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How to make the “right” legal decisions for your new business

A decision must be made about the legal structure of the business. That is, will it be a sole proprietorship, a partnership, or a corporation?

On this page we have just given you the basic gist of each type of legal structure. To understand each type of legal structure in much more detail, you could go though “How to incorporate?” It is complete guide on the different types of legal structures and the legal procedure of starting up your company.

Sole Proprietorship: (business owned by one person)

Advantages:

Ease of formation

Sole ownership of profits

Control and decision making vested in the hands of the owner

Flexibility

Freedom from government control and taxation.

Disadvantages:

Unlimited liability

Unstable business life if the owner should die

Less available capital in other types of business structures

Relative difficulty in obtaining long-term financing

Relatively limited viewpoint and experience of proprietor

Partnerships: (business owned by two or more persons)

Advantages:

Ease of formation

Direct rewards

Growth and performance facilitated

Flexibility

Relative freedom from government control and special taxation

Disadvantages:

Unlimited liability of at least one partner

Unstable life of business (e.g. if one owner should die)

Difficulty in obtaining large sums of capital

Firm bound by the acts of one partner as agent

Difficulty in disposing of partnership interest (e.g. if one partner wanted to buy out the other partner)

Corporations: (a legal entity distinct from those parties or individuals that own it)

Advantages:

A shareholder or partner’s liability is limited to a fixed investment amount

Ownership is readily transferable

Separate legal existence

Ease in securing capital from many investors

Ability of the corporation to draw on experience and skills of more than one individual

Disadvantages:

Activities are limited by the charter and various laws

Extensive government regulations are required

Less incentive for manager if he does not share profits

Expense of forming a corporation is high

Considering the different advantages and disadvantages of the various structures, you could choose a legal structure you would like to go for.

How to make the “right” business decisions

Once you have decided what your business objectives are, the next step would be to take appropriate steps to achieve your business objectives. These steps are your business decisions.

If you have a running company, then these business decisions are your strategies. Making the right strategies will help you reach your business objectives. However, since you are an entrepreneur, your biggest concern is “starting up” your company. You do not really have to make business strategies. You just have to start up your company.

To start up your industry, you will have to make the following decisions:

1. Legal decisions
2. Personnel decisions
3. Production decisions
4. Purchasing and inventory decisions
5. Marketing decisions

In this guide we have just given you the introduction to the various decisions involved. Each of these decisions is actually very deep. There are whole books written on marketing, inventory control, production practices etc. Here we just provide you an introduction to give you an idea about what is involved.

Why are business objectives needed

Business objectives are important to give direction to a business. If you are running a business without any business objectives, you shall not be able to grow successfully in any direction. Having business objectives, gives you a much better understanding of where you stand, how to improve and what changes in your current method of working will be required to reach your objectives. Not having business objectives leads to an un-coordinated business that has a very low probability of being successful.

When setting business objectives, one must make sure that they are:

Quantitative: The business objectives should be expressed in terms of numbers. It should not be expressed vaguely like, “Our sales should go up!”

Time-frame specific: Time frames should be specified in the business objectives. This helps you to understand where you stand with respect to the completion of the current objective.

Flexible: It is very important that your business objectives are adaptable to change. If the situation in which the business is working changes, the business objectives should change to reflect these changes.

Understandable: The business objectives should be made in an understandable way. This helps in communicating your objectives to your investors, employees, partners etc. Without this communication of business objectives, it becomes very difficult to reach them.

Realistic: It is important that the business objectives are realistic, or you may end up disappointing your investors and your self.

Examples of business objectives:

“Sell 1000 units o product A and 500 of product B by December 31, 2007”

OR

“Maintain a minimum of 5% market share in the soft drinks segment in Pune City during the whole of 2006”

business objectives

Business objectives are specific statements that give projections about growth or development to companies. For example, a business objective could be, “We must triple the sales of our product by next year.”

Defining your business

A business definition basically tells you ‘what kind of business’ you are in. It is a one-line summarization of your entire business. It helps you clearly communicate what your business is about to others.

