etc.

Choose a record-keeping system Choose method of inventory control Obtain business insurance Open banking accounts Start marketing Open your doors

Personal Evaluation

Why do you want to be in business for yourself? You need to evaluate your reasons to determine why and what type of business is best for you. The following are a few factors to consider before embarking on business ownership.       

Primary reason for being in business Amount of capital required Your skills Your likes and dislikes Amount of time you are willing to devote Your financial goals Your business management, knowledge and experience

The following checklist contains a few personal considerations for being in business for yourself.

YES

NO

Do you enjoy working long hours?

Do you have self-discipline and willpower?

Do you easily meet deadlines?

Do you work well under pressure?

Will you jeopardize your home?

Do you have the necessary physical strength?

Does your family support this venture?

Do you have a back-up plan?

Experience & Skills

YES

NO

Does your idea make use of your skills?

Does your idea require skills you do not have?

Can you find affordable experienced personnel?

Are you experienced in this line of work?

Do you have managerial experience?

Are you able to interpret financial data?

Are you familiar with tax regulations?

Do you know bookkeeping and accounting?

Planning & Preparedness

YES

NO

Have you written a formal business plan?

What services/products will be offered?

Do you know who your customers are?

Have you arranged for a location?

Do you have a list of potential suppliers?

Do you know the competition?

Have you arranged for insurance?

Do you have a business license?

Have you investigated advertising and cost?

Have you hired a competent staff?

Requirements for Success

Will your business meet unmet needs?

Is there a similar business in the area?

Will your business have a pricing or service YES

NO

benefit the competition does not have?

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Training & Experience

The Government Printing Office also publishes several useful books that are available at One of the most common mistakes made in starting a http://bookstore.gpo.gov. The Alabama business is trying to do so without the necessary Development Office has manuals helping business training and experience. Before you start a business, owners and managers understand the employment ask yourself whether you have the background, laws for the State of Alabama at experience and training that is required. For example, www.ado.state.al.us. a retailer would need some expertise in management, sales and buying. The management experience would It is impossible to become an expert over night. need to include personnel, record keeping, Many businesses rely on the expertise of others such marketing, and other skills. as a small business lawyer or a certified public If you do not have this experience, how do you get it? Generally, it is best to work for a time in a similar company. This gives you a closer look at what that type of business entails without risking your investment during the learning period. Another way is to study, study, study. The more research you do and the more information you acquire, the easier your decision will be to start your own business.

Another suggestion for gaining experience is to take courses at your local college or university. Most area schools offer both credit and continuing education courses throughout the year. Entrepreneurial training is also available through The Chamber's Business Resource Center in Montgomery. One program, called Entrepreneurial University, is a 13-session course designed for would-be and existing entrepreneurs who want to expand their knowledge on how to develop a small business and the skills necessary to make it grow. The program's sessions last two hours, one night a week, for 13 weeks.

Please contact The Chamber's Business Resource Center for more information.

There are many publications designed to help provide insight into the day-to-day operations and problems that an entrepreneur may face. The Small Business Administration (SBA) offers a wide range of management and technical publications to assist you. Contact the SBA at (205) 290-7101 and request the SBA 115-A, Business Development Pamphlet or go to www.sba.gov.

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accountant.

Writing a Business Plan

One of the most important steps to take when starting or expanding a business is to write a business plan. A business plan is a description of your business, including your product or service, your market(s), your people, and your financial needs. There are three major reasons why you should take the time to create a written business plan.

The first reason is that the process of putting a business plan together, including the thought you put into it before beginning to write the plan, forces you to take an objective, critical and unemotional look at your business project in its entirety. It is a useful management tool that can help you plot a course for your company’s start-up and initial growth.

A second advantage that comes with having a written business plan is that the plan becomes an operational tool which helps you manage your business and provides a way to benchmark and measure your success.

Lastly, a properly prepared business plan is a vital sales tool you can use to impress potential investors with your planning and managerial experience.

Since many businesses start or expand through borrowed money, the presentation of reliable and complete information in a business plan is essential.

The business plan is an excellent tool to present to a banker when financing is needed. A good business plan tells the banker that the applicant has put a great deal of thought and effort into the project. The plan will let the banker know that he is dealing with a serious, well-informed prospect, giving him more faith in you as an entrepreneur.

B. C. D. E. F. G.

Description of the Business Legal Entity Location of the Business Management Personnel Professional Services

VI. Cover Marketing Analysis

A. Your Products/Services

If a business plan is to be submitted to a bank, it is B. Life Cycle/Seasonality C. Market Analysis important to realize how a banker analyzes a D. Customer Profile business plan and the questions that will be asked E. Competitive Analysis during the analysis. A banker’s job is to assess the F. Market Potential degree of risk in each proposed loan and to be VII. Marketing Strategies satisfied that the borrower can operate the business A. Location/Distribution profitably, and repay the loan. A banker does this by B. Price/quality Relationship analyzing a number of things; nature of the business, C. Business Image and Packaging purpose of the loan, amount of the loan, ability to D. Public Relations and Advertising repay the loan, and your business management E. Customer Service ability.

