1. NC SMALL BUSINESS
TECHNOLOG
OGY
AND TECHNOLOGY
DEVELOPMENT
DEVELOPMENT
CENTER
Star t-Up
Resource Guide
k
Starting a business in North Carolina

2. Publication Data
© 1997 by the University of North Carolina’s
Small Business and Technology Development Center
5 West Hargett Street, Suite 600
Raleigh, North Carolina 27601-1348
Phone 919/715-7272 or 800/258-0862 (in NC only)
All rights reserved. No part of this publication may be reproduced,
stored in a retrieval system, or transmitted in any form and by any means—
electronic, mechanical, photocopying, recording, or otherwise—without the prior
written permission of the publisher.
Revised edition
January 2002
This material is based on work supported by the US Small
Business Administration (SBA). Any opinions, findings,
conclusions, or recommendations expressed are those of the
author(s) and do not necessarily reflect the views of the SBA.

3. Contents
Table of Contents
Start-Up Chart
Business Star t-Up Planning Chart ............................................................................... 1
Yourself Potential
Assess Yourself as a Potential Business Owner ........................................................... 2
Personal characteristics ............................................................................................................ 3
Demands of owning your own business ...................................................................................3
Business experience and management skills ...........................................................................3
Action items ..............................................................................................................................4
Results of self-analysis ............................................................................................................... 4
Conclusions ..............................................................................................................................5
Feasibility
Determine Concept Feasibility .................................................................................. 7
Define your business idea.........................................................................................................7
Refine the concept ...................................................................................................................7
Define your market through research and analysis ..................................................................8
Enhancing your chance for success ........................................................................................ 9
Make Important
Examine Critical Issues & Make Impor tant Decisions .............................................. 11
Entry options ........................................................................................................................... 11
Buying an existing business..................................................................................................... 11
Finding a business for sale ......................................................................................................11
Evaluating the business .......................................................................................................... 11
Buying a franchise .................................................................................................................. 13
Starting a new business .......................................................................................................... 14
Selecting and using professionals .......................................................................................... 14
Selecting a business location ................................................................................................. 15
Minimizing your risks ................................................................................................................16
Insurance protection .............................................................................................................. 16
Legal Considerations and Requirements ................................................................ 17
Requirements
Regulatory requirements ........................................................................................................ 17
Tax information ....................................................................................................................... 18
Incorporating a business ........................................................................................................ 20
Insurance ................................................................................................................................ 20
Protecting your intellectual property ...................................................................................... 20
Select the type of business structure ....................................................................................... 21
Employee responsibilities ........................................................................................................ 23
Business structure chart ........................................................................................................... 25
Your Plan......................................................................................
Develop Your Business Plan ...................................................................................... 27
Business plan outline ............................................................................................................... 27
Tips for writing a good business plan ...................................................................................... 29
Mistakes to avoid when writing a business plan ..................................................................... 29

4. Contents
Your Financing
Arrange Your Business Financing ............................................................................. 31
Getting the funding you need ................................................................................................ 31
Equity funding ......................................................................................................................... 31
Debt funding .......................................................................................................................... 32
Operations-related financing ................................................................................................. 33
Business loans ......................................................................................................................... 33
How to choose a banker ........................................................................................................ 34
What a lender looks for........................................................................................................... 35
Tips for getting and using small business credit ...................................................................... 36
Worksheet: Uses and Sources of Funds ................................................................................... 38
Resource and Information List ................................................................................. 39
State resources ....................................................................................................................... 39
Federal resources ...................................................................................................................39
Other resources ...................................................................................................................... 40
Internet resource addresses ................................................................................................... 4 0
Licenses, permits, and taxes ................................................................................................... 41
Index ........................................................................................................................ 42

5. Welcome
Introduction
S
mall businesses are vital to the growth and development of
communities throughout our state. They bring innovative
products and service to the marketplace and provide a
range of opportunities and jobs for North Carolina workers. Over
the years, our state has made investments in business
development support resources such as the Small Business and
Technology Development Center, the North Carolina
Biotechnology Center, and the Technological Development
Authority.
Today, as a result of our investments in small businesses and the
successes of entrepreneurs, North Carolina is known worldwide
as an excellent location to start and operate a business. It is my
hope that our state can build on our record of past success. Let
The Honorable
Michael F Easley
. us continue to work together to make North Carolina a great
Governor of North Carolina place to develop and grow businesses.

7. Outline
Business Start-Up Planning
Assess yourself as a
potential business owner
Determine concept
feasibility
Define Gather Assess
Idea Information Feasibility Yes
Re-evaluate No
Examine critical issues
and make decisions
Investigate legal
R esource & contact list considerations
Develop your
business plan
Arrange your
business financing
1

8. 2

9. Chapter 1
Assess Yourself as a
Potential Business Owner
W
hile owning a business may
be a personal dream for CHECKLIST FOR STARTING A BUSINESS
many, managing that
business may prove difficult because o Assess yourself as a potential business owner
of a lack of prior business ownership
o Determine concept feasibility
experience or management skills. An
honest self-evaluation will allow you o Examine critical issues & make important decisions
to assess your personal characteris- o Investigate legal considerations & requirements
tics and determine your willingness to
meet the demands of owning your own o Develop your business plan
business. o Arrange your financing
Some of the questions below
might be difficult to answer, but it is
critical to evaluate your personal
weaknesses along with your strengths. o Do you possess computer
skills?
BUSINESS
When owner weaknesses are identi-
fied, partners, managers, staff mem- o Are you aware of your cur- EXPERIENCE AND
bers, and external resources or
education and training may be found
rent credit rating? MANAGEMENT
MANAGEMENT
to balance strengths and offset SKILLS
weaknesses. o Do you know what basic skills
Check the questions below that DEMANDS OF you will need to succeed in
you can answer with “yes.”
OWNING YOUR business?
PERSONAL OWN BUSINESS o Do you possess those skills?
o Do you realize running a o If you discover that you do
CHARACTERISTICS
CHARACTERISTICS business may require working not have the basic skills
12-16 hours a day, six days a needed for your business, will
o Are you a leader?
week (and possibly Sundays, you be willing to delay your
o Are you confident? late nights, and holidays)? plans until you have acquired
o Do you like to make your own the necessary skills?
o Do you have the emotional
decisions? strength and good health to o Have you ever worked in a
o Do you handle responsibility handle the work load and managerial or supervisory
well? daily schedule that owning position?
your own business will re- o Have you hired or fired
o Do you thoroughly plan
quire? people before?
projects from start to finish?
o If required, are you prepared o Have you ever worked in a
o Are you self-disciplined and
to temporarily lower your business similar to the one you
independent?
standard of living until your are considering?
o Are you flexible? business is firmly established?
o Have you had any business
o Do you read business publica- o Is your family prepared to go training in school?
tions? along with the pressures they
too might face?
3