A business definition is generally based upon 3 points:

Who? : Who is your customer? To know this look at your customer description from “Understanding your business! (Situation Analysis)”

What? : What customer needs will be satisfied by your business. Remember needs are not only physical needs. There are also other needs like the need for achievement, need for status etc.

How? : What solution does your business offer to satisfy the needs of the customer.

For e.g. if it were a business making snacks the answers to the questions would be:

Who? People who want to “munch” something

What? Need to quickly quench their hunger in an enjoyable way.

How? By providing good tasting between meals food products.

A “sample business definition” using the answers to the above questions would be:

"We will manufacture good and tasty sweet snacks to enable individuals to quickly satisfy their hunger."

After you have your business definition ready, the next step is to formulate your business objectives.

Identifying personal objectives

This is the phase where you understand why you want to take up this new project of starting a company.

What is the purpose of this exercise?

Since YOU are starting a company, there must be some need that you would like to satisfy or some aim you would like to achieve though the company. We are not talking about business aims like “increasing market share” etc.

We are talking about personal needs and aims. Like the need for money, or the need for recognition and status in society etc. This exercise will help you understand and identify what personal needs you are trying to satisfy.

Having identified your personal needs, you have to see whether the company you are starting and the effort you take will be able to satisfy your personal needs. If the effort you put in setting up the company will not pay off and will not satisfy your personal needs then you rather not waste time, effort and money setting up the company.

Do this exercise so that you can set your personal goals and commit to yourself what you are planning to do. Besides, the most important reason to set personal objectives, is so that you have some basis to set your business objectives.

To understand your personal objectives, ask the following questions:

What is my motivation to start a business? Is it wealth, security, self-esteem or some thing else?

How much risk am I willing to take upon me?

How long and hard am I willing to work?

What is a reasonable timetable for my objectives?

When shall my personal objectives be reached?

Will I be able to “survive” if my objectives do not get fulfilled?

Competition

The following is the list of questions that will help you analyze your competition. Answer these questions and you shall know much more about your competitors and how they are going to affect your business.

(Make sure that you do not define your competition too narrowly. For E.g. when you are staring a movie theater, your competition is not only other movie theaters, but also VCD rent places etc.)

Who are your potential competitors?

What are their strengths and what are their weaknesses?

Who are the customers of each competitor?

Why might a customer buy from them instead of you?

What is the approximate sales volume of each competitor? Are there significant trends in sales?

What is market share of each competitor?

What is the pricing structure of each competitor?

Do your competitors enjoy the support of a strong franchise or parent company?

How is each competitor positioned? This means what is the mental image that comes in your consumers mind when he/she thinks about your competitor?

How do your competitors promote their products and services?

What are the distribution arrangements of the competitors?

Who are the suppliers of each competitor?

Are there any new competitors that are going to come up in the industry?

What are the management strengths and weaknesses of each major competitor?

Are the competitors well financed?

How committed is each competitor? Will they fight hard for market share?

Will the future technological developments affect your competitor? Are they better equipped to handle the change than you?

How do the competing products rate in terms of quality, size, appearance etc.?

What are the credit terms of the major competitors?

How much warrantee do the competitors give for their products?

Do the competitors own any exclusive distribution rights that would affect your market entry?

What are their hours of operation?

How saturated is the competition? Is there room for a new business?

Before you go ahead, you must try to find out the answers to all the questions on this page. This will give you a good understanding of your own business. During the process of finding the answers you may realize that there are certain flaws in your thinking and your business idea. Go back and correct these flaws.

All this information will have to be documented into the business plan. Having information about your customers, competitors etc. tells you how you should run and set up your business so that you can cater to the needs of the market. Having all this is essential if you intend to approach a bank, financial institution or a venture capitalist with your idea.

Business Location

If you want to start a food stall or a restaurant or plan to go into the retail business, it is very important that you choose a good location for your business. It is also important to choose a good location when you are about to start a production or manufacturing house.

To evaluate the location that you have chosen, answer the following questions:

What is the total cost of renting or acquiring the property?

