Starting Your Maine Business

1. Starting Your Maine Business By: Josh Nadeau, Small Business Development Center Director www.mainesbdc.org April, 2019

2. Brief Rundown of what will be covered … • What does it take to be an entrepreneur? • Small Business Financing • Legal Structure • Licensing & Safety • Insurance Requirements • Maine Small Business Statistics • Small Business Resources • Start-Up Checklist

3. If anyone is trying to start a business because it’s easy…….

4. An Entrepreneur must have… 6) Intuition 7) Self-Confidence 8) Market Awareness 9) Ability to Accept Challenges 10) Solid Work Ethics Passion Persistence Good Health/Energy Creativity/Innovation Independence/Self Reliance

5. Impactful Quotes “When I’m old and dying, I plan to look back on my life and say ‘Wow, that was an adventure,’ not ‘Wow, I sure felt safe.’ “Tom Preston-Werner, Github co-founder I’m convinced that about half of what separates the successful entrepreneurs from the non-successful ones is pure perseverance. – Steve Jobs “If you’re not a risk taker, you should get the hell out of business.” - Ray Kroc, founder of McDonald’s. “I have not failed. I’ve just found 10,000 ways that won’t work.”   – Thomas Edison “Show me a person who never made a mistake, and I will show you a person who never did anything.”– William Rosenberg, founder Dunkin’ Donuts

6. What is a Business Plan?? Here’s a couple different definitions…. A business plan is a formal statement of business goals, reasons they are attainable, and plans for reaching them. A business plan also includes background information on the organization as well as financial information and projections. In simple terms…. A business plan is a roadmap that provides direction so a business can plan it’s future and avoid road bumps and potholes.

7. Why do I need a business plan?? To Raise Capital (AKA “Get a Loan”). To Develop a Strategic Game Plan. To develop a path for your business. To avoid mistakes. To attract investors.

8. Financial Planning/Projections Without a doubt, this is the most important part of the whole business plan.Each new business has to show on paper that it is feasible to start this new venture. If you can’t get the numbers to work on paper, you can’t make the numbers work in the real world.

9. To prove feasibility, we do what’s called a 12 Month Cash Flow Projection. Let’s take a closer look at one…

10. Will I need financing, and if so, who can I turn to? • Small Business Lending Resources includes: • Banks & Credit Unions • Municipality • Economic Development Organizations • SBA • Local Investor’s

11. Small Business Loans • How do I apply for a Small Business Loan? • What do bankers look for when they look at a loan application?

12. 8 C’s of Credit Credit Capacity Capital Collateral Character Conditions Commitment Cash Flow

13. Credit Your willingness and ability to repay debt. A score of 0, or a number between 300 to 850 is given to each person who looks to obtain credit. This score is called the FICO score.

14. Credit Continued… You can obtain 1 Free Annual Credit Report per year from www.annualcreditreport.com. You will have to pay a small fee if you also want your actual number (Fico Score) with the report.

15. Capacity • Do I have experience running a business? • Have I had this business for more than one year? • Do I know this industry well? • Do I have a good team working for me? • Is the business operating well?

16. Capital What is Capital? Capital is financial assets or the financial value of assets.

17. Capital Continued… Are you financially sound? What does your personal financial statement look like? Do you have a positive or negative net worth? How much existing debt do you have? How much money do you have to invest?

18. Collateral

19. Collateral Continued… All asset values are discounted to determine loan values. Each bank applies the discount differently. • Land and buildings 80% • Vehicles 75% • New Equipment 75% • Used Equipment 50% • CD’s 100% • Accounts Receivable 0% • Inventory 25% • Shrimp vs. Hammers

20. Character This is a subjective measure of both the borrower’s willingness and ability to repay the loan. Personal Credit History, financial strength, and relevant work experience are evaluated. The loan officer also takes into consideration the borrowers personality, spirit, appearance, tone, and emotions into consideration.

21. Character Continued… • Do you have a good reputation? • Are you a go getter? • Do you shy away from confrontation and controversy? • Are you easily frustrated? ***These are all different intangibles that are evaluated…***

22. Conditions Lenders consider a number of outside circumstances that may affect the borrower’s financial situation and ability to repay, for example what’s happening in the local economy. Another example would be to consider all the competitors in your local market that will affect your business.

23. Commitment What is the applicant’s level of commitment to this project at hand? Usually, a scale of 1-10 is used in rating the level of commitment with 1 being not committed and 10 being fully committed.

