How to Start a Small Business in San Luis Obispo County





Should I Start My Own or Buy an Existing Business

The purpose of this publication is to help you start your own business.There are other avenues such as:


1)Buying an Existing Business

We suggest you contact your accountant or business broker if you are interested in buying an existing business.


2)Become a Franchisee†††††††††

A franchise is a form of licensing:it is a method of distributing products or services.A typical franchise is simply an agreement between a seller and a buyer that permits the buyer (franchisee) to sell the product,method or service of the seller (franchisor).The seller's knowledge,image,success,manufacturingand marketing techniques are supplied to the buyer for a royalty fee and often an initial payment.



1)Proven business methods and services: i.e.location analysis and counsel;store development;advertising;merchandising counsel and assistance;and financial assistance in the establishment of the business


2)Initial employee and management training,and continuing management counseling


3)Ready-made business without having to build up slowly


4)Established reputation


5) Reduced Risks



1)Lack of independence


2)Continuing obligation to the franchisor


3)Lack of individual identity


4)Contract agreement difficult to cancel


The Idea


If you have decided to start your business from scratch you need to know how to find a good idea and develop it into a good business opportunity.


Business opportunities usually develop from simple ideas that come from ordinary sources.They do not have to be sudden flashes of inspiration.Many very good ideas have come from frustrating experiences as a customer, suggestions from friends or business colleagues, or from personal interests.To find a good idea and turn it into a good business opportunity, it is critical that you focus your idea,set a goal and then get information and feedback on your idea.


1)Focus Your Idea††††††††††††††††††††††††††††††††††††††††

A business idea should be well focused.You should be able to explain it clearly and simply to potential customers, future employees and investors.It should be straightforward and easy to understand.If you are unable to describe your business idea in less than fifty words, you may need to take another look at your idea.Perhaps your idea isn't focused enough.


2)Set a Goal†††††††††††††††††††††††††††††††††††††† ††††††††††

Once you have focused your idea, set a goal that fits your idea.Think about where you want your business to be five to ten years.Make sure the goal is ambitious yet achievable, and, most of all, keep it simple.Like your idea, your goal should be easy to explain to potential employees, financial sources, etc.The easier your idea is to explain, the easier it will be to achieve.


3)Get Information and Feedback on Your Idea

Once you have set a goal, you must learn as much as possible about the industry or the market.You can do this by examining your competition, talking to potential customers and taking advantage of the many other sources of information available in the San Luis Obispo area.


4) Examine your Competition††††††††††††††† ††††††

Finding out what your competition does to stay in business can be one of the most important forms of market research that you will ever conduct.Read your competition's literature.


Your competition is in business for a reason.You must find out what that reason is and figure out what it is going to take to make the competition's customers come to your business and buy your product or service.†† You don't have to reinvent the wheel.If your competitor is doing a good job, why not take the best of his ideas and throw in a few of your own?Ask your family, friends, and co-workers."What do you think of this?"†† They will be glad to help most of the time.


Seek out the competition and find out what you are up against in the marketplace.Is there room for another competitor in your community?Is there a profit potential or will another competitor be too much competition to make a profit?


5)Talk to Customers††††††††††††††††††††††††††††

Successful businesses all seem to have at least one thing in common.Business owners continually conduct the most basic of all forms of market research; they talk to customers.


Talk to potential customers about your idea.If you speak enough with potential customers, you will develop a vision of what is needed in the community.You can tailor your product or service to meet that need.

You really need to tune into your customers--where they are, who they are, and what makes them buy.You need to know why they are buying, what they are buying now, if they will actually buy your product or service, and how that fits into your scheme of things.If you do not attract and hold customers, you are not going to be in business very long.



6)Other Sources of Information††††††††††††

For you to gain the knowledge necessary to turn your idea into a successful business opportunity, you must get feedback.Before starting your business get additional information.Such as:


a)Talk with suppliers

b)Attend trade association shows

c)Contact the Small Business Administrations through the Chamber of Commerce in San Luis Obispo at (805) 781-2777

d)Contact SCORE (Service Core of Retired Entrepreneur)throughthe Chamber of Commerce in San Luis Obispo at (805) 781-2777


Now that you have thought long and hard about whether your idea can be turned into a successful business, you need to ask yourself why you want to go into business.Do you have the characteristics necessary to become a successful business owner?Have you realistically looked at the advantages and disadvantages of owning a business?These are questions you must ask yourself before,not after,the business has started.






One of the first steps that you should take before deciding to go into business is to determine why you,the prospective business owner,want to go into business.Have you realistically calculated many of the advantages and disadvantages of owning a business?Do you have many of the essential characteristics to be a successful business owner?Are you ready to handle the common types of problems faced by small businesses?Are you ready to make the commitment and take the risks?Are you sure that this is what you really want?These are important questions that you need to ask yourself.


Advantages and Disadvantages of owning a Business



1)Being your own boss

2)Direct involvement in all business decisions

3)Close contact with people (customers, employers, etc.)

4)Potential for higher income

5) Independence and personal satisfaction

6)Creative opportunity



1)Vulnerability to economic changes

2)Long business hours,possibly few vacations

3)Necessity to be competent in most areas of business

4)Greater financial risk

5)Responsibility for employees,creditors,customers,etc

6)Having to meet obligations when inconvenient

7)Frustrations from customers,suppliers, government,etc


Profile of a Successful Business Owner


Successful business owners are known to have certain general attributes and characteristics that distinguish them from other people.These characteristics do not guarantee success in business, but acquiring them can increase the probability of success.You may not have all the experience necessary for starting a business, but you have to be willing to learn.Concentrating on and developing the characteristics and actions of successful business people can improve the odds of success in your new business.


Below are several major questions concerning a business owner's characteristics and attributes.Take time to answers these questions honestly.If the majority of answers are"yes," then you probably have what it takes to start and run your own business.If your answers are"sometimes" or"no," it is suggested that you choose partners in your business who are strong on your weak points.Having a business team with strengths and characteristics that complement yours can be a deciding factor in the success of your business.


1)Drive and Perseverance

Do you have the drive, persistence, and ambition to achieve and grow?Are you completely committed and determined to attain your goals?Do you strive to achieve excellence?

Do you seek and take initiative?Are you a leader?Do you have a high level of self-confidence?Are you a hard worker?Do you have low a need for status and power?Do you have good health and an enormous amount of energy?


2)Responsibility and risk

Are you willing to accept complete responsibility for yourself and your business?Do you take charge of things and see them through?Are you willing to assume risk (financial, career, family)?


3)Human relations and management skills

Do you get along well with others?Do you level with people and say what you mean?Are you trustworthy and reliable?Do you have patience?Do you have the ability to organize well?Can you make quick confident decisions?Do you have a tolerance for ambiguity, stress, and uncertainty?Are you aware of your strengths and weaknesses, as well as your partners'?Do you have good communication skills?Do you carefully read and understand important papers and documents before signing them?Do you seek and use feedback from your past actions?


4)Mental ability and technical knowledge

Do you have a "nose" for business?Are you creative and innovative?Do you have analytical skills?Do you have a "head" for numbers?Do you know or are you willing to learn the technical aspects of your business?


Successful business owners are not gamblers.They view challenges as opportunities rather than risks.They can recognize an opportunity and know how to take advantage of it.Successful business owners are fanatics about fundamentals.They pay dogged attention to their firms' finances, operations and the external forces that affect them.They have the ability to think like their customers and cannot put up with bureaucracy.One of the predominant traits of successful business owner is perseverance to the point of obsession.They demonstrate extraordinary motivation, tenacity, and the will to succeed.Business owners that win have vision, boundless energy, intellectual creativity and patience.They have confidence in themselves, their business, their employees and the community.


Common Problems Faced by Small Businesses


1)Owner's inexperience in business management

2)Too much debt-- business is too highly leveraged

3)Weak competitive strength

4)Lack of proper inventory controls

5)Lack of proper credit or collection control

6)Low sales volume

7)Poor business location

8)Owner's lack of bookkeeping knowledge

9)Employee and labor problems


The Business Plan


The process of writing your business plan allows you to take an objective view of the business in its entirety.Most entrepreneurs have great ideas, but no plan of action, hence the business proceeds haphazardly.Writing down the specific details of the business while writing the business plan allows the entrepreneur to take an outside view and make realistic, objective decisions.


Taking an objective view of the business allows you to identify its strengths and weaknesses, as well as opportunities and possible threats.The business plan should give enough information to help detect problems, needs and details possibly overlooked.Planning helps determine how to achieve the businesses' goals.


Planning is very important in spotting problems, variables, and situations.Each of these should be spelled out in the business plan, with a contingency for handling each crisis as it comes up.


A finished business plan becomes an operating tool that will help you to manage your business and work toward its success.A completed plan is used to communicate your ideas to vital people, such as bankers, business people and partners. ††If you are seeking financing for the business, the business plan becomes the basis for the loan proposal.


