I didn’t like the direction things were going here so there won’t be any new postings in this format. Look for a new project to appear in this space really soon.

DISCLAIMER: I am not a lawyer or an accountant. It’s always a good idea to check with professionals about these sorts of issues. This is merely a general discussion so you can discuss things intelligently with your paid professionals.

OK, you’ve got your first product or service idea, you’ve figured out pricing, how you’re going to market it and all the other little details. Now you have to decide how to structure you business. There are four forms your business can take (in the US):

• Sole Proprietorship - This is you. If you don’t do anything you are a sole proprietor. They are simple and cheap to set up — where I live the only cost is $14 to register a DBA (”Doing Business As”) form with the county. It doesn’t even cost that if you do everything in your own name. You report profit and loss on a Schedule C for Federal Taxes. You are personally liable for everything that happens with the business. For instance, let’s say Bob is delivering cookies to one of his hotel clients and runs a red light causing an accident. Not only can his cookie business be sued but they can take his house because he and the business are the same.

• Partnerships - There are 2 kinds of partnerships — General and Limited. A General Partnership is basically a sole proprietorship for 2 or more people. The biggest disadvantage to a General partnership in my opinion is that each partner is personally liable for all debts of the partnership. For instance, if Fred and John enter into a partnership and Fred skips town with all the money, John is still responsible for all the debts of the partnership.

  This shortcoming is partially addressed by the Limited Partnership. In a limited partnership one or more of the partners are limited partners and one or more are general partners. General partners are repsonsible for the day to day management of the business and are fully liable for debts of the partnership. Limited partners are passive investors that are liable for debts only to the extent that their investment is at risk. In other words, in the above example, Fred (the general partner) skips town with all the money but John (the limited partner) only loses his original investment. He is not responsible for things like continuing to pay the rent, liabilities to suppliers, and so forth.

• Corporations – A corporation is a separate legal entity from the owner or owners. In the eyes of the law a corporation is a totally different “person” from you. Corporations require legal paperwork to be filed with the state government (typically) and specific rules have to be followed regarding corporate minutes, board meeting and so on. All of this work provides several advantages, however. Stockholders (owners) have no liability outside of their investment and there are a number of things corporations can do, such as provide retirement plans, that other business forms typically can’t. Income from corporations can be subject to double taxation although this can typically be avoided.

  From the standpoint of taxes there are two different kinds of corporations — a C corporation and an S corporation. A C corporation is a regular like IBM. An S corporation acts like a sole proprietorship or partnership (depending on the number of shareholders) for the purpose of income tax, that is, profits and losses are reported on the individual’s Schedule C.

• Limited Liability Company (LLC)- The LLC is a relatively new type of hybrid business structure that is now permissible in most, if not all,  states. It is designed to provide the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership. Formation is more complex and formal than that of a general partnership.

  The owners are members, and the duration of the LLC is usually determined when the organization papers are filed. The time limit can be continued if desired by a vote of the members at the time of expiration. LLC’s generally must not have more than two of the four characteristics that define corporations: Limited liability to the extent of assets; continuity of life; centralization of management; and free transferability of ownership interests.

Which is best? That’s for you and your advisor’s to determine. In my opinion, most micros and submicros are perfectly well served by the sole proprietorship form.

Hosting is a term used in the computer industry for a company that uses their servers and network connections to provide space for your website. In the old days, hosting was an expensive proposition because there wasn’t much competition and the alternative was to set up your own servers and high speed connection(s). Sometime in the 90s a whole bunch of people figured out that there were a few people making a ton on money running hosting companies. See the thing about hosting is that it’s almost all sunk cost. That is, once you set up the basic infrastructure it doesn’t matter whether you’re hosting 1 or 100 or 1,000 websites. So, once you’ve sold enough hosting accounts to cover your costs the rest is pure profit.

Once the price of hardware started to come down to the essentially free level (who’d have thought you could buy a brand new Dell for less than $500?), a lot of people jumped on the hosting bandwagon. Good news for you and me because that means prices come down. And come down they have. In the mid 90’s, I had a hosting account that provided 5Mb of space and 5 email addresses for 1 domain and was limited to some painfully small amount of bandwidth (traffic) after which I started paying by the megabyte. It cost $30 a month. Now there are a lot of companies that offer hosting for less than $10 a month that allow unlimited traffic, large amounts of disk space, and unlimited domains.

At any rate, with the prices being what they are, how can you afford not to have a website? For $120 a year you can add legitimacy to your micro, because on the Internet, with a well designed website, nobody can tell you’re operating out of your mom’s basement. Maybe the price isn’t the problem, maybe it’s that you feel like you aren’t technically capable. Most webhosting companies have addressed that with some sort of software that helps you build a website without ever mucking with any of the goring details. A lot of hosting companies use Site Studio ( demo here), a browser based website creation utility that lets you literally set up a website in a few minutes if you already know what you want to say.

