The actual execution or implementation of your idea in the form of a startup business is probably the hardest part of this methodology. This is the stage that should keep you up at night and rightly so. After all, what do we really know about spearheading a serious brick-and-mortar business? We can be extremely knowledgeable about the market we’re trying to penetrate; we can know all the in’s and out’s of the services or commodities we offer; we can even predict the reactions of our would-be clientele. But how does our expertise relate to the actual setup and implementation of a real business? Are we in over our heads?
No. Don’t stay up worrying at night. Many others in the same position we’re in have achieved their goals in the past, and many more after us will succeed as well. Many before us were armed only with an idea. Ideas that have since become eBay, Amazon.com, and others. At the risk of using a cliche, knowledge is, in fact, power. Let us look at the stories of how some of the biggest players got big, and glean from these stories the steps we need to take. Keeping in mind, this is no guarantee that you won’t suffer many a sleepless night, for this is indeed a daunting task. But armed with this particular knowledge, our dogged persistence and some good old-fashioned elbow grease will allow us to see the fruition of our goals. So, let’s roll up our sleeves and begin.
This blog is about process engineering. That means that we are trying to engineer an efficient methodology to achieve a particular goal: in this case, to take an idea for a startup company from concept to market ready products and services. All our information has thus far come from the experiences of those who have been in the game for a long time, and have developed keen insight as to the how’s and why’s of business. None of this has changed. We are going to break business implementation down into five fundamental categories. These categories are continuous functions and not discrete tasks. We should study these categories well, and keep everything in mind (or at least in a handy notebook, so we don’t forget anything on the job!). If every category is accounted for, we’ll hopefully be in good shape!
Business Entity Setup
A business or a firm is an organization that conducts economic activity. The three basic forms of business entity are sole proprietorship, partnership and corporation. An entrepreneur should understand the pros and cons of each type of entity before choosing the appropriate business entity setup.
When a business entity is owned and managed as such by one person, it is called a sole proprietorship. It is the least expensive entity to form and requires no formal charters and only few governmental regulations to be adhered to. In some cities, a sole trader must obtain a business license from the local authorities before commencing business. The advantage of a sole proprietorship is that it is not charged a corporate income tax, the profits of the organization are deemed as ordinary income for the owner. One of the biggest drawbacks of this entity is that the sole proprietor is exposed to unlimited liability and losses, business debts and obligations on account of the status. There are no distinction made between the business and the individual. As the name suggests, the entity is limited in its ability to raise capital to the personal wealth of the sole proprietor.
When two or more people come together to form a business association, it is called a partnership. Depending on the size of your company, partnerships can be extremely beneficial. There are two types of partnerships namely General and Limited Partnerships.
General partnership can be formed by a verbal or written agreement between the partners specifying the nature of their business relationship. All partners are equally liable for the debts and losses incurred and likewise share the income earned.
Limited partnership allows the liability of some of the partners to be limited to their capital investment into the business. The basic requirements of such an arrangement are that at least one of the partners will be a general partner and that the limited partners do not have any management authority. As with sole proprietorship, partnership income is deemed as ordinary income for the partners. Many business entities that have started out as sole proprietorships or partnerships and have ultimately converted to a corporation.
Some of the severe limitations of the above mentions entities are unlimited liability, difficulty in transferring ownership, finite life of the business and difficulty in raising capital.
Most startup ventures choose to be setup as a Corporation. It has its own legal entity and therefore has similar characteristics to a human being. A corporation can negotiate and enter into contracts, can acquire and exchange property, and take legal recourse. For all legal purposes a corporation is a “citizen” of the state of incorporation, even though it has no voting rights.
Entrepreneurs wanting to incorporate must get legal counsel and devise the articles of incorporation. Traditionally, they include:
- Intended name of the company – corporation
- Nature of the business
- Projected life of the corporation
- Number of authorized shares to be issued and the different types, classes of shares outstanding with a statute of limitations
- Type of rights granted to the shareholders
- Name and addresses of the members of the board of directors
Corporations are comprised of three distinct interest groups: the stockholders who own the company, the directors who set the vision and the officers who manage the day-to-day operations. With the separation of ownership from management a corporation has significant advantage over the other business entities in that::
- Ownership is easily transferable through the trading of shares of stock.
- Perpetual existence, since the corporation is a distinct entity from its owners.
- The stockholders liability is limited to their stock ownership.
Another tricky topic is equity structure. Equity distribution should be planned well ahead of time. One effective skeleton that seems to work in a great deal of contemporary startups is the issuance of 10 million shares upon incorporation. The Founding partners initially own sixty percent of the company while all other participants own the remaining forty percent. As each milestone is reached for each round of funding, the ownership begins to get diluted.