One of the major steps in starting a new business or getting financing is to prepare a business plan. This Financial Guide provides you with the basic information that you need to include in your business plan.

Start With a Business Plan

A well thought out business plan is a valuable tool for any new company or one that is seeking financing. It also provides milestones to gauge your success and the process of developing a business plan helps you think through some important issues that you may not have considered yet.

Before you begin preparing your business plan, take the time to explore and evaluate your business (and personal) goals. You can then use this information to build a comprehensive and effective business plan that will help you reach these goals.

The purpose of this Financial Guide is to provide a basic introduction to preparing a business plan, rather than specific details to be incorporated into the plan since those depend on your specific goals and the nature of the specific business. Professional guidance is recommended when it comes to the actual preparation of the plan, particularly for the financial components.

If You're Starting a New Business

If the reason for preparing the business plan is that you are starting a new business, you should first examine your reasons for wanting to go into business. Some of the most common reasons for starting a business are:

  • You want to be your own boss.
  • You want financial independence.
  • You want creative freedom.
  • You want to fully use your skills and knowledge.

Next, you need to determine is what business is "right for you." Ask yourself these questions:

  • What do I like to do with my time?
  • What technical skills have I learned or developed?
  • What do others say I am good at?
  • Will I have the support of my family?
  • How much time do I have to run a successful business?
  • Do I have any hobbies or interests that are marketable?

Then, you should identify the niche your business will fill. Start by conducting the research necessary to answer questions like these:

  • What business am I interested in starting?
  • What services or products will I sell?
  • Is my idea practical, and will it fill a need?
  • What is my competition?
  • What is my business's advantage over exiting firms?
  • Can I deliver a better quality service?
  • Can I create a demand for my business?

You will also need to consider several options for getting your business off the ground:

  • Do you want to purchase an existing business or start one from scratch?
  • Are there franchises available for this type of business? If so, does a franchise make sense for you?

The final step before developing your plan is the pre-business checklist. You should answer these questions:

  • What skills and experience do I bring to the business?
  • What will be my legal structure?
  • How will my company's business records be maintained?
  • What insurance coverage will be needed?
  • What equipment or supplies will I need?
  • How will I compensate myself?
  • What financing will I need?
  • Where will my business be located?
  • What will I name my business?
  • Your answers will help you create a focused, well-researched business plan, and that should serve as a blueprint. It should detail how the business will be operated, managed, and capitalized.
write-a-business-plan

Based on your initial answers to the questions listed above, the next step is to formulate a business plan. A business plan sets forth the mission or purpose of the business venture, describes the product or services to be provided, presents an analysis of the market state, outlines goals that the business has and how it intends to achieve those goals, and last but not least, includes a formal financial plan.

In most cases, a business plan is necessary to obtain external capital for your business, but it also serves a number of other purposes. It forces you to critically evaluate the feasibility of your business and whether it will provide a return which is appropriate to the time and money you will invest in the business. The plan provides a benchmark against which you can evaluate the success of your business in later years.

What the Business Plan Should Include

Whether you are starting a new business, seeking financing for an existing business, attempting to analyze a new market, or wanting to define and evaluate future growth, the following outline of a typical business plan can serve as a guide. However, you should adapt it to your specific business.

Introduction and Mission Statement

In the introductory section of your business plan, you should:

  • Give a detailed description of the business and its goals.
  • Discuss the ownership of the business and its goals.
  • List the skills and experience you bring to the business.
  • Discuss the advantages you and your business have over your competition.
Products, Services and Markets

In this section, you must describe your products and/or services and:

  • Identify the customer demand for your product/service.
  • Describe how your product/service is unique.
  • Identify your market, as well as its size and locations.
  • Explain how your product/service will be advertised and marketed.
  • Explain the pricing strategy.
Financial Management

In this section, you should:

  • Explain the source and amount of initial equity capital.
  • Develop a monthly operating budget for the first year.
  • Develop an expected (return on investment), or ROI, and a monthly cash flow for the first year.
  • Provide projected income statements and balance sheets for a two-year period.
  • Discuss your break-even point.
  • Explain your personal balance sheet and method of compensation.
  • Discuss who will maintain your accounting records and how they will be kept.
  • Provide "what if" statements that address alternative approaches to any problem that may develop.
Operations

In this section it is important to:

  • Explain how the business will be managed on a day-to-day basis.
  • Discuss hiring and personnel procedures.
  • Discuss insurance, lease or rent agreements, and issues pertinent to your business.
  • Account for the equipment necessary to produce your product or services.
  • Account for production and delivery of products and services.

