Introduction: Managing regulation
State and federal regulation is a fact of life in small business. Even before the business gets off the ground, entrepreneurs need to be knowledgeable about the implications of choosing a business structure, sophisticated about choosing a name and web address, and prepared to make a slew of decisions that will affect them down the road.
As the business grows, so do the regulatory requirements. Rules in areas such as contract work, workman’s compensation, worker safety, and the environment are triggered by steps in the business growth process. Knowing the right information, and acting before a rule goes into effect, can save critical time and money.
On August 1, The Idaho Business Review gathered a panel of small business experts to discuss what business owners and managers can do to navigate a complex and ever-changing regulatory environment.
What to know when forming a new business
I usually advise my clients that first of all, it’s easier to start a business while you are still employed if you can. Start building clients and getting familiar with the industry while you are still earning income. It also helps you to apply for a loan to have income already when you are pursuing financing.
Don’t pay for things you don’t have to pay for. I see clients paying some company to file their LLC with the Secretary of State, or to register their EIN number on the IRS website. Those are easy to do.
You should have counsel from an attorney or CPA when forming your company and think about all of those things. It’s also helpful to analyze what resources you have to take the plunge of starting the company right now: Do I have backup savings? Do I have talent here? Do I have access to talent if I’m not great at certain things?
From a regulatory aspect. it’s important to know your taxes. How difficult will it be when you are paying your taxes, instead of having your employer paying your portion of Social Security? You’re getting a double hit.
The IRS has a virtual tax workshop on line that is great for you to walk through to help you understand these things before you jump in.
Most of the companies I have worked with have already formed their business by the time I meet them, but in the angel investing world we come across a lot of people who have a lot of ideas. This isn’t necessarily regulatory advice, but go out and vet that idea before you form a business. Bring in partners, bring money into it. The rest of it is important, but the answer to “When should you form a business?” is when you have some sort of proof that there is a market out there for whatever it is you have to sell.
The corporation was already formed before I joined. It comes down to having a good team. A great team of attorneys and CPAs can really steer us in the right direction. You may have a skill set or passion for what you are doing, but might not have expertise in other areas – that’s really been helpful for us, to have attorneys and CPAs help us through those decisions.
I basically formed the company when we took over the business. It was an existing business that been in operation for 20 years. As far as our portion of it goes, we bought the business and real estate as well.
We were ready to move it in a real direction. Leaving the corporate world, and moving into a venture on your own, you have to be 50 percent crazy and 50 percent smart. Or it’s more like 80 20.
One of the things that I did was I sat down in my corporate world and made a list of the people I use as resources on a daily basis – the accounting department, company lawyers, human resources, every single department within the corporate structure, and took that into the private industry structure as well.
I made sure that if it wasn’t something I was comfortable with or didn’t have breadth of knowledge to move forward, I found someone who did.
There is a breadth of people we use daily in the corporate world, and when you are a small business owner you are the end-all, so you have to be prepared if you can’t answer the question or don’t know where to find the regulation. You need to find the team of individuals that is there at your call to assist. That’s why I have known Gary (Moore) for a long time, because I have used the Small Business Development Center and the Small Business Association through the state for many of my needs. And Karen Appelgren and I go way back too. It’s a matter of recognizing your own strengths and weaknesses and filling your team.
Early on, I relied heavily on my Chamber of Commerce. They were a good resource to understand the structure of the community the business was located in. I grew up in Weiser, but I had been gone for 18 years and a lot had changed.
I started research at the Chamber, then moved to the Small Business Development Center at the Treasure Valley Community College. There is also the real estate end of it. I had a lot of meetings with accountants to make sure the numbers fleshed out.
Luckily enough, I had some great people in the corporate world. We all have people within our network that have their own set of skills that can be of benefit. A lot of times you will discover in your network hidden talents you never knew existed, so don’t be afraid to delve into those business relationships and personal relationships so you can use them to the best of your ability. You already have those relationships so there is already that bond of trust there. They wouldn’t be a friend or business associate if you didn’t really value them, so look into your circle first.
We relied heavily on trade associations and the Idaho Nursery and Landscape Association. That was a terrific resource for us early on in getting to understand some of the regulations.
Choosing a name for your business
Doing the research on that name is critical. Sometimes I meet with clients who have already started branding their company. They have paid for design work and so forth, and if we go on the U.S. Patent and Trademark site, come to find out that name is being used by some other company doing business across state lines.
Then the new company has to change everything up, or they find that the domain names they want for their website have been taken already. So check the Idaho Secretary of State, check the U.S. Patent and Trademark Site, and do google searches.