You must first start by gathering information.This can take a few weeks or a few months, depending on the complexity of the business.After gathering this information, organize it into specific categories.This is the time to start planning goals, objectives, and targets, and start developing the marketing and operations outline, as well as financial information.Decide how much money is desired, when it is needed, how much time is going to be spent on the project and how long it will take until the business starts to break even.


Set aside certain time periods to work on the project.It is difficult to find the time if you already are working for someone.Planning a new business can sometimes seem impossible.It is important that you stick with it and spend at least a few hours on it every week.You do not have to do it alone; business partners, professional help and friends and family can help you along the way.It helps to bounce a few ideas off people to get an objective view.


Set up a time line for the completion of the business plan.†† Have sections of the business plan finished by certain dates.Set a certain date for the completion of the entire business plan.Do not forget to make extra copies; you will need them.


The written plan should be long enough to cover your subject thoroughly.If it is more than thirty pages, you need to submit supporting documents (appendix A), and then go through it and trim it down.As long as you are brief and to the point, less is more, because, in a few words, you have already made an impact.If the plan is under twenty pages, you need to go through the information and do a little more research to make sure nothing was omitted.


While writing the business plan, keep in mind that, although it will be a good guide as to where you want the business to go, its immediate purpose is obtaining funds for the business.Also remember that the business plan is not written in chronological order;it should be presented in sections that best explain the business.Research is the key here; a financial backer is not going to approve any funds if you have skipped something that might hinder repayment.


The cover page of your business plan should include the name of the business, address, name of owners, telephone number and a logo (a professional looking logo makes the plan look better).A plain business-like cover page is preferred over a flashy and showy design, which gives the impression of an unprofessional plan.A lender is more likely to think that it is a well-prepared plan if it remains professional and conservative.†††


Parts of a Business Plan


The business plan should include:


††††††††††† Executive Summary

††††††††††† General Company Description

††††††††††† Products and Services Plan

††††††††††† Marketing Plan

††††††††††† Management Plan

††††††††††† Operating Plan

††††††††††† Financial Plan

††††††††††† Legal Plan

††††††††††† Supporting Materials





The Executive Summary:


This section is crucial when you need to get the attention of a possible financial backer.Most financial institutions go through many business plans every day.The executive summary is forfive- minute readers, if it doesn't get their attention in that amount of time,your plan is usually put at the bottom of the heap.This part of your plan must convey a clear picture of the venture,but still create a sense of excitement that will keep the five-minute readers' attention.


The executive summary must be written and rewritten to achieve clarity and interest.The executive summary should include an overview of the entire proposal within one to three pages, and should be completed after the other sections are finished.†† Remember that the goal of the business plan is to gain financing for the project.This section should be done professionally.A copy of an executive summary is in appendix A.


General Company Description:


The business plan usually begins with a brief description of the company itself.This part of the plan explains what type of business it is,where the business is located,and to what part of the market it will be catering.Many aspects of the legal plan are used in this section and should be referred to before you sign the legal plan.Some of the questions that you might what to answer in the general company description include:


††††††††††† Is the company a start-up, a buy out, or an expansion?

††††††††††† What is the basic function of the business?

††††††††††† What is the primary product or service?

††††††††††† Who is your customer?

††††††††††† What type of company is it, manufacturing, retailing, or service?

††††††††††† How is the industry doing now?

††††††††††† What are the company's objectives?

††††††††††† What is the firmís distinctive competence?


Products and Services Plan:


As the title implies, this section of the business plan explains the details of the products and services that the company has to offer.If the product is something new and unique,the technique is using a new machine, a picture should be included to gain the interest and sincerity of the project.Innovations and technical breakthroughs should be patented and mention in this section.Most financial investors will be the most interested in something that is already made, tested and fully functional.Some business plans offer a similar product that competitors are currently making.In this case,you should explain why your product is better,and why your customers will buy it instead of your competitors'.Questions you should answer while writing the products and services plan may include:


††††††††††† What product or service is being offered?

††††††††††† What are the unique characteristics of the product or service?

††††††††††† What is the danger of obsolescence?

††††††††††† How does the product or service compare with the competitors'?

††††††††††† What makes the firm's service more superior?


Marketing Plan:


Financial investors and prospective lenders give a high priority to marketing considerations.The product may be the best thing since the invention of the wheel, but if nobody wants to buy it, they will not invest.The marketing plan, therefore, explains the type of market that exists for the product or service and its benefits to its users.Some of the benefits may be convenience, time saver, attractiveness, better health, greater operating cost, or quickness and ease of the product or service.


The marketing plan should also include the potential customers already in existence and if the market is ready to buy the product or service.The plan also should have a marketing strategy, including promotion, advertising and type of sales force.You also should discuss these elements in relation to the competition.


You should also include a market analysis in this section.This is a reasonable estimate that a certain percentage of the market can be achieved.These estimates need to be based on more than just guesses or second-hand information.If not, then they will not be accepted as realistic or credible by prospective investors.


Some questions you should consider when writing the marketing plan include:


Market Analysis:


††††††††††† What is the target market?

††††††††††† What kind of person is your target customer?

††††††††††† How much share of the market is expected?

††††††††††† What are the market trends?

††††††††††† What is the market potential?





††††††††††† Who are the biggest competitors?

††††††††††† How does your business compare to competitors?

††††††††††† How will you compete?


Marketing Strategy:


††††††††††† How will the company attract customers?

††††††††††† What are the channels of distribution?

††††††††††† What areas will the products sell in?International?

††††††††††† What type of sales force is employed?

††††††††††† What type of sales promotion and advertising will be used?

††††††††††† Do you have a credit and collection policy?

††††††††††† How does your strategy better than competitors?


Management Plan:


If the company is not managed right,you can soon find yourself with a lot of financial problems.Financial backers look for a well-managed company to take care of their investment.The management plan must include how the organization will be structured and give a detailed background on the people in decision making positions, such as the president, CEO, etc.The ideal managerial structure would be a company with diverse management capabilities.Potential investors like to see at least one person in a finance and marketing position and one person in productions and operations.The company should have two perspectives on how decisions will be made to guarantee financial solvency.Some of the questions that may need to be answered in the management plan include:


††††††††††† Who are the managers in power?

††††††††††† What are their skills, education, experience and background?

††††††††††† Are there any consultants, and what are their qualifications?

††††††††††† What form of compensation is given t each key manager?

††††††††††† How is ownership distributed?

††††††††††† What is the rewards system?

††††††††††† What type of management style is used?


Operating Plan:


Also explained in this part of the plan is, how the product is produced, or how the service is provided,where the company is located and what type of facilities are used.The plan also should explain how quality control, inventory control, subcontracting, and other problems are handled in the company.You also should consider environmental conditions, resource availability, customer accessibility and adequacy of labor supply.


Questions you should answer while writing the operating plan may include:


††††††††††† How will the product or service be produced?

††††††††††† What facilities will be used?

††††††††††† What methods of production will be used?

††††††††††† What type of quality control system will be?

††††††††††† What type of inventory control will be used?

††††††††††† What are the environmental restrictions?

††††††††††† What are the advantages and disadvantages of location?

††††††††††† What are the labor requirements?

††††††††††† What are the production cost?

††††††††††† What are the sources of supplies?


Financial Plan:


When applying for funds,the financial plan is the most crucial section of the business plan.This section should explain the projections of revenues and profits, and the basic financial structure.Revenues and profits should be projected monthly the next two years then quarterly for the next five years (appendix A).You also should include a statement of cash flows and a balance sheet in this section.The financial structure should highlight the arrangement of the companies resources, including how much money is reserved for each part of the business, equipment and supplies.†† This part should also show the sources and cost of the funds, how much is borrowed, the amount invested and how it will be paid back.


Some of the main documents that you will use in the financial plan are the balance sheet, income statement and cash flow projections.You also should include a break-even analyses, which tells you how much money you need to make everyday, week and month to stay in business.This is a good tool for monitoring your business goals.A copy of one is†† in appendix A.


Some of the questions that should be answered while writing the financial plan include:


††††††††††† What are the assumptions used for the projections?

††††††††††† What are the projections for the first months?Years?

††††††††††† What are the projected expenses for the first months?Years?

††††††††††† What are the projected profits for the first months?Years?

††††††††††† What are the projected cash flows for the first months?Years?

††††††††††† When will the business break even?

††††††††††† Will additional funds be required?

††††††††††† How much has been invested and how much has been loaned?††

††††††††††† What percentage of funds will be debt and equity?



Legal Plan:


The legal plan should explain the legal structure of the organization.There are three types of legal organization:sole proprietorship, partnership and corporation.Complications arise in companies all the time;the legal plan should explain all of the variations of ownership and organization.For example, the company could be a corporation, but be considered under a "S class" for federal tax purposes.The legal plan can be considered in all of the sections of the business plan, usually explained in the general company description.The legal issues are very important and should be spelled out.A standard form for each type of company is given in appendix A.Some questions you might what to consider while writing the legal plan include:


††††††††††† Will the company function as a proprietorship?