10. Yourself
Assess Yourself
o Do you understand business financing and cash
flow management?
RESULTS OF SELF-ANALYSIS
RESULTS SELF-ANALYSIS
This self-test is simply an overview of the
o Are you aware of the recordkeeping require- personal characteristics and basic skills needed in
ments expected in managing a small business? small business ownership. The questions with a
o Do you understand the fundamentals of market- “yes” answer indicate the presence of a strength or
ing and marketing development? attribute needed to successfully manage a small
business. Those not checked might indicate weak-
nesses or a lack of willingness to make the sacrifices
necessary to run a small business.
If you decide to continue with plans to establish
a business, then you should resolve to change each
blank to a “yes.” A partner or other solution may
provide balance for weak areas, thus changing a few
blanks to “yes.” If there are a significant number of
unchecked boxes, however, overcoming problems
may require more development on your part.
ACTION ITEMS
Identify the five most important interests, skills, or Based on your interest, abilities, and experience,
previous work experience that you enjoyed: summarize your strengths and weaknesses as they
relate to the business skills necessary to start and
grow a successful business.
______________________________________________
_____________________________________________
______________________________________________
_____________________________________________
______________________________________________
_____________________________________________
______________________________________________
_____________________________________________
______________________________________________
_____________________________________________
______________________________________________
_____________________________________________
______________________________________________
_____________________________________________
______________________________________________
_____________________________________________
______________________________________________
_____________________________________________
Also ask someone that knows you well to
Write below any opportunities that may be associated
identify your strengths and weaknesses. Compare
with these characteristics, skills, or previous work
your answers with theirs.
experience.
My strengths are:
______________________________________________________________________________
______________________________________________
_____________________________________________
______________________________________________
_____________________________________________
______________________________________________
_____________________________________________
______________________________________________
_____________________________________________
______________________________________________
_____________________________________________
My strengths identified by someone who knows me
well are:
______________________________________________
_____________________________________________
_______________________________________
______________________________________________
_____________________________________________
______________________________________________
_____________________________________________
4

11. Yourself
Assess Yourself
My weaknesses are: ______________________________________________________________________________
My weaknesses identified by someone who knows me well are:
_______________________________________________________________________________
___________________________________________________________________________________________
___________________________________________________________________________________________
Identify ways you can overcome these weaknesses: ____________________________________________________
What kind of commitment are you willing to make to get your business off the ground?
___________________________________________________________________________________________
___________________________________________________________________________________________
___________________________________________________________________________________________
___________________________________________________________________________________________
Time commitment: ________________________________________________________________________
Resources commitment: _________________________________________________________________
Are you prepared to lose your investment and other savings? ____ Yes ____ No
What are your expectations for the business within one year? _______________________________________
___________________________________________________________________________________________
___________________________________________________________________________________________
___________________________________________________________________________________________
After three years? ________________________________________________________________________
___________________________________________________________________________________________
___________________________________________________________________________________________
___________________________________________________________________________________________
CONCLUSIONS
CONCLUSIONS
Understanding your personal characteristics,
required business skills, and demands of business
ownership are critical in helping you find the busi-
ness best suited to you and your interest. Honestly
assessing yourself will help you determine what you
need to do to acquire the skills you need, clarify your
expectations, and motivate you to seek ways to keep
learning as you proceed to develop your business
idea.
5

12. 6

13. Chapter 2
Determine Concept
Feasibility
M
any questions must be
answered and certain CHECKLIST FOR STARTING A BUSINESS
information gathered before
determining the feasibility of your o Assess yourself as a potential business owner
business idea. Careful research and
o Determine concept feasibility
analysis will help you in evaluating
your concept and assist you in assess- o Examine critical issues & make important decisions
ing your idea. o Investigate legal considerations & requirements
YOUR
DEFINE YOUR o Develop your business plan
o
BUSINESS IDEA Arrange your financing
The first step is to begin
gathering as much information as
o How will your customer know
possible about your business. You
you have products or services REFINE THE
will want to read articles, books,
and trade publications. It is also a
available? CONCEPT
good idea to visit existing busi- o How much will your custom- As you refine your idea, there
nesses and begin the research and ers pay for your product or are business-specific issues that
planning process. service? need to be addressed:
It is important to remember Using the answers you have o What specific product or
that every business is unique. provided to the questions above, service will your business
Taking time to explore your write a paragraph describing your provide?
concept will help you identify business concept.
o Do you have the capability or
those specific factors which makes _________________________________ skills to provide this product
your business concept unique. The
_________________________________ or service? If not, how will you
following questions will guide
overcome this deficiency?
you in defining your business _________________________________
concept. While looking for the _________________________________ o What makes your business
answers, also attempt to identify idea, product or service
the potential problems which _________________________________ unique?
might relate to your business idea. _________________________________ o What will be your competitive
o What business will you be in? _________________________________ advantages?
o What product or service will _________________________________ o What competitor disadvan-
you provide to your custom- _________________________________ tages do you have?
ers? o Have you identified any
_________________________________
o Who will buy your product or _________________________________ potential problems? If so, how
service? will you overcome them?
_________________________________
o Why will your customer buy In addition to looking at the
_________________________________ business concept, you should also
from you?
explore the market and the indus-
o When will your customer buy
try you are interested in by seek-
your product or service?
ing out the opportunities and
7