To convince a banker or investor of the merits of a loan request, a borrower must present complete, well-organized information which addresses these and other concerns. It is important to remember that the proper packaging of a loan proposal can be an important step in getting it approved. Business plan resources and advice can be found at the following websites: www.score.org www.sba.gov/tools www.bplans.com

VIII. Books, Records, Controls

A. Record Keeping Checklist B. Other Operational Controls

IX. Financial Data A. B. C. D. E. F. G. H. I.

Business Plan Outline I. Cover Page

II. III. IV. V.

A. Name of Business B. Name of Principals C. Address and Telephone Number of Business

Table of Contents Executive Summary Mission, Goals, and Objectives The Business

Sources and Applications of Funding Capital Equipment List Balance Sheet Break Even Analysis Income Statements Monthly Cash Flow Projections Start-up Budget Notes of Explanation For an Existing Business: 1. Historical Financial Reports 2. Balance Sheets for Past Three Years 3. Tax Returns

X. Supporting Documents A. B. C. D. E. F.

Personal Resumes and Financial Statements Job Descriptions Credit Reports Letters of Reference Letters of Intent Copies of Leases, Contracts, Legal Documents

A. Overview of Industry

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When analyzing individual products or services that are going direct to market, an incredibly useful tool is the one page business plan. This style of product or service analysis delves into the micro of what you are planning to offer through your business. It helps you determine your product and services direct from your market research. This is used then to roll into the macro of your larger business plan. It can also serve as a bare bones business plan, provided you are self-funding. Remember, as we mentioned

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previously, if you are seeking financing or investing, those entities still want to see the more traditional long form business plan.

There are many different branded names for one page plans: Business Model Canvas, LEAN Canvas, and so forth. The sources mentioned before have samples you can use. Below is a great generic sample to show you the elements of the tool. It can be downloaded from bplans.com.

THE LEAN BUSINESS PLAN TEMPLATE - Your business plan on a single page.

IDENTITY

PROBLEM WORTH SOLVING

OUR SOLUTION

TARGET MARKET

THE COMPETITION

SALES CHANNELS

MARKETING ACTIVITIES

REVENUE

EXPENSES

MILESTONES

TEAM AND KEY ROLES

PARTNERS AND RESOURCES

HOW TO FILL OUT YOUR LEAN BUSINESS PLAN IDENTITY

Describe your business in one sentence. What do you do and who do you do it for? For example, a bike shop’s identity might be: “We offer high-quality biking gear for families and regular people, not just gearheads.”

Your identity is what sets you apart from the competition. It’s how you define who you are as a business.

PROBLEM WORTH SOLVING

Describe the problems that your potential customers have. Why do they need your products or services?

TARGET MARKET

Who are your customers? Describe your ideal customer here and, if you know, how many of them there are.

SALES CHANNELS

Describe how you will sell to your customers. Will you sell directly to them at a storefront or with a website? Will you use a sales team or distributors?

Describe your sales process here.

REVENUE

What are your primary revenue streams? Don’t worry about listing specific revenue goals when you are early in the process. Instead, describe how you will make money and what products or services will generate that revenue.

OUR SOLUTION

What is your product or service? Describe it here and how it solves your customer’s problem.

THE COMPETITION

What other products and services do your potential customers use today to solve their problems? How are you better than the competition?

MARKETING ACTIVITIES

What are the primary ways you will reach your customers? If you will be advertising or using PR, describe those activities here.

EXPENSES

List your major expenses here. There’s no need to go into a lot of detail in the early stages. Just list the areas that you expect to spend the most money on.

MILESTONES

List the your primary goals and objectives that you hope to achieve over the next few months. What do you need to get done to take your business from idea to reality?

TEAM AND KEY ROLES

If you have business partners or need to hire key people to help you launch the business, list those people and positions here.

PARTNERS AND RESOURCES

Some businesses need key partners in order to launch. Other businesses may have intellectual property or other resources that will help them get up and running. List those partners and resources here.

Start-Up Guidelines Legal Structure

Once you decide to start a business, you must decide what type of business entity to set up. There are many legal and tax considerations that become complicated, and it is advised that you consult an attorney or accountant to help you determine the appropriate structure.

There are five principle forms of business structures: 1. Sole Proprietorship 2. Partnership 3. Limited Liability Company (LLC) or Limited Liability Partnership (LLP) 4. Corporation 5. Subchapter S Corporation

The decision should be based on your specific circumstances, goals and needs. These structures, along with their advantages and disadvantages, are listed below.

Sole Proprietorship

Sole proprietorship is defined as a business owned and operated by one person. To establish a sole proprietorship, you obtain necessary licenses and begin operation. A sole proprietorship is an extension of the individual. Income is reported on the individual tax return using your social security number.

