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New Business Start‐Up Guide A Resource for Entrepreneurs

© Abbott, Stringham & Lynch 2016

Contents

Page

Introduction

Chapter One Determining the Business Viability 1

1. DefineYourBusinessPurposefromtheCustomer’sPerspective 12. DescribeYourBusiness 13. UnderstandYourMarket 14. DetermineCashViability 25. IdentifyChallenges 26. WriteYourVisionandKeyStrategies 2

Chapter Two Planning Your Business 3

1. PrepareanExecutiveSummary 32. InvestigateFundingNeedsandOptions 33. ConsiderEquityvs.DebtFinancing 54. ChooseTypeofEntity 65. SelectaName 86. ProtectYourIntellectualProperty 97. DraftaCompleteBusinessPlan 108. ValueaStart‐up:InvestmentValue 119. ValueanOngoingBusiness:FairMarketValue 1410. NegotiateEarlyStageFinancing 14

Chapter Three Registering with Regulatory Agencies 15

1. SelectYourStateofDomicile 152. FileOrganizationDocumentsWithCalifornia 153. ObtainaFederalandStateEmployerIdentificationNumber 194. RegisteraFictitiousBusinessName 205. ObtainaLocalTaxRegistrationCertificate 216. ObtainaCaliforniaStateSeller’sPermit 237. ObtainOtherFederal,State,County,andLocalBusiness

LicensesAsRequired 248. RegisterwiththeCountyAssessor’sOffice 24

Chapter Four Setting up Operations 25

1. ChooseaBusinessLocation 252. ComplywithZoningLaws 263. ConsiderFederal,State,County,andCityIncentives 27


Contents (continued) Page

4. NegotiateaLease 275. NegotiateContacts 286. ObtainInsurance 28

Chapter Five Running Your Business 31

1. ObtainaBankAccountandGetaBusinessCreditCard 312. SetUpanAccountingSystem 313. MakeTaxElections 324. ImplementGoverningPrinciplesandInternalControls 325. UnderstandPersonnelIssues 336. SetUpaPayrollSystem 357. MaintainProperRecords 388. PayYourTaxes 389. ObtainAdditionalLoans 3910. RaiseAdditionalVentureFunding 4011. MonitorYourFinancialForecast 4212. CreateaMarketingPlan 4213. ConsiderOtherResources 44

Conclusion 44ExhibitA‐TopFiveChallengesFacingStart‐upsToday 45ExhibitB‐SourcesofFunding 47ExhibitC‐EntityPerspective 49ExhibitD‐TenGoverningPrinciplesforaStart‐up 51ExhibitE‐1‐TaxRates 53ExhibitE‐2‐Federal&CaliforniaPayrollTaxRatesfor2015&2014 55ExhibitE‐3‐PayrollTaxDepositRequirementsSummary 57ExhibitE‐4‐PayrollTaxesSummary 59ExhibitF‐NewBusinessChecklist 61


Introduction

Congratulationsonyourventuretobecomeabusinessowner!ThisNewBusiness Start‐UpGuide provides logical steps to follow to get you started;althoughyoucanvarytheorderaccordingtoyourcircumstances.ThegeneralstepsintheGuide are useful for starting a business anywhere in theworld. However, theGuide isintendedtobeachecklistandtoolforstart‐upsspecificallyinSiliconValley.Forexample,ChapterThreegives instruction for registeringwith regulatoryagencies in SiliconValleyand California. Many federal, California, and local tax and regulatory requirements areincluded.Beadvisedthattheremaybenewregulationsorrulesspecifictoyoursituationsthat are not included in theGuide. We recommend you involve an attorney, a CPA, abanker,andabusinessinsuranceagent.Abbott,Stringham&Lynch (ASL), has anEmergingBusinessGroupwhich can guideyouwithbestpractices foryournewbusiness. Withover700business clients,wehaveobserved and cataloged best practices for start‐up companies. Our services includeaccounting, tax, business valuation, and business advisory services. We have access tosubject matter experts, affiliates, and library resources that can provide help and bestpractices for financial, legal, personnel, insurance, marketing, and administrative issues.Since our founding in 1977, our firm has served as an advisor to hundreds of start‐upbusinesseswhichbecamemature, thriving companies. Letushelpyoualong theway toyourbusinesssuccess.PleasebeawarethatthelinksincludedarecurrentasofJanuary2016.

For any questions or suggestions about this guide, contact: Mark Sheffield Abbott, Stringham & Lynch [email protected] (408) 377-8700

1© Abbott, Stringham & Lynch 2016

Chapter One

Determining the Business Viability

Youhaveprobablyalreadyconceptualizedyournewbusiness.Beforeyouplowaheadandpossibly waste a lot of time and money there are six essential steps to determine theviabilityofyourbusiness.Gethelpifyouneedit,butdon’tskipthesesixsteps.

1. Define your Business Purpose from the Customer’s Perspective

Think long and hard to answer this fundamental question: What is the big need,problem, or desire you are solving? Describe your purpose from the eyes of yourcustomer. Who are your customers? Why will they want your product or service?Whatareyouprovidingthattheycan’talreadygetfromcompetitors?Tobesuccessful,yourbusinessmustbeaboutcustomers,notyou. Whatisittothem? Thisconceptisthemostimportantelementinyourplanning.Boilitdowntoasentenceortwo.Thisisyourmissionstatement,sowordsmiththesentenceuntilyougetitjustright.Youneedto get this right, because investors, lenders, and customers will want a preciseexplanationofthesolutionyoucanbring.

2. Describe Your Business

Writedownhowyourbusinesswilloperate. Atthispoint,youonlyneedaparagraphor two. Beconcise. Describehowyouwill accomplishyourbusinesspurposeabove.Forexample,whatarethekeyproductsorservices?Wherewillyougettheproducts?Whoorhowwillyouprovidetheservices?Locationofbusinessandcustomers?Howwillyoumakemoney,orgetpaid?Goingthroughthisexercisewillhelpyourefineyourbusinessconcept.Youmaythinkofcomplementaryideas;orfindfaultsthatcauseyoutoreconsiderwhethertogoforward.Eitherway,thisexerciseisworththeeffort.