14. Feasibility
Concept Feasibility
identifying potential problems. Answering the MARKET RESEARCH
following questions will help you assess your market
Market research tells you who your customers
and industry:
are, where they are, and how large the potential
o What industry competition exists in your town or market is. Through research, you will be able to
region? gather certain information and data such as:
Identify your competition: u Demographics
__________________________________________________ u Size of your potential market
u Customer lifestyles and buying behavior
__________________________________________________ u Specifically who the customer is
__________________________________________________ u Determine demand for your product or
__________________________________________________ service
o What will you do to better provide a unique or There are two basic types of market research—
better product or service then your competition? primary and secondary:
Primary research is research gathered first-hand
o If there is little or no competition, why not?
through techniques like surveys, questionnaires,
o Is there potential international or government focus groups, or in-depth interview. Primary research
procurement opportunities in your product or can be time consuming and possibly expensive.
service? If so, identify them. However, it provides the business owner with the
o Are there emerging opportunities in the market opportunity to hear customer feedback and act
place? If so, identify them. accordingly.
o Are current business and economic trends favor- PRIMARY RESEARCH METHODS
u Customer habit tracking
able?
u Surveys
u Interest rate u In-depth interviews
u Inflation u Competitor analysis
u Business climate u Questionnaires
u Business trends u Focus groups
u Unemployment u Advertising response rate tracking
Remember, it is important to evaluate all aspects u Field studies
of your business concept and to continually balance Secondary research is already published re-
your ideas against reality. search. It includes sources like directories, industry
After defining and refining your business idea, journals, and association publications. Secondary
does it still look like a good idea to you? If so, you research is accessible, less expensive, can be con-
will now want to do more in-depth market research ducted on a continuous basis, and can be combined
and analysis to better define your market and oppor- with business owner’s knowledge of the business,
tunity. geographical conditions, and customer base. The
business owner can informally tailor the research
YOUR
DEFINE YOUR MARKET findings to meet the needs of the business.
THROUGH
S ECONDARY RESEARCH SOURCES
u Business encyclopedias and directories
ANALYSIS
RESEARCH AND ANALYSIS u Newspapers
While market research provides data and infor- u Business magazines
mation about the industry and its customers, market u Trade publications
analysis helps the business owner understand the u Market analysis
business environment and the basis on which s/he Market analysis helps the business owners
must compete. understand the business climate in which s/he must
compete. It is through market analysis that a business
8

15. Feasibility
Concept Feasibility
owner determines if a certain business or industry
provides an attractive opportunity.
Market analysis provides competitive analysis
which includes:
n Industry analysis: evaluates the industry’s overall
opportunity and attractiveness including ease of
entry, availability of substitutes, and buyer/supplier
issues
n Competitor analysis: who are the primary com-
petitors, and what are their strengths and weak-
nesses.
n Your business analysis: identifies strengths,
weaknesses, opportunities, and threats within your
identified market.
YOUR
ENHANCING YOUR
CHANCE FOR SUCCESS
There are always risks in starting a new busi-
ness. As a business owner, you will want to lower
your risks by incorporating the following ideas into
your start-up plan:
o Plan ahead.
o Make sure you have experience in management
and in the type of business you want to start.
o Try to best use your strengths and interest in the
most appropriate way.
o Make decisions based on facts or reliable informa-
tion. Don’t make hasty decisions.
o Make sure your family is supportive and under-
stands the emotional support needed during the
start-up phase or when things get difficult.
o Be persistent, and DON’T GIVE UP!
9

16. Notes
10

17. Chapter 3
Examine Critical Issues &
Make Important Decisions
A
s you explore starting your
own business, you will find CHECKLIST FOR STARTING A BUSINESS
there are many decisions
which must be made and important o Assess yourself as a potential business owner
issues to consider so as to minimize
o Determine concept feasibility
your risk and increase your success.
Four important topics covered in this o Examine critical issues & make important decisions
section are: o Investigate legal considerations & requirements
n Entry options o Develop your business plan
n Selecting and using professionals
n Selecting a business location o Arrange your financing
n Minimizing your risks
ENTRY OPTIONS
ENTRY The decision to buy a busi- outside your area of expertise, it is
You may be considering ness requires careful evaluation of important to make certain that the
starting your own business as a many factors including pricing key employees will stay after the
result of a life situation triggering and financing your purchase. sale or that you can hire someone
your entrepreneurial desires. Such with similar experience.
The potential buyer must
events could include corporate
understand their criteria for
down-sizing, an accident that
selecting a business as well as the Finding a business for sale
limits your physical abilities, or
motivation for wanting to pur- Finding a good business
receipt of an inheritance. There are
chase the business. opportunity is not always easy.
many reasons why people want to
Sources to consider:
go into business for themselves,
Consideration should be given n Printed advertisements
and there are various options for
to the following:
: n Trade sources and suppliers
entering a business of your own.
The most common entry options o What is your experience with n Friends and acquaintances
are: the industry and/or manage- n Intermediaries such as brokers
ment? or acquisition specialists
n Buying an existing business
n Purchasing a franchise busi- o Does the business match your
strengths?
Evaluating the business
ness
n Starting a new business As a buyer, first evaluate a
o Is the business what you
business by reviewing its history
enjoy doing?
Buying an existing business and the way it operates. Develop
o Is it in a desirable location? an understanding of the business’
Purchasing an established
business can lighten the burden of o What are you willing to in- method of acquiring and serving
start-up costs, lag time without a vest? its customers, determine how it
salary, establishing markets, and generates its sales, learn its mar-
o Can you get financing?
other costs associated with the keting strategy, and develop an
o What size business do you understanding of its finance and
creation of a new business. Estab-
desire in terms of sales, profit, operations functions.
lished businesses may have
and employees?
existing good will—intangible
assets such as reputation or his- If the business under consid-
torical value. eration has a product or service
11

