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Seeds For Thought Sometimes, two heads are better than one. Ask owners their sale or retirement plans. Limited partners are silent. Incorporation protects a name. Businesses can take unexpected directions. Considering Your Business Format     One of the main reasons that you might elect entrepreneurship as your career choice is independence. You're your own boss. You win and lose by virtue of your own hard work and mistakes.    You like this idea.    If you do like this idea, why would you ever consider a partnership? The honest answer is that you probably wouldn't unless two heads and/or two wallets are better than one.    In Ana's story, Ana's partnership with Sheila certainly worked. Presumably, Ana was able to accomplish a lot more with a partner than she would have been able to do alone. Certainly, Ana was able to able to move her plans along more quickly.    In the last lesson, you saw three people starting landscaping, sewing/design, and used car sales' businesses. Each of these businesses could be started small on a shoestring budget. The entrepreneurs didn't necessarily need a partner's help.    But, what if your business concept needs more, maybe a lot more money or a lot more experience? Let's say that your entrepreneurial dream is to start a yacht charter service. Without a lot of experience, contacts or deep pockets, you could meet a lifetime of frustration trying to find someone to provide you with a yacht. Obviously, you'll need a lot of money to purchase a yacht or even raise a downpayment. Even if you find the opportunity to lease the yacht, you'll probably need substantial financial backing to stay afloat until the clients start lining up at the dock and your booking secretary is able to say,    "Sorry, we book well in advance. Call us again in 18 - 24 months."    Simply, if you want to be in the yacht chartering business, you will probably need a well-connected or well-heeled partner.    Other business start-ups may also need significant capitalization, a lot of money. For example, if you wanted to start a Laundromat, a theater, a hair styling salon, a service station or a video store, you might also need some type of monetary support from a partner.    There are two major types of partnerships: general and limited.    A general partnership consists of two or more partners where each partner assumes total liability for the other partners.    Let's say you start a business with your best friend, Joe. Joe has a few problems but overall he's a good guy. You have a 50/50 general partnership. In the beginning, the partnership seems to be working. But, after a while, the long hours start to take a toll on Joe and you suspect that his drinking problem may be back. Joe starts doing a lot less than half the work. Then, you find out that Joe has been buying expensive gifts for his girlfriend using the assets of the business as collateral. You confront Joe. Joe quits the partnership. You are responsible for all the debts including those for Joe's girlfriend.    Let's try again.    You start a 50/50 partnership with your friend Alicia. You both work very hard. Then, Alicia's boyfriend, Marcus, loses his job and Alicia insists that you and she hire poor Marcus. But, when Marcus comes on board, he thinks that he runs the place. Marcus starts doing his own thing and Alicia just giggles and smiles. You protest in vain. Marcus and Alicia start acting like they have two votes against your one. This new arrangement makes the working environment very uncomfortable for you. Marcus and Alicia suggest that YOU quit the partnership.    Here's a general partnership which did work: Discovery Flower Boutique    Christine wants to be a florist. In doing her research, she meets Darlene who owns and operates Discovery Flower Boutique. They hit it off. Discovery is just the kind of business that Christine is interested in owning, so she asks Darlene if she would be interested in selling. Darlene says that she intends to work for at least another five years until her husband retires and her last son graduates from college.    Christine has an idea. Rather than being competitors, perhaps, they can be partners. They agree on a value for the business of $40,000. They agree that each year for five years that Christine will give Darlene $8,000 and that in consideration she will get 20% of the business. After five years, Christine will be an experienced owner of the business and Darlene will have achieved her objective and can retire or become an employee of Christine's. A win/win partnership.    As you do your research, if you find an existing business you might like to own, it certainly makes sense to ask the owner about his or her future plans. The answer could be a pleasant and workable surprise.    In forming a general partnership, you should have a partnership agreement drafted by an attorney. That agreement will cover such topics as: A description of the business. The duties of the partners. Description of powers to vote and borrow. The contribution and percentage interest of each partner. How and when profits and benefits will be divided. How partners can withdraw and new partners be added. Insurance and survivorship benefits.    