Do Business Well

A corporation is owned by its stockholders. There may be one stockholder holding all the shares, or there may be millions of shareholders holding various amounts of shares. Without going into details that are far beyond the scope of a business this size, I should point out that it is also possible for corporations to sell various classes of shares with various rights and preferences. For the very small business, we can limit our discussion to two types of simple corporations: the regular, or “C” corporation, which is taxed directly by the IRS; and the “Sub S” corporation, where the earnings are passed through to the stockholders, who must pay the tax personally.

Both of these forms limit the financial exposure of the owners to their actual investment and any value in the corporation beyond that investment. This is the single greatest advantage of a corporation. However, the shareholders can lose this protection if they don’t completely separate the affairs of the corporation from their own personal affairs. They must also be certain that the amount of the original investment is clearly adequate to protect the public and the vendors from the likely activities of the corporation. Continue Reading »

5 Comments »

Here are two examples of what can happen. Let’s say that you currently own your own home, which is worth $150,000, and it has a mortgage of $70,000. You also have stocks and other holdings worth $25,000. You intend to open the business with your savings of $20,000. After six months in business, you decide to close down due to continuous losses. You are out of cash and owe suppliers $40,000. You signed a lease that has eighteen months to go at $500 per month. You also failed to pay employee tax deposits of $10,000.

Your vendors, the landlord, and the government will go after your home, stock, and anything else that isn’t nailed down to collect the $59,000 you owe. And they will have every legal right. Continue Reading »

5 Comments »

Excessive Overhead

I’m sure most of us would like to start our new business with all the luxuries. I’ve seen plenty who’ve tried. Start with a very nice location (and very nice rent to go with it), big payments on the first- class furniture and fixtures, and plenty of talented staffers. With all this in place, if you do everything else right, you’ll only need one hundred thousand dollars per month in sales to break even.

Ask yourself these three questions every time you want to add to overhead. Will this expense add to sales? Is this expense absolutely necessary to maintain long-term quality and service? Do I take a substantially greater risk by adding this overhead than I do by going without awhile longer?

Items like advertising are much harder to quantify by these three questions, but at least it will keep your focus on the reason for advertising; adding to sales. Other expenses, like a newer truck or a second accounting clerk, should be easier to figure using just those questions. Continue Reading »

1 Comment »

ASSET VALUE

For most companies the asset value should represent the lowest amount below which the owner might just as well liquidate. There are only two differences between asset value and liquidation value. In calculating asset value you don’t have the costs of liquidation and you can be more generous in appraising certain assets than you might be if you had to liquidate.

INDUSTRY STANDARD VALUE

It’s common in many industries to have a valuation method. Travel agencies are generally valued at ten times annual commission. Manufacturers’ reps, on the other hand, are generally only worth one year’s commission. Magazines use a certain number of dollars per subscriber. Manufacturers might expect to get between two and ten times annual earnings. Continue Reading »

No Comments yet »