††††††††††† Will the company function as a partnership?General or limited?

††††††††††† Will the company function as a corporation? Regular or Subchapter S?

††††††††††† What are the legal liabilities of the legal form?

††††††††††† What are the advantages and disadvantages of this form?

††††††††††† What legal firm or attorney has been selected to represent your††††††††††† ††††††††††† firm?

††††††††††† What legal issues are significant to the company?



Supporting Material:


All of the documentation you submit in the business plan should be relevant to the business, or provide information not given in the body of the business plan.You can make this section look as creative as you like but remember that financial investors are looking at these articles, so it should be professional and easy to read.In addition to the appendixes mentioned above, supporting materials you may consider adding to the business plan include:


††††††††††† Resume

††††††††††† Letters of Intent

††††††††††† Letters of Recommendation

††††††††††† Special Awards/Achievements

††††††††††† Newspaper and Magazine Clippings

††††††††††† Additional Information (Building Lease, Franchise Agreement, Etc.)


A business plan is two things, first it is a presentation of the positive attributes of your business to lenders or suppliers from whom you are requesting credit.It should tell the complete history about your business, form the past, present, and the future, as briefly as possible.Second, a business plan is your guide to your business.It organizes on paper your thoughts as to why you are in business, who your customers and competition are, the strengths and weaknesses of the business, and your plans for the future.Good Luck!!






Now that you have determined your business potential you should ask the following two questions:


1)Is there a need for your business?

2)Will your business be able to survive the competition?


Once you have answered these questions you will be able to check additional sources and develop a marketing plan.


Is There a Need For Your Business?


People have a natural tendency to be overly optimistic about the prospects of success for a proposed venture.Even though the failure rate for new small businesses is very high.To improve your odds,you should conduct a careful feasibility study before you start your business.Marketing research is a good way for you to look at your chances for success.The most important single thing about marketing your business is knowing your customer.


The Customer:


Most businesses depend on a specific group of the population for their sales.This group of potential customers is called a target market.The first thing you must do is get to know your target market.Find out the demographics, or facts, about your intended target market population by determining age range, sex, profession, income level, population size and growth rate, and permanency of the population.

The next step is to find out as much as you can about the life-style and social behavior patterns of your target market, such as buying habits, changing trends and social influences.The more you know about your potential customers, the more easily you can build a business to provide a service they need.After knowing who your customers will be, you must look into what their needs are and how to satisfy them.

Some other aspects of marketing that you should be aware of and familiar with are the four "P's" of marketing:product, price, place, and promotion.



1)Product (or service)

A business must serve the needs of its customers if it intends to survive.††† A product/market mismatch can lead to the failure of the business.Successful people do not start out with a set idea for a product or service.They let the market dictate to them what is missing,and decide whether they are interested in supplying it or not.Build your business to fit the needs of the market and not what you think the market needs.

The word product can be interpreted broadly to include not only the good or service itself,but also all the intangible benefits that come from doing business with you.You should ask yourself the following questions:


A)Why should anyone want your product or service?

B)Is it currently supplied by another business?

C)How is your product or service superior to others?


It is also important to find out about the industry that you will be joining.This can be done by asking questions such as:


A)What is the future outlook for the industry you are joining?

B)What impact will the national economy have on your industry?

C)What is the projected growth rate of the industry you are joining?

D)When will the growth occur?



Place involves both location and physical facility.

Location:†† Many marketing experts consider location the make it or break it decision.Will customers be willing to go out of their way to come to you,or should you go out of your way to come to them?Your decision on where to locate should also be tied in with your product.If your product is subject to impulse buying and is not very different from other similar products,then you need a place with a lot of casual traffic.If you have a special product that people need,then you can afford to be somewhat out of the way.A successful location is largely dependent on the type of business,the type of goods or services to be soldand the target market.Major considerations are:


A)Closeness to the target market.Customer flow is important to retail establishments and restaurants.

B)Supplies and/or raw materials availability.

C)Transportation costs.

D)Labor availability,rates and productivity.

E)Utilities and their respective rates.

F)Overall business environment in the community.

G)Police and fire protection

H) Housing availability for owner and employees.

I)Quality of life in community.

J)Future quality of location.Location in relation to major competitors' locations.


Physical facility:The next step is to determine whether to build,buy or lease the business facilities.The first two choices involve a considerable outlay of funds and raise problems of future relocations.Major considerations are:


A)Zoning:Can the business be operated without an exemption,or will a delay be involved? How may permits are required?

B)Rental Expense:How is the rent determined,by flat rate,or percentage of gross sales?What about sublet rights?

C)Lease Terms:What are the options to renew or cancel the lease?

D)Additional Costs:What is the condition of the facility?How much remodeling will be needed?Does it need additional lighting,air conditioning,plumbing,etc.?

E)Remodeling:Will a permit be required?

F)Lot and building Size:Can expansion be accommodated?If leased,will the leaser build additional facilities?If leasee remodels or adds additions,who owns such improvements?

G)Storages Capacity:Is there enough to meet the need?

H)Parking:Is there adequate parking for customers and employees?

I)Insurance:What insurance does the leaser carry?Must the leasee purchase additional coverage (leasee should consider title insurance for leased or purchased facilities)?

J)Type of shopping center:Will the nature and design of the shopping center complement or hinder your business?




Other sources of assistance in locating a business site:


1)Banks and insurance firms

2)Real estate agents specializing in commercial and industrial property

3)Chamber of Commerce and/or city and county economic development corporations



The right price is very important in forecasting the cash flow your business will generate.The prices you charge will determine the dollar amount of your sales.You must set your price to be competitive,but at the same time make enough profit to stay in business.



It is your responsibility to let your customers know about your business.What are you selling?Where are you located?What are your hours?How can you use your product packaging to increase sales?Like pricing policy,promotion decisions are mainly ongoing business decisions.You need not be overly concerned about promoting your business until all other considerations are taken care of.Pre-opening promotion is a good idea.It lets you start your business with a bang!It also helps shorten the time it takes to turn a profit.Be careful though,†† most new businesses badly underestimate their advertising budget.Both pricing policy and promotion are very important issues when preparing your marketing plan.Price and promotion will be discussed in the section on The Marketing Plan.


Will Your Business BE Able to Survive the Competition?


In our free-enterprise system,no business is without current and future competition.Assessing the competition and finding a way to beat the competition is the key to success.Many entrepreneurs mistakenly believe that their competition consists solely of firms that offer similar products or services in the same geographical area.However,competition may actually include indirect competitors who are vying for the same customers.Your estimation of your competitors should include all those who offer similar products and substitute products.They may be in the same geographical area or in any other area that is accessible to your market.




You need to find out:


A)What businesses offer substitute or similar products or services?

B)Who are your biggest competitors (direct and indirect)?

C)How long have your competitors been in business?

D)How are the competitions' businesses similar to and/or different from yours?

E)What are your competitions' strengths and weaknesses?

F)How is the competition's business doing?

G)How will competitors react when you enter the market?

H)What are the competitors' managerial abilities,financial situations,facilities,reputations,etc.?


Financial institutions and investors often place heavy weight on the elements of competition when deciding whether to fund a new business.Therefore,you should take their cue and evaluate your ability to compete very carefully.Join the game only if you are confident that you can be successful.If not,you may want to try another field.


Sources of Market Information


1)Market research consultants and advertising firms

2)Colleges and universities

3)Trade associations and government agencies

4)Research you conduct on your own

5)Other sources such as telephone yellow pages,city directories,state industrial directories,etc.


The Marketing Plan


Now that you have decided to go ahead with your business venture,you must prepare a marketing plan to attract your customers.Price and promotion play a big role in this plan.Find out all you can about your competitors' pricing policies.Look through their catalogs and promotional materials.Calculate all your expenses to determine the minimum price you can afford to charge.Figure out when you expect to turn a profit,then set up a promotional plan to get the customers into your business.

Promotion can take many different forms.Each has its own advantages and disadvantages.The appropriate method of promotion depends upon the type and scope of your business.


The two primary media are print and broadcast.Print includes newspapers,magazines,fliersand posters.Broadcasting includes radio and television.In selecting promotional methods,do not go just for the cheapest option.Find out which option gives you the better dollar value.Be skeptical when you talk with media experts.Be sure to conduct a follow-up test to evaluate the results of your promotional efforts.Modify your plan when necessary.Remember repetition is the key to successful media advertising.


A comprehensive marketing plan also includes a marketing budget.How much can you afford and how much are you willing to spend?How and when are you planning to spend it?Where will you get the necessary funds?


A very important aspectin designing your marketing plan is being consistent with the sales goal you set for your business in the pro-forma statements.


Financial institutions look in detail at your market survey and your marketing plan when deciding whether your business is a good risk for their money.It is very important for you to prepare and present a credible market survey that showsthere is a need in the community for your business.You must also demonstrate that you have the ability to compete successfully.A comprehensive marketing plan and budget are usually taken as a sign of responsibility and are viewed favorably by the financiers.†††


Structuring Your Business


The legal structure of a business can take three basic forms:


1)Sole Proprietorship

2)Partnership ("Limited" or "General")

3)Corporation, S or C class


Before selecting the legal structure of the business, the following questions should be asked:


1)How much money do you need?

