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Seeds For Thought
Considering Your Business Format
One reason that you might be interested in entrepreneurship as a career is that you are attracted to the idea of independence, calling your own shots and being your own boss. You win or you lose by virtue of your own hard work and mistakes.So why, if going it alone sounds so good, would you consider a partnership? The honest answer is that you probably wouldn't unless the offer was irresistible or unavoidable. In Ana's story, Ana's partnership with Sheila worked. It was a good matching of strengths. With a partnership, Ana was able to accomplish much more than she could have on her own. Also, Ana was able to able to move her plans along much more quickly with Shelia's money and connections. In the last lesson, you read about three ambitious young people starting landscaping, sewing/design, and used car sales businesses. Each of these businesses were started small on a shoestring budget. The entrepreneurs were able to get up and running without a partner's help. However, as an exercise, you can continue the stories and think how those start-up businesses might have been different with powerful partnership connections. Realistically, what if your business concept needs an infusion of money beyond your individual ability to invest or borrow? Let's say that your entrepreneurial dream is to start a yacht charter service. Without a lot of experience, contacts and deep pockets, who's going to give, sell you or lease you a yacht? Even if you could patch an acquisition deal together, you'd still need substantial financial backing to stay afloat until the clients start lining up at the dock and your booking secretary is able to say, "Sorry, we book well in advance. Call us again in 18 - 24 months." Simply, if you want to be in the yacht chartering business, you will probably need connected, moneyed partner(s). Other business start-ups may also need significant capitalization, a lot of money. For example, if you wanted to start a Laundromat, a theater, a hair styling salon, or a service station, you might also need some type of monetary support from a partner(s). There are two major types of partnerships: general and limited. A general partnership consists of two or more partners where each partner assumes total liability for the other partners. Let's say you start a business with your best friend, Joe. Joe has hit a few rough patches in his past but overall you figure that he's a good guy. You structure a 50/50 general partnership. In the beginning, the partnership seems to be working. But, after a while, the long hours start to take a toll on Joe and you suspect that he has a drinking problem. His work gets sloppy and his absenteeism increases. All of a sudden, your best friend, Joe, starts doing a lot less than half the work. Next, you're shocked to find that Joe has been buying expensive gifts for his girlfriend with the company credit card. You confront Joe. Joe quits the partnership. You are still responsible for all the debts that Joe incurred including presents to the girlfriend(s). You could be in very serious financial jeopardy trying to cover for the loss of your partner. This is not a good situation. Let's try again. You start a 50/50 partnership with your friend Alicia. You both work very hard. Then, Alicia's boyfriend, Marcus, loses his job and Alicia insists that you and she hire poor Marcus. But, when Marcus comes on board, he thinks that he runs the place. Marcus starts doing his own thing and Alicia just giggles and smiles. You protest in vain. Marcus and Alicia start acting like they have two votes against your one. This new arrangement makes the working environment very uncomfortable for you. Marcus and Alicia suggest that YOU quit the partnership. This is not a good situation. Here's a general partnership which did work: Discovery Flower BoutiqueChristine has an idea. Rather than being competitors, perhaps, they can be partners. They agree on a value for the business of $40,000. They agree that each year for five years that Christine will give Darlene $8,000 and that in consideration she will get 20% of the business. After five years, Christine will be an experienced owner of the business and Darlene will have achieved her objective and can retire or become an employee of Christine's. A win/win partnership. 
Again and again in this course, you will be encouraged to stop, reflect and pray to your guardian angels and patron saints. This means every day. So, if a problem arises, you can deal with it while it is a smaller concern. Or, if an opportunity arises, you will ready to act. In forming a general partnership, you should have a partnership agreement drafted by an attorney. That agreement will cover such topics as:
Sole ProprietorshipCorporationA corporation is owned by shareholders and run by a Board of Directors who hire a chief executive officer (CEO). It is possible to sell stock in a corporation. It is possible for a corporation, by itself, to borrow money. A corporation has a life of its own beyond the life of its shareholders. A disadvantage of a corporate business format is that the profits may be subject to double taxation. In other words, taxes would first be paid by the corporation and then by the shareholders. However, there is a corporate form designed for small companies called the Subchapter S corporation. The Subchapter S corporation can offer liability protection and the profit flow through benefits of a sole proprietorship or general partnership but there are restrictions on the sale of stock and the number of stockholders. Limited Liability Company (LLC)Since it exists as a separate entity, LLC members enjoy the liability protection of a corporation. That is, members are not held personally responsible for debts unless they have signed a personal guarantee. Business profits, losses and expenses flow through to members. A big advantage to the LLC is that there is no corporate double taxation. Naming Your BusinessYou should be aware that registering a sole proprietorship via a DBA form with the town clerk does not usually protect a business's name. In most states, if ten different Cheryls want to open "Cheryl's Catering Services," they can. Obviously, one bad Cheryl can hurt nine good Cheryls even though the nine have nothing to do with the one. However, incorporation does protect a name within a particular state. If Cheryl forms a corporation, "Cheryl's Catering Services, Inc.," then, no one else in the state can use that name. Even if for many years some other poor Cheryl had been using the name, "Cheryl's Catering Services" as a sole proprietorship, that Cheryl is out and must stop using the name. The Cheryl who has the right to use the name is the Cheryl who owns the Cheryl corporate identity. To protect a name nationally, in all fifty states, you'll need to register the name individually in all fifty states or register the name as a trademark and earn the ® distinction. You can try to do this yourself online with the Trademark Office. However, if you are serious, you will find it beneficial and expeditious to hire a trademark attorney. Hiring an attorney will require an investment of several thousand dollars and require some patience. 