18. Issues and Decisions
Checklist of material for the evaluation o Are all of the books in order and well main-
process* tained? Have you reviewed the past and current
financial statements with the counsel of an ac-
Obtain the following information from the
countant? Are there any liens against the property
existing business:
for sale? Are there any claims on inventory or
n 3-5 years financial statements equipment? Have the taxes been paid to date?
n 3-5 years tax returns
o Have you reviewed existing business contracts
n Interim financial statements
and the effect of the transaction on those con-
n Copies of all real estate, leases, or deeds
tracts? Are they loyal because of a personal
n Debt schedule
relationship or because of the level of quality
n Accounts receivable and aging schedule
service?
n Accounts payable and aging schedule
n Inventory list o Will the lease be transferred into your name or
n Supplier list (including contracts) will the owner require a new lease? Is the location
n Customer list (including contracts) suitable for your plans? Are there any environ-
n Projections mental concerns with this location? Are there
n Organizational charts and employee contracts licensing concerns?
n Industry information to which the owners may o What contingent liabilities exist?
have access
o What policies have been established with the
n Details of equipment leases and other contingent
employees regarding work environment, salary/
financial commitments
commissions, benefits, vacation pay, and fringe
* Checklist provided by the SABRE Group—Confidential
Business Sales and Valuations of Greensboro/
benefits?
Raleigh/Durham/Greenville o Will the owner be cooperative with the transition
of ownership with regard to tax issues, utility
Impor tant questions
Important transfers, government requirements, employees,
Evaluate the business’ potential according to and other procedures?
your goals, employer responsibilities, product or o Are there any environmental issues with respect
service demand, market, and financial consider-
to your chosen business?
ations. Ask and get answers to questions regarding
all aspects of an existing business before entering any o If using a broker, do you realize s/he is represent-
purchase agreements. Start with basic questions, like ing the interest of the seller?
those listed below. Others may be required depend- o Consider a non-compete agreement with existing
ing on the specific business: owners(s)
o Why is the business for sale? Has it been making o Consider a contractual arrangement with present
a profit? If not, do you have a plan to make the owners for a period of consultation
business profitable? o Consider whether owner is willing to finance all
o What kind of reputation does the establishment or some of the purchase price
have currently? How would you change that The services of an accountant, attorney, and
reputation? What is the price of good will? What banker are recommended when buying an existing
is the consistency of the client base—a few large business. Investigation and research will be crucial to
clients or many smaller customers? uncovering as much information as possible about
o Will the sale include equipment, property, inven- the business for sale.
tory, debts, employee contracts, name, logo,
slogans, signage, customer files, etc?
12

19. Issues and Decisions
BUYING A FRANCHISE
Franchising has emerged as a popular way for potential business owners to start a new business. A
franchise offers advantages in name and product recognition, proven operation procedures as well as volume
purchasing power. In this arrangement, the provider, or franchisor, contracts with you, the franchisee, to give
you the right to sell or distribute a service or product under the franchisor’s system in a particular area. As
with any opportunity, both advantages and disadvantages must be examined before a decision to invest is
made.
ADVANTAGES OF A FRANCHISE:
ADVANTAGES FRANCHISE: DIS ADVANTAGES OF A FRANCHISE:
DISAD ANTAGES
ADV FRANCHISE:
n Some require relatively small capital investment n Complicated legal negotiations
with franchise financing
n Restrictions on purchasing
n Initial corporate support for start-up
n Franchising fees
n Continuous management training and counseling
n Required to share portions of business profits
n Existing goodwill and brand name appeal (some- with corporation (sales/royalties)
times)
n Loss of control over some aspects of operation
n Standardized quality of goods/services (e.g., use of name/logo for advertising, territory,
n Proven products and business format uniforms, product purchasing requirements)
n Group purchasing power n Less freedom
n Some opportunities require no prior experience in n Potential problems if owner wants franchisor to
that business field buy franchise back
n Buying power and programs n Limited control over pricing, product lines, and
n Development of advertising and promotions suppliers
programs (both local and national) n Human resources policies may be instituted by
n Site analysis corporation (potentially unsatisfactory training
programs)
n Actions by the corporation may affect business of
franchisee (especially new store locations close to
yours)
Locate a list of lawyers specializing in franchise
negotiations while in the research stage. Once a
franchise opportunity has been selected, retain a
lawyer for every step of the negotiations. The nego-
tiations serve as the foundation of the franchise.
Working with the lawyer, set policies and agreements
that will enable the franchise to thrive now and in the
future. All obligations, rights, privileges, risks, oppor-
tunities, assets, and liabilities must be detailed and
agreed upon by all parties before the contract is
The US Department of Commerce offers a publication,
signed.
Franchise Opportunity Handbook, which is up-dated
every two years. For a low cost it can be ordered from
Superintendent of Documents, US Government Printing
Office, North Capitol and H Streets NW, Washington, DC
20402. There are also a number of books on franchising
available at public libraries and bookstores.
13

