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.

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.

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.

I was going to write a post about tools that you should have at your disposal when starting your new venture but discovered that Lifehacker had beat me to it while I was looking for a way to put tasks on my Blackberry and sync them to my PC without using Outlook. (Still haven’t figured that one out, I’ll let you know when I do.)

I agree with most of what was presented. Godaddy can be, ummm, strident in their marketing but it doesn’t bother me that much. I’ve never used DreamHost but it looks like they’ve got a pretty good deal running through 4/25/2009 and I like that they’re concerned about the environment. If you’re planning one sticking with just one domain for the forseeable future almost all the hosting companies have a deal that includes domain registration. Just make sure you can take it with you when you leave. There’s nothing worse than building up your brand and finding out that you’ve got to abandon it if you want to change hosting companies.

Email has become a fact of life. Many people prefer it to the telephone. It allows you to maximize the use of your time and in today’s world that is a good thing. Personally, I think it’s over-rated for some kinds of conversations. Email is very good for conversations that are of the customer service type, ie. “Do you carry roses?” “Yes, we do.” Email would not be so good for conversations that require a lot of explanation such as the initial phase of a custom house design. After the plans had been more or less finalized email would again be a useful tool for communicating.

If you’re going to use email as a part of your business strategy – and you should – an AOL address is not going to provide the sort of professional appearance you want for your business. I recommend you register a domain and set up one or more email accounts using that. In the old days it was trickier to do something like that than it is now. Now it’s so easy there’s absolutely no reason for anybody not to have a personalized email address.

I’m not going to go into a bunch of detail about how email works. I’ll assume you already know that (if not there’s an excellent tutorial here.

I use GoDaddy because 1) they’re cheaper than just about anybody else and 2) I’ve never had a problem with them. Fortunately if you don’t want to set up a website at the very beginning (but I recommend you do as soon as possible) or yours is a micro-business that doesn’t require a website (I’m not sure what that might be) GoDaddy also has email hosting plans that are as little as $10 a year. So for about $20 a year you can trade in that AOL address in for an email address that’s every bit as professional sounding as ibm.com

I’ll have a post about email marketing in the coming weeks and I suggest you read that before you venture into that arena. Some people who are perfectly fine with pulling 20 pieces of junk mail out of their mailbox and tossing them in the trash become absolute crusaders when they get spam (an internet term for unsolicited commercial email). You can lose your email account, have your isp account cut off, and even in some instances go to jail for sending out spam. Know the territory.

A micro-business is just like any other small business except for three things:

• Time Commitment
• Initial Investment
• Potential Profit

A micro-business should not require a huge time commitment — if it does then it’s just an unprofitable small business. Your goal should be to turn a profit of $50 an hour as an on-going concern. This doesn’t apply to start-up. When you’re first getting organized you’re likely to spend some chunks of time determining suppliers and so forth but once you have everything in place and you’re in the actual “production phase” if you’re not making $50 an hour in a venture then it’s a candidate to get replaced. Remember, you’re trading your life away here — Don’t do it cheaply.

A micro-business shouldn’t require a huge initial investment. By huge I mean anything over $1,000. It if takes more than this it’s either a poorly performing small business or a badly thought out micro-business. There is almost always a way to trade time for money. For most of us when we are starting out we have more time than money so it make sense to maximize our use of money.

A micro-business will have limited profit potential. Why is this a good thing? It means that there will be little if any competition. People, in general, are taught to think linearly (Don’t color outside the lines, remember?). People don’t start businesses in which the potential income is only $10,000 a year because nobody can live on that, right? The concept of operaing in multiple industries is not new. Conglomerates have been doing it for years — look at the product line for Berkshire Hathaway sometime. Do any of those businesses have anything in common other than they make a lot of money? That’s what we’re trying to do — on a much smaller scale. Just like J Paul Getty’s Rule #8 Diversify at the top. What happens if you mess up and generate a ton of profit and wind up with a small business instead of a micro-business? I guess that’s OK too. At that point you either find somebody to run you small business or you drop your micro-businesses and run it yourself. I expect you can figure out for yourself what I think you should do.

Let take an example of a small-business: Bill opens a print shop. He uses $30,000 to buy equipment, rent space and make sure he has cash to cover his startup period. He works 50 hours a week and at the end of the first year has paid himself a $20,000 salary and turned a profit of $40,000. Thus his income for the year is $60,000.