24. Cash Flow Does the business Cash Flow? Will the business make a profit if all things being equal stay as projected. Will there be no significant downturns in profit from month to month, and if so, can the profitable months sustain the non-profitable months.

25. Required Documents to apply and secure a loan… Business Plan with Sources & Uses 12 or 24 month Cash Flow Analysis Purchase and Sale Agreement Personal Financial Statement Schedule of Liabilities 3 Years Federal Tax Returns Profit and Loss Statements (Only if an existing business) Balance Sheet Credit Report Life Insurance if total loan amount is over $10,000

26. 6 Basic Questions every lender will ask you… How much money do you want? How much money are/have you invested in the business? How will the loan be used? How long do you need to repay the loan? How will the loan be repaid? What collateral do you have to offer?

27. Before meeting with a lender… • Call to find out the rules for their business loans. • Make sure the lender is looking for loans of your size and type. • Ask for a loan application. • Make an appointment. • Rehearse your presentation. • Remember, the lender is like a customer. You have to convince the lender that your business has merit.

28. Before meeting with a Lender Continued… • Understand the rules of the game before you start. • Try to find out who your lender will be and understand what they are good at and what makes them uncomfortable. *** Don’t go to a lender who has been an accountant for most of their life and then submit a business plan with subpar financial projections. Or one that has been in sales their whole life and lightly cover your competitors and strategies. Know your lenders hot buttons.

29. Legal Structure/Business Entity • Sole Proprietorship • Partnership • Limited Liability Company or LLC • C Corporation • S Corporation

30. Sole Proprietorship Definition - A business that is owned and usually operated by one person. The owner is solely responsible for the business risk. More businesses are operated as a proprietorship than in any other form.

31. Pro’s of being a Sole Proprietorship • You are in business quickly and easily. • There are hardly any restrictions and very few forms to fill out. • As a sole proprietor, you control all of the money made by the business. • You make all business operation calls. • You are management and, thus, can respond more quickly to day- to-day changes and decisions. • You experience less government control and taxation. • You don’t have to keep incorporation records and annual corporate records. • You don’t have to do a separate tax return for the business and you don’t have to prepare a balance sheet for the business.

32. Cons of a Sole Proprietorship • As a sole proprietor, you are responsible for 100 percent of all business debts and obligations. This liability covers all of the proprietor’s assets, including his or her house and car. Additional insurance coverage may be needed to cover personal injury or physical loss that may hamper the continuity of the business. • The death, physical impairment, or mental incapacitation of the owner can result in the termination of the business. • It is typically more difficult for sole proprietors to raise operating cash or arrange long-term financing because they have fewer assets. • All the decision-making power rests with one individual. • A sole proprietorship appears less professional than a corporation or an LLC.

33. General Partnership Definition - Similar to a proprietorship in most ways except that it involves more than one owner. A partnership is not a legal economic unit separate from the owners but an unincorporated association that brings together talents and resources of two or more people. Partners have to share both liability and business risk. Additionally, each partner is personally liable for the actions of the other partner(s).

34. Pro’s of a Partnership • Shared costs of start-up. • Shared responsibilities and work • Shared business risks and expenses • Complementary skills and additional contacts of each partner can lead to greater results. • Mutual Support and motivation • Pass through taxation – The profits from the business pass through to the owners personal tax returns. There is no separate filing for the business itself.

35. Cons of a Partnership • Partners in a general partnership are jointly and individually liable for the business activities of the other. If your partner skips town, you'll be liable for all the debts, not just half of them. • Shared Profits • You do not have total control over the business. Decisions are shared, and differences of opinion can lead to disagreements, a "falling out," or even one partner buying out the other. • A friendship may not survive a partnership. "A friendship founded on business is a good deal better than a business founded on friendship."

36. Partnership Agreement What is a partnership agreement and is it something I need to consider? Definition – A document that establishes the terms of a partnership and the agreements between partners.

37. An example of a very basic partnership agreement.

38. Limited Liability Company a.k.a. an LLC Definition -A limited liability company is one in which the members (owners) have a liability limited to their investment in the entity. It allows for structural flexibility in planning distributions and allocations. All members of an LLC can participate in the management, without risking loss of liability protection.