In the ending statement, you summarize your business goals, objectives, and express your commitment to the success of your business.

Once you have completed your business plan, review it with a friend or business associate. When you feel comfortable with the content and structure, make an appointment to review and discuss it with your banker. The business plan is a flexible document that should change as your business grows.

Starting a new business is a very exciting and busy time. There is so much to be done and so little time to do it in. If you expect to have employees, there are a variety of federal and state forms and applications that will need to be completed to get your business up and running. That's where we can help.

Tax Matters to Consider for Your New Business

Business Resources

We have all heard in life the two things that you can be assured of, and on that topic we mean taxes. Even if you pay no taxes in the first year or so, there still is the matter of completing certain tax forms in order to operate a business.

Employer Identification Number (EIN)
Securing an Employer Identification Number (also known as a Federal Tax Identification Number) is the first thing that needs to be done since many other forms require it. The fastest way to apply for an EIN is online through the IRS website or by telephone. Applying by fax and mail generally takes one to two weeks. Note that effective May 21, 2012, you can only apply for one EIN per day. The previous limit was 5.

State Withholding, Unemployment, and Sales Tax
Once you have your EIN, you need to fill out forms to establish an account with the State for payroll tax withholding, Unemployment Insurance Registration, and sales tax collections (if applicable).

Payroll Record Keeping
Payroll reporting and record keeping can be very time-consuming and costly, especially if it isn't handled correctly. Also, keep in mind, that almost all employers are required to transmit federal payroll tax deposits electronically. Personnel files should be kept for each employee and include an employee's employment application as well as the following:

Form W-4 is completed by the employee and used to calculate their federal income tax withholding. This form also includes necessary information such as address and social security number.

Form I-9 must be completed by you, the employer, to verify that employees are legally permitted to work in the U.S.

Which kinds of business organization or business entity will limit my liability to business creditors?

Corporations, limited liability companies (LLCs), limited partnerships, and limited liability partnerships (LLPs) are the three most common business entities that limit liability. General partnerships and sole proprietorships don't limit owners' liability. Limited partnerships limit the liability of some partners (limited partners) and not others (general partners).

What is the "corporate double tax" and how can it be avoided?

Double taxation of corporations results in a significant tax burden on corporate income. Often referred to as the "corporate double tax," it occurs when a business corporation (or an entity treated for tax purposes as a business corporation) pays a federal tax on its income, and tax is also paid by its owners in the form of individual income tax on capital gains and dividends when they collect corporate profits.

Double taxation occurs even if the corporation retains its after-tax earnings (as opposed to distributing them as dividends) because the value of the stock increases to reflect an increase in assets held by the corporation. Shareholders that decide to sell their stock will realize a capital gain and pay tax on that gain.

The tax on the corporation is called an "entity level tax" and an entity so taxed is called a "C-corporation" (C-corp). The double tax can be avoided one of two ways:

  • By electing to be an S-corp. While this doesn't change its nature under state business law, but in most cases eliminates federal tax at the corporate level.

  • By postponing profits distributions to corporate owners, the second tax (on the owners) can be postponed.

Which types of business entity are best for tax purposes?

Which types of business entity are best for tax purposes?

It depends. Generally speaking, the "pass-through" type of entity saves tax overall by eliminating tax at the entity level. pass-through entity owners are taxed directly on their share of entity profits. Another pass-through advantage is that owners can take tax deductions for startup or operating losses, against their income from investments or other businesses.

Which are the "pass-through" entities?

You have much control over whether the entity you choose is treated as a pass-through entity for federal tax purposes (see below), but the leading pass-through forms are general partnerships, limited partnerships, LLPs, LLCs, S-corps, and sole proprietorships.