What is the estimated cost of any necessary repairs, remodeling etc.?

Does the site provide as much space as you need?

If customers visit your place of business-

-Is adequate, convenient and safe parking available?

-Is public transportation available?

Is the location likely to develop "drop in" or "impulse" consumer traffic?

Is the site located at a popular area (E.g. Near a movie theater or a shopping complex)?

If not, you will have to spend a lot of money marketing your product/service and it will eat into your profits!

What other types of businesses are located around your site? Are they going to compete with your business?

Is fire protection close by?

Are basic utilities available (E.g. water, electricity, sewer, gas etc.) at a reasonable cost?

Are you going to be transporting products from one part of India to the other? If so, are the expressways located close to your location?

What is the history of the site? What types of businesses were previously run at the site? Why are these businesses no longer there?

After seeking answers to these question you will be able to get a good judgment of how good the location you have selected is.

In some businesses some questions are more important than other questions. For E.g. If you are in the manufacturing business, you will not have too many customers coming to your site. So you do not have to bother about customer parking. If you are in the retail business, customer paring is an important factor.

If you are an entrepreneur you will generally find it most convenient to start of your business right at home. This removes a lot of overhead costs of rent, electricity bill etc.

Only if your business is so large that accommodating it at home will be difficult, think about choosing another location. In some cases, it is required that you set up at some other location, (E.g. when you are starting a restaurant) in that case, you have no choice but to choose the location wisely. Let the location questionnaire above guide you in your decision.

Customer and relation to product

Customer & his/her relation to the product

To understand your consumer and his/her relation to your product/service, answer the following:

Who is the likely consumer?

Where does he/she live?

What is his/her age?

What is his/her income?

What is his/her level of education?

How many potential customers are there?

Are customers likely to perceive a purchase risk?

What needs does the product/service satisfy?

How is the product going to be used?

What are the other uses of the product?

How many units is the customer likely to buy?

If it is a service, will the customer have to be present when the service is provided?

Where would the customer learn about the product/service (e.g. friends, newspaper)?

Who actually would buy the product (e.g. Mom, Purchasing agent)?

Who influences the buying decision? (e.g. kids, engineers etc.)

How much would the customer be willing to pay for the product?

How much would price change affect your customer?

Not all these questions pertain to every type of business. If they do pertain to your business, find out the answers. After finding the answers you will have a very good understanding of your customers and your product/service.

Understanding your business- Situation Analysis

Situation analysis is basically done to analyze your:

1. ‘Customer’ and ‘customer relation to product’

2. Location where you could set up your business

3. Competition

Situation analysis gives you a much better understanding about these three things. It is used to understand what kind of environment your company will be in, what are the factors that may affect its possibility to succeed, and what might make your business fail.

How to make a “perfect” business plan?

Once you have your “brilliant” business idea, the next step is to form a business plan.

What is a business plan?

A business plan is basically a carefully prepared document that gives all the possible information about what is going to happen in the company that you want to start. It gathers all the information required to take decisions about the business.

Why make a business plan?

The process of planning makes you think. This makes you understand what decisions and steps need to be taken.

A comprehensive business plan gives you a better understanding of the details than would be possible if the business were just run on a day to day basis.

A well-written business plan will be very effective if you try to communicate with partners, employees, investors or venture capitalists ideas about your business.

A well thought out business plan will convince investors that you are serious. This greatly increases your credibility.

A written document is a reference to how much a business has achieved and how much it plans to achieve in the future.

In conclusion: I you are a serious entrepreneur, you have to have a business plan. If you don’t, your business will not be going in any direction in particular. You shall waste a lot of time making haphazard decisions instead of progressing.

Steps in the planning process:

The following steps are followed in the process of making a business plan:

1. Understanding your business - Situation Analysis

2. What do “you” want? – Forming Personal Objectives

4. Forming the right business objectives

5. Forming Strategies And Tactics

6. Written Document

7. Review & Control and back to Step 1

This guide takes you step by step through the entire process of forming your business plan.