2)Who will be the source of any needed funds?

3)What skills are needed that you cannot provide?

4)Are there other people available to round out the necessary skills in starting and continuinga business?

5)How much control do you have over the operation?

6)How will the business be taxed and how will applicable laws influence it?

7)To what extent will you be personally responsible for debts or claimsagainst the business?

8)What will happen to the business if you are not able to work for any length of time?


There are many legal and tax considerations that will enter into this decision,so make sure you consult your attorney and your accountant.


Sole Proprietorship


The sole proprietorship is the most common form of business organization.You own and operate the business and have sole responsibility and control.Essentially,you the owner are the business.The profits of the business are considered personal income and therefore are taxed at your personal rate.



1)Ease of formation:Fewer legal restrictions,usually less expensive than a partnership or corporation

2)Flexibility:Quick response to business needs

3)Profits:You have sole ownership of profits

4)Exclusive control and decision-making:You are in charge

5)Tax deductions:Losses are tax deductible



1)Unlimited liability:You are responsible for the full amount of business debts,and this liability extends to your personal assets

2)Unstable business life:Business could be crippled or terminated by your illness or death

3)Limited investment:Investment in the business is limited to the resources that you can raise




A partnership is the association of two or more people as co-owners of a business.It is a legal mechanism that allows for profits and losses to be divided among a group of investors.Partnerships are typically used by groups of professionals such as lawyers and accountants,or for groups of real estate investors.


When forming a partnership,you should have a partnership agreement developed that specifies the legal obligations of each partner.A partnership agreement will:


1)Stipulate the initial amount of funding each partner will contribute to the business.

2)Determine how management decisions will be made and authority will be divided.

3)Establish methods for settling disputes among partners.

4)Set up a procedure for selling out:specify how each partner's interest will be valued;establish restrictions on partner's interest to a third party.

5)Specify what would happen to your business if one of your partners dies or becomes physically or mentally incapacitated.

6)Specify the rights of the partner's spouse.


The most common types of partnerships are "general" and "limited."


"General" Partnership


General partners participate in the management of the business and are personally responsible for all debts.



1)Ease of formation

2)More skills and capital available to boost performance and growth

3)Flexibility and decision making with relative freedom from government control and special taxation.

4)Losses are tax deductible



1)Unlimited liability

2)Personal liability of a solvent partner for the actions of unscrupulous partners

3)Unstable life of business:partnership is dissolved if a partner dies or withdrawsunless specifically prescribed in the written agreement

4)Buying out a partner may be difficult unless specifically prescribed in the written agreement

5)Potential for disagreements between partners could lead to costly dissolution




Limited partners are liable only to the extent of their investment and do not share in the management of the business.



1)A person can invest capital in a partnership business and reap a share of the profits without becoming liable for all debts of the partnership,†† or risking more than the amount of capital contributed.



1)Must have at least one partner who is liable for all debts of the partnershipand other (limited) partners whose liability is limited to their investment in the partnership.

2)No voice in the management of the partnership

3)There are other legal and tax considerations involved,and legal advice is necessary in choosing this form of organization




The most complex form of business organization is the corporation.A corporation is made up of three groups of people:shareholders,directors and officers.The corporation can borrow money,own assets†† and perform business functions without directly involving you or the other corporate owners.



1)Limitation of the stockholders' liability to a fixed amount,usually the amount invested.

2)Business looks more credible than a sole proprietorship to potential suppliers,employeesand bankers.

3)Ownership is readily transferable.

4)Separate legal existence.

5)Relative ease of securing capital in large amounts and from many investors



1)Activity is limited by the corporation's charter and various laws

2)Extensive government regulation and burdensome federal,state,and local reports

3)Considerable expense in formation of corporation

4)Greater administrative expense on an annual basis


"Tax Option" Corporation" (Sub-Chapter "S")


This form of business organization permits a small business corporation to have its income taxed to the shareholders as if the corporation were a partnership.The double tax feature of the system of corporation income taxation can therefore be avoided.Shareholders can offset business losses incurred by the corporation against their income.




1)Losses are tax deductible

2)Share the same operational advantages of a corporation

3)The double tax feature of corporate income taxation can be avoided

4)No limit is placed on the size of the corporation's total income and assets



1)Limited to a maximum of thirty-five shareholders

2)Limited to one class of stock

3)Limited as to sources of income

4)Some states do not recognize such business organizations






Before starting a business, the legal environment of your establishment should be researched.There are many laws, rules, and regulations that must be followed to start and run your business.Almost every aspect of your business is under some form of legal ruling.Specific forms, licenses and other documentation must be filed with state and local government offices in order to begin.Without this documentation, you may be unable to open.It is important for you to take a close look at California's legal business requirements.


Aspects Of Business Under Legal Guidelines


Major aspects of business governed by business law can be divided into the following areas:legal structure, business name, trademarks and patents, licensing and permits, contracts and legal liability.


Legal Structure


The legal structure is an important aspect of the laws governing your business.The laws governing many aspects of business vary depending onlegal structure.As mentioned in an earlier section, the three main categories are sole proprietorships, partnerships, and corporations.You must decide on the legal structure of your business in order to become familiar with the rules and regulations you must follow.


Business Name


Choosing a name for your business can play an important role in determining the success of your business.The name you choose will be associated with the product or service you offer.In choosing a name there are certain rules to follow.


There is a body of law that specifically governs the business name.For example, if a business contains anything other than the actual names of the owners, then it is classified as a firm name or a fictitious name.†† If the legal structure of the business is a corporation, then it must be incorporated and the business name must reflect this fact.


The Fictitious Business Name Statement must be filed within 30 days of the date you open your business.†† The statement is valid for five years.There is a $10.00 fee for initial filing and a $2.00 charge for renewal.†† A copy of this form is included in appendix B.The chosen business name must not be similar to any other business so as not to misleadthe public,and it must not violate any federally protected names.The fictitious name mustalso be printed in the newspaperforfour consecutive weeks.


To file your fictitious name or find out if the name you have chosen is still available, contact:


San Luis Obispo County Clerk's Office

County Government Center

1057 Monterey Street

San Luis Obispo, CA 93403

(805) 549-5241



Trademarks and Patents


A trademark is a symbol that identifies a specific product.If your business sells services, then the service mark is the one that you use in advertising,it will enable the public to set you apart from your competition.Both trademarks and service marks can be registered for your protection.†† You can do so by contacting:


Patents and Copyright Office

Federal Building

450 Golden Gate Avenue

San Francisco, CA 94102


Mailing Address

P.O.Box 36013

San Francisco, CA 94102


A patent is a legally granted monopoly right to produce, use, sell, or gain profit from a specific invention.Patents are extremely important in business.There is a specific body of patentlaw that protects the rights of the registrant.Patent lawyers are usually listed separately in the telephone directory.In fact,general lawyers usually refer most inquiries about patents to these specialists.


Licenses andPermits


Several federal, state and local licenses and permits are required for starting a new business.Before you even apply for a license, you must first find out the land use requirements, zoning requirements and detailed building code requirements for your type of business,and should do so before signing a rental,lease,or purchase agreement.For assistance, contact:


City of San Luis Obispo Development Department

990 Palm Street/P.O. Box 8100

San Luis Obispo, CA 93403

(805) 781-7171


Permits required for new businesses are different depending on the type of business.To find out what you need, you can contact the city's license department.A business operating outside of city limits must contact the County Clerk.The most common licenses and permits include a business license, building permit, sales permit, and occupational licenses.


Business License††


Allbusiness licenses must be posted on the business premises for public inspection.Depending on the location of your business, a city or county business license must be filed.†† If it is located within city limits, then a city license must be filed.†† A copy of this form is included in appendix C.If it is located outside city limits, than a county license must be filed (appendix B).The fee varies depending on the type of business.†† You can obtain a business permit at:


County of San Luis Obispo Tax and License Collector

County Government Center, Room 203

San Luis Obispo, CA 93408

(805) 549-5832


City of San Luis Obispo Finance Department

990 Palm St./ Box 8100

San Luis Obispo, CA 93403

(805) 781-7134



Building Permit


If you are planning to construct your place of business,or do any major remodeling, you must have a building permit.Special permits may be required for parking, food preparation, discharge of pollutants, etc.If you are building within city limits, there are specific forms that must be filed (appendix B).For more information, contact:


City of San Luis Obispo Planning Department

990 Palm Street

San Luis Obispo, CA 93403

(805) 781-7172


If you are building outside city limits, specific forms must be filed with the county (appendix C).For further information on county building permits, contact:


County of San Luis Obispo PlanningDepartment

County Government Center

976 Osos Street

San Luis Obispo, CA 93403

(805) 549-5600



Seller's Permit


If you are planning to sell items that are subject to state sales tax, you must also apply for a seller's permit for each place of operation.A personal Statement of Financial Condition and estimations of monthly sales and expenses are required with all new applications.There is no fee required for a sales permit.However, under certain conditions,a security deposit may be necessary.A copy of the seller's permit that must be filed is includedin Appendix B.For further information, contact:


California State Board of Equalization

Business Taxes Field Office

1303 Grand Avenue, Suite 115

Arroyo Grande, CA 93420-2461



Occupational Licenses


There are many occupations that require licensing in California.Before starting your business, you should find out whether or not you will be required to be licensed.For information on this subject, contact:



Department of Consumer Affairs

3220 South Higuera, Suite 304

San Luis Obispo, CA 93404

(805) 549-3166





A contract is a legally enforceable agreement between two or more parties, creating legal rights and duties.Business contracts can be divided into three groups:commercial contracts, employment contracts, and real estate transactions.