3. Understand Your Market

Theobjectivehereisnottodevelopafull‐fledgedmarketingplan.Rather,itistoensurethatyouhaveidentifiedyourmarket fortheproductorservice;andconsideredsomestrategiesandtacticstoreachyourcustomers.Trytoanswerthesequestions:Howbigisyourpotentialmarket?Youneedageneralidea.Findoutabouttheindustry.Whatarethebarrierstoentry?Whowillbuyyourproductorservice?Aretheresufficientandwillingbuyers?Isthemarketunderservednow?Estimatethedollarpotentialyouhave.Howwillyouidentifyandselltoyourcustomers?Youcanlookatthesuccessofsimilarbusinesses,ortalktopotential customers. Identify your competition and consider whether there is enough market to go around.

Chapter One Determining the Business Viability


4. Determine Cash Viability

Thisstepisarough,preliminarycalculation.Makesureyourbusinesspencils‐outonanapkin from the get‐go. The premise is: Cash is king. There are two aspects toconsider:

Is thereprospectiveprofitability? Will revenuesexceedexpenses indue time? Isthereanamplegrossprofitmargin?Estimateoverheadcosts.Istherestillenoughmarginleftoverforanacceptablebottom‐lineprofit?

Whatabout start‐upandasset costs? Afteranalyzingprofitabilityabove,evaluatestart‐up costs. Some businesses can start on a shoestring; others require a largecapitalinvestmentinequipment,facilities,research,anddevelopment.Doyouhavethecapital? Doyoureallythinkinvestorsor lenderswillbewillingtoprovidethefundingforyouridea?Isthebusinessstillprofitableafterconsideringdepreciationandrecoveryofthedevelopmentcosts?

5. Identify Challenges

Whatarethechallengesyourbusinesscouldface?Behonestinyourassessment.Areyousufficientlymotivated?Areyoureadytoworklonghoursandweekends?Doyouhave moral support from family and friends? How is your health? Entrepreneurstypicallymakehugeinvestmentsintimeandenergy.Doyouhavewhatittakes?Yourattitudeanddrive isakey factor in thesuccessofyourbusiness. Doyouneedhelp?Canyoufindtherightteamtogoforward?Gettingtherightpeopleonthebusiscriticaltoyoursuccess.Identifyingchallengesisnotmeanttodiscourageyou.Smallbusinessopportunities abound. Dun and Bradstreet (D&B) reports that more than 90% ofAmerican businesses employ 50 or fewer employees; and over half of those employfromonetofouremployees. TheAmericandreamattractsmillionstosmallbusiness.Withthatdreamcomechallenges. Justbeawareofthem. Reviewthe listofTopFiveChallenges Facing Start‐upsToday inExhibitA. After you have reviewed the list, sitback, ponder, and apply the smell test. Consider these questions: Does the newbusiness have the smell of success? Do you really believe in it? Is it completelyreputable? Will customers still need or want your product or service during arecession?Ifnot,canyouweatherthestorm?Themostimportantpartofthesmelltestisthequestion:Doesitfeelrighttogoforward?Ifso,goforit!

6. Write your Vision and Key Strategies

Afteryoucompletethefirstfivestepsabove,it’stimetowriteyourvision.Yourvisionanswersthequestion: Whatisyourbusinessgoingtolooklikeinthreetofiveyears?Whatareyou trying tobuild? Whatare thekeybenchmarksyouareafter? Youcanestimate your revenues, or both revenues and expenses, or use other benchmarkingcriteriathatarekeyindicatorsofwhatyouaretryingtoachieve.Yourvisionmaybeasentenceoraparagraph.Underthevision,listthefiveorsixkeystrategiesthatwillgetyouthere.

3 © Abbott, Stringham & Lynch 2016

Chapter Two

Planning Your Business

Ifyoucompletedthe firstsixstepsabove,congratulations! Nowyouhavecompletedthebasicsofasimplifiedbusinessplan,whichissometimescalledanExecutiveSummary.

1. Prepare an Executive Summary

HereistherecommendedoutlineforyouronetothreepageExecutiveSummary:

A. BusinesspurposeB. BusinessdescriptionC. MarketdescriptionD. CashviabilityanalysisE. ChallengesF. VisionandStrategies

ThebestpracticeistohavetwoExecutiveSummaries: (1)Oneisthefirstsectionofyourcompletebusinessplan.Thisshouldbenolongerthanthreepages.(Seesection7in this chapter). (2) The second Executive Summary is a one page document that isprovidedto investors. Itcrystallizesyourbusiness in themostconcisetermsandwillgive you confidence and focus. This is the crisp business overview that a potentialfunder,partner,teammember,orotherkeyplayercangraspin5minutes.Otherwise,youraudiencewillbeconfusedandfrustratedtryingtofigureoutwhatyourbusinessis,leavingnodesiretoexplorefurther.Youhaveonechanceandabriefamountoftimetomakeagoodfirstimpression.Mostentrepreneursarewaytooverbose.Theyspendtoomuchtimewritinga50pagebusinessplan,whentheyshouldhaveconcentratedonanextraordinarilyconciseExecutiveSummary. Get theonepageExecutiveSummarydownpatsoitrollsrightoffyourtongue.Thewordsmakeallthedifference.IfyouaresuccessfulwithyourExecutiveSummary,funderswillbehappytogiveyoudirectiononwhatelsetheywantintermsofanexpandedbusinessplan.YoumaywanttoprepareaPowerPointpresentation.Ifso,keepittotenorfifteenslideswithnomorethanafewbrief concepts or pictures per slide. Entrepreneurs often try to put too muchinformationandverbiageonaslide.Limitthetechnicaldetail.Theslidedeckisnotadesigndocument.Mostofthefocusshouldbeonthebusiness.

