THINGS YOU SHOULD KNOW

SEEKING MONEY AND INCORPORATION:
If there is one thing I would want any entrepreneur to know, it is that they will find it almost impossible to find someone who will help finance their new business. Everybody knows that banks do not lend money to people who need it and only rich people are likely to get loans or find angels to help get a new enterprise started. Gaining experience is never a complete waste of time, but if entrepreneurs fail to understand this, they may never achieve the success they are seeking.

Even the most intelligent people have spent years looking for the money to start a new business and have failed. But that does not mean you should give up your dream. Instead just ask yourself what you can do to move forward without somebody else's money. If you are able to make enough progress -- making use of your own resources and perhaps a little help of friends and family, are more likely to find someone that will help or invest. Even if your business is still in the development stage, and might not make money for several years, you may be able to attract investors if you have place and/or a product to show them.

You do not have to set up a corporation in order to get started in a new business. If you have assets or another business that you want to protect in case the new enterprise were to fail, then you might well consider spending the money required to have a corporation during the startup phase of the enterprise. But there is otherwise no need to spend the money and there are advantages later if when you issue stock if you have waited. Waiting until after the startup phase will be justification for issue of more shares to you then. If at that time you have an investor, even if just a member of your family, there would be justification to record startup costs, and maybe even research and development as an asset on the books of the new enterprise. (If you had incorporated at inception all research and development cost incurred are expensed and the corporation may have financial statements that show no assets -- even though you have spend day upon day working to create something of value.)

WHERE TO INCORPORATE:
Nevada has no taxes so I see people paying their money and getting a Nevada Corporation. But then they pay to have a home office there and also find that they have to pay California and other states for the privilege of doing business in each state. It may cost more each year to be a California Corporation but it may be worth it.

California has no limit on the number of shares that can be issued. Planning ahead the typical company will file articles of incorporation authorizing several million shares at inception. When and if the company is taken public it has authorized shares to sell and need not amend the articles after approval by shareholders. In Nevada, if you want a few hundred authorized shares it does not cost much to form the corporation in that state, but if you want several million shares, the cost to incorporate may exceed the amount you will pay to the State of California.

Investors may look at the state of incorporation and think of the difference between a California Corporation and a Nevada Corporation as they would compare the difference between a Chevy and Buick or a Volkswagen compared to a BMW. California is a merit state and has adopted laws that make it possible to raise capital that are not available elsewhere. Past experience with stock being offered by Nevada corporations may also cause investors to elect to invest elsewhere.

IMPORTANCE OF ACCOUNTING AND AUDITING SERVICES:
From what you see advertised, all you need is a software program and you are ready to set up your accounting records, write checks and obtain financial statements that will tell you what has happened in your business. But don't rush out and buy it or download it from the Internet. .

In the past decade there has been a vast improvement in the way businesses have maintained accounting records based on recording transactions at the same time as tasks are performed. Compared to small enterprises that got their start in the years gone by, (when accounting and financial reporting was in most instances done "after the fact"), new programs save a great deal of time and provide what is called information technology today. But before the new company buys into a system for keeping its records, management with help of a knowledgeable accountant should determine what significant separate divisions of the business may develop and how it might wish to record costs by department and/or cost centers. It is not a bad idea to initially have a manual system and do manual after-the- fact accounting until this information is sorted out. A system to allows someone to prepare checks making use of the computer or a system to keep tract of accounts receivable might be used from the start. But don't expect to buy a system that will provide everything you need in the future during the first few months and maybe not until after the end of the first year. Manual records can be maintained and once that manual system is providing the information you need, it will be the correct time to install the system that will post accounts as transactions occur and provide financial information.

Accounting records must provide information that can be used for preparation of financial statements that are in accordance with Generally Accepted Accounting Principles. Adjustments to these records to reflect taxable income should be recorded on working papers that are updated each year as the tax forms are prepared. It is important to know what is happening in your business and tax accounting is for the purpose of determining taxable income, not for providing the information that you need.

Unless you have no aspirations to someday have a large enterprise that may require capital from investors, (and perhaps even if you don't have this in mind), you should have audits of the Company's accounting records and obtain audited financial statements. In the future , your Company is likely to need these audits and obtaining them at that time will likely be much more expensive than if obtained each year from inception. If your independent CPA tells you it is too expensive, find another who performs audits - if your bookkeeper tells you don't need an audit, by all means make sure to have one and install additional internal controls.

INTERNAL CONTROLS:
Separation of duties is essential if you are to make sure that your operations are protected from defalcations. Management should never depend on one person who has total control of both handling transactions and recording the records. Never allow the bookkeeper to sign the checks and have deposits taken to the bank by others. A member of management should open envelopes received from the banks, then review bank statements, reconciliations and other correspondence from the banks or from customers. Do not allow the bookkeeper to open the mail and thus hide anything that might indicate a problems.

TAXES AND PAYING THEM:
There is no more sure way to have your company shut-down, than to ignore your obligations to pay taxes on time. Fines and interest on late payments are expensive ways to finance a business. Payroll taxes deducted from employee wages and sales tax collected from customers are considered the property of the government being held in trust until paid. Collection of these taxes and penalties are a priority of those whose job it is to see that they are paid.