Advantages:

• Ease of formation • Sole ownership of profits • One owner has control/decision-making power • Flexibility in day-to-day management • Relative freedom from government intervention

Disadvantages: • Unlimited liability. This extends to all of the proprietor’s

assets including the home and car, but may be lessened by proper insurance coverage • Unstable business life. The business may terminated upon the death of the owner • Less available capital • Difficulty in obtaining long-term financing • Relatively limited viewpoint and experience

Partnership

The Uniform Partnership Act, adopted by many states, defines a partnership as “an association of two or more persons to carry on as co-owners of a business for profit.” Though not specifically required by the Act, written Articles of Partnership are customarily executed. These articles outline the contribution by the partners into the business (financial, material, or managerial) and generally delineate the roles of the partners in the business relationship. Some of the characteristics that distinguish a partnership from other forms of business organizations are the limited life of a partnership, unlimited liability of at least one partner, co-ownership of the assets, sharing of managerial duties, and sharing of the profits.

The Service Corps of Retired Executives (SCORE), has developed an outline of considerations in forming a partnership at its website: www.score.org/business_partnership.html.

Advantages: • Ease of formation • Direct rewards • Growth and performance facilitated • Flexibility in decision-making • Relative freedom from government control and special taxation

Disadvantages: • Unlimited liability of at least one partner • Unstable life-elimination of either partner

constitutes automatic dissolution of the partnership

• Difficulty in obtaining large sums of capital • Firm bound by the acts of one partner as agent • Difficulty of disposing of partnership interest

Limited Liability Companies and Partnerships

The LLC and LLP arose from the desire of business owners to adopt a business structure permitting them to operate like a traditional partnership. This distributes the income and income tax to the partners (reported on their individual income tax returns), but also protects them from personal

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liability for the business’ debts, as with the corporate business form. As a separate entity, it can acquire assets, incur liabilities and conduct business. As the name implies, however, it provides limited liability for the owners. The owners risk only their investment. Personal assets are not at risk. The Alabama Secretary of State’s office can help you with requirements: Business Services Alabama Secretary of State P.O. Box 5616 Montgomery, AL 36103 (334) 242-5324 www.sos.state.al.us Advantages: • Limited liability without limits on management participation

• Flexible ownership and capital structure • No double taxation • Allocation of tax benefits among members

Disadvantages: • Initial cost to establish • Poor tax treatment of fringe benefits • Rules are still evolving

Corporation

The corporation is by far the most complex of the business structures. A corporation is a distinct legal entity. That is, it is separate from the individuals who own it. A corporation is formed by the authority of a state government. Corporations which do business in more than one state must comply with federal laws regarding interstate commerce as well as with the state laws, which may vary considerably.

A corporation is comprised of three groups of people: shareholders, directors, and officers. The procedure ordinarily required to form a corporation begins with a subscription for capital stock, and a tentative organization created. Then, approval must be obtained from the Secretary of State in the state in which the corporation is to be formed. This approval is in the form of a charter for the corporation, stating the limitations of the particular enterprise.

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Advantages: • Limitations of the stockholders’ liability to a fixed amount of investment

• Ownership is readily transferable • Separate legal existence • Stability and relative permanence of existence • Relative ease of securing capital • Delegated authority • Ability to draw on expertise and skills of many

Disadvantages: • Activities are limited by charter and various laws • Minority stockholders may be exploited • Extensive government regulations and reports • Fewer financial incentives for the manager • Double taxation - income tax on corporate net income (profit) and on salaries and dividends

Subchapter S Corporation

The Subchapter S Corporation is a legal corporation that is afforded special tax treatment under Subchapter S of the Internal Revenue Code. Under state law, S Corporations retain the normal features of corporations, to include limited liability, but for federal tax purposes they are treated much like sole proprietorships and partnerships. The profits are taxed at the individual rather than corporate rate; hence, the stockholders report corporate income, loss, deductions, and credits on their individual tax returns. In most all other aspects, the S corporation operates in compliance with state and federal laws relating to corporations, just as a regular corporation.

Advantages: • Limited liability of stockholders • Ownership is readily transferable • Separate legal existence • Taxed similar to partnership. Profits pass through corporation un-taxed, but are taxed as individual stockholder income, loss, deductions and credits

Disadvantages: • Activities limited by charter and various laws • Extensive government regulations and reports

• Limits to the number of stockholders • S Corporation cannot own more than 80% of any other corporation

• Stockholders must be individuals, not entities • Stockholders must be resident citizens • Only one class of stock may be issued • The law prohibits S incorporation for the sole purpose of obtaining limited liability status

Procedures for Incorporation

The following procedures apply to the formation of an Alabama (domestic) for–profit corporation under Title 10, Code of Alabama 1975, as last amended.

