Author Archives: Derrick Skogsberg

Can I Incorporate in a Different State?

Question of money

Question of money (Photo credit: Ano Lobb. @healthyrx)

One of the biggest decisions a small business owner must make is “where should I incorporate?” The most logical and common answer is the state in which the business resides. Generally speaking this is probably the best choice.

A business owner is not legally obligated to incorporate in their home state, though. Often times there are advantages to incorporating elsewhere such as tax and cost related benefits. There are “corporation-friendly” states that offer incentives for incorporating your business there.

Although there may be incentives to leave your home state, the biggest question you should ask yourself is: “should you?”

Incorporation Considerations

There are three main factors to consider when deciding whether or not to incorporate in a different state: tax considerations, cost considerations and jurisdictional considerations. Many times, after thorough analysis of these factors, business owners find that the best option is incorporation in the state that the business is located.

That being said, let’s take a look at each factor individually.

Tax

Tax (Photo credit: 401(K) 2013)

Tax Considerations

From state to state, the characteristics of a corporation remain relatively the same. The applicable state tax rates, however, vary widely. Some states have tax rates as high as 10% whereas other states, such as Nevada, have no franchise tax or state income tax. The tax breaks are part of what makes Nevada such a desirable state in which to incorporate. However, incorporation in Nevada does not excuse you from paying taxes in your home state because every state requires taxes be paid by businesses operating within its borders.

Money cash

Money cash (Photo credit: @Doug88888)

Cost Considerations

Although incorporating your business does not require you to retain a lawyer, seeking some legal counsel is advisable due to the complexity of the process. If you decide to incorporate outside of your home state, it is best to seek the counsel of a licensed and practicing lawyer in that state.

Each state requires that a corporation has a resident agent for service of process located at a physical address within that state. There are firms that provide this service at a nominal fee ranging between $125 and $200 per year. A corporation without a physical address in the state will be required to pay an authorized company for this service.

Additionally, there is the paperwork required to apply for qualification to do business in that state. Every state requires this type of registration. This process can involve paying filing fees, supplying reporting requirements and even possibly paying penalties if you have conducted business prior to registering. Typically, a corporation will end up having to pay maintenance fees and taxes in its home state as well as in the state of incorporation during this process.

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(Photo credit: Wikipedia)

Jurisdictional Considerations

When a corporation is incorporated in one state and headquartered in another, it is subject to the jurisdiction and service processes of the state of incorporation. This can prove to be problematic or inconvenient for a number of different reasons.

One of those reasons is that any communications, such as legal notices, in the state of incorporation must go through your registered agent in that state. This means that important documents or time-sensitive information may be misplaced or may not reach you in time.

Another downside is that your corporation is governed by the laws of that foreign state. This is problematic because in many states, the court system requires that you appear in that state’s court if and when any legal disputes arise.

Why Should You Incorporate in Your Home State

If the business you operate is a small business and you anticipate having five or fewer shareholder, then it is usually considered best practice to incorporate in the state where you have the most physical presence. The physical presence includes employees, property and shareholders and for most small businesses, is their home state.

Many small businesses will attempt to protect their assets and avoid paying taxes by incorporating in a “tax-free” state like Delaware or Nevada. However, there are drawbacks to falling for an out-of-state incorporation plan:

  1. Typically, you will still have to pay taxes in your home state: Even if you incorporate in a state like Nevada where there is no corporate or state tax and you do business within another state that does, you will be responsible for paying taxes on your profits anyway. This is often overlooked by over zealous small business owners in search of an easy way around paying taxes.

  2. You raise your administrative costs: As previously mentioned, by incorporating in a foreign state you will incur the added costs of a registered agent in that state as well as additional out-of-state filing fees. In addition, you may have to file a “foreign registration” document in your home state.

  3. You put your personal assets in danger: Your business must be registered in the state where you are doing business in order for your personal assets to be protected from business-related liabilities. If you are registered out of state, your personal assets are exposed.

  4. You may run into banking troubles: As a “foreign business,” you can run into problems opening up a bank account in both your incorporation state and in the state you are physically located.

  5. Transparency is the new privacy: There was a time when incorporating in Nevada or Delaware came with strict privacy rules that protected certain information such as the identity of officers and directors. However, recently these states have tightened their disclosure rules. Because a new corporation will have to register as a foreign entity, it will have to disclose all management individuals.

As you can see, there are both advantages and drawbacks to incorporating in other states. However, for small businesses it is generally accepted as best practice to incorporate in your home state.

Incorporating in your home state can save you not only mounds of paperwork but also mounds money. Each situation should be handled on a case-by-case basis and, in general, legal counsel should be sought.

Armed with knowledge of laws and regulations, you should be ready for your business’ incorporation.

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Top 5 Business Funding Misconceptions

In today’s economy, small business is the backbone of the American workforce. In the US, 99

Seal of the U.S. government's Small Business A...

