business

So you have decided to start your own business. You have done your research, created your business plan and have some money to get started. Great! Now what? Well, the first thing you need to do is create a legal entity so you can request a federal tax id, setup a bank account and so on. For small businesses that intend to stay small that usually means incorporating with the state in which you currently reside. However, if you plan on building the next monster company you should contemplate incorporating in Delaware instead of your home state.

Many institutional investors prefer Delaware corporations and some may even require you to reincorporate in Delaware prior to an investment. Why? Because Delaware has a separate Court of Chancery, a business court. The Court of Chancery does not use juries and the judges are appointed based on merit, not public election. Because there are no juries, decisions issued from the Chancery Court are done so as written opinions. The opinions create a large body of legal precedent for the investors to rely on, making it the most business friendly state to incorporate in from a legal standpoint. Investors like that.

There are a few other benefits to incorporating in Delaware:

• You don’t need to be a resident of Delaware.
• Non-Delaware Businesses don’t pay Delaware Corporate Taxes.
• Different kinds of business can be transacted under one corporate roof.
• Shareholders can act in writing instead of holding meetings.
• You can add people to the board who are not shareholders.
• One person can act as the only officer, director and shareholder of a corporation.

The state of Delaware has a booklet dedicated to the subject if you want more details. Corporations and LLCs of Delaware are permitted to run their businesses in all 50 states and foreign countries. You can incorporate for as little as $79.00 (no, I have never used these guys) and the ongoing cost of operations are relatively low.

Please note: I am not an attorney, financial advisor or tax expert. You should consult your own counsel prior to making any business decisions.

Starting a business is easy. You can legally create a business entity in a few hours with a couple hundred bucks. The hard part is raising capital for growth and keeping the business running long term. It’s a long, hard road and it is not for everyone.

I always encourage would-be entrepreneurs to take the leap and go for it, but before you do you should know what you are up against. Here are a few sobering facts:

• According to the U.S. Small Business Administration, roughly 50% of small businesses fail within the first five years.
• In 2008 627,200 U.S. businesses were born, 595,600 businesses closed and 43,546 filed for bankruptcy.
• Only 2,765 venture capital deals were done in all of 2009.
• A typical venture fund may invest in 1 out of 400 opportunities presented to it.

But it isn’t all bad news. Plenty of small businesses beat the odds, never get funding and have a huge impact on the US Economy. Small businesses:

• Represent 99.7 percent of all employer firms.
• Employ just over half of all private sector employees.
• Pay 44 percent of total U.S. private payroll.
• Have generated 64 percent of net new jobs over the past 15 years.
• Create more than half of the nonfarm private gross domestic product (GDP).
• Hire 40 percent of high tech workers (such as scientists, engineers, and computer programmers)

I get a lot of emails from first time entrepreneurs looking to start a company. Almost every email I get sounds something like this. “I am thinking of starting a business doing X. I am really passionate about X, I want to take control of my life and be my own boss. I am looking to raise capital and I was wondering where to start.”

My Simple Advice

If you are so passionate about X stop talking and start doing. Commit your own dollars to getting your business concept off the ground and bootstrap it for as long as you can. Few investors will put money in to a company without some significant financial and/or resource commitment from the entrepreneur.

You will be hard pressed to raise capital these days without at least one of the following:

1. A proven track record as an entrepreneur.

2. A functioning business with a business model that investors can help scale with cash.

3. Some rock solid intellectual property.

Can you start your own business? Hell yeah you can! Can you raise money? You bet! But don’t expect any investor to put up money until you have some skin in the game. If you are successful in raising capital remember that business is like marriage and you have make a commitment to your backers. The notion of “I want to take control of my life and be my own boss” is all wrong. The business is the boss, at least until it gets to scale and profitability.