STRUCTURE

Business Structure Decisioning: Sole Proprietorships

The simplest business structure available to new entrepreneurs, sole proprietorship is a popular choice. But just because it is simple doesn’t necessarily mean its the best for your business. What follows is an explanations of the positive and negative aspects of being in business for yourself, and what options may be better choices if the bad outweighs the good.

What Is A Sole Proprietorship?

Before we discuss the positive and negative aspects of this business structure, let’s first define what sole proprietorship is. Sole proprietorship is a business structure that relies on one person to shoulder all of the legal ramifications of being in business, including financial and representation within the community. Direct sellers, contractors and consultants all fall within this category, as do any other businesses that are not incorporated or have limited liability status.

Advantages of a Sole Proprietorship

There are quite a few advantages to choosing a sole proprietorship business structure. They are:

  • Simpler Taxes: A sole proprietor files his or her taxes as if they were self-employed, and therefore will receive the same benefits. Additionally, there is only form to fill out (in the US this is IRS Form 1040; in Canada is the same form as everyone else, the T1);
  • Minimal Start Up Costs: Although in comparison to a corporation or limited liability company, sole proprietors have few (if any) start up costs to incurr when choosing their business structure.
  • Less Paperwork: When you are a sole proprietor, the need for paperwork is considerably less than for a larger business or corporation — such as payroll. If you are the only employee, then you can pay yourself directly out of your earnings instead of having to write checks.

Disadvantages Of A Sole Proprietorship

As with all business structures, there are both perks and drawbacks to every situation. Here are some of the disadvantages of becoming a sole proprietorship:

  • Liability Issues: There isn’t anyone else to take responsibility should something bad happen when you are a sole proprietor, like if a customer slips on the way up the stairs to your business or if your company isn’t able to stay in business after a couple of years and needs to declare bankruptcy. Therefore, if you are thinking about starting a business that has a higher-than-average risk of struggle (such as restaurants or manufacturers), you may be better off using a corporate business structure instead.
  • No Regulation of Financial Statements: Although sole proprietors still have to provide the governement with some sort of financial data at the end of every year, there are fewer requirements than with a corporation. And with less attention to the financials, many entrepreneurs flail before they realize they are in trouble. Ensuring that you’ve got a solid financial structure set up before you get going will alleviate this concern.
  • Higher Risk of Loneliness or Depression: People who work for themselves are often by themselves, and frequently becoming a sole proprietor means losing the water cooler social aspect of working for someone else. Make sure that you’ve incorporated social time into your work day, whether through networking or other means, so as to reduce isolation.
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Methods For Licensing Inventions: Preparing New Product Submissions

Companies that are potential licensees can be found by looking in magazines or catalogs that feature products by companies that are within an invention’s field of industry or one can go online and search using terms on search-engines that describe an invention and find companies that way. It is important to secure a patent pending before presenting an invention to manufacturers for licensing consideration.

Research Potential Licensee-Companies

The manufacturing/marketing company an inventor licenses his invention to, is called the “licensee” and the inventor or his agent is referred to as the “licensor.” If an invention is in an industry such as pet supplies, fishing tackle, health & beauty aids, etc., then one simply gathers information on companies that are in the invention’s field of industry, so that those who look reputable can be contacted about reviewing the new product-invention.

The advantages in securing a License Agreement for an invention include the following:

  • Ongoing royalty payments
  • marketing expenses are the licensee’s
  • an established company can gain wide exposure for inventions
  • product liability and patent-related legal issues are the licensee’s responsibility

Following Up

When methods used for locating potential licensees, yield lists of companies that look to be high quality and reputable in their industry, one can then contact them by written-letter or by email to request an opportunity to submit an invention to their new product buyer.

One can then either follow-up on letters/emails with a phone call or it can be requested that contacted companies reply to the letter sent, to confirm receipt of it and/or interest in a more detailed submission. The advantage of mailed letters is that they can be sent return-receipt, so that an inventor knows it was received, on a specific postmarked date.