Commercial Contracts:The laws of commercial contracts originate from many sources, but the most important law concerning commercial contracts is the Uniform Commercial Code.It is a comprehensive commercial law adopted by every state that covers the sale and purchase of goods .It does not apply to services.†† It is recommended that you review the Uniform Commercial Code before starting your business.


Employment Contracts:Employment contracts are governed by labor laws.An entire section of the legal profession specializes in this very complex and constantly changingarena.†† Youmay want to consult one of these specialists for assistance.


Real Estate Transactions:Real estate transactions involve the lease or purchase,of land,or property for your business premise.


Legal Liability


A business has three types of liabilities:legal liability, employment liability, and product liability.


Legal Liability:Legal liabilities are the obligations a business owes to the government, such as abiding by the business law, the contract law, the tax law, the permit and licensing requirements.Legal liability also includes the protection against deceptive trade practices listed under the Uniform Deceptive Trade Practices Act.


Employment Liability:Employment liability is tied closely to employment contractsand labor laws.There is an entire body of lawwhich regulates the number of hours worked,minimum wage,health benefits, discriminations, undocumented alien workers, termination of employment, retirement benefits, vacation, insurance, union contracts, etc.


Product Liability:†† Product Liability is a business' responsibility to ensure that the product it sells is safe for the public to use.It also covers warranties businesses offer for its products.You must make sure that you understand your responsibility, as a business owner, to the legal environment.†† You must become aware of its implications to your business before you start.


For information concerning the legal liability of your business, you can contact:


The Better Business Bureau

P.O. Box 746

Santa Barbara, CA 93102

(805) 963-8657





Financing is one of the most important aspects of starting a new business.Both insufficient and over financing can cause small business failures.Your ability to provide and raise adequate capital will determine the fate of the business.Over financing with quick credit at high interest rates can also put the business at risk.Before starting a business you must analyze what type of capital and how much is needed.Decisions on how to finance the capital and at what cost is needed for the business.




Start-up capital is the money it takes to start a business before it actually opens its doors to the public.Some of the possible start-up costs may include research and development, real estate, equipment, inventory, personal, legal fees and possible franchise fees if you decide to open a franchise.


Working capital, or current assets,is the money needed for the day-to-day operations of the business.A solvent business should always keep enough working capital to keep the business going until profits can replenish the fund.Some of the operating costs may include taxes, payroll, utilities, rent, advertising, loan repayments, inventories and supplies, maintenance, insuranceand possible accounting and legal fees.


Financing Capital:


There are basically three types of financing that an entrepreneur can obtain.They are equity financing, debt financing, and internal financing.


Equity refers to the amount of money that a private investor would invest in the business.This would include your own personal investment.Ownership of the business is given to investors and yourself.Sources of equity financing may come from venture capitalists or from private investment.


Debt financing is the process of borrowing funds and repaying them with interest.There are many sources of debt financing available.It is advised you search for funds thoroughly to find the lowest interest rates and terms possible.Several types of debt are available.


Some of these include:


††††††††††† Unsecured Term Loans

††††††††††† Equipment Loans

††††††††††† Real Estate Financing

††††††††††† Equipment Lease


Internal financing is the process of using funds generated from credit, asset generation and more efficient operating cost, relieving working capital.Since the money comes from an established business, its internal financing is not used for start-up capital.


Sources of Financing


There are a variety of places to look for funds to start up a business.Some of the common sources are venture capitalist, private sources, banks andthe government.


Private Sources


Private sources include your own savings, which can be good and bad.It can be good because you do not have to pay it back with interest and you know it is there when you need it.It can be bad because you are not earning any interest on those funds anymore,and all of your extra cash is usually taken up.


Other sources of private funds include friends and relatives.Friends and relatives are an excellent source of funds because you are not forced into a loan that you have to pay, and relatives are usually open to negotiation.If the money is not paid,however your relationship may be jeopardized.††




Almost all banks offer both short-term and long-term interest rate loans.All commercial banks offer business loans.In San Luis Obispo, the Bank of San Luis offers loans specifically for start-up and continuing small businesses in the area.It is best to consult with all available banks in San Luis Obispo before settling on any one bank.For a complete listing please consult the phone book or the Chamber of Commerce for more help.





Federal, state and local government agencies offer a number of financial assistance loans to small businesses.Each one of these loans helps to finance a specific type of business.The drawback to these types ofloans is the specifications that these government agencies have on the companies that they fund.For a list of loan programs and their requirements, contact the Chamber of Commerce, or the United States Small Business Administration.


San Luis Obispo Chamber of Commerce

123 Chorro Street

San Luis Obispo, CA 93401

(805) 543-1234


Small Business Administration:


The Small Business Administration (SBA) offers a variety of loan programs to eligible small businesses that can't borrow on reasonable terms from conventionallenders without government help.There are two types of SBA loans available,guaranty loans, and direct loans.


Guaranty loans are loans made by private lenders, usually banks, and are guaranteed to be paid back by the SBA in case of default up to 90 percent.


The maximum guarantee percentage of loans exceeding $155,000 is 85 percent.SBA can guarantee up to $750,000 of a private sector loan.Working capital loans generally have a maturity of seven years and cannot exceed 2.75 percentover the New York prime.Loans with maturities of less than seven years can't exceed 2.25 percent over the New York prime.


Direct loans from the SBA are available to applicants unable to secure a SBA guaranteed loan.Before applying for a direct loan an applicant must seek financing from a bank.Direct loan funds are very limited and interest rates are based on the cost of money to the government (T-bonds) and are calculated quarterly.Other SBA loans include:


††††††††††† Small general contractor loans.

††††††††††† Seasonal lines of credit guarantees.

††††††††††† Energy loans.

††††††††††† Handicapped assistance loans.

††††††††††† Export revolving line of credit guarantees.

††††††††††† International trade loans guarantees.

††††††††††† Pollution control financing loan program.


Venture Capitalists


Venture capitalists invest in a new firm to gain a higher percentage of interest than they would by conventional means.Many venture capitalists are controlled by banks, financial institutions, insurance companies, large corporations, private institutions, or individuals.Most venture capitalists have preferences in locations, industry and size of the investment.Their preferences in ownership is to purchase stock, but usually are not interested in running the business but want to make sure the investment will pay off.


Venture capitalists usually charge large fees and interest.One advantage is with venture capitalists is that they sometimes are willing to take risks not acceptable to public lending institutions.Some disadvantages are thehigher rate of interest they charge, the restrictions they place on the term of the loan and the degree of control they may demand over the business.


Other Sources:


Other sources of capital may include credit unions and life insurance groups.Both institutions offer personal loans to members usually at interest rates lower than that of banks and public loan agencies.Insurance companies commonly loan funds against the entrepreneur's life insurance for up to 95 percent of the policy value.Interest payments may also be deferred if the primary loan payments are made on time.The insurance coverage will also be reduced until the loan is paid back.




To apply for a business loan, some of the preparations should include:current business balance sheet, income statements for three to five years, current personal financial statements, a list of collateral and a detailed statement on the amount of the loan requested and the purpose of the loan (appendix C).


After taking these documents to your bank, usually in business plan form, the bank should be willing to consider you directly.When applying for the loan you should consider the loan for aSBA loan guarantee program.


Whether the business is considering debt of equity financing, it is important to understand the factors which will affect a credit decision.


Those factors include:


††††††††††† Experience of Management

††††††††††† Collateral

††††††††††† Types of business

††††††††††† Business history

††††††††††† Type of Industry

††††††††††† Ability to Repay

††††††††††† Amount of Funds to be required


Financial Consulting Firms


Financial consulting firms do not lend you money directly, but are an invaluable source for locating lenders.Many of the financial consulting firms are also contractors for government loan agencies.Financial consulting firms are professionals in the world of business financing.They offer business advice, help determine the needs of the business and also help prepare a loan package to present to the potential lender.



Accounting For Your Business


Good record keeping the constant and detailed knowledge of expense,income,and profit or loss--is the first step toward the profitable management of your business.