Screen your Business Idea

If your idea has passed the initial questionnaire you should screen your idea further. To further screen your idea, do the following:

Conduct “Experience Surveys”

What we mean by “Experience Surveys” is that you will have to find and then ask professionals about your idea. Query the following people to get a better idea about your idea:

Engineers: Ask them whether the product/service can be designed and built in a feasible way? What will go into the designing and building of the product?

Suppliers: Ask the suppliers whether the raw materials or whatever may be required to make the product/service available at a reasonable rate?

Middlemen: Ask the middlemen whether there is a market for your product/service? Would the middlemen be interested in carrying your product/service?

Government officials/lawyers: Ask them whether there is any licensing, safety or environmental requirements of which you should be aware. Will warning labels or disclaimers be required?

However “original” you think your idea is, there is a good possibility that someone out there has already done it. Make sure to use the Internet to look up your competitors product. Learn as much as you can about your competitors product.

Read up all the news items about your competitors and their product. Read up about their pricing, profits, distribution, marketing etc.

At the end of all this, you will have a pretty good idea about your product/service. You your self will know whether it is a profitable idea or not.

Be sure to let the idea go if it not a profitable one. As I said earlier, many people can’t let go of their idea even though they “know” it will not work. This always leads to failure. Do not do this.

If you realize that your idea is not that great let it go. Brainstorm and find a new idea. But for now, let us assume that you have found a good idea! The next step is to make a business plan.

Is your business idea really that good?

Most people who are reading this already have a great business idea and now they want to start a company and enforce their idea.

Everyone has “brilliant” business ideas. To keep business ideas in check, in all big companies there is some sort of idea screening process. Most of the time the problem with ideas is that the ideas are brilliant but not very feasible in the real world.

The first way to screen your ideas is to answer the following questions. These questions are designed to give you a better understanding of your own idea. If you find that you cannot answer these questions, you might need to research about your idea some more.

Is there a genuine need for your product/service?

Is the need substantial enough to support a profitable business?

Do competitors currently offer similar products/services? If “yes”, do your ideas offer distinctive advantages and customer benefits that competitors don’t?

Is the product/service feasible to produce?

Is the product/service legal?

Is it safe?

If the product/service is a durable good, can it be easily serviced? (Who will service it?)

Are the investment costs required to develop, produce, and market the product reasonably, within your financial realities?

Is the “pay-back period” fast enough to allow you to stay in business?

Can the product be expanded into a line of similar or compatible items later, if the original product was successful?

Can you protect the product with a patent or copyright?

Does the product infringe upon anyone else’s patents or copyrights?

Are all the needed raw materials and supplies readily available?

In many cases, once you answer these questions you realize that your idea is not that great. You might have to brainstorm and come up with another idea. But, sometimes, what happens is that people are so convinced about their idea they disregard all the information that clearly points out that their idea is not profitable. This always results in failure. What ever you do, make sure you do not fall for this mistake!

How to start a company?

Introduction

Here we have provided a huge guide that will give you an introduction to every aspect of starting a company. We have covered: screening business ideas, making a business plan, marketing, forming business objectives, making the right legal decisions etc. etc.

If you are interested only in the legal process involved in starting up a business like a “Partnership” or “Public or Private Limited Company” or a "Sole Proprietorship", we have a separate article for the same called “How to incorporate?”

Do you have what it takes to start a company?

If you pick up any book on being an entrepreneur, the first chapter will be about, “Do you have what it takes to start a company?”

The point all these books are trying to make is, “It is not easy to start a company! It is positively difficult to be an entrepreneur.”

Most people don’t want to take the risk to start a new company because they are afraid of things like:

What if I fail?

What if it does not work?

What if I go bankrupt? etc. etc.

People, who work past these initial fears and decide to go ahead and start a company, have to be prepared to really work for it. It is difficult to start a company and most people quit on the way. There will be many things that de-motivate you when you go about starting your company.

If you seriously want to start a company be ready to work very very hard for it!

Next we have explained how you can pick the best possible "business idea" for your new company....

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