It is usually more effective to state in a letter or email that it will be followed-up with a phone call. When one receives responses from manufacturers interested in further reviewing an invention, one can either send a product sample/prototype and further written details about the invention or request an appointment to present the invention in person at their buying office.

Rehearsing and Timing Presentations

A presentation should be practiced before making one in person. An inventor should be well prepared to make a presentation for their invention but should also insure that the presentation is timed, so that it does not exceed a reasonable time-limit.

A presentation generally should not exceed 20 minutes in length because executive buyers with manufacturing companies are usually extremely busy and a shorter power-presentation can be effective and is usually the best approach. A buyer can extend the length of a presentation if he chooses to, by asking questions after an inventor is done with the initial presenting.

Composing a License Agreement Proposal

An inventor should compose a sample license agreement that shows all of the terms and conditions that need to be included in the contract, leaving certain terms blank, such as the amount/percent of royalty that will be paid and the length/term of the contract in years that it is initially in force. Having a proposal on-hand gives an inventor the readiness to negotiate terms, should a presentation meeting reach that stage of interest by a buyer.

Terms and Conditions

An inventor may wish to set the term that a License Agreement is in force with a manufacturer (length of time) for only one or two years, with an option for renewal at the end of the term. This way, renewal depends upon the initial sales performance of the licensee. An inventor might also wish to include the condition of minimum sales that are accomplished per contract year by the manufacturer/licensee.

It might also be a good idea to include a clause in the contract that gives both inventor/licensor and the licensee the right to terminate the license agreement. This offers both parties a protective clause in the event for example that the licensee fails to pay royalties at the set contractual time periods or for other legitimate reasons. A licensee might also respectfully terminate a License Agreement in the event they feel they would be unable to fulfill their obligations, so that the inventor/licensor can pursue better options.

Requiring Timely Payments

The royalty-payment conditions can require royalties, to be calculated and paid, quarterly (4 times a year) or monthly, etc., and should the licensee become past-due in making royalty payments (by 10, 15 or 30 days, etc.); the licensor has the option to terminate the contract in writing – such as with a 15 or 30 day notice.

Inventors should take their time in pursuing License agreements carefully. Being in too much of a hurry to license an invention, can result in bad decisions when entering into contracts that are binding and that must run their full terms unless terminated due to violations of terms. It is in an inventor’s best interest to fully consider his options when entering into a License agreement and to do so with the help of an attorney if necessary.

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Starting Small Businesses: Professional Success Steps

Many people choose to start a small business from a former hobby in hopes of earning profit. While many entrepreneurs succeed in their endeavors each year, a handful of people are left scrambling to keep up from day one, unable to get ahead.

What distinguishes between those who succeed and those who fail lies within their managing skills. Learning and perfecting these aspects of small business ownership will help in becoming one of those who succeed.

Organization

One of the most important aspects of a successful small business, organization can be the life or death of a dream. If a business owner cannot keep track of his invoices from orders, how will he be able to track profit and loss properly? Organization of important documents is the first aspect that must be mastered.

For example, failure to track tax information can result in an IRS audit and a lot of hassle. Professional and successful small business owners usually have an organized office where they can find everything filed under appropriate categories. Purchasing a filing system is a must for small businesses, since it helps to keep organization swift and easy.

Professionalism

Treating the business as a professional affair goes a long way in small business success. Since many people choose to turn their hobby into a business, this step up in professionalism puts the business one up on competitors. Those who continue to treat their business as a hobby will find themselves left with ship-shod work, offices and manners.

Approach the business like a job instead of a hobby to ensure success. This includes creating separate office and work areas as well as ordering business cards to alert others the service or product will be handled in a professional manner. People are more willing to do business with someone who designates themselves in this way rather than with the one who ‘does this little thing on the side’.

Perseverance

Small businesses usually take a while to get running. Sometimes the legal and financial hassle of starting one is enough for some to lose sight of the dream. Do not let the technicalities blind the passion for starting the business in the first place. Keep a mission statement or vision for the business in view at all times. Consistently think of new ideas or unique products that the company can provide. This will lead to success, because determination beats all other odds.