The proposed name of the corporation must be reserved with the Corporate Section of the Office of the Secretary of State. If the proposed name is available, a Certificate of Name Reservation will be issued. Alabama law requires that the name contain the word ‘corporation’ or ‘incorporated’ or an abbreviation of such word. After receiving the Certificate of Name Reservation, the Articles of Incorporation may be filed. The necessary forms can be obtained and additional questions answered by contacting the Secretary of State’s office: Business Services Alabama Secretary of State P.O. Box 5616 Montgomery, AL 36103 (334) 242-5324 www.sos.state.al.us

Licenses & Permits

When determining what licenses and permits are required for your specific business, it is essential to determine the federal, state, county and city requirements that must be met. You should obtained the information early in the research process to determine if a particular type of business is allowable in the area you are considering. Every business is required to have a license to operate in Alabama, and there are varying rules, regulations and pricing for every type of business.

Most every person, firm, company, corporation or association engaged in any business, vocation, occupation or profession must obtain a state license, as well as a county license. The State of Alabama has created a useful website outlining many state business requirements at www.alabama.gov. Title 40-12, Code of Alabama, 1975 covers state license requirements. Additionally, municipalities issue business licenses to do business within their limits.

Authority of municipalities is covered in Title 11-51, Code of Alabama, 1975.

The Alabama Department of Industrial Relations, Labor Market Information Division, maintains a website on the Alabama Comprehensive Labor Market Information System (ACLMIS) that provides detailed information for all Alabama Occupational Licenses. Go to www2.labor.alabama.gov/oes.

The Alabama League of Municipalities provides a listing of the professions that municipal clerks must verify the possession of a state license before they may issue a local license. Go to www.alalm.org.

Any questions concerning privilege license laws or store license laws should be directed to: Alabama Department of Revenue Sales, Use, and Business Tax Division 50 North Ripley St. Montgomery, AL 36104 (334) 353-7827

Operating a Business in Montgomery County

Your business may need a Montgomery County and/ or State of Alabama business license. You can go to the Montgomery County Courthouse, 101 South Lawrence Street, Montgomery, to check on both of these licenses.

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as the manager. They provide an overall summary of The Business License Office will be able to help you how your business is doing and detail specific items in your records to identify issues and opportunities. in regard to your specific business licensing needs.

You must keep records to determine the tax liabilities of a business. The records must be permanent, You apply for a license at the License & Revenue Division, 25 Washington Avenue, Montgomery. You accurate and complete, and they must clearly establish income, deductions, credits, employee can download the application at information and anything else specified by federal, www.montgomeryal.gov. state and local regulations. When you start your They will direct you for any additional requirements business, establish the type and arrangement of books and records most suitable for your particular such as Building and Fire inspections. operation, keeping in mind applicable taxes and Although zoning regulations prohibit the operation of when they fall due. a business from a residence, in some situations the Accounting Methods city does allow persons to use their home as a base of operations for answering the telephone and book There are two types of accounting systems keeping procedures. These types of licenses carry commonly used for record-keeping purposes: cash stipulations: basis and accrual basis. Which one is best for you 1. No pedestrian traffic to residences for business depends on your sales volume, your legal structure, purposes. and whether or not you extend credit to your 2. No situation that could create a nuisance to neighbors. customers. In the long run, both accrual and cash 3. Street addresses cannot be listed in advertising. methods produce the same results.

Operating a Business in the City of Montgomery

However, a home phone number can be used.

Licensing dealing with minors, door-to-door solicitors and entertainment where children may congregate require a record check by the Police Department prior to the issuance of a license.

If you want to apply for any alcoholic beverage licenses, you must begin the application process at the ABC License Enforcement Division Office located at 8413 Crossland Loop, Montgomery.

Application is then carried to the Revenue Office.

Accounting & Record-keeping

There are obvious reasons for maintaining good records and books for your business. First and foremost, it’s the law. In addition, your banker or lender requires adequate and complete financial statements. Good records are also useful to you

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Cash Basis You do your business and pay taxes according to your cash flow. In other words, revenue is reported when cash is received and an expense when cash is paid.

Accrual Basis Under this method, income and expenses are charged to the period to which they should apply, regardless of whether money has been received. In accrual basis, it doesn’t matter when you receive or make actual payment. Income is reported when you bill.

Expenses are deductible when you are billed, not when you pay. Under certain circumstances, the IRS requires you use the accrual method. The accrual method provides more information but is more involved and difficult than the cash method. For this reason, most individuals and many small businesses choose the cash method.

Recordkeeping

When you develop a record-keeping system, keep in mind that it must be simple to use, easy to understand, reliable, accurate, consistent, and designed to provide information on a timely basis.

There are four basic types of records your business will generate and you will need to track.

Sales Records They include all income derived from the sale of products or the performance of services.

Cash Receipts They account for revenue generated through cash sales and the collection of accounts receivable.

Cash Disbursements Often referred to as operating expense records or accounts payable. All disbursements should be made by check so business expenses can be documented for tax purposes.

