ENT. Test 2

hourly wage

An hourly wage is simply the amount paid per hour for work performed.

Alternative sourcing tools for funding a biz

Crowdfunding & Crowdsourcing

unemployment compensation

Every state has an unemployment compensation law, which was put into place to provide financial assistance for some period of time to those people who lose their jobs through no fault of their own. Unemployment compensation pays to the former employee some set amount of money for a given period after she loses her job. During the time she receives these payments, she is required to look for a job. The entrepreneur is required to pay an unemployment tax to help fund this system. That tax will vary by state depending on the unemployment benefits that state provides, as well as the experience rating (the history of unemployment) of the company.

Property Insurance

Insurance that covers the building, fixtures, and inventory in all of the buildings that the business has function

Interview pt 2 (after initial interview)

Once the candidate pool has been set, the founder must winnow the candidate list down to a group to be interviewed. If possible, we recommend that you sit with the applications and the job description at one set time period, so that a direct comparison of the applications and job needs can be completed. Many businesses use some type of video feed program (e.g., Facetime or Skype) to interview candidates without having to incur travel costs. Those candidates who do not have the minimum requirements for the position should be rejected immediately. Those who closely match your job description should be the ones where you focus your next effort. Those that appear to be the best fit in that group should be considered for an interview. During the interview process (whether it is in person or done electronically), it is important that the entrepreneur not discriminate against any given individual. There is a short list of topics that should not be asked about in any interview.6 You should not ask questions about, nor can you consider in the hiring decision, any of the following: Age Race Disability Gender National origin Religion or creed Marital or family status If English is your first language If you drink alcohol Arrest record Pregnancy or if you have children Military discharge status Note that you can ask about prior convictions, but you may not ask about the candidate's arrest record. An arrest is not the same as a conviction. In summary, the discussion during the interview should be based on the needs of the job. The interviewer should also use the interview to provide a realistic preview of the job and the company to the interviewee. You should not overpromise what the job will be or the relevant job security present in the firm. Too often firms try to sell the employee on the job by overpromising what the job is or underselling the expectations the firm has of the employee. Instead, you should provide a valid and realistic perspective that promotes the firm and also sets appropriate expectations for the potential employee. Although it is a tedious process, the founder needs to check as many references as possible. However, the entrepreneur should balance the checking of references with the nature of the job. If the job requires very low skills, then perhaps the need for references might be a bit less important. However, if the job is more central to the organization and has higher required skill levels, then the importance of the references increases. The entrepreneur should also closely check references if the employee might be in a position to put either the business or its customers at risk. Thus, someone mowing lawns for you in a lawn mowing business might require only a simple employment Page 192check. In contrast, a new plumber, who will have access to clients' homes and must be covered under your liability policies, requires a more rigorous background check. The references proposed by the interviewee and any others that the founder believes would have knowledge of the person should be contacted. If the job requires driving, as it does for many salespeople, then the entrepreneur should inform the job candidate that he will be checking the candidate's driving records. In order to make these contacts and receive information, the person hiring must have signed permission from the candidate. The interview process and the checking of references is a time-consuming process. It is for this reason that the screening of résumés or applications prior to beginning this course of action is important. However, the entrepreneur does not want to shortchange the interview and reference process. As a result, you should keep your mind open about which candidate to hire after an initial interview and background check, and then conduct a second round of interviews. Some organizations go even further in making sure that the person is right for the firm and the firm is right for the person. For example, several organizations that we have worked with over the years require the candidates to spend a full day at the company. During the day the applicant will work with other members of the team, have lunch with the other workers, and get to see and be seen in the day-to-day environment. An evaluation by the employees of the company and the candidate at the end of the day provides the needed feedback to management prior to a hire decision. The entrepreneur should keep continuous records of all advertisements that have been run whether a physical publication or on Internet, who responded, and the criteria for the job. If there are ever questions and/or if discrimination is charged, this type of record keeping will be quite helpful in defending your actions.

Leases

One of the most significant contracts that a new business is initially involved in is the lease where the business will operate. Lease contracts may be of any term length that is agreeable between the parties. Whatever the length of the lease, there are several issues that the new business owner should consider: What exactly is the new business owner leasing? Beyond the basic address and exclusive access to the premises, leases should address utilities; access to parking (either exclusive or shared); responsibility for the external premises (including lawn care, painting, etc.); structural repairs/improvements; approval of leasehold improvements; and responsibility for permanently installed equipment (heating/air conditioning, plumbing, electrical, etc.). Can the business owner renew the lease? The lease should specify how long it is in effect and if there is the opportunity to renew the lease. Such renewability is not critical in all leases, but the entrepreneur needs to evaluate such details in light of their business. The initial space that is leased may not be critical for some types of businesses, such as an Internet-based business where no customers will be coming in on a daily basis. For these businesses, the website and telephone are far more important issues. However, if you have a bakery that makes specialty cakes, your customers grow accustomed to where you are located. If you have to move such a retail-based business, there are significant limitations to maintaining a customer base. Who is responsible for improvements? Who has responsibility and authority for physical plant improvements? A lease that includes the responsibility for making improvements to the facility should be accompanied by a lower lease payment. One entrepreneur bought an existing hair salon and negotiated what she believed was a reasonable lease with the landlord. During the first summer that she occupied the building, the air conditioner stopped working, and the lessee found out that she was responsible for replacing the air-conditioning unit; however, the landlord had the exclusive right to approve the unit. The landlord wanted a top-of-the-line unit to replace the old unit, while the lessee just wanted to install a functional mid-priced unit. The decision Page 175had to be made quickly, as it was midsummer in the southwest United States, with temperatures over 100 degrees. The owner of the business had no choice but to put in the unit the landlord wanted. The unit and the related improvements cost more than $25,000. Who has responsibility for maintenance and other facilities issues? Who has responsibility for issues such as the utilities, landscaping, janitorial costs, trash removal, parking lot maintenance and security, window washing, and real estate taxes? Can you place the signage you want, or are there restrictions? Who has to carry the liability insurance and at what level? Many leases require the tenants to carry insurance not only for themselves but also to cover any liability of the landlord. Insurance can be expensive, and it merits particular attention to be clear who has what responsibility for insurance. Can your landlord enter your place of business? Most leases give the landlord some rights to enter your business to inspect it. The landlord wants to make sure you are taking care of the rental location and that nothing illegal is occurring. However, it can feel like an invasion if the landlord can come into your business whenever he or she desires. If there are problems, what are the procedures for addressing and resolving them? If you cannot use all of your space and have a financial need, can you sublet some of your leased space to others? Many leases prohibit such subleasing. Most leases also do not allow you to cancel the lease unless you meet the specified conditions in the lease. To illustrate, recently a developing business was looking for a location for a new retail store. There appeared to be a number of good opportunities in the area where there were multiple buildings with empty space. Unfortunately, the business owners found that one space they really liked was already leased by a business that no longer existed. The lease had been written with the personal guarantee of the business founder Most states do not allow a landlord to charge two individuals for rent on the same space. Interestingly, the landlords chose to leave the space empty and collect full rent for the remainder of the old lease rather than rent the space to the new start-up at a lower rate. The individual who had personally guaranteed the lease before going out of business could only get out of the lease by filing personal bankruptcy, which he was not willing to do. If there are other problems and disagreements between the landlord and the business owner, how will these be solved—mediation, arbitration, or other means? If there are problems, can you withhold your rent? Leases help protect long-term businesses.