Conclusion

Starting a small business is exciting and can be rewarding, both financially and emotionally, if one employs the proper skills for success. Organization and professionalism are key components of a successful start-up. But the quality of perseverance is unprecedented in small business success stories.

Holiday Gifts for Entrepreneurs: For The Business Owner in Your Life

The following is a guest post from Avky Inc co-founders Kyle Uchitel and Aleksandr Vasser of Phoenix, Arizona.

For those with a loved one that happens to also be an entrepreneur, finding suitable holiday gift ideas can be a challenge. What do you get someone who wants to increase profits and productivity, decrease costs, and enhance their customers’ experiences? Something from this holiday gift list, of course.

Holiday Gift Idea for Entrepreneurs #1: Wireless Headset

There are few people who talk on the phone more than an entrepreneur. A wireless headset lets them multi-task even more than before without being tethered to their phone or computer. If you can find a headset that also looks good on their noggin during a teleconference, you’ll have found a holiday gift to be gushed about for years to come.

Holiday Gift Idea for Entrepreneurs #2: Fireproof Safe

If you are buying this holiday gift for your spouse or partner, you may want to use one of the other gift ideas instead, as a fireproof safe is more of a practical gift than a romantic one. However, if saving money is something that really excites your loved one, this holiday gift may be the perfect choice as not only will it keep their business’ valuables safe, but it will also reduce their insurance costs.

Holiday Gift Idea for Entrepreneurs #3: Magazine Subscription

Magazines.com offers a large selection of magazines for every hobby or interest, including entrepreneurs. Three magazine subscriptions for a year are only $30 USD (in the US only) and are a great way to extend a holiday gift throughout the entire year. Alternatively, you could try sending them a magazine from one of these Free Business Magazines.

Holiday Gift Idea for Entrepreneurs #4: A Retreat for the Senses

Your loved one works hard. Why not pamper them for a day and let them know how much you appreciate their efforts? There are two ways to go about giving this kind of holiday gift: either make your own “gift certificate” for a day of solace (including hot chocolate or a glass of wine, a bubble bath, massage, candlelit dinner and so forth), or purchase a gift certificate from a company like SpaFinders.com, which offers spa packages ranging from $25 and up for retreats all over the world.

Holiday Gift Idea for Entrepreneurs #5: Membership in a Business Group

Most entrepreneurs already belong to and pay dues for associations and memberships that relate to their business entity, such as the Better Business Bureau, Chamber of Commerce or specialty associations. Take a look around and see if there are other groups locally that they may want to either participate in or belong to – like a networking group, Toastmasters or the Guerilla Marketing Association, or even a business conference they may want to attend.

Making Assumptions In Real Estate

Making assumptions during a Real Estate transaction can be a costly mistake. Each year in North America hundreds of people assume that the property they are buying is all right. These same people proceed to purchase a home without taking the proper due diligence.

Problems such as wiring, plumbing, insulation and other mechanical features of the home begin failing and then the buyer doesn’t know were to turn.

Your first step in this instance is to seek legal advice from a professional. If your agent did their job then you should have a contract that protects you from many of these unforeseen issues.

However if you waived a home inspection, and failed to warranty the mechanical items in the home then you could have some very costly repairs on your hands. The furnace and air conditioning units are costly items to replace. An unseen leak in an oil tank can mean expensive environmental clean up.

In rural properties it is possible to find that your well has water that is not safe to drink, or that you need to truck water in because the well has inadequate flow.

If you failed to safe guard yourself in the agreement of purchase and sale you will be fighting an uphill battle if you choose to seek compensation. The courts will look more favourably on the vendor in these instances and you will be out of pocket for the repairs. This is unless you can prove that the vendor attempted to hide the issues from you, or failed to disclose problems with the home.

Before you make the decision to buy a home, make a checklist of areas to inspect. Specific areas such as, the roof, chimney, foundation, electrical, plumbing and insulation. Each of these areas of a home can unearth some of the homes history and will help uncover the overall state of repair for the home.