2. Investigate Funding Needs and Options

You can’t succeed in your start‐up unless you can fund your business one way oranother. Eventhebestideasdieonthevinebecausethebusinesslackedresourcestobringtheideastofruition.Withyourexecutivesummary,youarereadytoexploreyour

Chapter Two Planning Your Business


fundingoptions. Youneedafundamentalunderstandingofthefundingworldtohelpyoucompleteyourbusinessplan(Section7below). Itmaynotbenecessarytoraisemillionsofdollarstomakeyourbusinesssuccessful.Youmaybeabletogetstartedandsurviveforafewmonthsorevenyearsonashoestringbudget.Somekeeptheirdayjobinitially andwork on the start‐up in their spare time, preferring to avoid the risk ofshootingforthestars.Youmightfindasmallnichemarketwithoutalotofcompetitionthatwillprovideacomfortablelivingformanyyears.Forotherswhoarethinkingbig,competitive market conditions may dictate raising millions of dollars quickly.Determine your goals and anticipate the amount you need, the time frame, and thetypesoffundingyouwillgoafter. SeeExhibitB forSourcesofFunding. Seethenextstep, in Section 3 (p.5), for an analysis of equity vs. debt financing. Below are sometypicalfundingphases,sourcesandamounts.Ofcourse,everycompanyisdifferentsoyoursituationmayvary.

Typical New Business Phases and Funding Sources

Phase Sources Amounts

1. Start‐up,Bootstrapping Personalresources $10,000‐$150,000(Inceptionupto2yrs) Friends&Family CrowdFunding

2. EarlyStage,Seedmoney Angelinvestors $25,000‐$1million(1styrto3rdyr)

3. Mid‐stage SuperAngelinvestors $500,000‐$2million(2ndyrto5thyr) Institutionalsources

4. Later‐stage,A,B,Crounds VentureCapital(VC) $2to$5millionandup(2ndyrto10thyr)

ConsiderVCfundingifyourgoal istocreateabreak‐throughproductwithlargesalesand growthpotential, andyouwant to sell the companyor gopublic. ManyVCs arelooking for companies who expect to generate annual sales of at least $50 millionwithinfiveyearswiththepotentialofmanytimesthatamount.Youwouldlikelyneedinexcessof$10millionto$20millionoverthelifeofthecompanytofundsuchgrowth.VCs invest thatkindofmoney. Angel investorsdonot. Furthermore,angel investorsgenerally don’t invest seedmoney in businesses thatwill eventually needmore than$20millioninVCfunding.ThatisbecausethedilutionthatwilloccurwiththeA,B,andCroundsofVCfundingmakesitveryunlikelythatsuchearlystageinvestorswillmakemuch,ifanymoney.

Because of the large capital investments, VCs usually end up with control of largeenterprises. Today, some VCs make early or mid‐stage investments of $500,000 ormore.Ifyourbusinesswillbeasmallerscale,orifmaintainingcontrolisimportanttoyou,oryouwanttocreateafamilybusiness,thenyouprobablydon’twanttoseekVCfunding. In this scenario, try to raise sufficient funds from friends, family, and angelinvestors to bring the company to a level of profitability that will sustain moderategrowthwithouttheneedforVCmoney.



3.Consider Equity vs. Debt Financing

Generally, the more risky the venture, the more difficult to obtain satisfactory debtfinancing.Unlessyouhaveaccesstomortgageorothersecuredlending,itisdifficulttoobtain institutional funds for a start‐upwithout revenues andprofits. Therefore, forsomestart‐ups,theonlyalternativeistoseekequity(ownership)capitalfrominvestorswilling to accept the risks. Entrepreneurs who can bootstrap their businesses withloansfromfriendsandfamilyarelucky.Be aware that once you add additional owners, especially unsophisticated investors,your life becomes much more complicated. Stock option plans and convoluted captablesare time‐consuminganddistracting. Bewaryof crowd funding, especially if itinvolvessellingequitytomanysmall investors. Unsophisticated investorssometimeshaveunreasonableexpectationswhichcanmakeyourlifemiserable. Ifyoucanswingit,soleownershipisagreatwaytogo. Herearesomefactorstoconsiderinchoosingequityordebtfinancing.

AdvantagesandDisadvantagesOfEquityandDebtFinancing

Attribute Equity Debt Risk Spreadamonginvestors Restsonownerifpersonally

guaranteed Repayment Generallynotrequiredtobe

repaidMustberepaid,usuallyonaregularschedule

Assetsencumbered Pledgeofassetsnotrequired Usuallyrequiresmortgageon

assetsassecurity Rewardsofsuccess Sharedamonginvestors Enjoyedbyowner Flexibilityinstructuringoperations

Generallyhighdegreeofflexibility

Oftenrestrictedbyloanagreementanddebtcovenants

Choicesofentities Limitedtocorporation,LLC,or

partnershipCanbeanyform

Complexityofownership:multipleshareholders,preferredstock,stockoptionplans,etc.

Complex: maybeexpensive forlegal,auditing,andtaxservices;timeconsuming,maydivertbusinessfocus

Notcomplex

Motivateemployees Issuingstockoroptionsto

employeesmayincentivizethem.Or,itmaycreateafalsehopeandresentment

Noequityincentive.Canmotivateemployeeswithbonuses,retirementplans,orphantomstock



4. Choose Type of Entity

Inchoosinganentitytype,considertheseandotherrelevantfactors:(1)natureofthebusiness,(2)numberandrelationshipofthefounders,(3)amountandnatureofassetstobecontributedatinception,(4)participationofthefoundersinthemanagementofthe business, (5) capacity and inclination of the founders to dealwith administrativeburdens associated with the entity, and (6) method of profit distribution to thefounders, and (7) personal liability limitations. Choosing the type of entity can be adifficultdecisionsoseeklegalandCPAcounsel.Tohelpyougetstarted,seetheExhibitCEntityPerspectiveChartforasnapshotview. Reviewtheentitysummariesbelowtogiveyousomebackgroundandidentifysomeoftheissuesyouwillwanttoconsider. Soleproprietorship(orproprietorship): Ofalltheentitychoices,thishastheleast

administrative burden; no separate tax returns, no need for a charter, boardmeetings,etc.TheownerreportsoperatingresultsonScheduleCoftheindividualForm 1040 tax return. Any complexities with regard to record keeping andaccounting are driven by the nature of the business, not the business form. Theowner holds title to property and is personally liable for all obligations of thebusiness.Theowner’spersonalassetscanbeseizedtosatisfydebts.Thebusinessislimitedtotwosourcesofcapital:contributionsfromtheownerorloans.Becauseasoleproprietorisnotanemployeeofthebusiness,netincomefromthebusinessissubjecttoself‐employmenttax,whichispaidwiththeindividualtaxreturn.