Par Value

Shares in the firm must have an initial value at which they are offered, a "par" value.

Industries more likely to regulated by government

Toxic waste, alcohol, medical, military

Workers' compensation

Workers' compensation insurance covers liability for workers who are injured on the job. In many states, workers' compensation insurance is required and can represent a major expense for a business.

hybrid compensation

a hybrid compensation system, where a sales commission can be paid in addition to a basic salary.

utility patent

for a new process, machine, article of manufacture or composition of matter or any new and useful improvements of those

general partner

general partner is considered the manager of the firm and, as such, has unlimited liability for any debts or judgments against the firm

unemployment insurance

not considered a benefit but required by law

Floor value

the corporation has a floor value that is equal to the par value times the number of shares distributed, and this translates into the shareholder equity of the firm

Compensation

An entrepreneurial business needs a significantly less developed system than does a Fortune 500 company. The entrepreneur should decide on a basic form of compensation. The options might include the following: Hourly wage Salary Commission Hybrid/profit-sharing system

Banks

Banks have traditionally been a major source of funds for established firms but are quite restrictive in their lending to start-up firms, as the risk is perceived to be too high. However, there are some specific ways that banks lend to new businesses.(form of nonequity lending)

Human resources

the quantity and quality of human effort directed to producing goods and services

Managing family

Managing family members can be difficult, as these individuals know all of the "hot buttons" that make a fellow family member angry. However, there is no effective way to fire or truly discipline the person without causing major ruptures in the family structure. The result is that family businesses and the human resources in them have more in common with family counseling than they do with the legalistic methods described in the earlier part of this chapter.

Equity Theory

Owing to the level of complication within the workforce of most large firms, these firms require a systematic program that evaluates comparable employees both in the region and around the country. This systematic review of the employees will often include the following: (1) how they performed relative to their objectives; (2) plans for future employee growth through experience and training; (3) defined objectives for the next year; and (4) pay raise being awarded.

Profit sharing

Profit sharing is another example of a hybrid system. The firm may set some relatively low level of salary but offer to share a percentage of the profits at the end of the year or some other period of time with the employees.

Corporations

The result of forming a sole proprietorship or a general partnership is that the business debts flow directly to the owner(s), meaning that all owners are responsible for any debts of the firm that arise. Thus, owners can have their life savings disappear if the business goes bankrupt. The critical issues of personal liability and the desire to limit exposure to the original equity investment led to the development of other forms of organization. A corporation addresses both drawbacks by viewing the business not as synonymous with the individual but as a separate entity.6 If a corporation suffers substantial losses, the founder(s) will lose only his investment in the business.

copyright

can be claimed on creative materials generated, such as books, magazines, advertising copy, music, artwork, or virtually any other creative product, whether published or unpublished. In the United States, a copyright is assumed to apply to anything that is your own original work (whether that original work itself is filed with the U.S. government or not). The copyright is valid for the life of the author plus 70 years.

patent

covers a specific innovation, good for 20 years from the point that it is filed, fees are paid, and it is accepted by the U.S. Patent and Trademark Office for processing. Recent changes to the patent regulations have meant that patent protection is being granted on a "first to file" basis rather than a "first to invent" basis. This might have significant impacts on the timing of efforts by new businesses. patents are expensive to obtain and expensive to maintain, so they should be used only in the case where obtaining the patent is part of the sustainable competitive advantage of the organization. - types: Utility, Plant & Design

Debt

is. genric term used to describe any type of nonequity funding tied to the business & must be paid off with interest - The most common forms of debt for new businesses can be classified as follows: Loans from Bank or finance company Individuals Founders Credit cards Supplier credit

Retaining good employees

Once you have actually hired each new employee, you'll want to retain the employees that perform well. The above process takes a lot of time and effort. If it is done poorly and you don't retain the employee, then this process can simply be a waste of valuable time and money, not to mention the loss of productivity as each new employee has to be brought up to an acceptable level of performance. Therefore, the entrepreneurial business needs to retain those employees that add value. The key issues here are the compensation and benefits offered as well as the method and means of reviewing performance.

liability insurance

which helps to protect the business against lawsuit judgments. Such insurance does not cover intentional acts of malice; however, it does cover the business for accidents. Product liability insurance is expensive, but it can also be obtained to provide a legal defense fund in the case of a negligence lawsuit.