Since few small business owners spend much time record keeping,the customary warning of keeping only those records that are actually used should be replaced by two warnings.The first is to keep basic records.Never rely on memory,close personal contact with the business,or on some simple system that you believe replaces basic records.The second is to make effective use of the basic records that are kept.Many owners fail to use inventory recordsfor sale promotion,changes in buying or merchandising policies and charge account records for customer analysis and sales promotion.


Without adequate records,it will not be possible for your business to handle buying,inventory control,credit and collections,expense control,personnel,production controland most other aspects of management efficiently.Any experienced owner knows that it is just common sense to keep an accurate, written record of every business transaction.A lack of proper accounting and record keeping in your business makes it impossible for you to know how your business is doing,and in the majority of cases,the first indication that something is wrong comes too late.You will need accurate and complete records to help you monitor your business.Records will help you do income taxes at the end of the year,obtain loans,inform suppliers and creditors,and let you know how the business is doing financially.Records also aid in planning for the future based on factual financial knowledge rather than guess work.


Trade associations often provide guidelines or accounting records tailored to a particular business.There are also a variety of records and record keeping systems available at bookstores.It is suggested you use some type of computer based program tailored to your needs.


Every business should have up-to-date records which provide the following information:


1)Accurate records of sales and operating results,fixed and variable costs,profit or loss,inventory levels and credit and collection totals.

2)Comparisons of anticipated business performance with actual business performance.

3)Financial statements,such as profit and loss,cash budget and balance sheet.

4)Tax returns and reports to the government.

5)A method for uncovering employee thefts,material waste,or record keeping errors


Your essential records should have the following information:


1)Daily summary of cash receipts taken from cash register tapes,charge slips,or sales receipts.

2)An expense ledger tallying both cash and checks for accounts payable,payroll,rent and other recurring expenses

3)An inventory system showing shipments received,accounts payableand the amount of inventory on hand

4)An employee pay record listing hours worked,pay and withholding deductions for both full-time and part-time employees.

5)An accounts receivable record for credit sales


The Internal Revenue Service does not require specific accounting methods,records,or systems.However,the IRS does require that you maintain permanent books of account which can be used to show income,expense and deductions.These records must be accurate and reflect taxable income and allowable deductions.Records also must be kept so that they are available for inspection by IRS officers.


Accounting Methods


Choose either a cash accounting method or an accrual accounting method for reporting the income and expenses of your business.Your choice should be made after discussing the matter with your bookkeeper or accountant.Here are some of the differences.


The Cash method:


The cash method of accounting is used by individuals and small businesses that do not have inventories.


Income:With the cash method,all items of income received during the year are included in gross income.


Expenses:Usually you must deduct expenses in the tax year that youpay them.


The Accrual Method


The purpose of the accrual method of accounting is to match the income and expenses in the correct year.


Income:Under the accrual method,all items of income are included in gross income when earned,even though they may be received in another tax year.


Expenses:If you are a business that uses the accrual method of accounting,you deduct business expenses when you become liable for them,whether or not you pay them in the same year.All events that set the amount of the liability must have happened,and you must be able to figure the amount of the expenses with reasonable accuracy.



Hiring A Bookkeeper and an Accountant


It is highly recommended that you hire both a competent bookkeeper and a professional accountant.Spend the necessary time it takes to find the right bookkeeper and accountant for your needs.To find the right bookkeeper and accountant talk to people in the same type of business you are in to get referrals.Trade associations,management consultants,business associates and friends are also good referral sources.


Remember,it's not necessary to hire an accountant to do your day-to-day bookkeeping,but your bookkeeper must have adequate experience and qualifications to handle the record keeping needs of your business.It is also a good idea to contract the services of a professional accountant to provide important advice and help in determining what records to keep,the most economical way of maintaining the records,techniques on how to insure against paying unnecessary taxesand the most efficient system of cash flow management.An accountant's advice is helpful in keeping track of inventory,so that your business will always have enough on hand for customers but not more than should be kept.The accountant will also suggest methods for depreciating assetsand maintaining up-to -date balance sheets and income statements.



For any type of small business, different types of federal, state, and city taxes must be paid.Records must be kept that provide information needed to figure your tax deductions.


Federal Taxes:


Employers Identification Number


An Employer's Identification Number (EIN) must be obtained prior to starting your business.An EIN identifies your business for federal and statetax purposes.You may need to get a new EIN if the form of organization of your business,or the ownership of your business changes.


To apply for an EIN,use form SS-4, application for EIN.This forms is available from the Internal Revenue Service.The application should be made early enough to allow time for theprocessing of the form and for an EIN to be issued.


Registration forms may be obtained from the nearest Employment Tax District office.If you obtain a registration form from another source it may not be the latest version.If you are applying for a sales tax permit at an office of the State Board of Equalization,that agency also can assist you in filing for an employer account number.All registered employers must report any subsequent change in business name,address,or legal entity,such as individual to partnership,or corporation ( see appendix D).If you are registering in a year that is subsequent to the year of this guide,contact the nearest Employment Tax District Office for the latest version of the form DE-1 ( see appendix D).


Include your nine-digit Federal Identification Number on the registration form so that tax credit can be properly applied when claimed on your Federal Form 940.For information on federal filing requirements,contact your nearest Internal Revenue Service Office.Information on sales and use tax may be obtained from any State Board of Equalization Office.

Federal Income Tax Withholding


Any employer of one or more persons must withhold federal income taxes from wages paid to employees.For each employee,you should obtain a withholding exemption certificate,know as the W-4 (appendix D),from the District Director of the Internal Revenue Service,and have the employee complete the form.Based on the information on the certificate,a certain amount of taxes is withheld from the wage payments.Generally,the income tax must be withheld from wages if the wage for any payroll period is more thanthe amount of the employee's withholding allowances (per w-4) for the period.


A payroll may be daily,weekly,biweekly,or monthly.The amount to be withheld can be determined by reading Circular E,furnished by the IRS.There should be no withholding for those employees who claim "exempt"on the W-4's.Those employees must renew their exempt status every year by filing a new W-4 by February 15th each year.Otherwise,an employee need only fill out a new W-4 when the situation changes (martial status,address or withholding allowances).


Your are required to deposit the tax funds collected.You must file quarterly returns with the District Director of Internal Revenue.You must file an annual reconciliation of the quarterly returns with copies of the withholding statements.If you neglect to,or improperly file returns,penalties and excess payments may be levied.


Social Security Tax (FICA)


Anyone who owns a business,†† employs one or more persons and has net earnings of $400 or more as the sole owner or partner,is also subject to the social security tax.The employer pays a percentage of wages for each employee.This amount is matched by the employee on all wages received up to an annual maximum amount of earnings.The employee's share of the social security payment is deducted by the employer at the end of each pay period.This form is located in appendix D.


Self-employed individuals pay a self-employment tax,which is also a percentage of wages up to a maximum amount of earnings.This tax provides social security coverage for the self-employed,and it is paid in place of the social security tax.


You also must maintain the following information in your records on social security taxes of your employees:


1)The amount of each wage payment subject to FICA tax

2)The amount of FICA tax collected for each payment and the date collected

3)Also if the total wages payment and the taxable amount differ,the reason why they do must be clarified


For further information on social security taxes contact the Internal Revenue Service.Because of the nature of social security taxes,assistance in setting up records should be requested as soon as a business is formed.


Federal Unemployment Tax (FUTA)


The federal unemployment system,together with the state system,provides for payments of unemployment compensation to workers who have lost their jobs.Payments in kind (wages not paid in money)and tips must be included in wages paid to determine federal unemployment taxes.These forms are located in appendix D.


Additional information in your records required by the Federal Unemployment Tax Act (FUTA) are:


1)The total amount paid to the employees during the calendar year

2)The amount of compensation subject to the unemployment tax

3)The amount you paid into the state unemployment fund

4)Any other information required to be shown on the unemployment tax return,and amount of the tax.


Forfurther information contact:


Employment Development Department

3220 S. Higuera Rm 304

San Luis Obispo,Ca 93401



Internal Revenue Service

3220 S. Higurea Rm. 308

San Luis Obispo,Ca 93401




The California Employment Security System provides for two types of benefits to wage-earners:unemployment insurance (UI)and disability insurance (DI).A separated section of this guide is devoted to disability insurance benefits.


State Unemployment Insurance


Employers paying more than $100 in wages in any calendar quarter,and employing one or more workers,generally are subject to the California Unemployment Insurance Code.The current percentages being paid by employers in San Luis Obispo County is equal to 3.4 percent of the salaries earned by an employee.


The California Employment Development Department provides an "Employer's Guide"to the Unemployment Insurance Code of California (DE 1101C,located in appendix D),which should be consulted for details on these procedures.Unemployment Insurance is financed entirely by employer taxes.


Employer contributions are payable quarterly on or before the last day of the month following the closest quarter calendar.Late payments incur interest charges and possible additional penalties.


Unemployment Insurance is payable to covered employees who are unemployedthrough no fault of their own,able to work,available for work and actively seeking employmentandhave met all the eligibility requirements of the law.The weekly benefits amount to which a claimant may be entitled is based on the amount of wages paid in the highest quarter of his/her base period.