Partnerships: Generally, for taxpurposes, if twoormoreowners share revenues,

expenses, and profits, and you are not a corporation or LLC, then you have apartnership. The business files a partnership tax return, and partners receive aformK‐1,which isusedtoreport theirshareof incomeor lossontheir individualtax returns. Partnerships can range from simple to complex, depending on theagreement. Partnershipsprovidetremendousflexibilityintaxreporting;however,complextaxaccountingrulescanmakethecostofadministrationhigh.Apartner’sshareofearnedincomeinthepartnershipissubjecttoself‐employmenttax,whichis paid with the individual tax return. There are two types of partnerships:1. General Partnerships: These are associations of two or more persons as co‐

owners. Co‐owners personally share the risks and rewards. Each partner isjointly and severally liable for the partnership’s obligations. Likeproprietorships,apartner’spersonalassetscanbeseizedtosatisfydebtsofthepartnership. Tax gains and losses “pass through” to the partners individually.Sourcesofcapitalarelimitedtogeneralpartnersandloans.ProprietorshipsandgeneralpartnershipshavenoCaliforniastateregistrationrequirements,butseeChapter Three #2 to consider registering for legal reasons. Be aware thatCaliforniarequireslimitedpartnerships,LLCs,andcorporationstoregistertodobusinessinthestate.



4. Choose Type of Entity (continued)

2. LimitedPartnerships: Theseare likeageneralpartnership,except thatoneormoreofthepartners(i.e.,thelimitedpartners)havelimitedparticipationintheventure’s risk. This formoforganization is a legaldevice that enables limitedpartnerstobepassiveinvestors,andnormallylimitstheirliabilitytotheextentoftheirinvestment.Itenablesthegeneralpartnerstomanageandcontrolday‐to‐dayoperations.Ageneralpartner’sassetscanbeseizedtosatisfydebtsofthelimited partnership. A limited partnership is a pass through entity, althoughinactivepartnersmaybe required todefer “passive losses”until passivegainsare earned, or until dissolution. Limited partnerships can raise capital frommultipleinvestorswhowanttolimittheirrisk.

Limited Liability Companies (LLCs): LLCs combine the best attributes of limitedpartnershipsandScorporations.Theseattributesinclude(1)treatmentasa“passthrough”entityfortaxpurposes(iftheentityelectstobetreatedassuch),and(2)limiting the member’s liability to one’s investment. LLCs can raise capital from“members” who want to limit their risk. California charges a gross receipts feebasedontherevenuesoftheLLC,whichcanamounttothousandsofdollars.AnLLCmember is not an employee. Generally, if themember is actively involved in thebusiness, themember’s share of the earned income is subject to self‐employmenttax. Self‐employment tax is paidwith the individual tax return. Many attorneysrecommendyoustartwithanLLC,andif it lookslikethebusinessisgoingtotakeoff,youcanalwaysconverttoaCcorporation.

Corporations(C‐corporations):CCorporationsarecommonforstart‐upsexpectingto grow quickly and raise venture capital. (See Chapter 3, Section 1 Re:incorporatinginDelaware.)Corporationscharacterizedas“artificialpersons”withthe ability to hire employees, enter into contracts, acquire assets, etc. Theshareholders (owners) generally limit their liability to the investment in thecorporation. Since corporations are not “pass through” entities, corporations payincometaxesattheirownlevel.LossesofC‐corporationsarenotpassedthroughtoshareholders,butmaybecarriedbackorcarriedforwardtoothertaxyears,unlesslimitedincertaincircumstances.C‐corporationscangopublic.Thereisapotentialof “double taxation” of profits in a C‐corporation: once on corporate profits, andoncetotheshareholderswhenadividendispaidoruponliquidation.Corporationscanavoiddoubletaxationbypayingsalariestotheextentofprofits,butbeawareofunreasonable compensation issues. C‐Corporations can raise capital by sellingdifferent classes of stock or issuing debt. C‐corporations generally presentmoreadvantagesthanotherentitiesrelatingtocompensation. Forexample, incomecanbe shifted to the individual through salaries, fringebenefits, reimbursements, andotheritemsthataredeductibletothecorporationandmayormaynotbetaxabletothe individual. This shiftingof incomecanbeused tominimize thecombined taxburdenofthecorporation.



4. Choose Type of Entity (continued) Corporations(C‐corporations)(continued):Employee status enables the shareholder/employee to qualify for certain fringebenefits, such as medical and disability insurance, medical reimbursement plans,meals and lodging, and group term life insurance up to $50,000. In addition,shareholder/employees are eligible for retirement plans that can providetremendoustaxbenefits.

S‐corporations:AnS‐corporationisacorporationwiththelegalcharacteristicsofaC‐corporation. Therefore, S‐Corporations, like C‐corporations need articles ofincorporation,bylaws,boardofdirectors,andmeetingsofboardofdirectors. ThemajordifferenceisthatS‐corporationsfileanelectionwiththeIRStobetaxedasa“pass through” entity. The S‐election is a way to avoid the double tax that C‐corporationsexperience.UnlikeinaC‐corporation,profitsandlossesgenerallyflowtotheshareholders’individualtaxreturns,viaFormK‐1reporting.CaliforniataxesS‐corporationnet incomeat thegreaterof1.5%or$800. Similar topartnerships,shareholder loans toanS‐corporationcan increase theshareholder’s taxbasis forpurposesofdeductinglosses.However,loansfromthirdparties,suchasbanks,donotincreasetheshareholder’staxbasiseveniftheloansarepersonallyguaranteedby the shareholder. So, S‐corporation losses may not be deductible, if theshareholderdoesn’thavebasis.S‐corporationsmaysellstocktoamaximumof100shareholdersandare limited tooneclassof stock. Oneof theattractionsofanS‐corporation is that nonwage income and distributions passed through to theshareholders arenot subject to self‐employment taxorpayroll tax. However, theIRSmaychallengethedistributionifitisinlieuofcompensationwhichwouldhavebeensubjecttopayrolltaxes.InSiliconValley,S‐corporationsarerarelythechoiceforinvestorswhoarenotactivelyinvolvedinthebusiness.