Bonding

Bonding is a type of insurance in which the business is covered in case the workers cause any damage in the performance of their work also protects against embezzlement

sole proprietorship and general partnership

Both sole & general report their loses and gains on their own personal income tax - The result of forming a sole proprietorship or a general partnership is that the business debts flow directly to the owner(s), meaning that all owners are responsible for any debts of the firm that arise. Thus, owners can have their life savings disappear if the business goes bankrupt. (reason why corporation was from) - The drawbacks to this type of business are numerous, and for businesspeople who develop a substantial business, these drawbacks will outweigh the ease of establishment. The first disadvantage is that a business that involves more than a single founder cannot be a sole proprietorship. Kosher Home, by its very nature of having been founded by two individuals, could not be a sole proprietorship unless the founders placed 100 percent of the authority with a single individual, and the other founder was considered an employee (not a very attractive prospect to the founder treated as an employee). The law does not recognize other equity investors in this type of business. This limitation is a significant drawback for the growth potential of a new business, not only from an initial investment perspective but also because as the business develops it may need additional outside investment, which a founder may get in exchange for part ownership of the business. Such investment would be virtually impossible in this legal form. This inability to have additional owners also means that equity incentives to attract top employees and executives are not possible as you could not give them any ownership as part of their compensation. This leaves the founder with two options: either obtain all new monies as personal debt or go through the process of changing the legal form to a more robust one as the firm grows. A second significant disadvantage of a sole proprietorship is the liability for the owners associated with it. In the sole proprietorship all of the liabilities of the sole proprietorship are the direct responsibility of the owner of the business. Thus, a debt for the firm is a personal debt for the business owner. The result is that if the business does something relatively risky, such as trading commodities, or even something mundane, like taking delivery of a substantial level of inventory that ultimately cannot be sold, then those debts of the business are treated as debts of the owner. A third issue is one of legitimacy with suppliers and customers. Owing to the fact that this legal form is so easy to dissolve, suppliers typically require personal guarantees for the debts of the firm from the founder of the business. The result is that the value of the business is limited since it is so tightly tied to the founder. If the founder should seek to sell the business, it can be difficult to accomplish. - Thus, a sole proprietorship is very popular among individuals who: Are unsure of their business idea and just want to see what might happen (if the business proves successful these individuals often re-form the business later, using another business form). Have a very small business where the time limitations of the founder will keep the business from growing significantly. Have a business where the costs of equipment are low and, therefore, so are the risks. For example, a new business that embroiders names on shirts and hats can have relatively low costs and low risks.

laws & regulations for employees in new biz

New businesses generally deal with fewer regulations than do established larger businesses. Many regulations enacted by the federal government do not apply to businesses with fewer than 50 employees (this number varies with the regulation). Some industries are highly regulated regardless of size, whereas others are only loosely regulated even for the large, well-established organizations. If a new business deals with toxic waste such as asbestos, it can expect to have to file extensive registration documentation and be subject to significant regulation immediately, regardless of the size of the firm. Thus, regulation-related issues need to be carefully considered as the business is developed. This same issue will also apply in industries involving alcohol, medical-related industries, and military-related businesses. However, at the other extreme, an Internet business that sells retail goods faces only minimal regulation. There are some basic regulations that cut across the spectrum of businesses. Virtually all businesses must have an Employer Identification Number for tax purposes. Additionally, a business with employees will be required to calculate and deduct various taxes for federal, state, and, in some cases, local authorities. The payroll requirements are specific and well developed. Fortunately, an entrepreneur can simply purchase a canned package for doing payroll and should be able to meet all of these various requirements.

Business Angels.

These individuals may include entrepreneurs who have built one or more businesses and have cashed out (i.e., sold their businesses and have the excess cash in hand), executives with large organizations that have high incomes, professionals such as doctors and lawyers, and individuals with significant inheritances. These individuals can be very helpful sources of expertise and contacts in the area. However, the new businessperson should seek individuals who have relevant knowledge (not just money) to add to the firm. When seeking investment from such individuals, we suggest that you evaluate the nature of their advice, how intrusive they will be, the nature of their business experience, and what other contacts and relationships the angels may have that can help the new firm.

True or False: The greater insurance coverage obtained by a new business, the lower the cost.

True

General Partnership

General Partnership. If two or more people are involved in the founding of an organization, they can form a partnership. Similar to the founding of a sole proprietorship, the means of forming a basic partnership is relatively simple; however, it does involve an extra step beyond that of a sole proprietorship. - A general partnership shares some of the characteristics of the sole proprietorship. The owners report their shares of losses or profits on their own personal income tax returns in proportion to their interest in the firm. Business expenses have some flow-through to personal tax forms, but the restrictions are significant. General partnerships require little more in the way of formal paperwork than sole proprietorships and dissolution can be quite easy, although it does require a formal record with the local authorities. Some of the drawbacks of general partnerships are the same as they are for sole proprietorships. The issue of liability is usually a bit more of an issue than it is for a sole proprietorship. Partners are generally held to be jointly liable for all debts incurred by the partnership. This means that a debt agreed to by your partner for the business becomes your total responsibility if the Page 170partner fails to meet her obligations. Each partner is assumed to be involved with all decisions, which translates into a fiduciary relationship between partners. In other words, partners have the responsibility to watch out for the best interests of the other partners.

Managing Information Flow

New firms do not have the same complex information measurement methods of large firms, but they should be driven by the same basic philosophy. The key to this ability is obtaining data in a timely manner that is tied to the strategic needs of the organization. The lean start-up approach suggests that a new company's data needs are unique compared to an established organization. As the new company has no or a very small presence in the marketplace, they should seek to experiment in very small, fast past batches. A test, evaluation, modify approach to data collection suggests that the new business needs to be very purposeful in its data collection efforts as well as management practices. The goal is to find what works best with customers in the fastest approach possible.

Americans with Disabilities Act (ADA)

The Americans with Disabilities Act (ADA) generally covers those firms with 15 or more employees and provides that each and every business must provide unfettered access to all disabled people. This means at a minimum that ramps or elevators and Braille signs must be provided in the business. The entrepreneurial business may also be required to offer special accommodation to employees who need physical adaptations to work at the firm. Some states and cities have additional requirements beyond the ADA that may impact the entrepreneurial business in this regard.