Real Estate Investment Planning: Mapping The Road To Wealth

Whether investors own one-family rental homes or multi-unit store, office, and apartment complexes, they are operating a business. Most business experts, including the Small Business Administration (SBA), emphasize that a business plan is an essential prerequisite to the launching of any type of business. For real estate investors, the investment plan functions as their business plan.

Write a Real Estate Investment Plan

Having financial goals in writing makes real estate investing more concrete and attainable and less pie-in-the-sky. This is because organizing the relevant facts and figures helps tame the fear and reckless risk-taking that defeat individuals who fail to prepare.

To create a real estate investment plan:

  1. Establish personal financial goals, such as desired net worth, the amount needed for a comfortable retirement, and the amount to bequeath to loved ones.
  2. Set a schedule for achieving those goals, such as five years, ten years, or retirement age.
  3. Calculate various ways to achieve those goals – including different down-payment amounts to offer and the corresponding amounts to finance through mortgages, and making research-based estimates of the operating expenses of the properties and the rents needed to cover the expenses; this results in target cash flow amounts.
  4. Understand the types and quantities of property to seek based on those calculations.
  5. Determine how and when to dispose of the properties.

Tax professionals can suggest strategies for reaching financial goals and minimizing taxes. Investors will get more out of those consultations if they know in advance their net worth goals and cash flow needs.

Cash Flow Projection

A good real estate investment plan hinges on the determination of whether an investor wants to take out cash regularly from a property. How much cash is used to buy a property and how the debt and operating expenses are managed after the purchase affect the cash flow. The larger the down payment on a property, the smaller the mortgage payments will be and, by extention, less of the monthly rent will be devoted to the mortgage paydown.

The cash flow calculation will differ if an investor will not need to draw money from a property and instead wants to see both a good return on the initial cash outlay — the down payment — and growth in equity. In such a case, the investor may want to make a small down payment and finance as much of the purchase price as possible. This often means a small cash flow amount, which can be applied to paying down the principle on the mortgage loan. At the same time, the equity in the property will be growing because of the debt paydown, inflation, and appreciation.

Develop an Exit Strategy for Maximum Wealth Protection

The SBA advises small business owners to plan their exits from their businesses. The SBA notes that an exit involves several steps and can take several years, depending on the size of the business and the reasons for leaving it.

Similarly, real estate investors must decide when and how to dispose of properties in their portfolios, all in keeping with their investment goals. Outright sales, taking back mortgages, and 1031 property exchanges under the U.S. tax laws are some of the disposal methods, and each method triggers its own tax consequences.

The form of ownership in which property is held also must be considered. State laws have specific requirements for the dissolution of partnerships and corporations, and the appropriate tax returns must be filed. These procedures usually require sound guidance from attorneys and tax professionals.

Obtaining A Real Estate License To Save Thousands

Real estate agents have a lock on the real estate market, but have you ever wondered what it takes to become one? The answer might surprise you.

Becoming a Real Agent is Fast and Easy

You can become a real estate agent in two months. By taking a few evening classes, buying a book, and then taking a test. you can become a licensed agent. Once you pass the test you only need to spend some time with a current real estate agent. This can be completed by simply speaking with your local real estate agent, who sold you your home, who is a friend of the family, etc. Once you obtain your license, expect to save 3.5% on your future real estate transactions.

The Benefits of Obtaining a Real Estate License

You get a much better understanding of the real estate process. This is a great crash course in real estate. Most importantly, you learn a ton about how the transaction is processed and executed. This understanding can help you be a better customer when you choose to use an agent in the future. It will also speed up your real estate deals tremendously.

You also obtain the ability to command 3.5% of every real estate transaction you are involved in. Instead of for sale by owner, you can list your property on the MLS (the Holy Grail of listing services) and you can act as your own agent. Typically only licensed agents have access to the MLS database. This is very powerful. Normal for sale by owner properties are not listed on the MLS and those owners do not get a commission split. Additionally, since most do not offer any broker commissions, most brokers choose not to show these houses. These are a few reasons why for sale by owner houses typically sale for less and spend more time on the market.