5. Select a Name

Thisistougherthanitseems.Someentrepreneurswanttobecreativeandcute.That’sfine.Putallyourpotentialnamesonalist,andthenconsidertheseimportantfactors.

Choose a name that clearly communicates your product or service. Try out the

nameonfriends,family,andpotentialcustomers. Shouldithaveageographictie?Isthenamescalablenationallyandgloballyifyourbusinesstakesoff?Thenameisa key element of your start‐up’s branding and success. There is a process toselectingtheoptimalname.Sodon’tshortchangetheefforttogetitright.ContactMarkSheffieldatASLtolearnthebestresourcestohelpyoufindanamethatwillhelpandnothinderyoursuccess.



5. Select a Name (continued)

Beawareoftrademarklaw,whichregulatestherighttouseaname. Ifyoupickanamesimilartothattrademarkedbyacompetitor,youcouldgetsued.Itisbesttoselect a safe name and avoid the lawsuit hassle. You can search the federaltrademark registry maintained by the U.S. Patent and Trademark Office atwww.uspto.gov/ebc/index_tm.html. In addition, you can do a search throughcompanies likeTrademarkExpress orThompson andThompson. Some start‐upshireasearch firmforacomprehensivesearch,whichcostsaround$300. Youcanalso contact the State of California Secretary of State to do a name search forregistered businesses. Use a trademark attorney for expert advice in this trickyarea.

Youmayneed tocomplywith thecounty’s fictitiousbusinessnamerequirements.

SeeChapterThree,Section3forregistrationinformation.

Check to see whether your business and product names are available on‐line asdomainnames.Ifanonlinepresenceisimportant,itmightimpactyourfinalnameselection. Check with any domain name registrar, as listed at www.internic.com.Youmayhavesomerecourseifyournameisownedbyacyber‐squatterwhoisonlyholdingthenametosell.Formoreinformationgotowww.icann.org.

6. Protect your Intellectual Property (IP)

Intellectual property (IP) rights, including patents, trademarks, copyrights and tradesecrets, can secure your company’s interest in its important inventions and creativeassets.Untilyoulegallygettheseinplace,anyonewillbeabletoproduceoruseyourproduct. Patents and trademark registrations must be applied for through the USPatent and TrademarkOffice (USPTO). Copyrights can be registered through theUSCopyright Office, although such registration is not always essential. Trade secretsshouldbedocumentedinternally,firstastotheirexistenceandsecondastostepstakentomaintain their secrecy. Consult an experienced IP attorney for guidanceand legalhelp in theseareas tomakesureyourcompany isadequatelyprotected. Ensure thatemploymentandconsultingagreementscallforassignmentofIPrights.Consider patenting your company’s products, processes, formulations and aspects ofservice delivery that are new and that provide your company with a significantcompetitive advantage. Consider registering trademarks used in promoting yourcompany, its products and its services. Apply copyright notices to allmaterialmadepublicly available and consider registering copyrights of works that account forsignificant revenue to your business, especially if past experience gives you cause tofearcopying.Considertakingstepstoprotectthesecrecyofyourcompany’sbusinessinformation,products,processes,formulations,andservicedeliverymechanisms.



7. Draft a Complete Business Plan

After selecting a name, and entity type, and preparing an executive summary, youshould consider drafting a complete business plan. It is not mandatory, and manysuccessfulbusinesseshavebeenlaunchedwithoutone.However,investorsandlendersmay request a complete plan. Find out what they need and want. Experiencedentrepreneurs, banks, and investors generally agree that you should develop acompletebusinessplan.It’sabestpractice.Thevalueisintheprocess.Itwillhelpyoumakedecisionsandthinkaboutthingsyoumightnothaveconsidered.Thebest‐sellingbusiness plan software is Business Plan Pro by Palo Alto Software, Inc.(www.paloalto.com).Thestandardeditionis$100.Sampleplansforcertainindustriesare available for free. The software integrates with Marketing Plan Pro andWebStrategy Pro software to create a comprehensive business plan and correspondinginternetstrategy.Another business plan application is Automate Your Business Plan for $80 atwww.business‐plan.com. This software is designed for novices and is a stand‐aloneprogram.ItiscurrentlybeingusedinSBABusinessInformationCentersacrosstheU.S.Othersoftwareplanswhichmayworkwellforyouare: BizPlanBuilder,www.jian.com andMyBusinessAnalyst,www.mybusinessanalyst.com.

Thecompletebusinessplanshouldincludethefollowing:

A. ExecutiveSummaryofthreepages,maximum(seeChapterTwo,Section1)

B. Overview:Product,Company,ManagementTeam,ExternalTeam

C. MarketAnalysis:TotalAvailableMarket(TAM);SegmentedAddressableMarket(SAM);ShareofMarketyoucanreach(SOM);IndustryAnalysis;Competition;MarketDynamics.

D. BusinessRoadMapandStrategy:Go‐to‐MarketStrategy;SalesStrategy;PricingStrategy;Top10BenchmarkCustomers

E. Financials:CurrentFinancialStatementsandCapTable;SalesandP/Lforecasts;BalanceSheetforecasts.ASLwouldbehappytohelpwiththis.



8. Value a Start‐up: Investment Value You shouldvalueyour start‐up ifyouplan toexchangeequity for funding. Valuingastart‐up is different from valuing an ongoing business (see Section 9 on page 14 forvaluinganongoingbusiness).Oversimplifying,thevalueofastart‐upisthesubjectiveamountan investorwill investrelativetotheownershippercentagetheywillreceive.Thisiscalledinvestmentvalue.Asafounder,youmightdisagreewiththeinvestmentvalue. That’s Ok. You don’t have to take their money. Investors have their ownformulas, calculations and rules of thumb. There is no magic, gold‐standardcomputation to calculate investment value. The definitive investment value is theamountawillingfounderandinvestoragreeon.Herearethreetypicalapproachesfordetermininginvestmentvalue:

1. MultipleofRevenues:Mostlyusedintechstart‐ups.2. InvestorReturnExpectation:Mostlyusedinnon‐techstart‐ups.3. Moresophisticatedmethods:Involvesmoreadvancedcalculations;usedto

valuebothtechandnon‐techstart‐ups.