Accounts Receivable These are sales stemming from the extension of credit. These records should be maintained on a monthly basis so you can age your receivables and determine how long your credit customers are taking to pay their bills.

Again, if you do not have the necessary experience, it is recommended that you consider hiring a bookkeeper or CPA to help you develop your record-keeping system.

A number of one-book record keeping systems are available. Some have instructions and forms designed for specific business segments, while others are for small business use in general. Trade associations, manufacturers and wholesalers offer specially-designed record keeping systems to meet the general needs of a variety of retail and service establishments.

There are several copyrighted systems providing simplified records. These systems cover the basic records with complete instructions for their use. Free basic templates can be downloaded from score.org.

In order for a record keeping system to be useful, it must be simple to use, easy to understand, reliable, accurate, consistent, and designed to provide information on a timely basis. To keep effective records, you must be able to: • Identify earnings for self-employment tax • Identify the source of a receipt • Keep track of all deductible expenses • Figure depreciation allowance • Take advantage of capital gain and loss laws • Support items on your tax returns

Accounting Systems

Computerized accounting is the way most accountants do books each month. If you want to do your own books, you should consider an accounting program for your record keeping. There are several good accounting programs available at office supply retailers. Accounting systems range from simple and inexpensive to powerful and costly. Some of the available options include the one-write system, a ledger-less system for accounts receivable and accounts payable, standard ledgers and journals, prepackaged services provided by banks and service bureaus, bookkeeping services, and accountants.

With this wide variety of options, it is important to choose a system that you can understand and feel comfortable using.

The accounting system you choose should meet the needs of your business situation and, at the minimum, meet the following objectives: • The system should yield an accurate and precise picture of

the operating results • The records should provide a convenient basis for comparing current data with previous year’s operating results and budgetary goals

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• The financial data should be presented in a format that is useful to prospective creditors, bankers, auditors and management • The accounting records should reflect losses such as theft and bad debt • The accounting process should include compiling and filing reports and tax returns • The accounting records should be able to substantiate the value of fixed assets for insurance claims, in the event of a loss • The United States Securities & Exchange Commission requires most publicly held corporations to file certain annual and interim quarterly reports

Insurance

Insurance for some business owners is an overwhelming task. However, if used correctly, insurance can contribute to the overall success of your business by reducing the uncertainties. It can also reduce employee turnover, improve your credit at the bank, make it easier to sell to customers on favorable terms and help keep your business running if a covered incident interrupts your normal business operations.

You should purchase a number of basic types of insurance. If you are operating a business from home, your household insurance probably will probably not cover your business venture. A separate policy or upgrading your current house insurance to cover the business is a necessary cost of doing business. The importance of good insurance management is too important to overlook. It is essential that you discuss your insurance needs with your agent.

Whether you deal with an independent agent, insurance broker, or work directly with an insurance company, be certain you’ve done comparisonshopping before you sign up. Depending on the type of insurance you are purchasing, various factors will affect your insurance premium. The lower the premium, the higher the deductible; the higher

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the premium, the lower the deductible. Some firms have better track records in paying dividends and claims. Ask your peers, associates, or even trade associations in your state for insurers with a good reputation.

Insurance Checklist

Fire Insurance Liability Insurance Automobile Insurance Workers Compensation Business Interruption Insurance Crime Insurance Glass Insurance Rent Insurance Employee Benefit Coverage Aviation Insurance Group Life Insurance Business Life Insurance Group Health Insurance Disability Insurance Retirement Insurance Key Man Insurance Marine and/or Inland Marine Boiler and Machinery Flood Insurance

Insurance matters are addressed in two SBA publications: MP-20- Insurance Options for Business Continuation Planning, and MP-28Small Business Insurance and Risk Management Guide. Both are available online at the SBA Library site.

Financing Overview

The financing of a small business is the greatest obstacle for an entrepreneur when starting a new business. Developing a sound strategy for obtaining the proper type and amount of financing is crucial for the long-term success of any business opportunity. Raising capital is the most basic of all business activities.

An advantage to financing a business through personal or family savings is that it is less costly than bank financing. Reducing risk and expenses early in the life of a business are two factors that will help insure long-term success. For these reasons, you should give this financing option every consideration.

Banks, Credit Unions & the SBA

In the early stages of starting your business, you may The most common sources of funding, banks and need to obtain financing for the basics necessary just credit unions will approve a loan if you can to open the doors. These include: demonstrate that your business idea is sound and that you have good credit, good character, adequate collateral, and the experience necessary to succeed.

Purchase a Business You may need to acquire the capital to purchase a It is often said that entrepreneurs have a difficult time new building or an existing business. borrowing money. This is not necessarily true. Banks make their money by lending money. However, the Start-up and New Growth Financing These costs can include professional fees, inventory, inexperience of many small business owners in financial matters often prompts banks to deny loan equipment, deposits, marketing materials, and requests. Requesting a loan when you are not working capital. properly prepared sends a red flag to the lender that you are high risk!!To be successful in obtaining a Equipment Acquisition loan, you must be prepared and organized. You must Part of operating a new business is the purchase of know exactly how much money you need, why you equipment -- whether it is kitchen appliances for a need it, and how you will pay it back. You must be restaurant or mowing equipment for a lawn service. able to convince your lender that you are a good Many commercial banks provide loans for this type credit risk. of financing.