Limited Liability Partnership

The general partner is considered the manager of the firm and, as such, has unlimited liability for any debts or judgments against the firm. In contrast, The other partners are called limited partners and can work for the firm but may not be active in the management of the organization. They are considered to be passive investors, and as such, their liability is limited to their investment in the business.

job description

A Job Description describes the job that is to be filled. In an entrepreneurial business, this document is not meant to be a formal, highly structured document as it might be in a large corporation.4 Nonetheless, we highly recommend that all positions that are hired into the business have a written job description. Too often entrepreneurs say they know what they want in an employee, but they never write it down. The reason is probably multifold, including a lack of time, an unclear picture of the new position, or a desire to remain flexible for the right individual. However, the process of generating a job description will assist the founder immensely as he carefully considers Page 188the skills, background, and ability of a potential new hire. All too often, the entrepreneur who fails to develop a job description ends up hiring someone because he "likes" the person.

bonus

A bonus system is similar to profit sharing; a bonus is offered to the employees based on their performance. Typically, bonus systems are not as well defined as profit sharing; instead, the level of reward is left to the discretion of the entrepreneur. The time period for which such profit sharing or bonuses are given should be relevant to the individuals in the firm and within the realities and constraints of the business. It is important that the entrepreneur provide bonuses in a timely manner. An entrepreneur may visualize a year as a relevant time frame, whereas workers may be looking for monthly or quarterly feedback on their performance through a bonus. It is very useful for the entrepreneur to consider Page 195the industry standards in developing her compensation system. Those in your industry who have developed a compensation system that works have the potential to provide information not only on the level of total compensation but also on how to structure

bonus

A bonus system is similar to profit sharing; a bonus is offered to the employees based on their performance. Typically, bonus systems are not as well defined as profit sharing; instead, the level of reward is left to the discretion of the entrepreneur. The time period for which such profit sharing or bonuses are given should be relevant to the individuals in the firm and within the realities and constraints of the business. It is important that the entrepreneur provide bonuses in a timely manner. An entrepreneur may visualize a year as a relevant time frame, whereas workers may be looking for monthly or quarterly feedback on their performance through a bonus. It is very useful for the entrepreneur to consider Page 195the industry standards in developing her compensation system. Those in your industry who have developed a compensation system that works have the potential to provide information not only on the level of total compensation but also on how to structure it.

commission

A commission is involved when the entrepreneur pays an individual a percentage of sales and is typically associated with the compensation of sales representatives - A commission compensation system can be abused and may be a source of frustration for employees and the entrepreneur. Abuse of the system can occur when the salespeople are so focused on their commission that they fail to watch for the overall good of the firm. For example, a commission can be based on sales made, and those sales could involve financing instead of immediate payment. A difficulty might occur with a particular salesperson who books a large number of clients who are financially weak and who later default. The salesperson got the commission, but the firm is stuck with bad accounts. Another potential for frustration with commissions comes when the firm either does, or does not, change the commission program to reflect the growth of the firm. To illustrate, when the company is young, the first salesperson may be paid a commission of 20 percent on sales. As the firm expands and hires more salespeople, the business would suffer if the owner attempted to continue paying a 20 percent commission. At this stage the firm is more established, with customers contacting the firm directly. Yet, the founder would have difficulty telling the new salespeople that he would be making less per sale than the existing salesperson. Similarly, the founder would have difficulty in cutting the existing salesperson's commission. Therefore, when you set the first salesperson's commission, realize that you may be establishing the standard for a long time in the organization. Any change that lowers compensation will be viewed by those employees already in place as a negative.

Corporation

A corporation addresses both drawbacks by viewing the business not as synonymous with the individual but as a separate entity. If a corporation suffers substantial losses, the founder(s) will lose only his investment in the business.

accounting system and the data flow management.

A key aspect of how the funding will be used is found in the information provided by the business, and that comes through the accounting system and the data flow management.

partnership

A more complex business form is a partnership. There are two broad categories of partnerships: general and limited. The two differ significantly from each other and will be reviewed separately. - If a partnership agreement is not developed and signed, the partnership will be governed by either the Uniform Partnership Act or the Revised Uniform Partnership Act. These partnership laws were developed as suggested formats and adopted by each state. Thus, although there is some variation among the states, they are nonetheless a relatively effective means to handle the basics of partnership. Although the laws vary somewhat from state to state, certain standards are in place in the absence of a preformation agreement. The rules in the acts are reasonable, but they rarely match exactly what most individuals would prefer for their business. For example, in these acts all assets are treated as equal for the partners. However, we find that rarely is there a true 50-50 partnership. Inevitably, one or more partners contribute more capital or take more of a role in running the business than the other(s). Given this situation, new-business owners would likely want to write a partnership agreement that recognized the larger contribution and perhaps provided a larger ownership stake. Similarly, issues like noncompete agreements are not covered in these acts.5

salary

A salary is similarly straightforward, as it is a set amount of money for a given time period

Equity theory

Equity theory is helpful to understand how to avoid problems with compensation. This theory argues that we all judge how we are treated relative to how we see others being treated. Employees have a powerful need to feel that their compensation given their level and performance is equitable relative to that of other employees in their firm or other individuals in similar situations.9 As a result, all employees need a clear rationale for how their compensation stacks up against that of others in the organization. Employees can accept that someone who has been in the organization longer has a better overall package; however, they will have difficulty accepting it if they are hired at the same time as another employee and do the same job but receive less pay. The owner might have a reason for that difference, but the presence of the difference would be difficult for the employee to understand.

Licensing and permits

Examples of licenses and permits include the following: Business license Local ABC (Alcoholic Beverage Control) liquor license Occupancy permits Federal liquor license (Bureau of Alcohol, Tobacco, Firearms, and Explosives) Business license (from the local city and county authorities) Sign permits OSHA permits for food handling Fire safety permit - At a minimum, most businesses must acquire a license to do business in the county or city in which they will be operating. This type of license is quite simple to obtain, as it normally requires only that one of the principals of the business fill out a form (more and more often online), pay a set fee (usually less than $100 and often quite a bit less), and agree to report basic information about the business's performance on a set schedule. The business will be required to pay a business license tax each year; the tax is often based on company sales.

How Laws, Rules, and Regulations Benefit New Businesses

Excellent sources of information regarding regulatory requirements are the Small Business Assistance Center (run by the Small Business Administration) in your area, the state or local department of economic development, and the local chamber of commerce. More and more government agencies are developing websites to provide all this information and, in some cases, even allow for online submission of materials. All states and cities are critically aware of the role new businesses play in their economic viability. The result has been the establishment of offices to help new businesses to navigate these laws and regulations.