A limited partnership is different. In a limited partnership, there are general partners and limited partners. The general partners run the business. The general partners make all of the business decisions. Limited partners are silent partners and do not run the business. Being silent means that limited partners have no say in how the business is run. The general partners assume the full liability of the business and the liability of the limited partners is limited to their monetary contribution to the business. If Richard invests $10,000 in your business as a limited partner, he can lose only his $10,000. You, as the general partner, have full financial liability. Sole Proprietorship    A majority of small businesses are sole proprietorships. In most cases, you will be starting your small business as a sole proprietorship. With a sole proprietorship, you make all the decisions for your business. You are the only person responsible for the profits and losses of the business. Also, in borrowing money for the business, you must personally guarantee the repayment of all loans. Your liability in a sole proprietorship is unlimited. Corporation    The main appeal of a corporate form of business ownership is that it reduces personal risk. The federal and state governments treat a corporation as a separate and distinct person under the law. If a corporation piles up debts, it is the corporation and not the corporate owners who are responsible for repayment.    A corporation is owned by shareholders and run by a Board of Directors who hire a chief executive officer (CEO). It is possible to sell stock in a corporation. It is possible for a corporation, by itself, to borrow money. A corporation has a life of its own beyond the life of its shareholders.    A disadvantage of a corporate business format is that the profits may be subject to double taxation. In other words, taxes would first be paid by the corporation and then by the shareholders. However, there is a corporate form designed for small companies called the Subchapter S corporation. The Subchapter S corporation can offer liability protection and the profit flow through benefits of a sole proprietorship or general partnership but there are restrictions on the sale of stock and the number of stockholders. Naming Your Business    In most locales, if you operate a sole proprietorship, you must register the name of your business with the town clerk's office. You will ask for a "Doing Business As" (DBA) form. For example, this will put on the public record that "Cheryl's Catering Service" is actually owned by Cheryl Donofski at 131 Plain Street in Newton.    You should be aware that registering a sole proprietorship via a DBA form with the town clerk does not usually protect a business's name. In most states, if ten different Cheryls want to open "Cheryl's Catering Services," they can. Obviously, one bad Cheryl can hurt nine good Cheryls even though the nine have nothing to do with the one.    However, incorporation does protect a name. If Cheryl forms a corporation, "Cheryl's Catering Services, Inc.," then, no one else in the state can use that name. Even if for many years some other poor Cheryl had been using the name, "Cheryl's Catering Services" as a sole proprietorship, that Cheryl is out and must stop using the name. The Cheryl who has the right to use the name is the Cheryl who owns the Cheryl corporation.    Any type of corporation, a regular corporation or a Subchapter S corporation, will do the job of name protection for your state. A Conversation With Ana    At the Lopez Goff gallery, Alex Darby spoke with Ana about twenty months after the opening of her gallery. Alex has read Ana's story.    AD: "Ana, how is the gallery doing?"    A: "Very well, thank you, Mr. Darby. Our first year gross was over $150,000 and we're on target to double that figure this year."    AD: "Has the gallery evolved as you thought it would?"    A: "Actually, I had thought that we would have had a 50/50 mix of new artist paintings and established artist limited edition prints. As things have worked out, our business is about 40% autographed posters, 30% limited edition prints, 20% paintings and 10% framing."    AD: "The autographed posters, then, have become much more than just a hook to bring in business for the other works."    A: "Yes, the autographed poster business has really taken off. We do the charity work as mentioned in the story but we have also been able to buy in bulk from individual galleries on a direct basis. We also are building an inventory and selling individual posters of significance, such as those by Picasso who, obviously, is no longer available to sign any more posters.    "In addition to the autographed posters, we are also finding a market in early 20th Century unsigned Deco posters and also advertising posters."    AD: "Is the young man you mentioned in the story still handling the poster business?"    