There are several sources to consider when looking for financing. It is important to explore all of your options before making a decision.

Savings, Friends & Relatives

Your savings and your family’s savings are viable sources of funds and show future creditors that you are willing to personally stand behind your business.

This type of faith is what banks and other creditors like to see before lending money to a small business operation.

Loan terms vary from lender to lender, but there are two basic types of loans: short term and long term.

Generally, a short-term loan has a maturity of up to one year. These include working-capital loans, accounts-receivable loans and lines of credit. Longterm loans have maturities greater than one year but usually less than seven years. Real estate and equipment loans may have maturities of up to 25 years. Long-term loans are used for major business expenses such as purchasing real estate and buildings, construction, furniture, fixtures, and vehicles, etc.

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Virtually every small business loan through a bank is a secured loan. This simply means the business, or the business owner, has pledged assets as collateral for the loan in case the business is unable to repay the debt. An unsecured loan means that no collateral has been pledged.

To convince a banker or potential investor of the merits of a loan request, you must present complete, well-organized information, which addresses these and other concerns. It is important to remember that the proper packaging of a loan proposal can be an important step in getting it approved.

Approval of your loan request depends on how well you present yourself, your business, and your financial needs to the lender. Remember that they are in the business of making loans, and they must know you will repay. This is where your business plan comes into play. Your business plan and loan proposal plays a very important role in the acquisition of your loan approval.

The Small Business Administration (SBA), established in 1953 by the Department of Commerce, is one of the best sources for small business loans.

However, the SBA is authorized only to make loan guarantees through participating banks and other institutions.

The business plan is an excellent tool to present to a banker when financing is needed. A good business plan tells the banker that you have put a great deal of thought and effort into this decision. A well presented business plan will let the banker know that he is dealing with a serious, well informed prospect which will give him more faith in you as an entrepreneur.

If a business plan is to be submitted to a bank, it is important to realize how a banker analyzes a business plan and what questions a banker will ask during this analysis. A banker's job is to assess the degree of risk in each proposed loan and to be satisfied that the loan can be repaid by the borrower.

A banker does this by analyzing a number of things: • • • • • • •

Nature of the business Purpose of the loan Amount of the loan Ability to repay the loan Character/management skills of the business owner Adequate credit history Collateral

To obtain information about the SBA loan programs, contact the state SBA office in Birmingham at (205) 290-7101 or www.sba.gov. Some of their other products include factor financing, and various lines of credit.

Unconventional Financing Barter Financing

Set up a mini-business within a similar, existing business space.

Landlord Financing

Negotiate to have your landlord pay for some needed upgrades, add that to the rent and amortize it over the life of your business’ lease; or negotiate free rent for a piece of the business.

Use Other People’s Credit

If you can’t get sufficient credit, have an acquaintance’s business buy the inventory or supplies you need, then pay the total back according to the supplier’s term.

Contract Financing

If yours is a service business, negotiate to have customers prepay services through one-year, allinclusive contracts.

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Concession Sales

If you are a retailer, sublease part of your retail space to vendors whose products complement your own.

Staged Financing

Look for financing in stages, starting with enough to help you get your business up and running so that you can improve its profitability.

Trade Credit

Negotiate aggressive payment terms and credit from suppliers.

Leverage Future Commitments of Business

To increase your business’ credibility and likelihood of receiving financing from a bank, leverage future commitments of business as documented in letters from customers.

• • • • • • • • • • • • •

Business Development and Support Coworking Incubation Domestic Soft Landing Minority Business Development Training Mentoring Counseling Advocacy Recognition Financing Resources Business Support Resource Referrals

Contact the Chamber Business Resource Center at 334-832-4790 or visit montgomerychamber.com.

Buy a Business

There are many ways to finance the purchase of an existing business. It is not uncommon to be able to negotiate financing from the seller for as much as 80 percent of the purchase price, or to repay the purchase price incrementally from future cash flows.

It is also easier to get bank financing for an existing business than for a start-up.

Set up a Home Office

Save on office space rent and get home business tax deductions.

Participate in an Incubation Program or Coworking Space

It takes the right mix of tools, networking and knowhow for entrepreneurs to succeed in today's competitive environment. The Montgomery Chamber Business Resource Center offers valuable integrative services to prospective and new business owners. We work holistically with resource and commercial partners throughout our ecosystem.

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Business Taxes Introduction

Some of the most complex issues facing small business owners today are the various taxes and tax structures. Your business may be subject to, or responsible for, collecting or withholding: • Income Taxes on the business itself • Sales and Use taxes • Employee-related taxes • Ad Valorem and other taxes (taxes on property) The IRS has a wealth of information at IRS.gov.

