I recommend that entrepreneurs and business owners draft a business plan before making important decisions on matters such as forming a new company, considering expansion into a significant new market, capitalizing on new forms of marketing opportunities, entertaining a strategic alliance or joint venture or seeking new sources of capital for a new concept or continued growth of an existing business.

It is hard to over estimate the value of a well thought-out business plan. Entire college courses can be devoted to business plan development. The plan should have “buy-in” by company executives, investors and other key players. A basic business plan usually contains the following:

The Executive Summary. This section, consisting of three to four pages, summarizes the entire plan in outline form. Highlights may include overview of the company; company products and services; the management team; the market-opportunity; company objectives; a funding request and a short financial summary, all keyed into specifics found in the plan detail.

The Company. This section will include an expanded description of the company; details of the products and services it currently offers or intends to introduce into the market; its competitive advantages; how it intends to distinguish itself from the competition and how the company plans to make money. Biography of company founders and key employees may be attached as an addendum.

The Market. This section will give historical and statistical data on the industry, its growth rate and capitalization; the submarket in which the company intends to operate; barriers to entry; how the company plans to identify target customers and properly price, advertise and sell its goods or services to those customers.

Company Operations. This section describes the company’s unique facilities and developed or planned technologies the company has or needs in order to capitalize on its target market opportunity. This section will vary greatly depending on industry. While a sales-orientated business such as a real estate or insurance company will focus on distinguishing its ability to attract and retain competitive sales agents and customers, a start-up restaurant may focus on its menu, décor, customer service, price points, margins and planned sales per square foot of leased restaurant space.

The Competition. This section will detail who the competitors are, what they do well, what they do poorly and their respective market share; the growth of the market in relation to the planned growth of the competitors within that market and the impact of the growth of the market and competition on the planned operation of the company. This section may also identify the prime movers and shakers who started and run the most successful, competitive or influential business in the market.

Risk Disclosure. This section is often the hardest for entrepreneurs to address. Often blinded by the seeming brilliance of an idea, entrepreneurs play down the risks of their plans. However there is substantial legal liability associated with failure to adequately address the known risks of a planned venture to prospective investors, lenders and partners. For this reason care needs to be taken and proper due diligence conducted to make certain that the disclosures are fair and accurate.

Financial Statements. This section may include historical data for previous years, including a profit and loss statement, sources and uses of capital and balance sheets. Include pro forma financial statements for the upcoming one-, three- and five-year plan showing cash burn-rate, break-even and return on investment. The pro forma statements should detail how funds raised by investors and lenders will be put to use to further company objectives. The financial statements must be supportable, consistent, conformed to accepted accounting principals and presented in a readable manner.

Secondary Source Materials. All relevant materials relied upon in developing the plan and its conclusions should be made available in the appendices of the plan. Information to voluminous to include should be noted and a means for interested reads to access the materials either through the Internet or other means should also be furnished.

There are many sources of assistance available to those seeking help with developing a business plan, including specialty websites, the SBA, banks, bookstores and professional business plan developers. Some of these resources are listed in my resources page.

This year I have worked with companies that have developed business plans ranging from 5 to over 50 pages. Generally, in developing a business plan, the shorter the better. It is hard to hold the reader’s attention with a plan over 20 or so pages. A 50 page plan, however, may be appropriate for a company seeking angel then private placement-venture funding in anticipation of a national franchise roll-out.

In cases where the business plan is part of an effort to raise capital through the investment community care needs to be taken to insure that proper state and federal investment offering registration and security law compliance is undertaken and maintained. In many cases entrepreneurs are well advised to obtain a non-disclosure agreement prior to furnishing the plan to prospective investors, lenders, vendors and others.

While substance is more important than style, a good visual presentation is desirable and offers a polished professional presentation. Furnishing data on CD-ROM is not uncommon. Accuracy is important and proof reading by all management team members is important for team cohesiveness and verifying accuracy of content.

Occasionally a business plan will grow out of a negotiated letter of intent or letter of understanding between interested parties. I hope to address key points of a well drafted letter of understanding in a future post.

A business plan can assist in avoiding misunderstandings between parties. The plan can guide counsel in drafting key agreements necessary to accomplish company objectives. Plans should not be static. A good plan is updated as new information becomes available, new realities become apparent or new opportunities present themselves.

A limited liability company must file its tax return as either a corporation, partnership or sole proprietorship. Federal tax law mandates that certain enterprises formed as an LLC are automatically classified as a corporation for tax purposes. A list of those businesses may be obtained from the IRS. Generally, however, a new enterprise formed as an LLC is regarded as a partnership for tax purposes.