20. Issues and Decisions
STARTING A NEW BUSINESS
STARTING Most banks today will require you to personally
guarantee the corporate loans for start-up businesses.
Starting your own business can be a very excit-
Consequently, all your assets will be at risk.
ing endeavor. It allows you great freedom and oppor-
tunity to explore and develop your own business You might ask, “How do I know what kind of
idea. It is an opportunity for you to exercise your business to start?” or “How are businesses formed?”
creativity and thinking ability to do the following: Business ideas emerge in may ways. Examples are:
n Research your business idea n Finding and meeting an unfulfilled market need
n Develop a strategy n Building a business on an existing customer
n Determine your marketing approach relationship
n Address key operational issues
n Spinning off a business based on your experience
n Make your own decisions
and knowledge
n Develop your business idea from the ground up
n Capitalizing on a new invention or technology
Successfully starting your own business can
provide a sense of accomplishment and satisfaction n Growing a part-time business or hobby into a full
in knowing you did it yourself. However, if the time opportunity
business fails, you must assume all the liabilities and You must decide what kind of business you
emotional strain that goes with it. There are many want to start. It is also important to examine yourself
misconceptions surrounding owning one’s own and decide what you want from the business.
business. Consider the following common miscon-
Keep in mind that starting a business requires
ceptions:
careful thought and planning. Many aspects of the
n I will be my own boss. Being your own boss does business must be considered including legal issues,
not mean you can play golf or go fishing anytime you financing, marketing concerns, employee relations,
want. Reality is, the business and your customers accounting procedures, equipment purchases, and
become your boss and can demand 50-65 hours per location.
week.
Research, preparation, organization, and plan-
n I can get rich overnight. Small business and free ning are critical in a start-up venture to minimize risk
enterprise provides a great opportunity to build and enhance your chance for success. Contact your
wealth; however, it will take time. Studies indicate small business assistance providers to assist you
that more than a third of small businesses that grow during this critical time (see Resource List).
significantly, do so after ten or more years of exist-
ence.
SELECTING AND USING
n I can expect immediate income from my business.
This is not likely. Generally, it takes 6-12 months PROFESSIONALS
before a new business can start to pay the owner a Starting your own business involves many
decent salary. You should have a cash reserve or decisions which often times seem overwhelming. It
savings to provide financial support for you and your has been shown that there is a strong correlation
family during the start-up phase. between using outside professionals and business
n I can start my business with little or no money. success. In today’s business world, where many new
Poor capitalization is one of the major causes of businesses fail within the first five years, it only
business failure. Lack of capital results in negative makes sense to increase your chances for success by
cash flow which can result in poor business decisions seeking the broad experience and expertise that
and serious credit problems. professional resources and advisors can provide.
Outside advisors assist you in making decisions
n I will incorporate and use other people’s money. based on facts, not wishful thinking. They can also
Many books and articles have been written about provide a reality check and give you insight in start-
OPM (other people’s money). It is difficult to borrow ing and guiding your business.
your way to wealth as a new business. The corporate
shield probably will not protect you in case of failure.
14

21. Issues and Decisions
There are two important categories of advisors:
informal and professional.
SELECTING A BUSINESS
LOCATION
LOCATION
Informal advisors include: Location is more important to some businesses
n Other business owners than to others. The importance of the location is
n Friends and family determined by certain characteristics of the business.
n Members of other entrepreneurial groups or Factors that must be considered are:
projects o Do customers travel to the business or do em-
n Members of your board of directors ployees travel to the customer?
Professional advisors include: o Is convenience a key factor in relationship to what
your business offers the customer?
n Lawyers
n Accountants o Is your business offering a special product with
n Bankers little accessible competition?
n Insurance agents o Will your product or service require a specific
n Marketing professionals location?
n Consultants o Will proximity to vendors and customers play an
n Small business assistance providers important role in your location?
Most professional advisors will expect to be o Are transportation, labor, utilities, state and local
compensated for their assistance while informal taxes, zoning, and other regulations critical
advisors typically only need to be asked to help. factors to consider in your site selection?
When selecting a professional advisor, look for a o Do traffic flow, parking and other business estab-
skilled advisor who meets your needs. Attributes you lishments impact your site selection?
should look for include:
o How much space is required?
o Strong professional skills and knowledge
o Integrity o Do you need expansion capability?
o Small business orientation o Should you lease or buy a facility?
o Engaging and creative o What are the terms of your lease, if leasing?
o Positive attitude
o Willing to listen o How is your rent determined?
o Team member and advisor NOTE: Rent = cost of space + advertising
Selecting the right professional advisor will not o What are the insurance requirements?
only provide advice and consistency to help your o Do you understand home-based business ex-
business succeed, but s/he can also be instrumental penses and requirements?
in identifying other professional team members. These questions represent some of the issues
To go about finding the right professional that need to be answered before making a business
advisor, you should: site selection. Additional questions and information
o Ask small business assistance providers may be required depending on whether your busi-
o Ask other business owners ness is a service business, retail store, or manufactur-
o Call the professional and schedule an appoint- ing facility.
ment. Interview them as you would an employee. Local resources are available to assist you with
Be sure to request references. your site selection. Resources include your Chamber
o Look for a comfort level and confidence; confi- of Commerce, NC Department of Commerce, Eco-
dence in their integrity, discretion, and concern nomic Development Board, commercial real estate
for your business. brokers, and your SBTDC counselor.
If you already have a good relationship with a
banker or other professional, s/he is a good source of
referral.
15

22. Issues and Decisions
YOUR
MINIMIZING YOUR RISKS TO DO
Risks abound in the business world. As an
entrepreneur, you will want to protect your interest List below the things you must now consider in
and minimize your risk from the beginning. order to buy and existing business, start a business,
or purchase a franchise.
The time to address these important issues is
during the planning stage. Advice of professionals in
accounting, insurance, banking, and law will help
you make decisions to best minimize your risks and
to identify your best protection options.
INSURANCE PROTECTION
Insurance protection is an important consider-
ation in minimizing risk. Oftentimes business owners
lack expertise when it comes to insurance needs.
Basic steps in developing an insurance program are:
o Review your current coverage
o Identify your insurance needs
o Develop a plan (including the cost)
o Seek professional advice
Most businesses will require the following types
of insurance:
n Fire insurance
n Liability insurance
n Automobile insurance
n Worker’s compensation insurance
Depending on the type of business you are
starting, other coverage you may need includes:
n Business interruption insurance
n Crime insurance
n Group life insurance
n Key man insurance
n Disability insurance
n Bonding
Most banks require insurance as a condition of
their loan.
16