The Alabama Department of Revenue has a publication titled Starting a Small Business that details all state tax guidelines for small businesses.

It is available on-line at their previously listed website.

Your state tax ID and federal tax ID numbers work like a personal social security number, but for your business. They let your small business pay state and federal taxes.

Your Employer Identification Number (EIN) is your federal tax ID. You need it to pay federal taxes, hire employees, open a bank account, and apply for business licenses and permits.

It's free to apply for an EIN, and you should do it right after you register your business.

Your business needs a federal tax ID number if it does any of the following: • Pays employees • Operates as a corporation of partnership • Files tax returns for employment, excise, or alcohol, tobacco, and firearms

• Withholds taxes on income, other than wages, paid to a non-resident alien

• Uses a Keogh Plan (a tax-deferred pension plan) • Works with certain types of organizations

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Apply for an EIN with the IRS assistance tool at IRS.gov. It will guide you through questions and ask for your name, social security number, address, and your "Doing Business As" (DBA) name. Your ninedigit federal tax ID becomes available immediately upon verification.

The need for a state tax ID number ties directly to whether your business must pay state taxes.

Sometimes, you can use state tax ID numbers for other functions, like protection against identity theft for sole proprietors.

The process to get a state tax ID number is similar to getting a federal tax ID number, but you will have to do it with the Alabama Department of Revenue.

Contact them at the location listed previously.

The following information is related to the four basic small business tax groups.

Income Taxes on the Business

Every business is taxed on its income. Businesses typically submit estimated tax payments. Estimated tax payments may be paid in full or in equal installments on or before April 15, June 15, September 15, and January 15. It is highly recommended that you get a separate bank account in which to immediately deposit your estimated taxes.

Federal Taxes

Income from proprietorships, partnerships or other unincorporated businesses is subject to individual income taxes of the owners using form 1040 with appropriate schedules. Incorporated businesses are subject to U.S. corporate income tax laws. For further information contact: Internal Revenue Service (800) 829-1040 www.irs.gov

State Taxes Like the federal income tax, the state also requires that income from proprietorships, partnerships or other unincorporated businesses be taxed at the state individual income tax rate of the owners. In Alabama, both foreign and domestic corporations are subject to a net Income Tax and Business Privilege Tax. Several useful publications, Taxpayer Service Center locations and phone numbers are available at www.ador.state.al.us.

For information on city and county taxes, contact the appropriate city and county offices in your area.

Sales & Use Taxes

Any person desiring to conduct a retail business in Alabama must submit an “Application For Sales Tax License” to the Department of Revenue. Sales tax is imposed on the retail sales of all tangible personal property sold in Alabama by businesses located in Alabama who have inventory for sale in the state. The tax is remitted by the 20th of each month for the previous month’s sales.

Local taxing authorities may also impose a sales tax; these rates vary.

Employee-Related Taxes

Employment related taxes generally fit into three categories: 1. Taxes you must pay for each employee 2. Taxes you must withhold from each employee's pay 3. Workers' compensation

Workers’ compensation is not actually a tax but an expense related to employment. Workers’ compensation rates vary depending on industry, occupation and risk factors involved.

For more information concerning employment taxes contact the appropriate state or federal agency.

Federal Payroll Taxes

For federal income tax withholding information contact: Internal Revenue Service Tax Information 1-800-829-1040 An invaluable resource in insuring timely compliance in Federal Tax Administration is IRS Publication 15, Circular E-Employers Tax guide. It is a 68-page document covering all aspects of tax management. Go to www.irs.gov/pub/irs-pdf/ p15.pdf IRS Publication 505, Tax withholding and Estimated Tax is at: www.irs.gov/pub/irs-pdf/ p505.pdf. To order forms contact: Internal Revenue Service Forms Distribution Center 1-800-829-1040

State Payroll Taxes

For State of Alabama tax withholding information, contact: Alabama Department of Revenue Business Registration Unit (334) 242-8830 www.revenue.alabama.gov/withholding

Social Security Tax

The contribution rate, also known as FICA, is 7.65%for employees and 15.30% for self-employed.

The rates are broken out as follows: 6.2% (Social Security portion) on earnings up to the maximum taxable amount; 1.45% (Medicare portion) on all earnings. Set by law, these rates haven't changed since 1990. The Social Security Administration has a web page especially for employers at: www.ssa.gov/employer.