A business formed as an LLC by two or more members’ consisting of existing business entities or individuals not otherwise scheduled by the IRS may elect to have the new entity taxed as a corporation or a partnership. An LLC established by a single business entity such as a corporation or partnership or an individual may be referred to as a “single-member LLC” (“SMLLC”). The SMLLC owner may choose to have the entity classified for tax purposes as either a corporation or as a “disregarded entity.” An LLC whose members consist of a husband and wife, only, may also elect to be classified as a disregarded entity if the assets of the entity are strictly community property. A disregarded entity is a legal entity separate from its owner, the corporation or individual, that has elected to report its income and losses as those of its owner on its owner’s tax return. That is, the entity is “disregarded” for tax purposes.

A LLC that is not automatically classified as a corporation by the IRS can file a Form 8832 to elect their business entity classification. According to the IRS, if a LLC does not file IRS Form 8832, then it will be classified under the default rules. Under the default rules if a LLC has at least two members and is not required to be classified as a corporation then it will be classified as a partnership and will be required to file a partnership tax return. A SMLLC that is not required to report as a corporation will automatically default to the classification of disregarded entity. A disregarded entity – sole proprietorship completes the appropriate schedules of the single owner Form 1040. If the sole proprietorship has net income over $400.00, then it may be required to also file a Schedule SE for self-employment tax.

The preferable election for the SMLLC is business-specific. A short list of considerations might include long term business goals and owner-exit strategies; cash contributed to the company for investment in tangible and intangible assets; the amount of time and labor the entrepreneur will be contributing to the business; potential liability for Social Security payroll taxes that are collected under authority of the Federal Insurance Contributions Act (FICA); the prospect of a future merging of the entity into a corporation. I hope to take a closer look at some of these considerations in future posts.

Initial election decisions are best made after consulting with a tax professional and legal counsel. Under the check-the-box rules, the initial election is made at the time the Certificate of Formation is filed with the Secretary of State. Changes in status may be made after formation and may be unavoidable as when a SMLLC admits a new member and must elect to be regarded as either a corporation or partnership.

I have had a number of clients inquire on the merits of incorporating or forming their limited liability company in Nevada. There are websites that advertise the alleged benefits of incorporating in Nevada. Some of the claimed benefits include (i) protection of the owner’s identity from public disclosure; (ii) protection of assets from lawsuits and judgments; and (iii) tax savings.

I’m not convinced any of these claims are true in every instance and have concluded that it does not make sense to incorporate in Nevada unless you are planning on doing business in Nevada.

A Nevada entity cannot do business in Washington until it registers with the Washington Secretary of State as a “foreign corporation” doing business in Washington. Failure to register to do business in Washington will result in the loss of corporate protections and can result in personal legal liability for the owners.

The Revised Code of Washington (“RCW”) provides that “[a] foreign corporation holding a valid certificate of authority shall have no greater rights and privileges than a domestic corporation of like character. Except as otherwise provided by this title, a foreign corporation is subject to the same duties, restrictions, penalties, and liabilities now or later imposed on a domestic corporation of like character.” (RCW 23B.15.050(2)) This statute, along with others, levels the playing field between the Washington and the Nevada corporation for Washington businesses.

A partial list of the duties of a Washington domestic corporation include: maintenance of a permanent records of all meeting minutes; appropriate accounting records; record of its shareholders, in a form that permits preparation of a list of the names; copies of its articles or restated articles of incorporation and all amendments; copies of all financial statements; list of the names and business addresses of its current directors and officers. To the extent these obligations are imposed on the Nevada entity doing business in Washington the identity of its owners and operational identity-protections are lost or greatly compromised.

Once the Nevada entity intentionally avails itself of the opportunity to conduct business in Washington State it subjects itself to Washington law and the jurisdiction of the Washington courts. If a Nevada entity is sued in Washington and loses, the judgment is enforceable in Nevada.

It will cost more to operate a Nevada corporation in Washington. The Nevada corporation will have to pay a filing fee an annual registration fee in Nevada and Washington, thereby doubling up on those fees. Also the Nevada corporation will be subject to Washington Business and Occupation tax.

It is highly improbable that the alleged advantages of operating a Nevada corporation or limited liability company will benefit most Washingtonians. For those Washingtonians planning on doing business in or from Washington it makes good sense to incorporate or form your limited liability company here.