Fair Labor Standards Act (FLSA)

Fair Labor Standards Act (FLSA) establishes a minimum wage for workers. Virtually all workers (other than workers on small farms and administrative employees) are covered by the act. This law requires that employees be paid a minimum wage, which in 2017 was $7.25 per hour. However, states or cities may have higher minimum wages. For example, in 2014 the minimum wage in Seattle was $15.00 per hour. It is even possible for local governments to pass their own minimum-wage requirements as long as they exceed the federal requirement. Many major cities have what they call "living wages"; a living wage is an index wage that requires the minimum wage to be at least what someone who works 40 hours a week needs to stay out of poverty. If your business is covered by the FLSA, it is also covered by the Equal Pay Act, which requires that an employer not discriminate in pay to men and women who do the same job. The FLSA requires that all nonexempt employees who work over 40 hours a week be paid at the rate of time and a half. Compensatory time is not typically allowed from one pay period to the next. Therefore, if the pay period is only one week and you have employees work overtime this week, then you must pay the overtime rate for those hours. You cannot give them time off next week as compensation. If, however, the pay period is two weeks, then time off in one week can be used as compensation for time worked in the previous week. Thus, the firm needs to be very clear on its time frame for issues such as pay. Another legal issue related to pay is child labor. The government closely regulates the use of children under age 16. The entrepreneur would be well advised to seek out legal advice if he plans to employ children, even his own, in the business if they are younger than 16 years of age. Act doesnt cover workers on small farms but covers virtually everyone

Job Advertising part 2

Finally, for very unique skill requirements, there are companies that do an extremely good job recruiting and placing people. These companies traditionally charge the company seeking to hire the employee, and that fee can range from a set fee to a significant percentage of the placed employee's first-year salary. This can be very expensive, so the new business owner needs to clearly think through the benefits of casting a more professional net. In writing the advertisement for the new hire, the entrepreneur should keep it concise and oriented toward the basic information needed for a potential applicant to evaluate his qualifications for the position. However, there are thousands of generic advertisements placed every week that look identical to one another. You will want your advertisement to be distinct enough to stand apart, so it will draw the attention of potential applicants. If possible, your ad should communicate the culture of the firm and your desire to have the right person join your organization. The advertisement should also express excitement about the business. Overall, remember to write the ad to sell the job and the business honestly to the potential employee. Even though many people who read the advertisement may decide that they are not qualified, you would like them to walk away with a positive view of the business from their reading of the advertisement. The advertisement should ask applicants to submit a résumé and a short list of references. Virtually all potential candidates will have résumés prepared unless they are applying for jobs at the very lowest skill levels. A deadline should be established for applying in order to fairly evaluate the applicants in comparison to each other. A typical wording might state, "The application deadline is January 15, 201X, or until the position is filled." This allows a comparison across candidates after January 15 and also allows for the possibility that no one will meet all of your requirements by the deadline.

crowdfunding

First, we review those funding sources that do not require equity in the firm, followed by a review of equity investments, and wrap up with alternative sourcing tools, such as crowdfunding, that have become so popular.1 Separately we will discuss a means for determining the actual amount of funding a new business should seek, to ensure it has sufficient resources at the outset of the business.

HR and Family biz

Human resources in such businesses are still critical, but since family members make up many of the significant employees in the company, everything becomes more delicate. The combination of father, mother, uncles, aunts, and children all in the business has impacts well beyond the standard human resources practice. The introduction of family brings new issues into the business that must be considered. One difference that arises in such businesses is that hiring does not always occur in the manner described previously in this chapter. Instead, the family member is simply hired without interviews, clear understanding of their skills, or explicit mutual understanding of expectations. You should recognize that this does not eliminate issues of discrimination if the firm is large; placement of family members because they are family members into positions in a large business can still result in charges of discrimination. The key issue in discrimination is that everyone is not given a fair chance at a job.

Human resources management (HR)

Human resources management includes the hiring, inspiring, and managing of personnel, which is one of the toughest and yet most important functions for an entrepreneurial firm to develop. For example, hiring personnel who are consistent with your business strategy and style is critical to business success, since without them it is unlikely that you will be able to implement your strategy. Similarly, managing the firm's personnel so that you increase employee skill development allows the firm to develop a key resource. This type of resource is one that other firms cannot easily copy and one that may, in turn, lead to better firm performance. The business of simply meeting the basic legal requirements of your human resources function can be daunting—yet is insufficient for the firm to be successful. This chapter will explore the rich set of issues, both legal and nonlegal, that a start-up business must consider.

Limited Liability Partnership

Limited Liability Partnership. Some of the drawbacks to a general partnership encouraged the development of another type of partnership: a limited liability partnership (LLP). An LLP still has at least two individuals who are partners in a venture (although technically, one person can form an LLP and declare a full pass-through of all income on his or her federal taxes); however, there are two classes of partners in such a venture. The first is a general partner. The general partner is considered the manager of the firm and, as such, has unlimited liability for any debts or judgments against the firm. In contrast, the other partners are considered to be passive investors, and as such, their liability is limited to their investment in the business. The other partners are called limited partners and can work for the firm but may not be active in the management of the organization.

performance review

In a performance review, the entrepreneurial business owner reviews the employee's goals and outcomes on those goals over some given period. Workers are motivated by more than salary. The formal conversation with a worker who is doing a good job, showing that her work is appreciated, is another form of compensation. If the worker is not performing as expected, then the employer should also be very clear about that fact. Although we recommend that all performance reviews be done in writing, we do not suggest that a complex form need be used. Providing effective feedback can be handled in a number of ways but should cover each of the areas of the employee's responsibility. Entrepreneurs should provide formal feedback on a frequent basis. Not only does the new firm operate in a manner that does not lend itself to waiting a year, but newer generations of employees are looking for more frequent and specific feedback. During this feedback, the founder is well advised to provide praise where it is warranted and detail any deficiencies and areas that need to be developed. As will be discussed in the next section, it is critical that the employee know exactly how his performance is compared to expectations. Too often the entrepreneur does not want the confrontation, so will give only positive feedback but then later fire the person. The result is a surprised employee who may seek legal representation to get compensation for being unfairly fired. As will be discussed in the next section of this chapter, if you have not provided accurate performance reviews, the individual may win if the parties do go to court.