For social security tax (FICA) information contact: Employer Reporting Service Center (800) 772-6270 Monday - Friday, 7 am to 7 pm, EST employerinfo@ssa.gov

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Workers’ Compensation

For workers’ compensation information, contact: Alabama Department of Industrial Relations Workmen’s Compensation Division (334) 242-2868 www.dir.state.al.us

Unemployment Compensation Tax

For Unemployment Compensation Tax information, contact: Alabama Department of Revenue (334) 242-8830 For further information on Alabama Unemployment and Workers’ Compensation, see the Alabama Development Office publications, A Guide to Simplifying Alabama’s Employment Related Laws and Alabama Unemployment and Workers’ Compensation Manual. You may request copies by contacting: Research Division Alabama Development Office Center for Commerce Building, Suite 600 401 Adams Avenue Montgomery, AL 36130 (334) 242-0400

Miscellaneous Taxes Ad Valorem Tax Ad Valorem Tax is a property tax levied on the owners of real and personal property within Alabama. All property must be assessed each year, between October 1 and December 31, with the county tax assessor. This property will be assessed in one of the following four classes and assessment rations: • Class I. All Property of Utilities • Class II. All Property not Otherwise Classified • Class III. All Agricultural, Residential, Forest Property &

Historical Building Sites • Class IV. All Private Passenger Automobiles/Motor Trucks Used for Personal Use

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The tax rate is 6.5 mills per dollar of assessed value for the state; local rates vary. Title 40, Code of Alabama, 1975 Chapter 7, requires all business personal property to be reported to the local taxing official in each county annually.

Business personal property is all furniture, fixtures, and equipment used in the operation of all businesses, corporations, and partnerships.

For more information on ad valorem tax contact: Alabama Department of Revenue Property Tax Division (334) 242-1525 www.ador.state.al.us/advalorem/index.html

Motor Vehicle Division

The following taxes are administered by the Alabama Motor Vehicle Division: Motor Vehicle Registration Fees An annual registration fee or tax on each motor vehicle operated upon the public state highways of Alabama. The standard rate of tax is $23.00. The State ofAlabama also has a Certificate of Title fee of $18.00 due with the application for title to record the ownership of the vehicle. Tags may be purchased and fees paid in the taxpayer's county of residence.

International Registration Plate Fees The motor vehicle division in Montgomery issues international registration license plates to owners of commercial and private truck/truck tractor and trailer combinations with a gross vehicle weight of 26,000 pounds or more that travel in interstate commerce (two or more states). These fees are due annually with varying rates depending on the heaviest weight to be hauled and the states in which the vehicle is to be traveling. Alabama currently collects fees for approximately 46 states. License fees are different for each state.

For more information: Alabama Motor Vehicle Division P.O. Box 327630 Montgomery, AL 36132-7630 (334) 242-9000 www.ador.state.al.us/motorvehicle/index.html

Seller's Use Tax

This tax is imposed on the retail sales of all tangible personal property sold in Alabama by businesses located outside Alabama that have no inventory for sale in Alabama but only a sales office or agents soliciting retail sales in Alabama. This tax is due on a monthly basis and is to be remitted by the 20th of the month following the close of a month.

Consumer’s Use Tax

This tax is imposed on tangible personal property brought into Alabama for its storage, use or consumption in the state when the supplier did not collect seller’s use tax on the sale of the property.

This tax is due on a monthly basis and is to be remitted by the 20th of the month following the close of a month. The rates are the same as shown above.

Lodgings Tax

the lease agreement, are subject to sales tax. This tax, in both cases, should be remitted by the 20th of each month following the month that the tax accrues.

Privilege/Business License Tax

A privilege license is a license requirement of every person, firm, company or corporation engaged in any business, vocation, occupation or profession described in Title 40-12 Code of Alabama 1975. The annual license covers the period of October 1 through September 30. The license will be delinquent on November 1. Please refer back to Chapter 2 Licenses and Permits for more detailed information.

Store Licenses

Any person, firm, corporation, association or copartnership, either foreign or domestic, is required to obtain a license to operate, maintain, open or establish any store in this state in which goods, wares, or merchandise of any kind are sold, at either retail or wholesale. A check with city and county officials will determine what local licenses and permits are necessary.

You can learn more about these and other industryspecific taxes at the Alabama Department of Revenue (site previously mentioned).

This is a privilege tax upon every person or firm that rents or furnishes lodgings or accommodations to transients for a fee. The tax is remitted on the 20th of Starting a business is one of the most exciting things in life! The Chamber’s Business Resource Center each month following the month the tax accrues. can help you get started and thrive. The Center In addition to the state rate, there may be city and/or provides guidance from experienced sources in developing business contacts, strategizing your county lodging taxes due; these rates vary. business plan, and gaining recognition for your business. With the Chamber Business Resource Rental or Leasing Tax Center, you have years of experience and proven This is a privilege tax levied on the lessor for the strategies for success. leasing or renting of tangible personal property.

Leasing tax is due on “true” leases. “True” leases are those in which the title to the property is retained by the lessor at the end of the lease agreement.

“Conditional sale” leases, leases in which the title to the property is transferred to the lessee at the end of

Contact the Chamber Business Resource Center at 334-832-4790 or visit Montgomerychamber.com We help you Learn, Connect and Grow!

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Chamber Business Resource Center P 334 832 4790 F 334 240 6869