State Disability Insurance


California's Disability Insurance (DI) program provides benefits toeligible workers who suffer a loss of wages when they are unable to perform their usual work because of nonoccupational illness or injury,or pregnancy.Work-connected disabilities are covered by worker's compensationlaw.


Employers are responsible for withholding,and paying to the Employment Development Department,contributions from employees'subject wages.Employers are liable for the Disability Insurance contribution,whether or not such contributions,have been deducted from the employee's wages.For further information on how to fill out the Disability Insurance Form DE 2503,see appendix D.


Disability Insurance,which covers non-occupational disabilities,should not be confused with workers' compensation insurance,which relates to work-related injury or illness.However,if the weekly benefit rate for a worker's compensation claim is less than that which would be payable under disability insurance coverage,disability benefits may be used to pay the difference.Currently in San Luis Obispo County,the benefit rate is 1.25 to a maximum of $31,767 in wages per year.


Employment Development Department

3220 S.Rm.304

San Luis Obispo,Ca93401



State Board of Equalization

1303 Grand Ave.

Arroyo Grande,Ca93420



State Franchise And Income Taxes


Net income for corporations is generally the same as that determined for federal income tax purposes,with certain exceptions.Income of partnerships or sole proprietorships is taxed as the personal income of the proprietor.The California personal income tax system is patterned after federal income tax law,including a comprehensive system for withholding personal income taxes.Taxpayers not subject to withholding,or whose expected tax liability exceeds the amount withheld,must pay estimated taxes quarterly.You should see your accountant for more complete informations.


If your business is defined as a "subject employer"under the California Unemployment Insurance Code,you must register with the California Employment Development Department to obtain a state employer identification number.By law,the California Employment Development Department administers the reporting,collection,refundingand enforcementof state personal income taxes required to be withheld by employers.A business applying for Fuel Tax Permit or Sales Tax Permit from the State Board of Equalization is simultaneously registered with the Employment Development Department.Registration must be within fifteen days of the first payment of wages.No fee is required for registration.Most employers who withhold California personal income taxes already report to this department under the law relating to unemployment and disability.


The "Employer's Tax Guide" provides extensive instructions on requirements and procedures for withholding,filing,and remitting personal taxes.For a copy of the "Employers Tax Guide" contact the Employment Development Department at the address given below.


Employment Development Department

3220 S. Higuera, Rm.304

San Luis Obispo,Ca93401


Annual tax returns and full payment are due by April 15th for most taxpayers.Information on tax rates and credits is available from any office of the Franchise Tax Board.


Wages subject to personal income tax withholding consist of all compensation paid to an employee for services performed for the employer,with certain exceptions.Gratuities of $20or more a month must be reported to employers and are subject to withholding.


Sales and Use Tax


You must apply to the State Board of Equalization for a seller's permit for each place of business you operate.See appendix D.††


Most permit holders file sales tax returns quarterly, however,the Board requires many taxpayers to file monthly or annually instead.The Board also conducts an ongoing audit program to ensure that taxpayers are neither over nor underpaying.complete records of all business transactions--including sales, receipts,purchases and other expenditures--must be maintained and available at all times for inspection by Board personnel.

Workers' Compensation Tax


California law requires all employers to carry workers' compensation insurance by certification or self-insurance.Premiums are based on payroll levels and the type of occupation insured.The California Department of Industrial Relations administers the program.


For further information and specific requirements on workers' compensation insurance, contact:


California Department of Industrial relations

P.O. Box 603

San Francisco, CA 94101

(415) 557 - 1954




Before starting the business you should thoroughly investigate the business insurance needs.Insurance is often overlooked and is to late find out the business is not covered in the chance that a major accident may happen.A good insurance plan protects the business and yourself from a major loss and hedges risk to an insurance company.


In selecting an insurance plan, it is important that the business has all the right coverage for its specific needs at the best rates.There are many insurance companies to choose from all having different plans and rates.Package deals which combine several coverages in one policy are available to business owners by most insurance companies.The insurance plan for your business should be company specific to the business needs.A good insurance agent can be essential in helping select an insurance plan that is right for the business.It is preferred that you keep the same insurance agent who is familiar with the business for all the insurance needs, and any future insurance needs when updating the plan.


Critical factors of selecting an insurance plan:


††††††††††† Identifying risk that need to be covered

††††††††††† Determining the amount of loss from each risk

††††††††††† Obtaining coverage for largest potential loss first

††††††††††† Avoid duplicate coverage


Types of Insurance


1)Key Man Life Insurance:

A sole proprietor or a partnership should consider obtaining a key man life insurance policy at least in the amount of financing to be obtained to start a business.The insurance will protect the business in the event of illness or death of the principle.


2.Liability Insurance:

Liability insurance is one of the most important type of insurance for the business.Liability insurance will protect the business from financial loss due to bodily injury or property damage caused by negligence of business operations.Negligence may include acts of the owner, acts of employees on the job, business conditions, and/or products of the business.For a copy of the basic liability insurance application and additional forms of insurance that are needed please see appendix E.†† Businesses may also be subject to damage claims even when reasonable care was used.Some of the liability insurance policies available include:


††††††††††† Owner

††††††††††† Product

††††††††††† Contractor Accidents

††††††††††† Personal Injury (Libel and Slander)


3.Property Insurance:

Property insurance provides protection to the owner from damage to of loss of property.In determining property insurance rates, insurance companies take into consideration several factors concerning the property and building (appendix E).Some of the property losses that can be covered include:


††††††††††† Equipment and Inventory

††††††††††† Fire, Windstorm

††††††††††† Theft, Vandalism

††††††††††† Explosion, Riot

††††††††††† Employee Dishonesty

††††††††††† Business Interruption



4.Workers' Compensation Insurance:

Workers' compensation insurance provides compensation benefits to employees injured on the job.Employers failing to provide safe working conditions are liable for damage suits brought by the employee suffering injury.Employers are required by law to carry workers' compensation insurance for all employees.Premiums are determined by the state and will vary according to the occupation and salaries of the employees.Workers' compensation insurance is available from both the state and private insurance companies (appendix E).For further information on workers' compensation insurance contact the following.


California Department of Industrial Relations

P.O. Box 603

San Francisco, CA 94101

(415) 557 - 1954


5.Automobile Insurance:

Automobile insurance offers both property and liability coverage for vehicles owned by or used by the business for business purposes. Several types of property insurance for automobiles exists including collision, theft, and breakage.Liability insurance for automobiles protects the owner from losses resulting from an employees injuring people or damaging others property (appendix E). Non-owned automobile insurance is available for to the employer for employees driving their own vehicles on company business.Rates are determined by the type of vehicle, what itís used for, and the driving record of the employee driving the vehicle.


6.Other Insurance:

Depending on the type of business and the situation other insurance coverages may be needed.One should consider that different businesses need different types of insurance plans (appendix E).You should consult with a capable insurance agent about these special situations.††† Also, you may take into consideration how much of the business you want to insure.Some of the other types of insurance that may be considered for the business include:


††††††††††† Surety Insurance

††††††††††† Employee Health and Life Insurance

††††††††††† Key Person Insurance

††††††††††† Credit Insurance







Running a small business takes an enormous amount of time and personal effort.As a business grows, it becomes impossible for an entrepreneur to oversee every single detail, even if he or she is putting in 60 hours per week.So, sometime in the future, you will probably be faced with the task of hiring employees.Your business can only be as good as the people you attract and keep.Therefore, it is important that you take the time necessary to find the right people because this will save you frustration and valuable time in the long run.This means that hiring, training, and keeping good employees becomes critical.


Think of the people you will hire as an investment.When you choose people to work for you, keep in mind that they will be with you for a long time an that these people are going to be an essential ingredient in your success.†† Look for people who balance your strengths and weaknesses and who have a track record of success.Be familiar with track records potential employees because people tend to repeat their bad habits.


It is not easy to find good, qualified help when often you offer little money, skimpy benefits, and limited room for advancement.That is one reason why employee relations is such an important part of the small-business environment.Employees of small companies are often more satisfied with their jobs than are their counterparts in big business.The reason for this is that their jobs are more challenging, their ideas are more often accepted, and their bosses more often treat them with respect.The best way to attract and keep good people is to offer them:



2.A good working environment

3.A sense of accomplishment

4.A belief in the business

5.A fair salary


Regular Employees


††††††††††† There are two types of permanent employees:Common law employees and statutory employees.


Common Law Employees


How do you know when a person is an employee?According to common law terminology, an employee is a person hired to render services, and an employer is the person who retains control or the right to control how the service is to be rendered.The right to control is the most important consideration in determining if there is an employee/employer relationship.


If you employ one or more people, then you must obtain workers compensation insurance.You are also required to withhold social security , income taxes, and pay the employer's share of various taxes and benefits.For details, refer to the section on understanding taxes.


