Starting New business? Get Some Expert Advice
Illustration by Stephen Sauer
The late President Harry Truman has many admirers, but few imitators. There are, one suspects, at even the highest echelons of business management, few desks with a sign proclaiming "The buck stops here."
These days, the bucks seldom stop anywhere. They flow continually, like Old Man River. For example, if you hire a consultant to advise you on what laws and regulations you must follow when starting a business, you may well be advised to hire a lawyer. And if your lawyer is Manchester Attorney James Normand, his first advice to you will be to hire an accountant. Makes sense, no doubt, but is that really legal advice? Sure is. Would Normand be billing you for it if it weren't?
"If you don't have any money, you're going to become a debtor, and you're going to need a lawyer," he explains. OK, clear enough. So hire an accountant and make sure you have enough money to meet all the legal obligations that your lawyer will explain to you, as well as enough to pay for both the accountant's figuring and the lawyer's advice - as well as all the other startup costs of your business. And your lawyer should be business savvy.
"Good business lawyers are really business advisors more than anything," Normand says. "If you're simply going to establish a corporation or an LLC (Limited Liability Corporation) shell, you're not providing the service you should be providing to your client." Often budding entrepreneurs are "folks who have great ideas and lots of energy, but don't have any idea about what capitalization the business needs to get to the point where the company is self-sufficient and profitable." Often those issues are not well thought out by the prospective entrepreneur and "that is why meeting with an accountant at the same time you're meeting with an attorney is frequently a good idea," Normand says. The next step is, well, cover your own assets.
If you plan to be in business for a while (and who starts with the idea of being an immediate flop?) and you have other assets in life, you should establish a corporation or an LLC just to operate as a business and not out of your garage or living room. That will not only shield your personal assets (home, car, life savings, etc.) from your company's indebtedness, it will also, Normand advises, be a way of "telling your customers you are for real, you are serious and you are in business to stay."
For small "mom and pop" businesses, the kind he usually advises, Normand often recommends an LLC corporate structure, "since that is an easy entity to administer for individuals." Other possibilities include a regular business corporation, called a "C corp." One advantage of the "C corp," Normand says, is that it allows the company to have a tax year that is different from the calendar year. "Sometimes that is helpful if you have a lot of money coming in at the end of the year and you don't want to pay (the tax) all out until the following year." An LLC, on the other hand, has to report all profits on a calendar year. "With a C corp. it is also easier for a large business to retain capital so that their books are not brought down to zero at the end of every tax year," Normand says.
Another category, known as an "S corp.", bypasses the company as a taxable entity and taxes the earnings of the shareholders. New Hampshire law, however, has no personal income tax and does not allow for the "pass through " feature of the S corp. Each company pays through either the Business Profits Tax or the Business Enterprise Tax. For other nuances and variations in tax law, it is a good idea to consult a lawyer - and an accountant. And bear in mind that some costs will likely rise faster than your company's profits, especially as your business adds employees. Insurance costs often go up by double digit percentage points.
"I can tell you the health insurance industry really is going to be making it more and more difficult to hire middle-aged employees because a mature, competent middle-aged employee costs twice as much for health insurance" than a young employee. "A good employee, 50 years old with a good work ethic, costs more money," says Normand, who has seen the health insurance costs for the 15 employees in his law firm go up by as much as 80 percent in a single year. "In my book, it's still worth it because you've got a good employee." But the Queen City attorney predicts a significant increase in hiring and firing discrimination lawsuits as companies try to control costs by favoring younger employees.
As a firm grows, diversity of the workforce might become an affirmative action issue, observes Linda Johnson at the Manchester headquarters of McLane, Graf, Raulerson & Middleton. While a good faith effort to expand and diversify the pool of applicants will put a company in a favorable light in employee discrimination cases, each hiring decision must be racially, ethnically, religiously and sexually unbiased. Those factors may come into play only when they are a part of a "bona fide occupation qualification," says Johnson, whose concentration is in employment law. If, for example, there is an opening for a washroom attendant for a women's locker room, a male applicant may be legitimately rejected on the basis of gender. Otherwise the employer, unless under an affirmative action order, must hire the most-qualified applicant.
The employer must also ensure a non-hostile work environment, a sometimes difficult task when employing someone in a position usually filled by a person of the opposite gender - a woman in the trucking industry or a man in a fashion boutique, for example. For other issues, such as whether to hire or lease workers and what type of corporation to form, Johnson recommends hiring a general corporate lawyer to advise on issues such as contracting, tax law compliance and the like. A company also needs an exit strategy as soon as there are two or more owners, says Seacoast attorney Patrick Closson.
"If there's only one owner, he might have a hard time fighting with himself" over the disposition of the company, says Closson, while taking questions in his Portsmouth office. But if there is more than one owner, the death of a partner can open a Pandora's box of problems. "You and your partner may know how you want to run the business, but the spouse of a partner may have a different idea." It is a good idea to set provisions for such exigencies down in writing in legal form, Closson says. "Nobody wants to think about the end at the beginning, when everyone is trying to build the business, but when you have to deal with these issues it can be incredibly problematic and destructive for all involved."
Neither success nor failure of a new enterprise is guaranteed. As it was in the beginning, it is at the end that the only things certain are death and taxes. And lawyers' fees. And accountants' fees. And hard work.
"A small business can be satisfying because you have the opportunity to reap what you sow," says Normand. "You have the opportunity to control your income, the opportunity to control your flexible time and you have the opportunity to work 18 hours a day if you want." If you're both hardworking and lucky, you might even strike it rich.
"Some businesses, once fruitful, can be sold to bigger companies for significant premiums," says Normand.
7 rules for starting a business
- Hire a lawyer.
- Hire an accountant.
- Ask your lawyer (and accountant) what type of corporation would be best for your fledgling business.
- Hire without discrimination, even when filling positions that have traditionally been filled by a particular type of employee (males in trucking industry, females in fashion boutique).
- Anticipate rising costs, especially in employee health insurance.
- Plan for loss of partner(s) through death or retirement.
- Expect long hours, hard work and the rewards that may come (eventually) from deferred gratification.