Seal of the U.S. government’s Small Business Administration. (Photo credit: Wikipedia)

percent of all independent firms employ less than 500 employees. According to the Small Business Administration (SBA), these companies represent about 52 percent of the US workforce.

When broken out into business size, businesses with less than 20 workers employ 19.6 million Americans, businesses with 20-99 workers employ 18.4 million and firms with 100-499 workers employ 14.6 million Americans. With the autonomy to be your own boss and the sense of accomplishment associated with building something from scratch, it’s no wonder that the number of small business owners continues to rise.

However, many great ideas never get off the ground due to misinformation regarding funding. At Tenet Financial, we are here to help you get your business up and running in any way we can. So, here are the top 5 business funding misconceptions.

Myth #1 – Finding your own funding sources is easy. 

As an entrepreneur, securing funding for your business is crucial to prolonged success. Obtaining these funds on your own can be a long and tedious process, ultimately taking years to accomplish. Identifying and researching prospective investors with experience in your industry of expertise is generally how funds are successfully secured.

In this process, a business owner may be rejected multiple times, and each time is an opportunity to help build the business plan. It is no secret that one of the keys to securing outside funding is to have a solid business plan.

At many times, an entrepreneur may be a little overconfident about his/her product and may think that “it sells itself.” Funding partners, on the other hand, may not. That is why having an air-tight business plan and a fine-tuned elevator pitch are necessary for locking down a funding partner. Even with both in hand, it still may take months or years to raise the necessary capital.

Myth #2 – “It’s a numbers game: the more investors I contact, the more likely I can find funding.”

One of the worst ways to attempt to obtain funding is to send a mass email that begins with “Dear Sir or Madame.” Sending mass mailings is clearly the wrong approach and many investors view it as a waste of time, energy and, most importantly, money.

Most investors agree that they much prefer to be sought out by quality rather than quantity. Entrepreneurs should do the research and identify those investors that have a high level of success and knowledge in the industry of note.

Although it may not be a numbers game, it still is a sales game. Personalization of each investment request will help to improve the “closing” rate and will ultimately get the entrepreneur to the funding goal much more quickly.

Myth #3 – The SBA makes it easy to obtain funding 

The U.S. Small Business Administration exists to help small businesses find funding options. By their own definition, the SBA “provides a number of financial assistance programs for small businesses that have been specifically designed to meet key financing needs, including debt financing, surety bonds, and equity financing.”

Although the SBA is in business to help small business, their eligibility requirements may be too much to handle for many businesses.

Also, they lend to businesses, not people. So, they do require a high amount of collateral in addition to a solid business plan, or they may choose to only lend to established businesses with a proven track record of success (franchises.) It is best to consult a financial lending professional to see if this option is best for you.

Myth #4 – I can get government grants for my startup

There are federal grants available to small businesses. However, many of them are only available to scientific, medical, educational and non-profit institutions. If your startup does not fall into one of these categories, there’s a good chance your grant application will be denied.

Often times, businesses that acquire grants also depend on multiple sources of capital including that of lending institutions and private investors.

Additionally, there is a limited supply of funding and the process is very competitive. This avenue may be right for you if you are in the minority, however do not count on government grants for the lion’s share of your funding.

Myth #5 – Venture capitalists will fund my business

The truth in this is that venture capitalists will generally only invest in businesses that are already established and not ones that are developing. They tend to pool their monies and are extremely selective with applicants.

Tendencies to invest with so-called “safe companies” will limit their options to focus on candidates that have already achieved a large degree of success. Ultimately it is up to you to convince this funding source to invest in your business and having a robust and complete business plan will help you to do just that.

Finding a funding source that matches your business needs can be a long and trying process if you approach it on your own.

However, the funding professionals and Tenet Financial can assist in pointing you in the right direction. Don’t believe the myths, call get your business funded the right way by partnering with Tenet Financial today.

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Franchise Funding Options 101

Which Franchise Funding Option is Right for Me?

How to fund?

via: entrepreneur.com

So, you’ve got the perfect business idea. It’s the kind of business that is going to change the world, be beneficial to all and become an instant success. There is just one problem: you don’t have the cash to get it off the ground. How will you raise the funds to not only start a business but carry it through the difficult times and help it expand and grow? There are many options out there for business and franchise funding, but which one is right for you?

The answer might be one or more of these funding options. At times, new business owners may find that the best “option” might be a mix of borrowing from family, personal investment and even an SBA micro-loan. The funding experts at Tenet Financial will walk you through all funding options and will help get you on the path to success with your new business.

Personal Cash Funding

Cash purchase

One of the most common funding methods is personal investment. Personal cash funding is just what it implies: using your own cash to fund your business.