The Industrial Welfare Commission of the State of California has issued orders regulating wages, hours, and working conditions in fifteen different industries.At this point, it is best for you to consult your attorney or contact:

State of California Labor Commissioner

411 East Cannon Perdido, Room 3

Santa Barbara, CA 93101

(805) 963-1438


Department of Fair Employment and Housing

5720 Ralston, Suite 302

Ventura, CA 93003

(805) 654-4513

Employment Tax District Office

3220 South Higuera

San Luis Obispo, CA 93403

(805) 549-3388


Statutory Employees


Statutory law deals with actual written state and federal laws, unlike common law which relies mostly on previous court decisions.Certain people, such as family members, though not qualified as common law employees, may be considered statutory employees by federal and state law.Special rules apply to different occupations.When in doubt, consult your attorney or contact one of the offices mentioned above.




Many immigrants come to California to look for a chance to make their lives better.In the past, the laws dealing with hiring aliens were vague, and it was up to the immigration authority to catch illegal aliens at work.Businesses could hire pretty much anyone they wanted.Now the situation has changed.


The Immigration Reform and Control Act of 1986 not only makes hiring, recruiting, or referring unauthorized aliens illegal, but it also places the task of enforcement on the employer.

This law applies to all employers and employees.Under the new law, the employer is responsible for checking the status of every employee.The law also requires every employer and employee to fill out an Employment Eligibility Verification Form or the I-9 Form.This form is to be kept with the employee's personal file.If you knowingly hire an illegal alien, you will be fined between $250 and $10,000 per worker.The law also prohibits a business from using independent contractors who hire unauthorized aliens.


Be sure to file an I-9 form before hiring an employee.A separate fine of $100 to $1000 will be imposed for failure to comply with the I-9 paperwork requirement.You can get the I-9 form from any Immigration and Naturalization office.


On November 29, 1990, the President signed into law the Immigration Act of 1990.This new law will result in major changes in immigration concerning immigrants and non-immigrants.At present, the INS is developing the various provisions of the Immigration Act of 1990.†† For further information concerning these implementations, contact the INS at:


Immigration and Naturalization Service

US. Federal Building

300 North Los Angeles Street, Room 1001

Los Angeles, CA 90012

(213) 894-2119


For recorded information concerning immigration and naturalization laws, call toll free:




Alternatives to Regular Employees


There are many alternatives to hiring permanent employees.Due to financial limitations, you may want to consider hiring independent contractors or outside professionals on an as needed basis; and/or utilize partners, mentors, informal boards or friends to help out with the business.


Independent Contractors


Think about hiring independent contractors if you require a broad range of specialized services.When you first start your business, you may not be making enough money to hire enough full-time employees to provide all the services you require.


Employers hire independent contractors to perform specific tasks that require specific skills.The employer usually pays the independent contractor by the job rather than by the hour.When using an independent contractor, you are not required to provide workers' compensation insurance, to withhold income taxes, or pay employment taxes.Because of special legal considerations, though, you should consult your attorney or certified public accountant.



Outside Professionals


Enlist the services of a good bookkeeper, a good accountant, and a good lawyer.This is very important o the success of your business.In choosing these professionals, you should chose trustworthy and reliable individuals who are familiar with the type of business you are starting.An accountant or a lawyer can help you avoid serious financial and legal problems you may experience.


Mentors, Informal Boards, Etc.


Find a mentor, someone in the business whom you respect and who has been successful.Someone you can talk to from time to time about your business and how it is progressing.You need to get feedback from someone whom you trust and respect with prior experience in the business.You may want to put together an informal board of advisors who can offer you experience and expertise you can not afford to hire permanently.You should consider seeking the advice of successful local business executives or successful retired business executives.For information, contact:


Service Corps of Retired Executives (SCORE)

Central Coast Chapter

San Luis Obispo, CA 93401

(805) 543-1323


Sources of Information


When you have decided that you do need hired help, there are several ways to obtain the workers you need.You can try to find employees on your own, use an employment agency, contact a job training program, or use a government Employment Development Department Office.


If you are interested in using an employment agency, you can find them listed in the Yellow Pages under Employment Agencies.But you should be aware that many such agencies require that the employer pay a fee for the services.


For skilled workers in San Luis Obispo, contact:


San Luis Obispo Private Industry Council

3566 South Higuera, Suite 100

San Luis Obispo, CA 93401

(805) 541-4044


Note:The San Luis Obispo Private Industry Council is a contractor of the State of California.Its primary responsibility is to distribute job training funds to different programs in the San Luis Obispo area and to encourage employment opportunities by offering employers tax credit and wage supplement incentives.


If you prefer to use a government office for locating workers, you can contact an Employment Development Department Office in your area:



3196 South Higuera

San Luis Obispo, CA 93401

(805) 544-9050

835 Park

Paso Robles, CA 93466

(805) 238-4842

Other Sources


Greater Avenues for Independence (GAIN)


GAIN is a comprehensive employment training program designed to benefit both business and welfare recipients.GAIN benefits employers by providing them with a pool of trained workers ready for immediate employment.Many employers are eligible for significant monetary incentives for their participation, including tax credits and on-the-job training allowances.GAIN also benefits welfare recipients by providing them with training, guidance, and assistance in finding employment in an effort to end their dependence on welfare.If you would like more information , contact:


Department of Social Services

P.O. Box 8119

San Luis Obispo, CA 93403

ATTN:GAIN Program Field Office


Outside Assistance


Small Business Institute:


The Small Business Institute (SBI) is a program utilizing teams of senior undergraduate, and graduate business students as a part of class projects.Problems can be analyzed objectively for existing businesses and for those wishing to start a business.Feasibility studies and business plans are a commonly used and very useful to the entrepreneur.The program is sponsored by the Small Business Administration and California Polytechnic State University, San Luis Obispo, and is of no cost to the business.It is advised that you request assistance in advance of the opening of the business or as soon as a problem arises.For more information contact the following:



Walter Perlick, Ph.D

College of Business and Economics

California Polytechnic State University, San Luis Obispo

San Luis Obispo, CA 93407

(805) 756 - 1234



Service Corps. of Retired Executives (SCORE):


Service Corps. of Retired Executives (SCORE) is a voluntary non-profit national organization of retired business owners and executives, sponsored by the SBA.SCORE offers the knowledge, and experience without fee to small business owners who are experiencing management and optional problems.For more information on SCORE contact:


Service Corps. of Retired Executives (SCORE)

123 Chorro Street

San Luis Obispo, CA 93401

(805) 543 - 1323


Active Corps. of Executives (ACE)

123 Chorro Street

San Luis Obispo, CA 93401

(805) 543 - 1323


Other Sources:


There are many more resources available to prospective business owners.Financial planners and marketing researchers can provide extensive market analysis tailored to the needs of the business.Selection of a consultant or advisor can be a critical step.Most of the assistance groups mentioned and even some more can be reached at the San Luis Obispo Chamber of Commerce at:


San Luis Obispo Chamber of Commerce

1039 Chorro Street

San Luis Obispo, CA 93401

(805) 543-1323






Now that you have read this guide,do you still feel that having your own business is what you really want to do?If the answer is yes,here are some steps you should take to help you get started:


1)Talk to your family,relatives,and friends about your idea.Listen to their reactions with an open mind.Modify your plan,it necessary.Talk to them again.Practice the presentation you will make to the bank and other agencies.Remember,they are on ;your side;they want you to succeed.If you can't sell your idea to your friends and relatives,how can you sell it to others.


2)Do some market research.Do it yourself or find professional help.It is crucial that you know your competitive against.


3)Once you have foundif there is a need in the market place for your business,sit down and written a preliminary business plan.Focus on your strengths and focus on the weaknesses of you competition.


4)Begin assembling personal assets and other private financial resources.Determine how much money you have and how much you will need to borrow.


5)Talk to an attorney if you feel uneasy about any issue.Have the attorney agree to look over any legal documents,including all contracts and leases,before you sign them.


6)Get busy looking for the best location for your business.Location is of primary importance.Take your time and insist on the best possible spot.


7)contact other professionals,such as an accountant,for help in setting up your books,etc.;an insurance company to negotiate insurance coverage;and employment offices if you need employees.


8)Contact potential suppliers and distributors.This is also a good time to contact your trade association if you not done so.


9)Do you have all the answers yet?If not,stop!Go back and find the missing pieces.You may wish to contact a financial consulting firm at this point.Revise your business plan,if necessary.Approach the bank or a government agency for a small business loan only if you have enough information to answer all their questions.If you have looked into all the areas discussed in this guide,then you will be prepared to make a good impression and increase your chance of getting a business loan.


When all these things are done,and when your loan is approved,engage an advertising or marketing service and begin to plan for the opening promotional program.It need not be elaborate at this time,but the work should be out about when and where you are opening your business and what and how you are going to serve the customers.


Throughout this entire preparation time,you must remain flexible.Change your plan as often as the situation warrants.listen to the experts advice but be critical and skeptical when necessary.Be on guard against overly optimistic or pessimistic attitudes.Don't hesitate to ask for help.