23. Chapter 4
Legal Considerations and
Requirements
A
s an entrepreneur, it is your
responsibility to ensure that C HECKLIST FOR STARTING A BUSINESS
your business is properly
complying with state and federal Assess yourself as a potential business owner
regulatory requirements, registra-
Determine concept feasibility
tion, permits, licenses, and employer
responsibilities. Stiff penalties may Examine critical issues & make important decisions
be assessed against you and/or Investigate legal considerations & requirements
your company if you are found in
violation of certain government Develop your business plan
requirements. This section will Arrange your financing
address three primary legal consid-
erations:
Regulatory requirements
PERMITS PERMITS
Legal structure of your business
Employee responsibility Most new small businesses are For information regarding state
unlikely to require any federal permit or licenses, contact:
license to operate unless they are Business License Information
engaged in:
REGULATORY
REGULATORY NC Secretary of State
Rendering investment advice 919/807-2166 (in Raleigh) or
REQUIREMENTS Preparing meat products 800/228-8443
Selling alcohol, tobacco, and 110 South Blount Street
PERMITS, LICENSES, AND firearms Raleigh, NC 27601
REGULA
REGULATIONS Federal permits or licenses are http://www.secretary.state.nc.us/blio/
Most businesses are required to also necessary to start some default.asp
obtain some kind of license or per- large-scale operations in The services provided by this
mit—city, state, and/or federal. Certain regulated industries, such as: office include:
types of businesses may be required to Radio or television stations Individualized assistance from
obtain special permits from local health Common carriers (telephone counselors in identifying
authorities, building inspectors, and companies) appropriate licenses and
police/fire departments. The business Produce drugs or biological permits
owner should take steps to ensure that products Customized information
the business does not violate any zoning Consult an attorney regarding packages including applica-
regulations or ordinances regarding regulatory requirements. tions and instructions on
hazardous activities. Mistakes in obtain- Although a prospective busi- applying for licenses and
ing the proper permits and licenses can ness may not strictly fit in one permits
be expensive, at best. of these categories, it is impor- Resource center for informa-
tant that you make certain that tion on over 600 business
FEDERAL LICENSES AND no federal regulations apply licenses and permits
before starting your business. To determine liability for license
TA
S TATE LICENSES AND fees/taxes, contact:
17

24. L egal Issues
NC Department of Revenue In some cities, zoning and other related requirements must
License and Excise Tax Division be approved before you can obtain a license. If the business
501 North Wilmington Street is not located in a city, county privilege licenses may be
PO Box 25000 applicable. The business should contact the County Licensing
Raleigh, NC 27640 Office.
919/733-3673
Web site: w w.dor.state.nc.us/DOR/
w Zoning
The inspections or Planning Department, city or county,
SPECIAL LICENSES AND PERMITS determines if a business location is zoned correctly for the
In certain instances, such as contractors’ licenses and proposed business type. Some areas are not zoned for
bonding, day care certificates of competency, etc., you will commercial businesses, therefore, inquiries need to be made
need to obtain specific industry licenses and permits. The before establishing a business. Some home-based businesses
Business License Information office should be able to help are required to have a Home Occupation Use Permit.
you in this area, or refer to the numbers listed below: Others qualify as a “limited use business” that does not
Business License Information 919/807-2166 or require a permit.
800/228-8443
Alcoholic Beverage License 919/733-3641 Signs
Alcoholic Beverage Permit 919/779-0700 Sign sizes and locations are regulated within city or
Rest Home License 919/733-2855 county limits and are determined by the Inspection or
Architecture License 919/733-9544 Planning Department. Contact the city or county prior to
Auctioneer License 919/733-2182 design and construction of a business sign to ensure it meets
Barber Examiners License 919/733-3650 the regulations.
Cosmetic Arts License 919/790-8460
Electrical Contractors License 919/733-9042 TAX INFORMATION
INFORMATION
General Contractors License 919/571-4183 The SBTDC does not provide tax counseling.
Mortuary Science License 919/733-9380
Plumbing & Heating Contractors 919/733-9350 Income taxes
Real Estate 919/733-9580
Every business entity is responsible for federal and state
Nursing Home or 919/733-2342
income taxes. If your business is a sole proprietorship,
Home Health Facility
partnership, S corporation, or limited liability corporation
Child Day Care License 919/733-4801
(LLC), pre-tax income is taxed by reporting it on your
This represents only a partial list. To verify the require- individual return.
ments for your business, contact the Business License Infor-
If your business is a regular corporation, it will be
mation Office at 800/228-8443 or in Raleigh at 807-2166.
subject to corporate income taxes. Different report forms
LOCAL
CITY OR LOCAL LICENSES AND are required for different types of organizations.
PERMITS All federal tax forms may be obtained from:
Business owners need to explore local licenses and Internal Revenue Service
permit requirements and, in some cases, special licenses 320 Federal Place
which may be required (such as for alcohol, amusement, or Greensboro, NC 27401
child care) 800/829-1040 (information/assistance/forms)
Web site: w w.irs.ustreas.gov/
w
These licenses include privilege licenses, occupational
licenses, and other miscellaneous licenses. Contact the Tax IRS Numbers
Collector’s Office in the county in which the business will be Forms & Publications 800/829-3676
located for more information. Questions 800/829-1040
Tele-Tax 800/829-4477
Privilege License Call and ask for a “Getting Started” package for the
All for-profit businesses located within city limits must
have a privilege license before beginning business operations.
18

