LEARN HOW TO INVEST

GUIDE FOR BEGINNERS: Module 4

Michael Santos Presents

HOW TO BUILD YOUR BUSINESS

By learning how to build your business you will become a better investor.

How to Build Your Business From Scratch

In this chapter I’m going to begin a series of chapters that will help you understand how to build your business. If you feel as though you have a firm understanding of business, then feel free to skip to chapter nine.

By learning about business, you’ll become a better investor. I’ll create a case study for Liberty Hot Dogs, showing how it got started, how we managed assets, and how we eventually exit the business. Through the next five chapters, our case study on Liberty Hot Dogs will help us understand how to structure a business, how to raise capital, how to use financial statements, how to grow a business, and how to cash out.

Rely upon this article for an introduction to Liberty Hot Dogs, a fictional business. We’ll cover:

  • How to structure a business
  • What to know about business structures
  • How to file paperwork with authorities to start a business

How to Structure Your Business

Investing relates to business. We strengthened our possibility to become better investors when we strengthen our understanding of how businesses start, operate, and finish. It’s like that old saying: We should know how to crawl before we walk and know how to walk before we run. 

People structure businesses because they want to operate an entity that can stand alone and do transactions with other people or organizations. A business can provide better tax advantages and it can also protect individual owners from liabilities. Further, a business can become an asset with intangible value, like branding. It can also provide tangible value, like cash and property. 

To start a business, a person should think about what type of organizational structure will work best.

Some Common Business Structures

  • Sole proprietorships:
    • Ordinarily, this type of business structures involves a single owner or a married couple. They are easy to form, without too much regulation because the owners are solely responsible for the assets, liabilities, and tax filings. The advantage of a sole proprietorship is that the business itself doesn’t have to pay a tax. But the disadvantage is that the business cannot shield the owner from possible liabilities. 
  • Partnerships:
    • Partnerships involve two or more people. Like sole proprietorships, they’re easy to set up because the partners pay for their share of the profits through their personal income tax—the partnership itself does not have to pay any taxes or fees. Again, the disadvantage of this structure is that the partners will always be liable for any debts or liabilities generated by the business. 
  • Limited Liability Company (LLC)
    • An LLC differs from a sole-proprietorship and from a partnership because the business becomes a stand-alone entity, with its own tax identification number. If the business incurs liabilities, the creditors must turn to the assets of the LLC for payment. This structure provides some protection to owners who may not want to make their personal assets vulnerable to the corporation. The owners of the LLC are known as members, and members can include other LLCs, corporations, or individuals. 
  • Corporation
    • A corporation becomes a completely separate entity, divided into shares. Shareholders own the corporation. And the corporation will have its own taxpayer identification number. Shareholders may choose to form the corporation with the IRS as a “type C” corporation or a “type S” corporation, depending on tax considerations, size, or other factors. The corporation will have its own tax liability, which will be in addition to the tax liabilities shareholders incur for their portion of profits. The main benefit of a corporate structure is the protection from liabilities.

How to Start Your Business

After a person decides which structure would work best for his business, he can take the next step of filing appropriate paperwork with authorities. 

To help readers understand how to start a business from scratch, I’ll describe what steps I would have taken if I were going to start a hot dog stand after my release from prison—assuming I didn’t much of anything in the way of capital. 

Considering the different types of business structures mentioned above, I would have chosen to form a corporation. A corporation would have made sense to me for the following reasons: 

  • Since I would be starting without capital, I would need to form an entity that would allow me to raise capital.
  • With a corporate entity, I would be able to sell shares to separate people.
  • The corporation would also be able to raise capital by borrowing money, also known as raising debt.
  • The corporation would be a stand-alone entity, meaning that it may succeed, or it may fail, depending upon how well the leaders executed the business model. 

Basically, we can start a corporation by filing some simple paperwork with appropriate authorities. First, we need a name for the corporation.

LIBERTY HOT DOGS

As mentioned in the previous chapter, after 26 years in prison, about the only type of business I would be qualified to launch would be something simple. Let’s use Liberty Hot Dogs as the name of our business for this case study. 

Liberty Hot Dogs will sell hot dogs to consumers. 

 

Steps to Start a Business:

First, go the Secretary of State website for the state where you want to register your business. Look for the section that resembles “Business Search.” This section will have a search bar where you can type the name of the business you want to start. 

If I typed Liberty Hot Dogs, into the search bar on the Secretary of State website for “business search,” I would see that the name is available. 

The next step would be to go to the Internal Revenue Service website at IRS.gov/Businesses. Follow the links to apply for an Employer Identification Number (EIN) online. The entire process takes less than one hour. 

After you have your EIN number from the IRS, return to the Secretary of State website for your state. Navigate to the link for forms. You will find standard template forms for the type of organizational business structure that you want to form. Choose the appropriate business structure and fill out the forms with the Secretary of State. 

 

Corporate Bank Account:

Once you register the appropriate forms with the IRS and with the Secretary of State, you will be able to download forms that show you’re a business. The next step would be to go to the local municipality and register your business. You may have to pay for a business license. 

Online services like Legal Zoom charge fees from $100 to $1,000 to complete the necessary paperwork to launch a business. Although it may be more convenient, I found the state and federal websites rather easy to navigate and helpful. Anyone can launch a business in a few hours. 

To form Liberty Hot Dogs, I completed all of the above paperwork on my own. I paid the nominal licensing and registration fees. Once I had the official paperwork confirming that I was in business, I went to a local bank and opened my account—even though I didn’t have any money to start. 

This is a rather simple process to start a business. And once we start a business, we have a new asset. It’s an intangible asset, but an asset nevertheless. 

As founder of Liberty Hot Dogs, it would be my job to increase value of the business. As with any investment, the business would only be worth what the next person was willing to pay for it. 

  • What would be the next step to increase the value of Liberty Hot Dogs? 

Well, the business would earn money by selling hot dogs to consumer. But to begin operations, I would need to raise capital—because I didn’t have any capital. In the next chapter, we’ll continue with the case study, exploring how a business raises capital and increases value. 

Ultimately, this case study will help beginners who are learning how to invest.

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