Then a micro-business empire: Bob starts a craft business that requires a $200 investment in supplies, a PC repair business that costs $500 to get off the ground, a business stocking information racks around the city that costs $600 for the racks, and (because he loves chocolate chip cookies) a baking service that makes and delivers chocolate chip cookies to hotels which he spent $40 on. Total investment: $1,340. The craft business requires about 16 hours a week as does the PC repair, the info racks take about 3 hrs a week to stock and the baking takes about 5 hrs for baking and delivery. So Bob is spending 40 hrs a week on his businesses. The Craft business makes about $20,000 profit, PC repair about the same, info racks about 10,000 and the cookie business about 10,000. His net income for the year is $60,000, but he’s spent less time working and has risked less of his own capital.

In the first example, Bill’s Return on Investment (ROI) is 200% (not too shabby!) and his effective wage was $24/hr assuming he took 2 weeks off. Bob’s ROI was 4477% (even better!) and his effective wage $30/hr assuming he took 2 weeks off. Which would you rather do?

In our example, what happens when the cost of paper goes up and Bill’s profit drops to $30,000? He keeps going and hopes that things will get better. When the cost of flour goes up and Bob is only making $5,000 on the cookie business, he can, if he wants, walk away and start another business to make up for it.

The beauty of a micro-business is that you can start and run as many or as few as you want. Of course, the examples have been overly simplified to make a point but don’t let that fool you — Micro-businesses can, and should, be a lucrative source of income.

A micro is just like any other small business except for three things:

• Time Commitment
• Initial Investment
• Potential Profit

A micro should not require a huge time commitment — if it does then it’s just an unprofitable small business. Your goal should be to turn a profit of $50 an hour as an on-going concern. This doesn’t apply to start-up. When you’re first getting organized you’re likely to spend some chunks of time determining suppliers and so forth but once you have everything in place and you’re in the actual “production phase” if you’re not making $50 an hour in a venture then it’s a candidate to get replaced. Remember, you’re trading your life away here — Don’t do it cheaply.

A micro shouldn’t require a huge initial investment. By huge I mean anything over $1,000. It if takes more than this it’s either a poorly performing small business or a badly thought out micro. There is almost always a way to trade time for money. For most of us when we are starting out we have more time than money so it make sense to maximize our use of money.

A micro will have limited profit potential. Why is this a good thing? It means that there will be little if any competition. People, in general, are taught to think linearly (Don’t color outside the lines, remember?). People don’t start businesses in which the potential income is only $10,000 a year because nobody can live on that, right? The concept of operating in multiple industries is not new. Conglomerates have been doing it for years — look at the product line for Berkshire Hathaway sometime. Do any of those businesses have anything in common other than they make a lot of money? That’s what we’re trying to do — on a much smaller scale. Just like J Paul Getty’s Rule #8: Diversify at the top. What happens if you mess up and generate a ton of profit and wind up with a small business instead of a micro? I guess that’s OK too. At that point you either find somebody to run you small business or you drop your micro and run it yourself. I expect you can figure out for yourself what I think you should do.

Let take an example of a small-business: Bill opens a print shop. He uses $30,000 to buy equipment, rent space and make sure he has cash to cover his startup period. He works 50 hours a week and at the end of the first year has paid himself a $20,000 salary and turned a profit of $40,000. Thus his income for the year is $60,000.

Then a micro empire: Bob starts a craft business that requires a $200 investment in supplies, a PC repair business that costs $500 to get off the ground, a business stocking information racks around the city that costs $600 for the racks, and (because he loves chocolate chip cookies) a baking service that makes and delivers chocolate chip cookies to hotels which he spent $40 on. Total investment: $1,340. The craft business requires about 16 hours a week as does the PC repair, the info racks take about 3 hrs a week to stock and the baking takes about 5 hrs for baking and delivery. So Bob is spending 40 hrs a week on his businesses. The Craft business makes about $20,000 profit, PC repair about the same, info racks about 10,000 and the cookie business about 10,000. His net income for the year is $60,000, but he’s spent less time working and has risked less of his own capital.

In the first example, Bill’s Return on Investment (ROI) is 200% (not too shabby!) and his effective wage was $24/hr assuming he took 2 weeks off. Bob’s ROI was 4477% (even better!) and his effective wage $30/hr assuming he took 2 weeks off. Which would you rather do?

In our example, what happens when the cost of paper goes up and Bill’s profit drops to $30,000? He keeps going and hopes that things will get better. When the cost of flour goes up and Bob is only making $5,000 on the cookie business, he can, if he wants, walk away and start another business to make up for it.

The beauty of a micro is that you can start and run as many or as few as you want. Of course, the examples have been overly simplified to make a point but don’t let that fool you — Micros can, and should, be a lucrative source of income.