Multiple of Revenues: There are certain industries where the value of a start‐up isbased on a multiple. This simple rule‐of‐thumb calculation is used to estimateinvestmentvalue:

Incertainhigh‐technologyindustriesinSiliconValleyinvestorsareprincipallylookingformarketshareormarketsharepotential.Annualrevenues(orprojectedrevenuesifthere is no revenue yet) is the key indicator of market share. There may be someservice industries that could use this method as well if profitability is somewhatpredictable. Caution! These multiples are highly volatile. They go up and downdependingontheeconomy,marketfluctuations,andavailabilityofinvestmentcapital.

Industry Revenues Multiple

Software 2x – 3x

Biotech 2x – 4x

SaaS 4x – 6x

Cloud 5x – 8x

BigData 8x – 12x

Social 10x +



8. Value a Start‐up: Investment Value (continued)

InvestorReturnExpectation:Thisisasimplifiedmethodusedfornon‐techstart‐upsortechstart‐upswherethereisnoindustrymultipleofrevenuesruleofthumb.Typicallytheseincludetraditionalbusinessesoutsideofthetechnologysectorspreviouslymentioned.

Thismethodisafunctionofprojectedannualprofitandtheinvestor’sexpectedreturnasfollows:

Definition of Investor Return Expectation (IRE): The IRE is the investor’s annualrequired rate of return to invest. The return investors require or expect variesdepending on the risk. Investors in stable companies will accept a much lowerreturnoninvestmentthananinvestorinastart‐up.Toillustratethisconcept,herearesometypicalIREs:

TypeofCompany InvestorReturnExpectation(IRE)

S&P500Companies 6.7%**

ProfitablePrivateCompanies 15%to25%***

Start‐upCompanies 33%to115%****

ExamplesofValue: Assumingthebusiness isearning$1millionofprofitperyear,(orthestart‐upprojects$1millionofprofitperyear),andusingthefollowingIREsherearesomecalculatedvalues:

TypeofCompany Formula = Value

S&PCompany $1mil/6.7% = $14.9mil

PrivateCompany $1mil/20% = $5mil

Start‐up $1mil/50% = $2mil____________________________________________________________________________________________________________________________________________ * Some label this formula: Income/Risk = Value. We think the terms profit and investor return expectation (IRE)aremoredescriptiveanduseful.

** Overthepast85years, theprice/earningsratioforS&P500stockshasaveraged15. Invertingthefraction,the earnings/priceratiois1/15=6.7%.Thisisthehistorical,averageIREforS&P500stockbuyers.

*** Manyprivate company investorsexpecta15% to25%returnoncompanies thatalreadyhaveprofit. Investors perceiveahigherriskthanwithpubliccompanies,partlybecausetheinvestmentisnotasliquid.

**** Inthiscase,start‐upshavenotgeneratedanyprofitsyet.Tooffsetthisrisk,angelsandVCstypicallywantbetween33%to115%annualreturnontheirinvestment(whichequatestoa10Xreturnoninvestmentoverthreetoeightyears).Thishigherexpectationisreasonablebecausetheriskoflosingtheirinvestmentismuchhigherthanwithprofitablepublicandprivatecompanies.Becausethereisnohistoryofprofitstobasethevalueon,investorslookatprojections.



8. Value a Start‐up: Investment Value (continued)

Calculating a Partial Investment: The investment value formulas above illustratehowinvestorsvalueanentirebusiness.Theinvestmentofcapitalintoastart‐upinexchangeforapartialinterestnecessitatesadifferentiationbetweenpre‐moneyandpost‐moneyvalue. For example, if an investor agreedwith thepre‐money$2milstart‐up valuation above, a typical offer for 20% of the company is $500,000calculatedasfollows$2milpre‐moneyvalue+$500,000newmoney=$2.5milpost‐moneyvalue

$2.5milx20%=$500,000

VariationsonStart‐upValues:Herearesomedifferentvaluesforstart‐upsbasedondifferentassumptions:

Start‐upInvestor ReturnExpectation(IRE)

Formula

=Value

100%: Becausechanceof$1mil profitissoslim

$1mil/100% =$1mil

33%: Prospectsof$1milprofit areexcellent

$1mil/33% =$3mil

50%: Goodprospectswith exponentialgrowthupside sotheinvestormight project$2.5milprofit

$2.5mil/50% =$5mil

IncreasingInvestmentValue:Ingeneral,youcanincreaseyourstart‐up’sinvestmentvaluebyconvincingtheinvestorofanyofthefollowing:

1. Theexpectedrateofreturnshouldbereduced(becauseoflowerrisk)

2. Projectedprofitswillbehigher

3. Theprojectedgrowthratewillbehigher Moresophisticatedmethods:Therearemoreadvancedmethodstovaluestart‐upsand

determine investment value including the VC Method, Scorecard Method, and RiskFactorSummationMethod. Thesemethodscanbemorecomplexincalculatingfuturegrowth opportunities. They may also consider other factors such as a company’smanagementteam,technology,marketsize,competitiveenvironment,andcomparativestart‐upcompanies’valuationsinthatparticularniche. ASLcanhelpwithallofthesemethods.

Contact Jeff Faust, Director of Valuation Services, at ASL for help with valuing yourstart‐up.



9. Value an Ongoing Business: Fair Market Value

Traditionalmethodsofvaluingbusinessesotherthanstart‐upsproduceafairmarketvalue result, which is different from the investment value approach illustrated insection 8 above. Fair market value is used to grant stock options or sell equity toemployees. Below are three main categories of traditional valuation approaches.Valuation experts use one or a combination of these approaches to calculate the fairmarketvalueonanongoingbusiness.