If your business is in the form of a partnership (any type) or limited liability company, you may choose whether your business is treated for tax purposes as a corporation or a partnership (or, if you're the only one in the LLC, as a corporation or disregarded for tax purposes). Tax and business advisors call this choice the "check-the-box" system. If it's actually incorporated, or you choose to have it treated as a corporation, you may qualify to have it treated as a pass-through by electing S-corp status.

Your choice under check-the-box is binding. That is, if you choose one entity (say, corporation) in one year and another (say, partnership) the next year, you must pay tax as if you sold last year's entity and put the proceeds into this year's.

What entities will let me both limit my liability and avoid the double tax?

S-corps (usually) and all of the following, assuming that you don't choose to have them treated as corporations: LLCs; LLPs; and limited partnerships, for the limited partners. For sole owners, the choice is limited to S-corps or, in states that allow single-owners, LLCs.

What's so great about limited liability companies (LLCs)?

LLCs combine limited liability with pass-through tax treatment. They can offer benefits unavailable from S-corps, their nearest rival (for businesses other than professional practices). The key benefits:

  • A way to allocate certain tax benefits disproportionately among owners.

  • Opportunity for greater loss deductions.

  • Avoiding or reducing tax when a new owner joins the business or when distributions are made to owners in business liquidation.

State law varies when it comes to allowing single-owner LLCs; some states allow it and some states don't. Where it is allowed, the owner can choose under check-the-box rules to have the LLC disregarded for tax purposes (without losing LLC limited liability), and pay tax directly on LLC income.

In states where single member LLCs aren't allowed S-corps are a good alternative, and they can also postpone tax, as compared to LLCs, where the business is to be bought out by a corporate giant.

What special considerations are there if my business is a professional practice?

Limitation of liability, especially malpractice liability, is a major concern. No entity will protect you against liability for your own malpractice. But LLCs, Professional Limited Liability Companies (PLLCs), and LLPs, where available for professional practices, will protect you against liability for malpractice of co-owner professionals in the firm, and maybe (depending on state law) for other debts. Professional Corporations (PCs) may not protect against liability for a co-owner's malpractice, depending on state law.

The tax rules governing those in LLCs, PLLCs, and LLPs are about the same, and somewhat more liberal than those for PCs.

What are the federal tax consequences of changing your form of business organization?

This is a critical decision that should be studied carefully with professional guidance, but briefly stated:

  • There's no tax on a change from C-corp to S-corp or vice versa.

  • There is no tax on a change from LLC, partnership or sole proprietorship to a C or S-corp.

  • There is no tax on a change from a proprietorship or partnership to LLC or vice versa.

  • There is a tax on a change from C or S-corp to an LLC, partnership or sole proprietorship.

Do state business entity rules follow federal tax rules?

Keep in mind the difference between state business law and state tax law. The tax status you choose for your entity under the federal check-the-box system doesn't make it that entity for state business law purposes. So, for example, choosing corporate tax treatment for a partnership won't bring corporate limited liability.

There is a trend for states to treat the entity chosen under federal check-the-box as the entity recognized for state tax purposes, but this is optional with the state.

State law may accept pass-through status for an entity (such as an S-corp or an LLC) and still impose a tax of some kind on the entity.


At Nugent & Associates, we're not just number crunchers. We bring over 3 decades of invaluable certified public accounting and tax expertise to your company – serving as business and financial strategists who can offer such services as tax and financial planning, investment advice, diligent financial records, and help with estate planning.

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Take advantage of our FREE and no obligation business checkup.

We will visit you at your business at a time and day convenient for you, analyze your numbers, discuss your goals and concerns and report back with a complimentary detailed written analysis to help your business succeed!

At Nugent & Associates, we're not just number crunchers. Our people bring decades of invaluable certified public accounting and financial and tax expertise to you – offering tax and financial strategies to individuals such as yourself. If you have any questions or concerns about your own tax, financial or investment matters, please do not hesitate to contact us.

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Contact Nugent & Associates today. We don't charge for phone calls. You may just find you found an ally in your quest to have a great financial future.

After all, at Nugent & Associates, we succeed when you succeed!


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