Subchapter C and S Corporations

In both Subchapter C and S Corporations, authorizing more shares, holding annual board meetings, and reporting standards to local, state, and federal authorities are among the issues that must be formally addressed by the corporation. The result is that a corporation has higher administrative costs than is typically seen in a sole proprietorship or a general partnership - a business that was larger, or one that was developing into a large business, formed as a Subchapter C Corporation. These corporation types take their names from subchapters in the Internal Revenue Code. However, today another form of corporation, the Limited Liability Company (LLC), has become a predominant business form in the United States - The entrepreneur forming either a Subchapter S or a Subchapter C Corporation will have to have the following: (doesnt have to have details of social responsibility policy) A corporate name—the new organization cannot choose a name that is considered a replication of another company's name. Patent and trademark attorneys offer services that include detailed searches of company names (and allow business owners some level of comfort with their choice) all the way to obtaining a nationwide trademark on the name. Location of the corporate headquarters—for a new business this is generally the same as the business address. General nature of the business—specified for the filing. Names, addresses, and titles—of all corporate founders and initial investors. A so-called time horizon for the firm's existence—for all intents, this is usually "in perpetuity." Authorized stock and capital—the par value times the number of shares issued is considered the initial capital of the organization. Some states require the company to have that amount on deposit in a business account with a bank. By-laws of the organization—the basic rules that will govern activity in the new company.

Testing

In fact, some states, such as Florida, offer a reduction in the rates of workers' compensation insurance if the business has a drug-free workplace program. This can be encouraged by requiring all new employees to submit to a drug test as well as requiring all employees to periodically submit to random drug testing. Most entrepreneurial businesses choose not to have drug testing, and they face risks in conducting such tests. The privacy rights of employees can come into conflict with the desire to have a drug-free workplace. Entrepreneurs are encouraged to consult a local lawyer before beginning such a program. An interesting question that faces many entrepreneurial firms in a state like Colorado or Washington is how to deal with a drug-free workplace when marijuana is legal in the state. Business owners have a right to insist on drug testing

Limited Liability Corporation (LLC)

In recent years the LLC has become one of the most popular forms of incorporation for new businesses.8 This business form is still relatively new; for example, it was only in 1994 that California passed a law to allow such entities. - The limited liability corporation has many similarities with the Subchapter S Corporation. There is the limited liability feature, which exposes each shareholder only to the amount of their investment. However, the LLC allows the new venture to have more investors, and it allows other corporations to hold stock in the company (a feature not available to Subchapter S Corporations).9 An LLC may have as few as one individual listed as an officer of the company, referred to as a "member" of the corporation. - The LLC is similar to a Subchapter C Corporation in that all of the information required is the same but is unlike a Subchapter C Corporation in that profits from the organization can be handled flexibly. The owners are allowed to flow the profits through to their personal returns to avoid double taxation, which occurs with a Subchapter C Corporation. Furthermore, there is substantial flexibility (unlike with a partnership) regarding the amount of income that is designated for each individual. It does not have to be in proportion to that owner's holdings. - The cost of formation of the LLC is very low as this type of organization is formed by simply submitting the paperwork to the state government and having a charter issued prior to beginning operations. State governments establish how this business entity is formed and a few states, such as New York, also require that the founder of the new business publish notice of forming the LLC in the local newspaper. Some states limit their use and will not allow professionals such as accountants and lawyers to form such business entities. As we have stated before, professional advice in regard to what is appropriate within your state is money well spent.

Hiring Employees

Once the candidate pool has been set, the founder must winnow the candidate list down to a group to be interviewed. If possible, we recommend that you sit with the applications and the job description at one set time period, so that a direct comparison of the applications and job needs can be completed. Many businesses use some type of video feed program (e.g., Facetime or Skype) to interview candidates without having to incur travel costs. Those candidates who do not have the minimum requirements for the position should be rejected immediately. Those who closely match your job description should be the ones where you focus your next effort. Those that appear to be the best fit in that group should be considered for an interview.

Job Advertising

Once the entrepreneur has generated the job description, she needs to try to attract the largest pool of applicants possible for the job. Although word of mouth is a means to advertise for a job, we suggest that it is but one of many possible methods for attracting a wider audience. There are a variety of ways to advertise and a large number of organizations that can help promote information on your job opening at little or no cost. These include: College placement offices Trade associations Employment agencies Online job posting - A more expensive means to locate potential employees is to use some type of job-placement website with a classic help-wanted ad. These include the many sites available such as Monster, Indeed, Ziprecruiter, and more localized sites. These advertisements vary widely in cost and ability to reach the audience you desire. Information from the advertising location on readership or viewership, statistics on reply rates, and rates charged are all important pieces of information for the entrepreneur seeking to place an advertisement.

the offer

Once you have selected your top candidate, you need to extend an offer. We suggest that all of the details of the offer be developed prior to any conversation with the candidate. Consideration should be given to the possibility that the candidate might wish to negotiate the deal. You should decide on your negotiation position and how much you are willing to offer for this particular candidate. While this negotiation is primarily an art, we do recommend that once an offer is made, you allow the candidate the opportunity to accept the offer or return to you very quickly with a counter position (establish the amount of time that the offer will remain in effect before you withdraw it and offer the position to another candidate).8 At that point, you can make whatever concessions you think are appropriate and then respond to the candidate. Once an offer is agreed upon between the parties, it should be put in writing by the founder, signed, and sent to the candidate. Only when the candidate returns a signed original of the offer letter should you consider the position closed. We don't wish to be too formal with this process, but we have watched many entrepreneurs be frustrated by employees who thought their agreement differed from that actually offered by the firm.

family biz and Succession (HR)

One especially tricky human resources issue that occurs in family business is succession. The business may have been founded by the father or mother. He or she is ready to retire and has a son and daughter in the business. Who in the next generation becomes the leader of the business? Too often the parent will put off the tough choices. The parent dies and a battle results in the family. To avoid this situation, the parent needs to choose a successor and prepare that person for the position by ensuring that he or she has all the contacts and understanding necessary to be successful. If the parent then decides to leave the business early, that parent needs to step back and let the designated son or daughter lead the business as he or she sees fit. Firms struggle to survive with two leaders of the business. The fact that the other child is not selected can result in difficulties in the family. Again, part of the means to overcome these difficulties is to work with professionals who act almost as family counselors to help the family see the rationales for the choices and how to deal with them positively.