TraditionalValuationCategory

Methods

Description

Incomeapproach DiscountedCashFlow(DCF)

These methods focus on theincome generating capacity of abusiness in a much longer timehorizon than the investmentvalueapproachabove.

CapitalizationofEarnings

MarketApproach ComparableTransactions Used to determine what themarket is paying for businessesinaparticularindustry.

GuidelinePublicCompany

AssetApproach RestatedNetWorth Thesemethodslookathowmuchmoneyhasbeen spent tobuild acompany or asset and what thecompanycouldgetifitliquidated.

ReplacementCost

ContactJeffFaust,DirectorofASL’sValuationServices,forhelpinvaluingyourongoingbusiness.

10. Negotiate Early Stage Financing

Now that you have a complete business plan and valuation, it’s time to meet withpotentialfunders.Hereiswhatyouneedforyourangelinvestororsuperangelinvestorpitch:(SeeChapterFive,Section10forVCFunding)Angelinvestorpitch:A. ExecutiveSummary(seeChapterTwo,Section1)B. BusinessPlan(seeChapterTwo,Section7)C. Tenpagesummaryorslide‐deckpresentationwithbulletpointsD. ExecutiveBiographiesofteammembers

Bepassionate,concise,andclear.Besuretoinvolveanexperiencedattorneytohelpyouwiththenegotiationsandtermsheet.


Chapter Three

Registering with Regulatory Agencies

Before you can legally hang your shingle, you need to deal with the bureaucracy. Thegovernmentwants tomake sure they can identify you if someone complains about yourproduct. It is away to protect the public from harmful products or services. Also, theregistrationrequirementsenablethegovernmenttotaxyourbusiness. 1. Select Your State of Domicile

Afteryouhavechosenyourbusinessentity type(seeChapterTwo,Section3),decidewheretoincorporateorregisterthatentity.Ifyouchoseacorporation,andyouplantoraise$5millionormoreinventurecapital,considerincorporatinginDelaware.ManySiliconValleyVCspreferDelawareincorporations;infact,theymayinsistonitbeforethey invest. TheseVCs favorDelawarebecause: (1)Delawarehasapredictable andwell‐developed body of corporate law, (2) they perceive that director and officerliabilityismoreprotectivethaninCalifornia,(3)complyingwithcorporateformalitiesis efficient in Delaware, and (4) they are familiar and comfortable with Delawareprotocol. Someattorneys today say it doesn’tmatter somuchanymorebecause thecorporate law in Delaware and California is now virtually the same. Talk to yourattorney.BeawarethatincorporatinginDelaware,orNevada,oranyotherstate,doesnotsaveyou taxes ifyourbusiness isbased inCalifornia.California‐basedbusinessesmustregisterandfiletaxreturnsinCaliforniaevenifdomiciledinDelawareorNevadaoranotherstate.IfyouincorporateinDelaware,youmustmaintainaRegisteredAgentintheStateofDelaware,followtheDelawareregistrationlawsandpayasmallannualfranchise tax to Delaware. Most California based start‐ups that are not pursuing VCmoneyincorporateinCalifornia,ordomiciletheirLLCorotherentityinCalifornia. Itavoidshavingtoregisterinasecondstate.ForDelaware,seewww.corp.delaware.gov/howtoform.shtml).

2. File Organization Documents With California

The filing process is different depending on the type of entity you select. Theinstructionsbelowwill help youunderstandwhat is involved for your typeof entity.Contactaqualifiedattorneyforlegaladviceandhelpbeforesubmittingtheforms.

Corporation:A. FileArticlesofIncorporationwiththeStateofCalifornia.

Chapter Three Registering with Regulatory Agencies


2. File Organization Documents With California (continued)

i. The State of California provides forms for writing the Articles of

Incorporation or you can create your own. The State also providesinstructionsforwritingtheArticlesatthefollowingURL:

http://www.sos.ca.gov/business-programs/business-entities/filing-tips Here are links for the forms for a general stock corporation, a close corporation, and a professional corporation.

General stock corporation: http://bpd.cdn.sos.ca.gov/corp/pdf/articles/arts-gs.pdf Closecorporation(upto35shareholders):http://bpd.cdn.sos.ca.gov/corp/pdf/articles/arts-cl.pdf Professionalcorporation(toengageinaprofession):http://bpd.cdn.sos.ca.gov/corp/pdf/articles/arts-pc.pdf YoucanalsorefertoexamplesfromNoloPressorLegalzoomtounderstandwhatisincludedintheArticlesofIncorporation.YoumaywanttoconsultanattorneyforassistancewithwritingtheArticlesofIncorporation.

ii. MailtheArticlestothefollowingaddress:

SecretaryofStateBusinessEntitiesP.O.Box944260Sacramento,CA94244‐2600

Includea$100checkormoneyorderforfilingtheArticlesofIncorporationmadepayabletotheSecretaryofState.

iii. Within90daysoffilingtheArticlesofIncorporation,completeaStatementofInformationonlineathttps://businessfilings.sos.ca.gov.

Includea$25fee,payablebycreditcard(VisaorMasterCardonly).Remembertofilethisformannuallyeveniftherearenochanges.Thereisaheftyfeeforfailuretofile.




LimitedLiabilityCompany:

A. FileArticlesofOrganization(FormLLC‐1)withtheStateofCalifornia.i. Write the Articles of Organization. The State of California provides

instructions for writing the Articles at the following URL: http://bpd.cdn.sos.ca.gov/llc/forms/llc‐1.pdf. You can review examples ofArticles of Organization fromNolo Press or Legalzoom. You may want toconsultanattorneyforassistancewithwritingtheArticlesofOrganization.

ii. Fillouttheformonline,thenprintandmailto:

SecretaryofState,DocumentFilingSupportUnitP.O.Box944228Sacramento,CA94244‐2280

Includea$70check for filing theArticlesofOrganization,madepayable totheSecretaryofState.