OK, then, what if you’re the cheapest person on the planet and don’t want to pay somebody $10 a month to run your websites? Wouldn’t it be cheaper to get DSL or cable and set up my own server? Maybe even run my own hosting company? NO! Don’t Do It! I worked for a company in the 90s that thought it would be a good idea to jump on the hosting bandwagon. Then they could get other people to pay for their expensive T-1 connection. So they set up a totally inadequate former PC in a spare office and started selling web hosting to local businesses. What they didn’t realize was that running a hosting company is a lot of work. It has to be available 100% of the time. If a piece of hardware fails it has to be able to be switched out—-right now. The short form of the story is that it didn’t work out. If you’re working on internet based businesses, you should be able to expense your internet connection anyway. So cough up the extra dollars.

The importance of a business plan cannot be overemphasized in any business. They are just as important to a micro-business although they don’t need to be nearly as formal. If you are seeking venture capital or financing you’re likely to need a business plan of 50-100 pages. For a micro-business, you shouldn’t need more than 5.

A business plan precisely defines your business and identifies your goals. The basic components include a current and projected balance sheet, an income statement, and a cash flow analysis. It helps you allocate resources properly, handle unforeseen complications, and make good business decisions.

Many entrepreneurs drag their feet when it comes to preparing a written document. They argue that their marketplace changes too fast for a business plan to be useful or that they just don’t have enough time. But just as a builder won’t begin construction without a blueprint, eager business owners shouldn’t rush into new ventures without a business plan.

Before you begin writing your business plan, consider four core questions:

• What service or product does your business provide and what needs does it fill?

• Who are the potential customers for your product or service and why will they purchase it from you?

• How will you reach your potential customers?

• Where will you get the financial resources to start your business?

What goes in a business plan? The body can be divided into four distinct sections:

• Description of the business

• Marketing

• Finances

• Management

Addenda should include an executive summary, supporting documents, and financial projections.

A business plan is a tool with three basic purposes: communication, management, and planning. As a communication tool, it is used to attract investment capital, secure loans, convince workers to hire on, and assist in attracting strategic business partners which are typically not goals of micro-businesses.

As a management tool, the business plan helps you track, monitor and evaluate your progress. The business plan is a living document that you will modify as you gain knowledge and experience. By using your business plan to establish timelines and milestones, you can gauge your progress and compare your projections to actual accomplishments. It can also let you know when when it’s time to shut down a particular venture. Each of your micro-businesses should have a business plan. That way you can compare the time and money you’re putting into each so that when you begin to get squeezed on on or the other you can shut down the worst performer.

As a planning tool, the business plan guides you through the various phases of your business. A thoughtful plan will help identify roadblocks and obstacles so that you can avoid them and establish alternatives. This is particularly important for micro-businesses that are run by more than one person. Having clearly defined roles in critical in these situations.

The SBA has a pretty good section on its website that discusses business plans in greater detail. Just remember that their target audience is small businesses that are looking for financing. Micros just need a short outline to keep everything defined.

A report by the Kauffman Foundation is out that indicates an increase in entrepreneurial business starts in 2008 of .02% over 2007 according to The Policy Dialog on Entrpreneurship blog. My guess is that a lot of the increase is due to entrepreneurs of necessity–people who are starting businesses because of layoffs or downsizings. The thing that confuses me a little is the breakdown by state. Some of the states with the highest job losses are among the lowest in new business starts. The only thing I can think of is that they’re not thinking about anything outside of their local economy. What people need to realize now is that because of the Internet the world is a very small place.

We’re going to get into this early because in most cases if you don’t have a website you don’t have a business. This isn’t always the case but you’re going to want to get one pretty quickly.

A domain is the thing you type into your browser window. For instance the domain name here is OrangeIsTheNewBlog.com. Others include  google.com, amazon.com and so on. The most common top level domains in the US are com, org, net and gov which used to stand for commercial, non-profit organizations, network infrastructure and government.  Without getting too specific your domain is your address on the Internet. A domain can affect people the same way a physical address affects how people feel about you and your business. For instance, it’s a well known fact that people are more likely to buy mail order from 123 Main St, Suite 27 than they are from PO Box 27. In the same way people are more likely to buy from a website with an address like www.amazon.com than they are something like www.obviously-a-webhost.com/stores/ mybusiness/ The first is easier to remember and more professional looking.

The great thing about the Internet is that addresses are all the same price… totally unlike 5th Avenue versus South Bronx. If you go to www.godaddy.com they’ll register any available dot com domain for about nine bucks a year. You can spend a lot more but you’ll get exactly the same thing regardless of the registrar (that’s the official title of companies engaged in registering domains) you go to. Godaddy offers other services like email and web hosting but I’ve never used any of those. I do use them exclusively for registrations though.