25. Legal Issues
particular type of business organization your are starting. You 919/733-7395
will receive a form SS-4 which you should file to obtain a Web site: w w.esc.state.nc.us
w
federal identification number. This ID number is needed Filing
only if you plan to hire employees. Employee portions of the federal/state income taxes
State tax forms and requirements may be obtained by and the Social Security tax, must be remitted along with the
calling: employer portion to the federal and state taxing authorities,
NC Department of Revenue919/733-3166 following the schedules provided by the agencies. You must
(all tax departments and forms) also complete quarterly returns for submitting payroll
information to the federal and state agencies. An explanation
You can obtain your state identification number by of these reports should be included in information you
calling 919/733-4626. A state identification number is receive from the IRS, the NC Department of Revenue, and
required only if employees are to be hired. Otherwise, send the Employment Security Commission.
quarterly payment with tax form, NC-40. Note that filing
estimated federal and state income taxes during the taxable Sales and use tax, retail/wholesale licenses
year may prevent penalties from being assessed.
All retail operators must collect sales tax. To find out
Payroll taxes what to remit and how to avoid tax on wholesale purchases,
contact:
Employee Taxes
There are several types of payroll taxes. As an em- North Carolina Department of Revenue
ployer, you must withhold taxes on behalf of your employ- Sales Tax Division
ees. These taxes are collected by you and are employee 501 North Wilmington Street
contributions. They include the following: PO Box 25000
Raleigh, NC 27640
Federal income tax 919/733-3661
State income tax Web site:www.dor.state.nc.us/DOR/
Social Security (FICA) tax (employee portion)
Wholesalers: If your business is that of distribution
Employees must complete forms W-4 and NC W-4 and you do not sell to the end-user or consumer, you should
before you can determine the amount to withhold for obtain a wholesale license.
federal and state income taxes from their salaries (Form
8109). Social Security is determined by a legislated percentage Other state taxes
which may be obtained through the Internal Revenue Service
publications. NC Department of Revenue
501 North Wilmington Street
Employer Taxes PO Box 25000
The second type of payroll taxes involve your expense Raleigh, NC 27640
as an employer. These are taxes that you, the employer, pay 919/733-3661
and include the following: Web site: w w.dor.state.nc.us/DOR/
w
Social Security (FICA) tax (employer portion) Amusement Tax 919/733-3673
Federal Unemployment Tax (FUTA)—form 508 Excise Tax:
State Unemployment Tax (SUTA)—Unemploy- Cigarettes 919/733-3673
ment Acct# (form NCU1-101/625) Soft Drinks 919/733-3673
The IRS “Getting Started” package will include infor- Franchise Tax 919/733-3166
mation on submitting your portion of FICA and federal Corps. Initial Franchise Tax Return
unemployment tax. —Form CE-302
Each new business should contact the Employment Fuel Tax 919/733-3409
Security Commission at the address for information on Installment Paper 919/733-7548
unemployment taxes:
Employment Security Commission
700 Wade Avenue
Raleigh, NC 27605
19

26. L egal Issues
Dealer Tax Workersí Compensation
Intangibles Tax 919/733-4147 Workers’ Compensation is a form of insurance for
Taxpayer Assistance 919/733-4684 employees. Due to your potential legal liability for job-related
Application for Sales and Use Tax Registration & accidents, Workers’ Comp is strongly recommended for all
Annual Whole License—Form NC E-504 businesses. If you are a sole proprietorship, partnership,
Local Taxes: List Tangible Property Tax (as of 1 LLC, estate, or trust, you are required by law to carry
January 1996) Tax Listing Form coverage once you have three employees (in addition to the
business operators/controlers). If you are incorporated, you
INCORPORATING A BUSINESS
INCORPORATING must carry coverage once you have three people (including
corporate officers) in the corporation. There are exceptions
Corporations Division to these rules: for instance, if you run an agricultural opera-
North Carolina Secretary of State tion, you must carry Workers’ Comp coverage when you
300 North Salisbury Street employ ten or more regular, non-seasonal employees. For
Raleigh, NC 27603 specific information, contact your insurance agent, attorney,
919/733-4201 or:
Web site: w w.secstate.state.nc.us/secstate/
w
c rp.htm
o Workers’ Compensation
430 North Salisbury Street
Call and request either “NC Business Corporation Raleigh, NC 27611
Guidelines” (which will explain how to incorporate your 800/688-8349 or w w.comp.state.nc.us
w
business in North Carolina) or “NC Non-Profit Corpora-
tion Guidelines.” PROTECTING INTELLECTUAL PROPERTY
ASSUMED NAME ACT When you begin your business, your ideas and know-
how may be some of your most valuable assets. Patents,
If you decide that your company will be a sole propri- trademarks, copyrights, and trade secrets, together, are called
etorship or partnership, and you wish to use a name other intellectual property. The wise business owner will review his
than your own name, you must perform a name search at the own company’s activities in each of these areas, list possible
County Registrar of Deeds to see if the name of your assets that should be protected, and evaluate their commer-
company is already being used. cial importance to the company. With small business assis-
tance providers, the business owner can develop a realistic
INSURANCE plan and budget for the company’s intellectual property
There are four types of insurance that are generally issues.
considered essential for small businesses:
Hazard (includes fire, wind, water, theft) Resources
Web site ww.uspto.gov
w
Fire insurance will compensate you for the loss of US Patent & Trademark Office 800/786-9199
and damage to your business property by fire. Copyright Office 202/707-3000
Liability insurance will help protect you against suits Trademark Assistance Center (NC) 703/308-9000
for physical damages done to someone on your property NC Dept. of Commerce 919/733-4151
and for liabilities arising for the use of the products or (business names)
services your company sells.
Other protections: directors, crime (robbery, burglary,
employee vandalism, business interruption, key person).
Auto insurance, either private or business, is required
by law for any vehicle used for business purposes. Before
buying any insurance, consider the risks that should be
covered, compare costs from the different companies, and
get professional advice from an insurance agent.
20