An accepted means of gaining entry into the world of business during the past thirty years has been through the purchase of a franchise. Simply put, franchising is a means of distributing goods or services employing a franchisor’s trademark(s) in compliance with a system of operation established by the franchisor. The franchisee is responsible for payment of a fee in exchange for the right to sell or furnish the goods or service in compliance with the franchisor’s system and use the franchisor’s trademark(s). The two principal forms of franchises are product distribution and business format franchises. The product distribution franchise model includes automobile, tire and gasoline distribution-franchises. The business format franchise model includes restaurant, copy-center and hotel chains operating nationally and internationally.

In a business format franchise, the franchisor generally provides the franchisee with an entire business concept including “operating manuals” explaining in detail important criteria such as site selection, details of branding the business location and products, pre-opening and operating procedures and strict guidelines on how the business is to solicit, interact and respond to its customers. The franchisee is expected to comply with every detail of the franchise agreement. Penalties for failure to comply with the terms of the agreement can be draconian.

Franchising has provided many individuals, investors and operating companies with a proven means of successful entry into many diverse businesses. Franchising as a business model has also been subject to a great deal of abuse by unscrupulous and inexperienced business people resulting in much litigation and imposition of federal and statutory laws designed to protect prospective franchisees and franchisors.

The Federal Trade Commission defines a “franchise” as a “continuing commercial relationship created by any arrangement” where (1) the franchisee sells goods or services that are associated with the franchisor’s trademark or must meet the franchisor’s quality standards, (2) the franchisor exercises significant control over, or gives the franchisee significant assistance in, the franchisee’s method of operation, and (3) the franchisee, as a condition of obtaining or commencing operation, is required to make payments aggregating more than $500 within six months of commencing such operation.

The Revised Code of Washington (“RCW”) defines a “franchise” as: (a) an agreement, expressed or implied, oral or written, by which: (i) a person is granted the right to engage in the business of offering, selling, or distributing goods or services under a marketing plan prescribed or suggested in substantial part by the grantor or its affiliate; (ii) the operation of the business is substantially associated with a trademark, service mark, trade name, advertising, or other commercial symbol designating, owned by, or licensed by the grantor or its affiliate; and (iii) the person pays, agrees to pay, or is required to pay, directly or indirectly, a franchise fee. (RCW 19.100.010(4))

Franchisors wishing to sell franchises in Washington State must first register their offerings with the Washington State Department of Financial Institutions unless the offering qualifies for one of the exemptions contained in RCW 19.100.030.

In future posts I will furnish more detail on the definition of a franchise; discuss alternatives to franchising and what constitutes inadvertent franchising; examine common myths and abusive franchise practices and current legal trends in franchising as well.

On January 1, 1997 the US Treasury Department issued new “check-the-box” regulations that allow taxpayers to classify certain business organizations as either a corporation, a partnership or a non-entity by merely filing the election at the time of organization. The long-standing fact and circumstance test was replaced by a simple election regardless of the characteristics the organization may possess. If not classified as a corporation by default or election, an organization with two or more owners will be defaulted to partnership status. Flow-through entities are those subject to partnership taxation under Subchapter K of the Internal Revenue Code.

Corporations are taxed at the entity level prior to distribution of income to shareholders. Partnership earnings and distributions are not taxed at the entity level. Instead, earnings and distributions ‘flow-through’ to the owners and are taxed at the ownership level. As part of the process the investor’s tax basis in the entity is increased by the amount of the entity’s earnings and decreased by the its losses. Common forms of flow-through entities include general partnerships, the limited partnerships and limited liability companies.

An individual or group licensed to render professional services may organize a professional limited liability company. Washington professional limited liability companies are subject to the provisions of Washington Professional Corporations Act.

A general partnership is an oral or written agreement by two or more individuals or companies to contribute money, services or assets to a business formed under applicable provisions of state law. There is no limitation on the number of individuals that may belong to in a general partnership. Each partner shares in the management, profit and losses of the partnership. Each partner is also jointly and severally liable for the debts and liabilities of the partnership. The owners of a general partnership may convert to a limited liability partnership upon a vote to amend the partnership agreement and by filing the required application with the Secretary of State.

A limited partnership is composed of one or more general and limited partners who contribute money, services or assets to a business formed under state law. The day to day activities of the limited partnership are managed by the general partner. The limited partners do not engage in formal management activities but share in the profit of the company. Unlike general partners, however, a limited partner’s exposure is limited to the amount of its investment in the partnership.

An subchapter “s-corporation” is a corporation established and governed by the Washington Business Corporations Act that files an IRS Form 2553 to elect flow-through entity tax treatment. Membership in an s-corporation is limited to 100 shareholders. Shareholders cannot include other corporations, limited liability companies, partnerships, certain trusts and non-US residents.

Only the limited liability company and limited liability partnership offer the tax incentives of a partnership with the asset-protection advantages of a corporation.