Seed

The Seed Stage is the initial consideration of an idea or thought that is the possible beginning of an entity. One must be careful in not trying to do too much too soon. Concentrate on one idea, focus and build from there. We always tell our clients that it takes five years to feel you are in business and can first reach the growth stage.

First Steps in Business

1. Business Plan. Our best advice is to keep it simple and understandable. It will always be a work in process because even a growing business should have an updated plan. A business plan helps you evaluate the feasibility of a new business idea in an objective, or unemotional way. It provides you with an operating plan to assist you in running the business and improves your probability of success. You can identify opportunities and avoid mistakes. It communicates your idea to others serving as a selling tool and provides the basis for your financing proposal. If you do not use the plan to raise money, your plan will be internal and less formal. If you are presenting it to outsiders as a financing proposal, presentation quality and a thorough financial analysis are very important. Your plan should include:
   1. Plan Summary
      1. Mission of your company
      2. Summary of company, management, executives and history, including organization chart
      3. Market share and overview of significant operations
   2. Company goals and actions, including monitoring
   3. Funding needs/Cash flow analysis
   4. Financial statements/Proforma financial statements
       
2. Understanding Oneself. A clear understanding of who you are is needed for "how you approach your business." Do I want or need partners? How much risk can or am I willing to take? What are my strengths? How can I fill my weaknesses? Really try to drill down to who you are and success surely will follow.
    
3. Entity Selection.
   1. Sole Proprietorship. This is the simplest form of ownership. However there is very little legal protection because the owner holds title to assets and is personally responsible for all liabilities. Personal assets may be at risk to satisfy business liabilities. In this form, it is important to have liability insurance. This is not a recommended entity of choice except perhaps when one is to first be on their own with no employees.
   2. Corporation - An entity created under state law for the purpose of conducting business. Corporations can hire employees, own assets, enter into contracts, and incur liabilities. An important aspect is that owners (shareholders) liability is generally limited to the extent of their investment in the corporation. The two commonly used corporation types are different for tax purposes as follows:
      1. Subchapter C Corporation. This is a separate legal entity responsible for paying its own income taxes. This was a popular choice prior to 1980. As a business grows and earnings are distributed, double taxation becomes a problem.
      2. Subchapter S Corporation. This is a corporation that files a Subchapter S election for income tax purposes and does not generally pay income taxes at the corporate level. The income ”passes through” to the shareholders who become the responsible party to pay income tax.
   3. General Partnership. A general partnership in essence is the combination of various sole proprietors coming together and doing business. As with a sole proprietorship there is no legal protection. The partners personally share the risks and rewards for all aspects of the business. Tax rules and regulations make partnerships increasingly complex entities. In a general partnership, each partner is jointly and severally liable for obligations of the business. Like proprietors, a partner’s personal assets may be at risk to satisfy business obligations.
   4. Limited Partnership – is similar to a general partnership with the exception that one or more of the partners have limited participation in the business’s risk. This type entity allows limited partners to be passive investors in a business, typically limits their liability to the amount investment, and allows the other (general) partners to run the business. A general partner’s assets are still at risk to satisfy liabilities of the business.
   5. Limited Liability Companies (LLCs) - legal entities created under state law. LLCs combine most of the best characteristics of limited partnerships and subchapter S corporations. This includes treatment as a partnership for federal income tax purposes, if the LLC elects to be treated as a partnership for tax purposes and limiting member’s personal liability.
   6. Limited Liability Partnerships (LLPs) - a special type of partnership that exists under state law. Not all LLPs have the same liability protection as it varies from state to state.
       
4. Professional Advisors. Be sure you have a good team. Your attorney, banker, insurance agent and CPA are experienced professional business people who see businesses day to day and will be invaluable to your decision making processes. The biggest mistake you can make is not asking for advice before acting.
    
5. Cash flow modeling. In any stage of your business, cash flow is very important. Any planning you do as you begin to start your business will always start with cash flow. An entity usually needs more cash than is anticipated.
   
   Understanding the distinction between net income and cash flow is very important. The flow of cash (receipts vs. disbursements) and the amount of financing a business has needs to be analyzed on a consistent basis. Your financial statements may tell you that you are making money but if the cash is not available challenges are ahead.
   
   Items to concentrate on in cash flow modeling are:
   
   1. Forecasting – You probably need twice as much capital as you think to start. It is important to prepare detailed forecasts and budgets of anticipated business operational needs.
   2. Cash flow – prepare a model that realistically sets forth expectations based on your forecatsting process.
   3. Needs assessment – assess the capital needed to begin and operate your business.
       
6. Capital Funding
   1. Debt vs. Equity – ask yourself, what do I really need? Please review the Capital Funding guide in the Capitalization area and determine what works best for your situation.
   2. Pros/Cons investors – the advantages and disadvantages of having investors are numerous, they should be considered carefully with input from your team of professional advisors to determine the best situation for you.