Regardless of who you use, it’s generally a pretty painless process. On most registrar’s home pages you’ll find a place right near the middle of the page for you to type in the domain name you want. It may take several tries to find one that’s available so it’s a good idea to have a selection of domain names already picked out.

I got tied up in starting a new micro and haven’t had a chance to post here. I’ll try to do better in the future.

One of the best things about micro-businesses is the low start-up cost. If your business idea needs a lot of start-up capital there is a good chance you haven’t thought it through really well or it’s not really a micros in the first place.

Generally, it’s best to finance your micro-businesses with your own money. Since we’re looking at an average start-up cost of about $500 almost everybody can come up with it somehow. If you can’t, put that idea on your Future Ventures List and find one that you can start for less then use the money from that to start the more expensive one.

I encourage you to avoid borrowing money at all to start your micro but especially from family and friends. It’s so easy to damage relationships by involving money with them and frankly it’s just not worth it. If you go to a bank to borrow money for you micro-business one of two things is likely to happen — they will flip you a credit card application or tell you that a business can’t succeed when it’s started with that kind of money. If they tell you that your business isn’t feasible I recommend you find another bank because this one is not likely to offer you the kind of support you need. If they give you a credit card application I recommend you don’t fill it out — chances are you have too many already.

There are some banks and business incubators which offer SBA backed microloans. These loans provide a maximum of $35,000 but the average is about $13,000. The maximum term is 6 years but the actual term is determined by the lender based on the eventual use of the proceeds. The interest rate is generally around 8-15%. The personal guarantee of the borrower is almost always required — meaning you will be responsible for the debt regardless of the business entity you are using and the business is unable to repay the loan.

As a final word of caution: I advise you against using debt to finance a micro (Have I made my stance clear enough on this subject yet?). There are so many opportunities that require little or no start-up capital. Use the profits from those to fund ventures with higher start-up costs or rethink the venture to see if there is a way to lower the capital requirements. If there’s a killer micro that is somehow time-sensitive most of us have things laying around that we never use that we can sell to raise the cash. eBay has turned the entire world into a giant non-stop yard sale. Look around for things you haven’t touched in 5 years. Use those things to fund your venture (and you’ll save on that storage unit too).

I have heard it said that in the early days of our country 95% of the male population was self-employed. I can’t find any independent validation of that number but if you consider that most people were farmers, artisans or merchants and that almost anything in the Colonial period would be what we have defined as either a small, micro, or submicro business I’m inclined to believe that it’s close to the truth. It wasn’t until the Industrial Revolution that big business and it’s attendant wage slave mentality took hold.  I can’t help but think that getting back to numbers that look more like that would make the US a better place. Not that I think everybody should be a subsistence farmer but there are a lot of people doing essentially pointless “work” at their jobs that could be running micros to make the world a better place.

That said,  Small Business Trends recently posted 5 Key Microbusiness Trends for 2009 that’s well worth a read. It contains some excellent insight on micro trends for the coming year.

The Internet has changed the way we can do business in two important ways especially for small and micro-businesses.

• It allows you to be open for business 24/7

• It allows micro-niches to be served

In some sense these are merely improvements over mail order but they allow you to do things that wouldn’t have been economically feasible pre-net.

The ability to be “open” all the time –like many things– can be both a blessing and a curse. You have to watch the amount of time you’re investing and you have to plan for “down-time” like vacations. In other words, what are you going to do when you want to take off for 2 weeks? You have to have a plan up front instead of coming up with something just before you leave if you are physically involved in order fulfillment or product delivery. Remember: the idea is to make a lot of money and have the time to spend it. A properly structured fulfillment system will alleviate many of these headaches.

The second way the Internet has changed things is that it allows micro-niches to be served that wouldn’t have been close to profitable in the pre-net days. Back then to reach a micro-niche you had to use mail order which meant printing a catalog, finding your customers and selling your product to them. The ‘Net isn’t magic, it’s just made the world a small place again. Now, on the web, you don’t have to print a catalog and you don’t have to pay somebody else to find your customers. That means you can bring your target market (the people you sell to) to a razor edge — ie. people who collect stuffed skunks.

One last note — conventional wisdom says that to make money on the web you have to cultivate customers (spend money) the same way you do with a brick and mortar — which is true if you’re running a small business on the web. If you’re running a micro-business on the web you only have to make enough profit to justify the time you’re putting in to it. I have one website that only makes about $50 a month profit. Not much, you say, but I only spend about 10 minutes a week on it. $50/0.66 hrs = $75/hour … good enough for me. And as near as I can tell this money will keep coming in forever.