Payroll taxes have to be paid and if it comes to the choice between paying salaries and wages or paying what might become delinquent taxes, pay the taxes. You can reason with unpaid workers, you can even loan them money until you are able to meet the payroll, but you may not get the same consideration from the IRS employees charged with their collection.

DO NOT JUMP THE GUN:
Trying to find an investor or investors without knowing what is allowed under SEC regulations and state laws can earn you the title of "bad boy". Any violations of these laws can prevent you and your company from raising capital during a period that follows the violation.

There are provisions that allow you to test the waters if you are anticipating a public offering but you cannot attempt to find investors until a registration is approved or until you have permission to proceed under an exemption from a registration. (Or you have permission to test the waters.)

The SEC regulations prevent the sale of shares except with a registration or when exempt. You can sell shares to persons in other countries (with agreement that they will not resell shares to persons in this Country) and this is exempt. You can sell shares in a private sale or to persons who have personal or business relationships to officers or directors (generally limited to 35 people) and these are exempt. But this should be done only after making sure that the buyer understands the financial position and risks that face the Company. Failure to provide truthful information in these instances can result in civil or criminal action against you as well as the Company. Never accept money from anybody until you know it is proper to do so.

While the SEC regulates the sale of shares to others, the States regulates what is allowed in the form of advertising to find investors. State law may indicate that if the company is a public company or has permission from the SEC, then advertisements can be published in newspapers and elsewhere. But in other instances no advertising is allowed when seeking an investor unless permission has been received from the State's Blue Sky Commissioners or their equivalent.

State authorities consider anything that can be seen by residents of their state while in their own state to be a violation of their laws. Thus any publication on Internet of an advertisement would be a violation. Internet offerings must be restricted and seen only by those who are in states where permission has been granted. Firewall protection on these sites should ask the viewer for the name of the state where they live and only then allow access to the page on which the information or advertisement appears.

KNOW THE LAW AND MAKE SURE THAT THOSE ON WHICH YOU RELY KNOW IT:
Nobody can know all that is needed to comply with all corporation and other laws to which we are subject today. The best we can do is to know enough to seek assistance from persons that do have the knowledge. But knowing enough means using judgement in determining that those professionals that are chosen have the knowledge necessary.

But if management is not able to know what laws may apply, how can they gain that assurance of compliance? When it is important enough you don't take changes. Like an architect charged with the building of a skyscraper (who hires an engineer to make sure the building will not fall down, and then hires another engineer to review the work of the first) you can obtain a review by a second law firm.

ISO-9000 MAY BE IMPORTANT TO YOUR BUSINESS.
Manufacturers and even service type companies are becoming aware of the importance of the International Standard Organization and its role. In the past it was important to make sure that if parts were to be interchangeable they met specific standards. Wasteful practices where a company might make it difficult or impossible to use a part manufactured by another company were greatly reduced. Today the ISO has taken it to higher level. Now when a manufacturer wants to supply parts for use in a machine made by another, the company may be required by the owner of the machine to be ISO "certified" -- like use of good manufacturing practices demanded of any company producing pharmaceuticals etc.

But instead of just being limited to manufacturing practices this extends to all of the operations of the company. This includes the logistics. Parts ordered by one company from a ISO-9000 certified company will be more likely to arrive on time -- and prevent delay of their operations. Companies are required to establish documented standards and controls that are expected to improve all operations.

LIMITED PARTNERSHIPS AND LIMITED LIABILITY COMPANIES:
Use of a partnership instead of incorporating, may allow you to write your own rules. Operations are controlled by the partnership agreement and in crafting that agreement it can contain any arrangements not otherwise considered unlawful. All partnerships must have at least one general partner and can have any number of limited partners. Limited partners are restricted from active participation in management and can become a general partner if they fail to abide by that restriction.

It is important to consider all and any contingencies and to provide for them in the agreement. If there is no provision that prevents it from happening, any verbal exchange between all partners can alter that agreement. When owners have special needs or are in different tax brackets the agreement can provide the best solution. (Although current tax laws have greatly reduced the tax benefits of partnerships that were available prior to 1986.)

In the formation of new businesses there may still be some benefit from use of a partnership during the initial stages of the operations. Any two or more people can join together in a partnership. Some can contribute time and others can provide money and take an active part in the management. Advertising for an active partner is not considered seeking an investor but advertising for a limited partner is the same as seeking investors and would be a violation of the Corporations Code provisions that prevent advertising for investors. .

New in the past decade is the Limited Liability Company. This prevents creditors from seeking recovery from the personal assets of the owners, much the same as in the case of limited partnership except no general partner is required. Shares or units of ownership of these companies are subject to the same security laws as for corporations. It should be noted however, that LLC is a designation that investors have had little or no experience with. Operations of LLC, like that of partnerships, can be changed and there are no established rules that would make it easy for the investor to understand or determine his rights in respect to management or other unit owners.

MORE TO COME
There is much more that you may need to know. From time to time more may be added to this section. Come back and see what is new.