I deal with a lot of sole proprietors and they use their own name as the name of their business, and they use their Social Security number as the tax ID.
I always recommend that if they don’t want to form at least an LLC to protect their personal assets, they apply for a tax ID number so their Social Security number isn’t being used out in the public world. It’s really important when you look at how you’re going to construct your company when your name comes into play, whether to keep it your name or creating a Doing Business As name. It’s important that you not be the primary name on the company.
For those of you planning to produce an app and publish it in any of the app stores, guess what: They don’t accept DBA names. So you need to make sure your entity or corporate name is the name you’ll be publishing under.
Steps to take when it’s time to seek money to help the business grow
Entity type is very important if you’re planning to seek private investors at some point. Investors do not like to invest in S Corps or LLCs.
The state has a lot of resources at no cost. It can help you do your market research to see if your product or service can be sold in the state or outside. A few of those resources are the SBDC and the SCORE office of the SBA. Use those before you delve too deep into starting your business.
Applying for an EIN
If you want to get a bank account, you’ll have to have an EIN. It’s easy to do that yourself on the IRS website. There are a lot of people out there, or websites out there, that will offer to do that for you for nice fee. But don’t do that – it’s easy and free.
Don’t use your Social Security number as your tax ID because the Social Security number is how the IRS tracks your business, so the Social could actually get out in the public and a hacker could access your bank account. It’s a protection for you not to have your Social Security number out in the private domain.
Finding the right real estate for your business
If you are looking for real estate with your business, work with a commercial real estate broker rather than your friend who sells homes. It’s a whole different ballpark, and you need to have the right kind of advice. You need someone to help run the numbers to see if it makes sense to support new debt.
Or use an incubator. They are wonderful. I used to run the business incubator in Nampa for Boise State University, and most business incubators have a space where you can lease an office, or they have co-working space where you can work for the day.
There are a lot of those around town; the SBDC has two, and there is Trailhead and several others that have popped up. Incubators allow you to
have space as a professional as you need it, without locking you into a long-term lease. Being locked into a lease from a commercial landlord can be really scary when you are starting a new business.
Know what is allowed when you are looking for real estate. We moved from Meridian to Garden City grow, and in Meridian we had used an onsite fuel station. We learned the hard way we had to have a much more comprehensive fuel setup in Garden City, and spill containment would cost $100,000. So in moving to Garden City, we had to change a key part of our business and we were not as efficient as we wanted to be, because we learned we couldn’t have that particular fuel setup on our site. It’s important to make sure you’re compliant with the city regulations. The city inspector pops in on the busiest time of year, they say, ‘You can do this, and can’t do that,’ and it’s pretty much that simple
There are hundreds of residential real estate brokers out there right now, but your commercial broker is tied a lot more into the business workings in your particular area and will have a much bigger breadth of knowledge in dealing with regulations. They are also able to forecast out a little bit further than what a home broker is able to do.
Sometimes the biggest lessons we learn are the mistakes we have made. When we bought the business we also bought the real estate. We bought in June of 2007, just about three weeks before the market crashed. Probably not the best investment I did at that point. Just make sure you surround yourself with individuals who are key to the business.
If you are leasing, it’s your landlord’s problem to deal with a lot of the regulatory things that come into play. But if you own the building, you have to be aware of building codes, ADA compliance, those kind of things. Leasing is nice from that standpoint.
Be up to date on city codes and county codes. A lot of times, the purchase of real estate will trigger certain things that haven’t been a problem for the previous owner. The building has not been kept up to code because it was grandfathered in under the previous owner, and a sale can trigger things a lot of times where real estate has to be brought up to code and you are paying hundreds of thousands in unforeseen expenses.
As for business incubators … in a community of 5,500, as much as we’d like to take advantage of business incubators, there are not as many of them in smaller rural areas. That’s where having friends at the Chamber can come into play. Or at the SBDC. Speak with some of your financial institutions; I have personally helped set up some small businesses that have leased space or borrowed space from Chamber of Commerce or from financial institutions for the first months of operation to get things up and running.
As an entrepreneur, you have to be able to think outside the box. Don’t be afraid to ask questions; the worst thing that can happen is you’re told no. I borrowed a desk at the chamber of Commerce to do research and was there for three months before we took possession of our property.
When to hire a new employee, and how to do it right
Most new business owners don’t have a lot of extra money so they are thinking, “How can I cut costs? Maybe if I hire an independent contractor I won’t have to pay workman’s compensation.”