Pros: The two biggest benefits to using cash that you already have are the availability and the avoiding debt. It is obviously a nice perk to not have to go and acquire funds from someone else. Smart business people keep cash available for opportunities, and this can be an example of that situation.

Another great practice when looking at franchise or business ownership is to start out debt free. Paying with cash you have on hand keeps your business in a great place financially.

Cons: Generally, it is regarded as best to protect or preserve your personal assets for an emergency and use someone else’s money to fund your business. When your business runs into a tight spot, and it will, it’s best to have cash available to keep the doors open.

Funding Example: Using your own cash can really be done in any type of situation, but it is typically done in business or franchise startups that require less upfront capital.

Although there have been some successful ventures started with large personal investments, there have been many more that have failed. If this is the route you choose for your funding, it is best to seek the advice of a funding professional to help guide you through your start-up.

Borrowing From Friends and Family

Borrow from family members

via: expertbusinessadvice.com

Your friends and family are often times your greatest supporters. However, once money lending comes into the picture, the dynamic of the relationship can change. Becoming a debtor to your inner circle may cause irreparable rifts. Conversely, starting a business with the financial backing of your friends and family can have a more positive outcome. In many occasions, they may devote time, effort and other resources above and beyond the financial assistance because of their vested interest in the success of the partnership. This source of funding should be well thought out and, at many times, be a part of your overall funding “potpourri.”

Pros: Funding can be hard to come by sometimes, and having a family member or members with money for your business can be very convenient. Often times, family can be more forgiving when it comes to paying the money back as well. While this is not a suggested reason to use money from family, it does often have more flexibility than most other sources.

Cons: The biggest reason to not use family money is because of the problems that it can cause with relationships. For some reason there is just a special set of emotions attached to the agreements made with family. Some people do just fine with this situation, but man more do not.

Another con of using money from family is that there is not an endless supply. In most situations there will only be one loan, then the money is dry.

Funding Example: Low overhead franchise models are often a time when family money us used. Let’s say you just need a van and some equipment to start a new franchise location in your city. This can make sense if the plan is right.

Local Bank or Credit Union

bank loan

Having an established, longstanding and positive relationship with your local bank or credit union can be a great funding option for your business. Don’t be discouraged, however, if you are rejected. There can be many qualifying factors to obtain a small business loan from your local financial institution and missing any one of them can result in the rejection of your loan application. Often times, it is better to let the professional lending consultants work their established network of lending resources to find you the best option for your business. Multiple inquiries to your credit can have adverse effects on your loan qualifications for up to six months so having a targeted approach to acquiring loans is usually best.

Pros: Gaining funds from a local bank or credit union opens the door to getting more funds in the future. Since banks thrive on keeping money out and lending, it makes sense in certain situations to keep this relationship.

It’s also nice to have someone locally to talk about finance and business planning issues with. Business bankers can be a very valuable resource for you and your franchise in the long run.

Cons: You have either heard or experienced the downside to banks sometime in your life. Funding institutions require lots of paperwork, lots of credit history, and lots of money down typically. Most likely the best way to express getting bank funds is this way: “If you can pay for something yourself, and don’t need bank loans, then you can qualify for a bank loan!”

Funding Example: Bank loans and SBA loans share similar characteristics. Franchises that require real estate of large equipment, or both are likely candidates for loans. Banks like to have assets to attach to just in case you can’t pay back your loan. This is commonly seen in things like auto repair shops or gyms that have storefronts and valuable equipment.

Retirement Funds

401K rollovers

via: makemoneyuniqueways.com

Did you know that your own retirement funds can be used to help buy and fund new a business or franchise? Rolling over your retirement funds and investing in your company is one of the smartest ways to fund your business. When you buy stock in your new company with your rollover funds, it is tax-deferred and free of penalties.

Pros: The goal behind using your 401k/IRA to fund your business is that you begin your business with no money out of pocket and debt free. This funding option is typically one of the quickest ways to raise money as well. Additionally, when it comes time to sell your business, you will have a tax deferred Exit Strategy Program.

Cons: The main concern when using retirement funds is just that, depleting your retirement account. There are arguments for both sides of this statement, as many believe that one of the best retirement vehicles is an income earning business.

Funding Example: This funding example is the most flexible of all the options because you can purchase and run any legitimate business model that you want to start up. You are only limited by your imagination.

Unsecured Line of Credit

Lines of Credit

An unsecured line of credit requires a strong business plan and great credit history. With this revolving credit line, a business owner can get pre-approved for up to $100K in 24 hours and can receive funds in as little as 3-5 weeks. Typically, unsecured revolving credit lines do not require any cash injection or collateral. However, a FICO score or 700 or better and 5 years of credit history is needed to secure this funding source.

Pros: Unsecured funds, often referred to as a signature loan, do not require any collateral. This means that as long as your credit is good, then you can secure funds pretty quickly. This allows a potential business owner to make quick decisions and start a business sooner than later. Unsecured funds are also a great funding source to combine with other funds since they do not require much to obtain.