Any type of corporation, a regular corporation or a Subchapter S corporation, will do the job of name protection for your state.In this new millennium, it would not be smart or practical to choose a business name if you could not also register the domain equivalent. So, that's a good starting point. You should only choose a name after you have secured your web presence. And, if you do secure the .com rights, you should also spend the extra few dollars and buy, at least the .org and .net extensions. 
A Conversation With AnaAD: "Ana, how is the gallery doing?" A: "Very well, thank you, Mr. Darby. Our first year gross was over $250,000 and we're on target to double that figure this year." AD: "Has the gallery evolved as you thought it would?" A: "Actually, I had thought that we would have had a 50/50 mix of new artist paintings and established artist limited edition prints. As things have worked out, our business is about 40% autographed posters, 30% limited edition prints, 20% paintings and 10% framing." AD: "The autographed posters, then, have become much more than just a hook to bring in business for the other works." A: "Yes, the autographed poster business has really taken off, especially online sales. We do the charity work as mentioned in the story but we have also been able to buy in bulk from individual galleries on a direct basis. In house, we also are building an inventory and selling individual posters of significance, such as those by Picasso who, obviously, is no longer available to sign posters. "In addition to the autographed posters, we are also finding a market in early 20th Century vintage Deco posters and also advertising posters." AD: "Is the young man you mentioned in the story still handling the poster business?" A: "Actually, the young man, David Hendricks, made a personal decision to devote his time to his painting. So, although he is still associated with the gallery, we have hired another full time person with two part time assistants to handle our poster division. A large part of our poster business is wholesaling to other retail galleries. Again, we have also started a website and are doing a solid business selling mostly posters on-line and through Ebay auctions." AD: "You've really come a long way. Any other immediate plans?" A: "Sheila feels that we can do more with paintings. She orchestrates the painting shows. She is pushing for us to lease a Sturgess Avenue storefront devoted exclusively to paintings. Her partnership does give us some leverage." AD: "You'd close this basement gallery, then?" A: "Absolutely not. This space would stay for the poster/print business and the new space would be a satellite of this operation. Up until now, the posters have been our profit center." AD: "Did you ever work out a buy-back agreement with Sheila?" A: "We've talked about it on and off, but really not seriously. We need each other too much. Our skills mesh very well. Our accountant has told us that the business is worth about $200,000 at this point. At that figure, to buy out Sheila would cost me $80,000 and I really don't want to be in a debt position again if I can help it. The business has paid her back the original $25,000 loan." AD: "The buy-back is gone then?" A: "Well, I would like to own this business outright, but I'm not pushing the point. Sheila and I do have a provision that in the event that one of us wishes to retire or is deceased that the other partner has the first right-of-refusal to buy the other partner's interest." AD: "And, you're still in your early thirties. And, Sheila is..." A: "And, Sheila is quite a bit older, yes." AD: "So, in about two years, you have gone from a low salaried job to owning your own business and you have equity of about $120,000." A: "Yes, but pardon the pun, that $120,000 is paper profit if I were to sell and I doubt that I will ever sell." AD: "You're satisfied then?" A: "I'm satisfied that I'm working in a field I love. I love being my own boss. And, I love the fact that my future earnings are limited only by my own creativity and willingness to work hard." AD: "Are you spending any of your new found fortune on luxuries?" A: "Not really. Early on Sheila and I made a decision to put most of our net earnings back into inventory. So, at this point, rather than trying to sell under the 90 day time frame, we are purchasing most of our inventory directly." AD: "I'm curious are the margins in the art business really 100% to 500%?" A: "Well, let's say that our wholesale/retail margins are consistent with the industry and with antiques, stamps, coins, oriental rugs and other investment collectibles." AD: "I think you learned that answer from your friend, Sandy." A: "I did." AD: "Ana, if you were advising others about starting in business, what would you say to them?" A: "I would say find a business you love where you are willing to work hard. It could be anything from sporting goods store to a bookshop. It doesn't matter. Read everything you can about the business and never stop wanting to learn more. Find people who are already successful in the business. These are people that you'll want to talk with. Just keep plugging, I guess. Nobody is telling you that you can't do something but yourself." AD: "Initially, did you find encouragement for your venture?" A: "Well, if you talk with people who are already successful in your field, then they can empathize with what you're trying to do because they were there once themselves. Successful people understand people who want to be a success. I had confidence and gained more confidence by talking and working with people like Sandy and Sheila. "If you're asking me what would have happened if I had spoken to unsuccessful people or people satisfied with their jobs or other people who think that you have to wait 20 or 30 years to accomplish something, then, yes, I suppose that they would have told me that it couldn't be done. That I was crazy." AD: "One final question. I know that a lot of people are going to think that your success rested with your association with Sheila Goff and her contacts. How would you respond to that?" A: "I would say, "Yes," and I would not try to minimize the benefit of Sheila as a partner. Did the $8 a foot rent help? Yes, it did. Did Sheila's contacts help? Yes, they did. At the same time, I would state that I was prepared to open by myself in East Bank, in the leather district or even from my own apartment. I would still have had my own museum contacts. I would have had the e-newsletters. I would have had the poster and print business. I would still have been looking for financial partners. I would still have been researching, studying and talking with successful people in the art world. I would still have had my dream and my willingness to work." AD: "Thank you, Ana." A: "Thank you, Mr. Darby." Go to Lesson Eighteen12 | 13 | 14 | 15 | 16 | 17 | 18 | 19 | 20 | 21 | 22 Index
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