But the IRS and Department of Labor look at tests at to see if someone truly is an independent contractor or not. You have to meet those tests; you can’t just say, “I’ll use them like an independent contractor but treat them like an employee and tell them they have to do things my way and to show up at this time.” I am aware of companies audited by IRS and found to be misclassifying employees, and it’s very, very expensive.
I see small businesses get in trouble with internships. There are rules on the Department of Labor’s websites. Talk to the DOL and the IRS before you make these choices.
We prefer having employees rather than independent contractors. The labor crunch is the single biggest limiting factor for our business to expand and grow. We want to make sure we have people who can handle the job and be with us for the long term. It takes a lot of planning. We have tried using independent and they haven’t been a fit for us. A lot of times, it just takes a great deal of planning and foresight to understand what your labor needs might be, especially in a seasonal business like mine.
In the tech world, you live and breathe by your independent contractors. You’ve all heard this: In Boise it’s hard to get good programmers and technical talent. So you are relying on people who are not local, who don’t work directly for you, and who hire their services out.
We have worked with a lot of contractors. The preference was to hire them as employees as possible for these highly skilled and in-demand jobs. But they don’t necessarily want to work as your employee.
They would rather be independent contractors working in multiple entities. That’s a challenge in that industry.
Regulatory concerns come into play with hiring employees
We want to make sure we are doing things by the book, in terms of how we select candidates and how we interview and recruit, and how we make decisions about layoffs. In the beginning, we hired an attorney to write our employee handbook to make sure it was compliant.
Be proactive about occupational safety instead of reactive; don’t wait for the OSHA person to come to the site to find problems. On the Boise State University campus is the Idaho Occupational Safety and Health Program (OSHCon) .
You can get an audit from them. They will come out and explore what you are going to do, and where you might have pitfalls, and you can be proactive and make changes before you have a problem.
One of our clients got letter from OSHA saying they were violation, with a fine attached. But by having OSHCon come out and go through their company, they were able to cut their fine in half. It’s free.
Consider using temporary employee agencies to try out an employee. They are taking care of payroll and all of that, and they’ll help you recruit the right people, and screen and interview candidates. They handle payroll and all of that. If you decide this isn’t a good fit they can send someone else the next day. It’s just another way to start getting your feet wet in having employees.
To be competitive, especially with a scarcity of labor, you have to offer benefits. We have really opened that up in terms of who can get in.
At least for us, when you are running a business, obviously you’re going to be more successful if you will align yourself with the right candidates, with people who can carry the load. So it’s worth offering the right benefits and retirement plan.
If you’re doing work for the federal government, particularly construction, wages come into play. Benefits have to equal a certain amount, and some of the jobs are going to require benefits associated with those jobs that you have to meet – just be aware of that.
From a small business standpont too, if you only have a few employees, it makes it more difficult to stay competitive in today’s job market. You have to find what works for you, and that means touching base in your network. Don’t be afraid to sit down and talk with your insurance agents and those kinds of things to develop a plan that will work for you. As much as I would love to offer a full benefit program to all my employees, financially it’s not reasonable. But I was able to find something that works for me and my employees. Being in Weiser and based on our annual income, I’d love to pay $20 an hour to my employees, but I can’t. But we came up with a benefit program that works.
There is a lot of work that has to happen before you get to the point of hiring. Make sure you are staying six months or a year ahead, is some of the best advice I was ever given.
Professional Employer Organizations, or PEOs, can be a lifesaver in hiring your first employee.
They have different arrangements. The most common one I see co-employment. You co-own the employee with the PEO and they essentially act as your HR department for you and handle payroll and those kinds of things. That can be nice when you are new; the process of setting up workman’s compensation and DOL accounts can be pretty onerous if you haven’t been through it.
There is a when you reach a certain number of employees that that might no longer work. But if you only have that first employee or just a handful, it might be the way to go.
Selecting the right insurance coverage can make or break a small business
Make sure you have gone through your real estate insurance policy with a fine-tooth comb to make sure everything that could potentially happen is covered. You learn a lot.
I try to save a nickel wherever I can, but my insurance policies are not necessarily one of the places I do that. I have pretty low deductibles; I’d much rather have those kind of situations taken care of rather than shell money out when something happens out of my own pocket, especially in the food industry and food manufacturing and production.
I also cater, I also have a deli in-house too, I do shows out on the road – and all of those kind of things have to be insured. In today’s marketplace, if somebody chokes on a piece of chocolate, I could be subject to a lawsuit.