39. Pro’s of being an LLC • More flexibility: Although a limited liability company must file articles of organization with the state, it has a more flexible management structure than a corporation. • Limited liability: As its title suggests, the LLC protects owners and shareholders from personal liability in case of judgments or debts against the business. • Tax options: An LLC can choose whether it wants to be taxed as a sole proprietorship, partnership, S corporation, or corporation. • Fewer compliance issues: In most states, an LLC doesn’t need to have an annual meeting, and the LLC isn’t required to have a board of directors. Plus, there’s less paperwork and recordkeeping required compared to a corporation. • Perpetual existence: Like a corporation, an LLC has a life of its own and can continue to exist after the owners sell their shares or die. • Formation: You can form an LLC with as little as one person, but you can also have an unlimited number of members.

40. Cons of being an LLC • If you are not an active owner in the business, you cannot take a wage, and instead must take your % of profit at the end of the year or a draw. • LLC’s can have high renewal and startup fees. Start-up fee for Maine is $175 plus any legal fees. • Investors are more likely to invest in a corporation, therefore making it harder to raise capital. • Unless you are running the LLC alone, the ownership of the business is spread across its members (this can also be a pro depending on how you look at it).

41. Corporation Definition -A separate legal entity “in the eyes” of the Internal Revenue Service (IRS) and is taxed at the corporate rates, which differ from the individual rates. The C Corporation will have a double taxation effect, one at the corporation level and then one at the individual level upon distribution of dividends.

42. Pro’s of a Corporation • Owner’s are separate from legal liability so they’re not entirely responsible when faced with legal issues or debt • Ability to sell stock, which raises the likelihood of acquiring financial capital • Well established structure with clearly defined roles and agendas. • Employees have the option to buy stock at a fixed price, and receive stock benefits.

43. Cons of a Corporation • Time and Cost of Incorporation. The incorporation process can be expensive and time-consuming. A number of documents must be prepared (including the new corporation's articles of incorporation and bylaws), and filing fees must be paid to your state's Secretary of State office. • Following Corporate "Formalities." All corporations are required by law to observe a number of corporate formalities, to ensure that the corporation is operating as a separate entity, independent of the business's owners. These steps include holding regular meetings of directors, keeping records of corporate activity, and maintaining the corporation's ongoing financial independence. • Tax Liability. The profits from traditional corporations are "double taxed."That is, the corporation itself is taxed for any profits earned, and any individual stockholder who earned profits from the corporation (in the form of paid "dividends") are also taxed.

44. Do I need any special licenses? Contact the Department of Economic & Community Development in Augusta. 1-800-872-3838 or visit www.maine.gov/businessanswers This free service from DECD will help you determine what licenses you may need to operate your business in Maine along with contact names and numbers of who to call to get the proper licensing and permits needed.

45. Code Enforcement Make sure to contact your local Code Enforcement Officer to make sure wherever you plan to house your business is zoned properly for the type of business you will be running. Code Enforcement can usually be contacted through the City or Town.

46. How Do I Make Sure I’m in Compliance with Safety and Health Regulations? SafetyWorks!Maine Department of Labor45 State House StationAugusta, Maine 04333207-623-7900 or toll-free 1-877-723-3345e-mail: general.bls-safetyworks@maine.gov

47. What is SafetyWorks!? • SafetyWorks! is an outreach program of the Maine Department of Labor designed to reduce job-related injuries, illnesses and deaths. SafetyWorks! is a voluntary program --- it is not OSHA and cannot issue citations or fines. SafetyWorks! services are available by request and free of charge. • The name SafetyWorks! is relatively new, but the Bureau of Labor Standards of the Maine Department of Labor has been providing services to help improve workplace safety and health for over 25 years.

48. Do I need to register my business? Sole Proprietorship – Not required to register with state, but must register with city or town you plan to do business in. Partnership – Not required to register with state, but must register with city or town you plan to do business in. LLC – Must register business and will do this through the LLC application process with the State of Maine. Still suggest registering with City or Town. Corporation – Must register business and will do this through the Incorporation application process. Still suggest registering with City or Town.

49. How do I know if a Business Name is taken already? https://icrs.informe.org/nei-sos-icrs/ICRS Click on “Corporate Search” Enter the name you want for your business If no results, the name is free to be taken.

50. What is a FEIN or EIN? Do I need one? A FEIN or EIN is a FEDERAL EMPLOYER IDENTIFICATION NUMBER, or EMPLOYER IDENTIFICATION NUMBER. If you plan to operate as a sole proprietor or partnership you are not required to get a EIN #, but it is recommended that you do. If no EIN is applied for, a sole proprietor or partnership may use the social security number of one of the owners of the business.