Finally, the biggest benefit occurs when you buy houses. Instead of paying full price, you get a 3.5% discount because that is your broker fee. Imagine buying four to five houses in your life time and saving 3.5% on every house. This could add up to tens of thousands of dollars in savings. Additionally, if you ever want to become an investor, having a license adds profit to your bottom line. You also get much greater sourcing of properties. Besides access to the MLS, you can simply walk into most banks and ask for their foreclosure list. This saves you the time of going down to a courthouse or going through another agent, whom you have to indirectly pay 3.5%.

Becoming a real estate agent is very cost effective. In addition to the great real estate knowledge you gain by going through the process, there are significant savings to be gained by acting as your own broker. Taking two months out of your life now could save you thousands of dollars in the future.

Avoid Capital Gains Tax on Real Estate Sales

Paying taxes can make it harder to grow investments, especially when they will be subject to taxation down the road. That is why it is important to know that for every investment there is a way to defer or avoid taxes.

Real estate investors do this through their losses on depreciation, which never actually come out of their pockets, but can show a loss where a profit was actually made.

For investors who want to sell a property that has gone up in value, the best way to defer taxes, perhaps infinitely, would be to take the profits from the sale and engage in what Robert Kiyosaki, best-selling author of Rich Dad, Poor Dad, calls a 1031 exchange.

What is a 1031 Exchange?

A 1031 exchange (also called as a like-kind exchange) is an event that takes place in real estate where a property owner sells a piece of land, a house, or a building, and uses all of the equity to purchase a larger piece of property of the same kind.

Since the gains that were made are being used to buy a bigger investment, all taxes are deferred until a sale is made that does not involve this transaction.

The term “1031 exchange” is used in common language because it is in section 1031 of the Internal Revenue Code that this idea is explained.

It is there that it states that gains taxes will be deferred on properties of the same kind if they are being used in a productive manner, such as a business or investment. This rule does not apply to stocks and bonds.

Important 1031 Rules

Investors have to understand that this kind of deal is not hard, but it does involve a few complications that cannot be avoided:

  • Two key deadlines
  • Placement of equity
  • Use of an intermediary

The deadlines that must be noted by someone attempting to make this kind of deal are 45 and 180 days after the sale of the property that brings in the proceeds for the new purchase.

The 45 calendar-day deadline is when buyers must identify the new property that they want to acquire. If this deadline is missed, the tax deferral is off. After 180 days, the identified property must be bought. These deadlines are concrete, and can fall on a holiday.

The last key to completing a 1031 exchange is using a Qualified Intermediary, also called a QI. The QI must be a person that is an unbiased third party, leaving relatives and business partners out of the loop. The QI will be the one actually securing the purchasing and selling of properties, making sure that it all goes to plan. Rates for such services can be as high as $2,000.

Investors must make sure that their QI is bonded and insured just as they ensure their electrician and plumber are licensed and insured.

Once all of the pieces are in place, real estate investors can turn small rental homes into larger pieces of property without having to pay the taxes on the gains that were made in the sale by growing their portfolios as they expand from duplexes to quadplexes to apartment buildings, or moving from owning a small cabin to a motel to a hotel.

When the original owner passes on, the property can still operate and earn money for the new owner who will never have to pay taxes on the gains until it is sold, if it ever is.

An Inherited House Can Be A Windfall

Those who inherit a house do not always view this as a lucky break (aside from the emotional aspect of losing a loved one). The inheritor may already own a home and have no use for another. The inherited house may be saddled with one or more mortgages, and it may also need costly repairs and upgrades. To the inheritor, what could have been a windfall seems like an albatross around the neck.

On the other hand, an astute real estate investor views even a problematic inheritance as a golden opportunity.