A: "Actually, the young man, David Hendricks, made a personal decision to devote his time to his painting. So, although he is still associated with the gallery, we have hired another full time person with two part time assistants to handle our poster division. At least half of our poster business is now wholesaling to other retail galleries. We have also started a website and are doing a solid business selling mostly posters on-line and through Ebay auctions."    AD: "You've really come a long way. Any other immediate plans?"    A: "Sheila feels that we can do more with paintings. She, as you know, orchestrates the painting shows. She is pushing for us to lease a Sturgess Avenue storefront devoted exclusively to paintings."    AD: "You'd close this basement gallery, then?"    A: "Absolutely not. This space would stay for the poster/print business and the new space would be a satellite of this operation. Up until now, the posters are where the money has been made."    AD: "Did you ever work out a buy-back agreement with Sheila?"    A: "We've talked about it on and off, but really not seriously. We need each other too much. Our skills mesh very well. Our accountant has told us that the business is worth about $200,000 at this point. At that figure, to buy out Sheila would cost me $80,000 and I really don't want to be in a debt position again if I can help it. The business has paid her back the original $25,000 loan."    AD: "The buy-back is gone then?"    A: "Well, I would like to own this business outright, but I'm not pushing the point. Sheila and I do have a provision that in the event that one of us wishes to retire or is deceased that the other partner has the first right-of-refusal to buy the other partner's interest."    AD: "And, you're still in your early thirties. And, Sheila is..."    A: "And, Sheila is quite a bit older, yes."    AD: "So, in about two years, you have gone from a low salaried job to owning your own business and you have equity of about $120,000."    A: "Yes, but pardon the pun, that $120,000 is paper profit if I were to sell and I doubt that I will ever sell."    AD: "You're satisfied then?"    A: "I'm satisfied that I'm working in a field I love. That I'm my own boss. And, that my future earnings are limited only by my own creativity and willingness to work hard."    AD: "Are you spending any of your new found fortune on luxuries?"    A: "Not really. Early on Sheila and I made a decision to put most of our net earnings back into inventory. So, at this point, rather than trying to sell under the 90 day time frame, we are purchasing most of our inventory directly."    AD: "I'm curious are the margins in the art business really 100% to 500%?"    A: "Well, let's say that our wholesale/retail margins are consistent with the industry and with antiques, stamps, coins, oriental rugs, etc."    AD: "I think you learned that answer from your friend, Sandy."    A: "I did."    AD: "Ana, if you were advising others about starting in business, what would you say to them?"    A: "I would say find a business you love and are willing to work hard at. It could be anything from sporting goods store to a bookshop. It doesn't matter. Read everything you can about the business and never stop wanting to learn more. Find people who are already successful in the business. These are people that you'll want to talk with. Just keep plugging, I guess. Nobody is telling you that you can't do something but yourself."    AD: "Initially, did you find encouragement for your venture?"    A: "Well, if you talk with people who are already successful in your field, then they can empathize with what you're trying to do because they were there once themselves. Successful people understand people who want to be a success. I had confidence and gained more confidence by talking and working with people like Sandy and Sheila.    "If you're asking me what would have happened if I had spoken to unsuccessful people or people satisfied with their jobs or other people who think that you have to wait 20 or 30 years to accomplish something, then, yes, I suppose that they would have told me that it couldn't be done. That I was crazy."    AD: "One final question. I know that a lot of people are going to think that your success rested with your association with Sheila Goff and her contacts. How would you respond to that?"    A: "I would say, "Yes," and I would not try to minimize the benefit of Sheila as a partner. Did the $8 a foot rent help? Yes, it did. Did Sheila's contacts help? Yes, they did. At the same time, I would state that I was prepared to open by myself in East Bank, in the leather district or even from my own apartment. I would still have had my own museum contacts. I would have had the newsletters. I would have had the poster and print business. I would still have been looking for financial partners. I would still have been researching, studying and talking with successful people in the art world. I would still have had my dream and my willingness to work."    AD: "Thank you, Ana."    A: "Thank you, Mr. Darby." Lesson 17 Resources Go to Lesson Eighteen 11 |  12 |  13 |  14 |  15 |  17 |  18 |  19 |  20 |  21 |  22 Index

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