Insurance in portfolio for new biz

One key concern is whether the insurance covers replacement cost or only current value. Much like owning an older car, you may have equipment that has only limited value in a resale market but is very expensive to replace if you have to buy it new. The firm must decide what types of risks it will accept and cover itself versus those that it will purchase insurance to cover. It is fairly standard to obtain coverage for fire, windstorms, hail, and smoke. However, the firm may also wish to obtain a special form of insurance that covers issues such as floods and earthquakes. The greater the insurance coverage obtained by the new business, the greater the cost. Thus, each firm needs to take some care to balance risk and cost.

This systematic review of the employees

Owing to the level of complication within the workforce of most large firms, these firms require a systematic program that evaluates comparable employees both in the region and around the country. This systematic review of the employees will often include the following: (1) how they performed relative to their objectives; (2) plans for future employee growth through experience and training; (3) defined objectives for the next year; and (4) pay raise being awarded. An entrepreneurial business needs a significantly less developed system than does a Fortune 500 company. The entrepreneur should decide on a basic form of compensation. The options might include the following: Hourly wage Salary Commission Hybrid/profit-sharing system

interview

Regardless of whether the candidate has or does not have a résumé, you should ask each one to fill out an application for employment. It is important to establish set criteria for every applicant and to have the ability to track exactly who applied for each position. A variety of generic forms are available at any office supply store or via any one of several software packages. We believe that at a minimum, the following information should be obtained in the application and interview process: Name, address, telephone numbers (home, cell), e-mail address (if applicable) Other addresses for the past three years Social Security number (SSN) Driver's license number and state of issue Work history Date available for work Position for which the candidate is applying How the candidate heard about the job Education and training Professional organization memberships Any record of conviction and, if so, details of that conviction If not a U.S. citizen, the appropriate documentation authorizing the candidate to work. (Note that sometimes very good people will come Page 191and apply for a job and ask you to sponsor them for a work visa. This typically requires several thousand dollars, which the applicant may be willing to pay. You as a business owner will have to be willing to take the time to act as a sponsor. You will also have to verify that this job requires some unique set of skills that only this person has.) References

Subchapter C Corporation

Subchapter C solves some of the issues raised regarding Subchapter S Corporations, while creating others. Subchapter C Corporations also have limited liability for the owners, but the corporation pays an income tax.7 This leads to the situation where the corporation pays a tax on its profits. Then those profits after taxes can be paid as dividends to the owners. However, the owners will have to pay taxes on their personal tax returns for the income distributed as dividends by the Subchapter C Corporation. This is the double taxation situation that is often discussed in the United States. It is possible for the developing new-business owners to mitigate the double taxation cost. The owners are also considered employees of the Subchapter C Corporation and as such are paid salaries and bonuses. The costs of these salaries and bonuses can be viewed as costs to the business. Thus, the owners can pay themselves virtually all of the profits each year so that little actual profit is reported by the corporation, and therefore, little corporate tax is owed. Profits that are not paid out for such items as salaries, bonuses, and/or dividends are then retained by the corporation for future expansion. A Subchapter C Corporation also has the advantage that fringe benefits that are paid out are not treated as income for employees. Thus, owners can have their health insurance and other benefits paid by the corporation, which then expenses each of these as a cost of business. An important feature of a Subchapter C Corporation is that there are no limits to the number of shareholders that the organization may obtain. The only real limit is the number of authorized and distributed shares in the organization. Shares in the firm must have an initial value at which they are offered, a "par" value. Thus, the corporation has a floor value that is equal to Page 172the par value times the number of shares distributed, and this translates into the shareholder equity of the firm.

Legal Issues with Pay (overtime)

The FLSA requires that all nonexempt employees who work over 40 hours a week be paid at the rate of time and a half. Compensatory time is not typically allowed from one pay period to the next. Therefore, if the pay period is only one week and you have employees work overtime this week, then you must pay the overtime rate for those hours. You cannot give them time off next week as compensation. If, however, the pay period is two weeks, then time off in one week can be used as compensation for time worked in the previous week. Thus, the firm needs to be very clear on its time frame for issues such as pay

similarities LLC & Subchapter C

The LLC is similar to a Subchapter C Corporation in that all of the information required is the same but is unlike a Subchapter C Corporation in that profits from the organization can be handled flexibly. The owners are allowed to flow the profits through to their personal returns to avoid double taxation, which occurs with a Subchapter C Corporation. Furthermore, there is substantial flexibility (unlike with a partnership) regarding the amount of income that is designated for each individual. It does not have to be in proportion to that owner's holdings.

The Occupational Safety and Health Administration (OSHA)

The Occupational Safety and Health Administration (OSHA) is charged with protecting the health of workers. OSHA has attempted to shape its regulations to be more lenient toward small business. For example, whereas all employees of any size firm are covered by OSHA, firms with fewer than 10 employees do not have the record-keeping regulations that apply to larger businesses. Additionally, any fines are lower for entrepreneurial businesses with fewer than 25 employees than they are for large businesses. Effectively, OSHA will not impact many new entrepreneurial businesses, such as small retailers. However, other entrepreneurial businesses, such as manufacturing firms, need to pay specific attention to OSHA requirements regardless of their size. We would advise an entrepreneur to consult with industry associations and your local chamber of commerce to judge the potential impact on your firm. If the impact looks to be significant, then a visit with your attorney is merited.