Benefits of Inheriting a House

Under federal tax laws, an inheritance is tax-free if the beneficiary is the husband or wife of the deceased or if the property is left to someone other than a spouse and is worth less than an amount specified by law  . Many states follow the federal lead, but it is crucial to know the particular provisions of the state in which the inherited property is located.

Fundamentally, the inheritance of a home is a windfall.

“Whether it’s for the purpose of selling the house and getting the equity or renting it and making income and gaining the tax benefits of ownership, such as depreciation, an inherited house can be a very nice benefit,” said Richard Seltzer, an attorney and long-time real estate investor based in Jersey City, New Jersey, in an interview with this reporter.

Challenges of Inheriting a House

At times, an inherited home comes with “baggage.” Seltzer’s story about a new client illustrates this point. The client had recently inherited a house in which his late brother had lived; the house had originally belonged to their parents.

“The house has been totally neglected, and there are all kinds of debts that the client is finding,” Seltzer explained. Nonetheless, Seltzer estimated that, after paying for the repairs to the house, the real estate commission when he sells it, and the debts on the property, the client will walk away with a sizable sum. “Yes, he will have some headaches and some hassles, but at the end of the road, he will make about $100,000, the inheritance is tax-free, and he’ll be happy when it’s done,” Seltzer noted.

To a real estate investor, a neglected property is merely a “fixer-upper.” If the investor chooses to sell an inherited house after fixing it, the sale proceeds can help finance the purchase of another investment property. Alternatively, the investor can rent out the house if the cash flow will be enough to cover the mortgage and operating expenses of the property.

How to Decide Whether to Keep an Inherited Property

Of course, anyone who inherits or is about to inherit real estate can consult an attorney, a tax professional, or a certified financial planner for guidance on what to do with the property and what tax consequences to expect.

In Seltzer’s view, there is one simple guideline for deciding what to do about an inherited home that comes with a mortgage. “It’s just a matter of affordability. If you can afford the payments, then you should keep it,” he stated, adding, “If it’s something that will fit into your lifestyle, you should keep it because in my opinion, real estate is an asset. Most pieces of real estate, if bought properly, are positive assets.”

Cost of Renting In A Property Slump

Thousands of landlords that purchased buy-to-let rental properties are now experiencing falling monthly rent. Whilst this means lower housing costs for tenants, rental yields for landlords are falling at the very time that income streams from alternative savings and investments are also plummeting. What can this fall in monthly rent be attributed to?

Increase in Rental Properties Hasn’t Offset Falls in the Cost of Renting a House

Falling house prices and general uncertainty have deterred many potential first-time buyers from investing in property. This has increased the demand for rental properties, but an influx of new landlords, particularly in the Manchester area, is causing monthly rental yields to fall.

Whilst FindaProperty.com has experienced a 22% increase in new business, this isn’t sufficient to offset the increase in rental properties available. This has meant that the average amount of time it takes to rent a house has increased by 27% to 70 days during the last 12 months.

Where Has the Cost of Renting a House Fallen Most?

The average cost of renting a house across the entire UK has fallen from £840 in January 2013 to £830 in February 2014. This means that average rental yields are down 1.2% over the last month and 4.8% in the last 12 months.

Rental properties in the North West experienced the biggest decline in rental yields. Annual rental prices in the North West fell by 14.3% to £592 pcm from £645 pcm. This can largely be attributed to an increase in rental properties of 45.9% in the Manchester area. A staggering 57.8% of rental properties in the North West region are now in Manchester. Most of these are new build rental properties.

There was also evidence to suggest that more expensive areas, such as Kensington and Chelsea are experiencing falls of up to 11.7%. This is due to a number of reasons, but is heavily connected to falling City bonuses and a desire to reduce housing costs. This is backed up by the fact that the more affordable London Boroughs have experienced a 6.7% increase in monthly rental yields.

Whilst many landlords are experiencing falling rental yields, those that aren’t tied in to fixed-interest mortgages are benefiting from reductions in Bank of England base rates. Always remember the property is a long term investment and the property slump won’t last indefinitely.