27. Legal Issues
In a general partnership, each partner is held person-
SELECT THE TYPE OF ally liable for all debts, taxes, and other claims against the
BUSINESS STRUCTURE partnership.
There are several forms of business structures for you to consider. A limited partnership has both general partners and
Selecting the business entity which is right for you will involve tax, limited partners. It restricts the amount of personal liability to
businessandestateplanning,andfinancialconsiderations. In this section, a limited partner. It allows investors to contribute but will
we discuss the various structures and identify the advantages and expose them to a limited amount of liability AND manage-
disadvantages of each. The legal structure you choose will determine the ment control. A limited partner is only personally liable up to
organization,debt liability, and tax requirementsaswell as other the amount of investment made.
aspects of business questions.
ADVANTAGES OF PARTNERSHIPS:
ADVANTAGES PAR
ARTNERSHIPS:
SOLE PROPRIETORSHIP Simplest form of business for two or more owners
Sole proprietorship means that one person indepen- Business can be established with minimal formal
dently owns and operates an unincorporated business for documentation (However, it is recommended that
profit. The business is considered an extension of the owner partnerships have a formal written agreement
rather than as a separate legal entity. For tax purposes, the with provisions for death, disability, liability,
profits/losses of the business are combined with other compensation, benefits, and dissolution)
owner income sources. Profits and losses belong to the partners
Partners have freedom to operate the business on
ADVANTAGES OF SOLE PROPRIETORSHIPS:
ADVANTAGES behalf of the partnership (i.e., they can hire/fire
Simplest form of ownership to establish and employees, borrow money, or enter into contracts)
operate No income tax on partnership entity (it’s passed
One owner on to individual partners)
Owner has complete control over management Buy/sell agreements
decisions and policies Availability of resources/skills from all partners
Use of all profits at the discretion of the owner Limited liability partners enjoy lower risks
Limited paperwork to state and federal agencies DIS ADVANTAGES OF PARTNERSHIPS:
DISAD ANTAGES
ADV PAR
ARTNERSHIPS:
All losses are incurred by the owner (owner’s General partners liable for all debts and actions of
income directly linked to success/failure of the partnership (joint and several liability)
business) Limitations apply to raising investor capital (e.g.,
DISADVANTAGES OF SOLE PROPRIETORSHIPS:
DISAD ANTAGES
ADV all investors would be partners)
All management decisions—staffing, policies, Responsibilities and actions of partners, if not
problems—must be handled by owner specifically written out, can overlap or contradict
Owner personally liable for all debts, taxes, and one another
claims incurred by the business Partnership income added to other sources of
May be difficult to raise capital (i.e., will depend income and taxed at owner’s personal tax rate
on owner’s credit history) Complications with taxes arise if fiscal year varies
Continuity of business disrupted by owner death from calendar year
or disability Partnership entity lacks perpetual existence in the
Combined with other income sources, profits event of death, disability, or withdrawal of a
taxed at owner’s individual tax rate partner (provisions must be made in advance)
PARTNERSHIP CORPORATIONS
CORPORATIONS
A partnership is a legally recognized entity between two There are three types of corporations: subchapters S, C
or more people who agree to contribute money, labor, corporations, and limited liability companies. The major
property, or skills and share in the business profits, losses, differences are centered around taxation, initial profitability,
and management decisions. There are two types of partner- shareholder compensation, and deductibility of fringe benefit
ships—general and limited. payments. After completion of the incorporation process, a
corporation is automatically classified as a C corporation by
the IRS. Board of Director approval is required, and a form
21

28. L egal Issues
must be submitted to the IRS to change the status to sub- Subchapter S corporation requirements
chapter S corporation. This action must occur within the first
It must be a domestic corporation
75 days of incorporating the business. Use IRS form #2553.
It must not have more than 75 shareholders (if
A corporation is a legal entity that exists under the stock is purchased jointly, a husband and wife are
authority of state law and separate from the people who considered one shareholder)
own, manage, and control its operations. Corporations Citizens or resident aliens must own all stock
acquire assets, incur debt, pay taxes, enter into contracts, sue/ It must have individuals, estates, and certain trusts as
are sued, have perpetual existence, and issue shares of stock shareholders
as evidence of ownership. It must have only one class of stock
To incorporate, articles of incorporation are filed with It must have an election with all shareholders present
the Secretary of State’s office. These articles define the
structure of the business (including its business purpose, ADVANTAGES OF SUBCHAPTER S
ADVANTAGES
amount of capital stock authorized, number of shares, and CORPORA
CORPORATIONS:
organization of a board of directors). The responsibility of Limited liability
the board of directors is to create by-laws and oversee Avoids double taxation
major corporate policies and practices. Retains advantages of a corporation with respect to
business obligations
ADVANTAGES OF CORPORATIONS:
ADVANTAGES CORPORA Maintain status of corporation with assets and
Can provide a single business owner with limited unlimited life separate from its owners
liability Owners can participate in management
Separate legal entity (with rights and responsibili- No restrictions on the right to transfer ownership
ties of a legal “person”)
DIS ADVANTAGES OF SUBCHAPTER S
DISAD ANTAGES
ADV
Limited liability for owners/shareholders
Transferability of ownership (i.e., shareholders
CORPORA
CORPORATIONS:
75 or fewer stockholders; only one class of stock
may trade or sell stock)
Stockholders limited to individuals, estates, or trustees
Continuity of existence beyond original founders
Must be a domestic organization and not a member of
or shareholders
an affiliated group
Absence of “mutual agency” (i.e., stockholders,
Stockholders limited to citizens or resident aliens of the
acting as owners, may not enter the corporation
United States
into contracts or agreements)
Ability to raise large amounts of capital by issu- LIMITED LIABILITY COMPANY (LLC)
ing stock
A limited liability company has a combination of
DISADVANTAGES OF CORPORATIONS:
DISAD ANTAGES
ADV CORPORA partnership and S corporation characteristics. An LLC has
the corporate characteristic of limited liability and the tax
Cost related to setting up the corporation and
advantages and flexibility of partnerships. Under the law an,
filing the required forms with the Secretary of
L LC is considered a separate legal entity and is formed by
State’s office.
filing Articles of Organization with the North Carolina
Formalities required by law (e.g., maintaining
Secretary of State. Two or more owners, or “members,”
corporate minutes, having a board of directors,
must submit the appropriate paper work.
recording shareholder rights, maintaining corpo
rate records and filings) LLCs merit a word of caution to potential business
Considerable organizational costs owners. There is a lack of public, judicial, and administrative
May take considerable time to set-up and orga- authority and familiarity regarding the classification and
nize a corporation operation of an LLC. An accountant and a lawyer versed in
Greater amount of regulation and supervision by the legalities and organizational structure are recommended.
governmental agencies
Corporations are subject to real estate, personal ADVANTAGES:
LLC ADVANTAGES:
property, and franchise taxes LLC is considered a separate legal entity
C corporations are subject to double taxation Unlimited number of shareholders unlike the S-
(corporation and shareholder earnings taxed) corporation limit of 75
22