Businesses as Equity Investors

The company that invests with the idea of an ultimate purchase does so because it is one of the least expensive means for trying out new ideas/products/methods and for maintaining access to the latest thinking in the field. For the established company to try to develop every idea in-house, it would have to redirect significant resources away from the core focus of its business. Instead, the large business invests in a series of businesses that are trying new things within its industry, and in effect, it has taken out a series of strategic options without having to detract from its core business. Those options that turn out to be successes are then purchased and brought into the core organization. This can be a wonderful harvest strategy for the entrepreneur to capture the value in a newly founded business; however, the founder(s) may not wish to sell the business at the exact point in time that the larger company wishes to close the sale. Depending on the nature of the investment, the founder(s) may not have the option to decide when the business is sold.

compensation system & compensation

The compensation system chosen by the firm is the aspect that is often highest in the minds of employees. In building the compensation system, the entrepreneur needs to maintain a fair and equitable system for all employees, both now and as the firm progresses into the future. Salary and benefits may appear to be a private matter between you and your employees; however, history would suggest that all information quickly becomes public knowledge among fellow employees. Even if the firm is a virtual one and no one works in the same office, the employees will easily communicate with each other on issues of compensation.

similarities LLC & Subchapter S

The limited liability corporation has many similarities with the Subchapter S Corporation. There is the limited liability feature, which exposes each shareholder only to the amount of their investment. However, the LLC allows the new venture to have more investors, and it allows other corporations to hold stock in the company (a feature not available to Subchapter S Corporations).9 An LLC may have as few as one individual listed as an officer of the company, referred to as a "member" of the corporation.

benefits

The package of benefits the firm chooses to offer can have as much impact on the success of the entrepreneurial business's human resources efforts as the compensation offered.10 Some benefits represent costs to the entrepreneurial business but are relatively easy for the entrepreneurial business to provide. For example, a two-week vacation after an individual has worked at a firm for a year can be provided by most firms. There is an expense since you are paying an employee that is not working; however, calculating when the benefit is due and managing the process is relatively easy. The same may be said of paid holidays and sick days; the sick days build up over time as the employee is working with the entrepreneurial business. - Medical care is one of the most expensive costs for any Page 196business, and yet it is also one of the most desired benefits by employees. The latest figures from the Bureau of Labor Statistics found that benefits cost 31.4% of total compensation costs for an employee.11 However, historically, the plans most entrepreneurial businesses provide are not the full-coverage plans provided by large businesses. In fact, at one time many small businesses did not offer any insurance to employees. While changes are always being made, currently under the Affordable Care Act, firms with more than 50 employees are required to offer their employees insurance. Federal and state governments have established exchanges grouping individuals and small firms together in an effort to seek to lower the health care insurance expense. There are also tax incentives for small entrepreneurial firms to encourage them to offer health insurance to their employees, even if it is not required. One of the biggest beneficiaries of this act, in fact, are the entrepreneurs in a business that employs only themselves and their family. Now under the exchanges these individuals can obtain a more reasonably priced health care product.

Hiring is important

To visualize how important hiring is to an entrepreneurial firm, compare the impact of one person in a large organization to that of one person in a small organization. If a large organization has 1,000 employees, one problematic employee represents only 0.1 percent of its workforce. In a small entrepreneurial firm with five employees, one employee causing problems represents 20 percent of the workforce. An unhappy person not working at full capacity will result in the entrepreneur spending an inordinate amount of time dealing with the problems caused by the troublesome employee. Thus, a poor employee has a triple impact on the entrepreneurial firm: (1) the owner's time is lost; (2) the organization does not fully benefit from the employee; and (3) the problems may bleed over to other employees. Where larger firms can absorb the resulting difficulties due to their built-in slack (excess resources), an entrepreneurial firm can be devastated by a bad hiring decision. The process of finding and hiring new employees is critical and should involve a series of deliberate steps.

Board of Advisors & directors

Two related entities that can help the new business owner foresee potential legal liabilities are boards of advisors and boards of directors. These boards are composed of people who have both insight and experience with which to advise the founders. An effective group of advisors will not only help the new business owner foresee if legal problems might arise but also help the new business wind its way through a full range of other issues and opportunities where experience is the best teacher. The new business should have at least one of these entities that will advise the founder. - A business that chooses to form a corporation must have a board of directors. These are individuals who have a fiduciary responsibility to the shareholders of the organization. In new corporations, the shareholders and board of directors are often the same individuals. In contrast, a board of advisors may be formed at the discretion of the founders (regardless of the legal form chosen); it is composed of individuals outside the new business who will advise the firm.

discrimination

it is important in designing the advertisement that the firm use nondiscriminatory language. Title VII of the Civil Rights Act prohibits discrimination in hiring, dismissal, level of pay, or promotions on the basis of Page 190race, color, gender, religious beliefs, or national origin. This law currently applies to all firms with more than 25 employees. However, there are also state laws that may apply to firms with fewer than 25 employees, plus other federal laws that put the entrepreneur at risk even if the firm has fewer than 15 employees. Therefore, the entrepreneur should avoid any discrimination or even the appearance of discrimination. The adherence to a nondiscrimination posture takes effort by the entrepreneurial business.5

trademark

legal protection of the intellectual property that is associated with a specific business. This may be the name of the firm, a symbol representing the firm, or the names of its products. Most large companies have trademarked their company name, symbols, and tag lines. - A firm that is violating a trademark can be sued and is required not only to pay damages, but also may be forced to change its name. A trademark is valid for 10 years and can be renewed as long as the firm or product is active.

Subchapter S Corporation (S-Corp)

required to pay income tax - Subchapter S Corporation. As with all corporate forms, the Subchapter S has the benefit of protecting the owners by treating the firm as a separate entity. Thus, the liability is generally limited to any investment the owners might have in the organization. However, a Subchapter S allows the owners to treat the income of the firm as they would if the firm were a sole proprietorship or a partnership. - Thus, the owners report their income or losses on their own personal income tax returns. The business must file informational tax returns that report each shareholder's portion of the business that allows the IRS to ensure the owners of the corporation are reporting their income. - The benefits of a Subchapter S can be summarized as follows: Limited liability for owners of the corporation. The potential to consolidate financial statements of business and personal income for the tax benefit of the owners. Relatively easy formation compared with a Subchapter C Corporation. Legitimacy in the market as a more established form of business (the right to put "Inc." after your business name). However, there are negatives to this form of business as well. Although the effort to form this type of organization is substantially easier than that involved in forming a Subchapter C Corporation, it is nonetheless quite cumbersome and expensive when compared to either a sole proprietorship or a general partnership form. A second consideration is the limitation to the number of shareholders in this type of organization. Historically, a Subchapter S Corporation has had a numerical limit to the number of shareholders. Currently that limit is set at a maximum of 75 shareholders. This limitation is fine for a closely held or family corporation but is a significant limitation to a rapidly growing organization or one that has any thought of going public in the future.