Cons: The biggest drawback to using these funds is the high credit score that is required to gain the amount of funds that most people require. There are also limitations to how you can get to the money, and the interest rates can quickly get out of control much like a credit card.

Funding Example: There are several ways to use these funds. Startup business capital and salaries are a great use for this money. Smaller equipment needs can also be very achievable with money from a line of credit. And last low overhead startups can also be kicked off with a line of credit.

SBA Government Loans

via: sba.gov

via: sba.gov

Government backed loans from the SBA are designed to help businesses get up and running quickly. Typically, SBA loans are for anywhere between $75K and $5M. Requirements for an SBA loan will include a strong business plan, 2-5 years of industry experience, a credit score of 680+, personal cash infusion of 20-30% and collateral of up to 100% of the loan value. Smaller SBA loans (called microloans) are available for up to $50K and are generally easier to obtain with collateral and a personal guarantee from the borrower.

Pros: The SBA makes it very clear what they require to get a government loan. There are also a lot more funds available than most other options. Interest rates are normally very competitive because the funds are backed up by the government. This means the bank that makes the loan does not require large interest rates to protect themselves.

Another nice thing about SBA money is that you can use collateral from the business to secure money that is required to get started.

Cons: These types of loans can take several months to complete. The amount of paperwork it takes to complete the process is gigantic, and often is a contributor of why it takes so long to close. SBA loans are also much like the previously mentioned bank loans. If you can get an SBA loan, then you could probably pay for the business yourself. There are a lot of lofty requirements.

Funding Example: Franchise models that require a nice sized store or piece of real estate are prime targets for this type of loan. Retail stores or strip centers often are considered for these loans.

Crowdfunding Platforms

crowd sourced funding

kickstarter.com

Crowdfunding has become more and more popular recently. Websites such as Kickstarter and Indiegogo are making it increasingly easy for startups to use the power of persuasion to secure funds from “venture capitalists” for their projects. With many of these platforms, business owners are able to keep the funds raised even if their goal is not reached. However, in others it is all or nothing.

Pros: This avenue of funds is great for the small business owner with a unique business idea that may not be considered in traditional funding systems. It’s also got the opportunity to appeal to a much larger audience for funds.

Another great thing about crowdsourcing is that you may not have to pay people back in cash, but have the options to pay back in product or membership perks.

Cons: One of the downsides to this funding option is that the fees charged can be very steep (often times 5-10%.) It’s also up to you to convince the people that will fund you that your idea is worthwhile. For someone that is a really great storyteller or marketer, this is an advantage, but to lots of people it is a disadvantage.

Funding Example: There are vast arrays of different types of business that get funded this way. Often times it’s a prototype product, and not an actual business that get funding. There are however small business owners that start services like aquaponic gardening that offer fresh vegetables in exchange for the startup funds.

Equipment Leasing

Exercise Equipment

via: exerciseequipmentwarehouse.com

A very specific type of funding that is available to the right franchise owner is funding for equipment. Many times when you purchase a new business, the money borrowed is not for the equipment you need. What good is it to start a restaurant that has an empty kitchen.

This is where equipment leasing comes in. The leasing option is very similar to leasing a car. You pay a monthly rate to ‘rent’ the equipment you need and when the time comes to get new equipment you just trade the old stuff in.

Interest rates can be all over the board based on what you are leasing and what your credit looks like.

Pros: The lease is actually based much more on the equipment than your credit score. This means someone with lower credit scores can still get the things they need to get started. Another advantage to the equipment lease is that you always have new and cutting edge equipment. If you are in a business that can excel with better equipment, this can give you the edge you need.

Cons: From a financial standpoint, it’s always best to reduce any monthly payments that are required of your business. Leasing requires that you pay each and every month for the equipment you own.

Funding Example: There are many applications for this type of loan. Exercise equipment, kitchen equipment and vehicles are just a few things that frequently use leasing programs for a small business.

So, what’s the right funding option for your business? Often times it can be more than one option. Tenet Financial’s professional funding consultants will help start you down the right path.

Try the pre-qualification calculator to see which funding methods you pre-qualify for. Call Tenet Financial at (888) 901-3335 to start your business funding off right.

 

Welcome to Tenet Financial Group’s Blog

Welcome to Tenet Financial Group’s blog.  We’re passionate about helping turn dreams into realities. These pages will serve to help educate you on the funding process as well as keep you informed on new developments in the funding industry.

We encourage ongoing communication so if you have any questions regarding one of our articles, please leave a comment and we’ll do our best to answer it.

Like always, we’re eager to talk directly with you about your funding options… Just gives us a call at (888) 901-3335 ext. 9 or shoot us an email!

Thanks!