A lot of times because of the fact that I do shows or business with certain companies, those companies require a rider on my insurance, and those are all things that take away from your bottom line. A lot of this I learned as I went along because it wasn’t in my wheelhouse beforehand. There were a lot of companies I went out and recruited to do business with, and the final negotiation was, “We need million-dollar coverage on your insurance policy just for us.”
Every 12 to 24 months, I’ll bid my insurance out to other insurance companies. It keeps my current carrier son their toes, to make sure they know and stay competitive with the marketplace.
I also see entrepreneurs with home-based businesses thinking their home policy is covering their business assets. Let your insurance agent know you are doing these business activities so you have the right coverage. If you’re getting financing the bank will require certain types of insurance.
A lot of times the client will dictate what kind of insurance you carry. They’ll send me contracts and the agent will say, “You’re not covered.” That might dictate the kind of business you pursue.
Educate yourself about taxes, and hire qualified help
The IRS has free webinars on different tax subjects, so take advantage of those. People learn the hard way; they don’t file their estimated quarterly taxes, then they owe taxes, and they are hit with a late payment, or an underpayment penalty. CPAs tell me that’s what takes a business down sometimes. They got behind and can’t ever seem to get back.
Idaho is a government use tax state, so any equipment that the government supplies in a contract, the state can tax it 6 percent. We had a client that had to close his doors because he didn’t figure that in, and he owed a million dollars to the state because of the number of trees the government had given him to plant. We got the Idaho Tax Commission involved and found in fact that is the way the tax law is written. So if you’re contracting with the federal government and they are supplying equipment, the state of Idaho is going to tax you on that equipment.
Have a great working relationship with your accountant and CPA so you can get them on the phone or email them when you need to.
The Idaho State Tax Commission puts on good workshops where they will discuss how to apply for permits for sales tax, or file for withholding. They’ll answer your questions. Just go to the Idaho Tax Commission website and search for “workshops.” You can talk to a human being. I know quite a few of the regulatory agency reps, and they say, “Please communicate to the small businesses owners that we are not out there to try and take them down. We want to help, we want to answer their questions, we want to explain things.”
Managing the growth of your small business
A warning story: I worked with a company that was expanding its presence and trying to get into all 50 states. They learned the hard way that not only do you really need to know what the federal regulations are around your industry, but also the state regulations.
They had changed their entire business model to expand into each of these states. Each state had different regulations. It really impacted their ability to grow quickly. Be aware of these things, down to being able to operate under your own name.
A lot of states will require, particularly in real estate, that you have a legal entity in that state that has its own name and website. If you’re in one of the emerging industries, you need to be aware of what those regulations are. The motto is to move fast and break things, but be careful of what it is you are breaking.
Fundraising for business growth
Sometimes SBA loans are the way to go. They have a lot of different eligibility rules that play into all kinds of decisions you might be a making.
Suppose you were planning to buy a building and to rent out some of the space, and use a portion for your own company. To get an SBA loan we need to have 50 percent of that building used for your own business.
I also work with clients who are pursuing crowdfunding such as Kickstarter or Indiegogo, and understand that it’s not always easy to do that, you have to be very good at marketing to get people to the site, and then good at fulfillment, because you have an obligation to send back fun things, like T shirts or coffee mugs.
The other kind of fundraising is raising private equity, selling a share of the company to investors. Those transactions are regulated by the SEC on both the investing and selling side. If you’re interested in bringing in investors to provide capital to grow your business, you have to work with a competent attorney because those are complex regulations.
Most of us in high-growth industries are looking to bring in investors, and there are a number of exemptions that allow you to raise money privately. Those regulations have been in a huge state of flux. There are restrictions on public solicitations and raising money from people who are not personally known to you. There’s a lot to know in that area, and there are a lot of very good resources out there too. The Angel Capital Association is a very good resource people looking at how to raise funding.
Do your research and go to meetings.
Growth is where we are kind of at right now. Many small business people I have worked with in the past, in economic development, they write their business plan when they first get started, and it goes in a drawer and is never looked at again.
Your business plan must be changed and updated at each stage of the organization. It’s a living, working document. Make sure as you begin to look at your growth potential, that one of the first things you do is revisit the business plan and see where the next level of growth is, and plot out a one-year, a five-year plan so you have the basis to grow your company.
I go to my CPA, my accountant, and say, “Help me get a good true valuation of my company; let’s make sure we understand the numbers.” Especially if you’re going to try to bring in investors, you have to have that base knowledge before you begin that process.
October 10, 2017 Breakfast Series
Cybersafety: Data security
For more information and to register for the event, visit https://idahobusinessreview.com/events/breakfast-series/