B. AfteryouhavefiledtheArticlesofOrganization,fileaStatementofInformation.

i. InstructionsforwritingtheStatementareprovidedbytheStateofCalifornia

at: http://bpd.cdn.sos.ca.gov/llc/forms/llc‐12.pdf, where it can be viewed,filledin,andprintedfromyourcomputer.

ii. PrintandmailtheStatementofInformationto:

SecretaryofState,StatementofInformationUnitP.O.Box944230Sacramento,CA94244‐2300

Includea$20checkforfilingtheStatementofInformation,madepayabletotheSecretaryofState.




LimitedPartnership:

A. File a Certificate of Limited Partnership (Form LP‐1). The State of Californiaprovides instructions for writing the Certificate of Limited Partnership at thefollowingURL:http://bpd.cdn.sos.ca.gov/lp/forms/lp‐1.pdfYoumaywanttoconsultanattorneyforassistancewithwritingtheCertificateofLimitedPartnership.

B. Fillouttheformonline,thenprintandmailto:

SecretaryofState,DocumentFilingSupportUnit,P.O.Box944225Sacramento,CA94244‐2250

Includea$70checkforfilingFormLP‐1,madepayabletotheSecretaryofState.

GeneralPartnership:

A. ConsiderfilingaStatementofPartnershipAuthority(FormGP‐1). TheStateof

California provides instructions for writing the Statement of PartnershipAuthorityatthefollowingURL:http://bpd.cdn.sos.ca.gov/gp/forms/gp‐1.pdf

YoumaywanttoconsultanattorneyforassistancewithwhethertoregisterthepartnershipandwithwritingtheCertificateofGeneralPartnership.

B. Fillouttheformonline,thenprintandmailto:

SecretaryofStateDocumentFilingSupportUnitP.O.Box944225Sacramento,CA94244‐2250

Includea$70checkforfilingFormGP‐1,madepayabletotheSecretaryofState.




LimitedLiabilityPartnership:A. File an Application to Register a Limited Liability Partnership (Form LLP‐1),

once general partnership status is granted. The State of California providesinstructions for filling out the Applications to Register a Limited LiabilityPartnershipat:http://bpd.cdn.sos.ca.gov/llp/forms/llp‐1.pdf

YoumaywanttoconsultanattorneyforassistancewithwritingtheApplicationtoRegisteraLimitedLiabilityPartnership.

B. Fill‐outtheformonline,thenprintandmailto:

SecretaryofStateBusinessEntities,P.O.Box944228Sacramento,CA94244‐2280

Includea$70checkforfilingFormLLP‐1,madepayabletotheSecretaryofState

3. Obtain a Federal and State Employer Identification Number

Federalidentificationnumber:OwnersofnewbusinessesinCalifornianeedtoobtainafederalemployeridentificationnumber.Thisnumber,alsocalledafederalEIN(orFEIN), is the equivalent of a Social Security number for an individual. Mostbusinesses, aside from sole proprietors, need a FEIN. Sole proprietors with noemployeescanusetheirownSocialSecuritynumberinsteadofaFEIN.TheFEINisneededtohaveemployees,tofileincometaxes,andtomeetbankrequirements.

TheprocesstoobtainaFEINisasfollows:

Gotohttp://www.irs.gov/pub/irs‐pdf/fss4.pdfandfilloutIRSFormSS‐4.Thencall the IRSBusiness&SpecialtyTaxLineat (800)829‐4933 from7:00am to10:00 pm local time,Monday through Friday. Relay the information from thecompletedformoverthephonetotheIRSrepresentative,whowillthengiveyouyourFEIN.

ThereisnofeeforcompletinganIRSFormSS‐4.



3. Obtain a Federal and State Employer Identification Number (continued)

California identification number: In addition to a FEIN, a state employeridentification number is required of all businesses operating in California withwagesthatexceed$100inthecalendarquarter.

The process to obtain a State of California employer identification number is as follows:

Gotohttps://eddservices.edd.ca.gov/tap/andfilloutthee‐servicesformonline.

Additionally,youcanafilloutformDE1–Rev.75(1‐11)athttp://www.edd.ca.gov/pdf_pub_ctr/de1.pdfandmailto:EDD,AccountServicesGroup(ASG)MIC28,P.O.Box826880,Sacramento,CA94280‐0001

ThereisnofeeforcompletingaformDE1‐Rev.75(1‐11).

4. Register a Fictitious Business Name

Ifyouaregoingtorunyourbusinessunderanynameotherthanyourlegalname,youneedtoregisterasafictitiousname.Thisprocessensuresthatconsumershaveaccesstothetrueidentityoftheownersofabusiness.Californiarequiresabusinessthatusesafictitiousbusinessnametoregisterthatnamewiththecountyclerkwhereitsprimarybusinesssiteislocated.

TheprocesstoobtainafictitiousbusinessnameinSantaClaraCountyisasfollows:

A. Firstyoushoulddetermineifanyoneelsehasregisteredyourdesiredname.

Youcanresearchfictitiousbusinessnamesonlineforfreeathttp://www.clerkrecordersearch.org/.

B. Once you have decided on an available fictitious business name, complete an

applicationat:http://bit.ly/20cEeVZ

Mailtheprintedform,a$40.00checkpayabletotheClerk‐Recorder’soffice,andaself‐addressedstampedenvelopetothefollowingaddress:

ClerkRecorder'sOffice70WestHeddingStreet,EastWing,FirstfloorSanJose,CA95110



4. Register a Fictitious Business Name (continued)

C. Publish the fictitious business name statement in a general circulationnewspaperwithin30daysofthefilingdate.

ThislinkcontainsalistofgeneralcirculationnewspapersinSantaClaraCounty:http://www.scscourt.org/forms_and_filing/forms/PB‐4000.pdf

Call the newspaper for specific information on how to publish your fictitiousbusinessname. Youwillhavetopaythenewspaperafeeforpublication. Youmust publish the legal notice a total of four times (once a week for fourconsecutiveweeks).

D. File an affidavit with the county clerk that indicates the publication of the

statementwithin 30 days after the completion of publication (The newspapermayfiletheaffidavitforyouoryoumaydelivertheaffidavittothecountyclerk).

5. Obtain a Local Tax Registration Certificate

Mostcitiesrequireallbusinessestoregisterwiththatcity’staxcollector.Thewebsitesonthenextpageprovidetheformsandinformationtoregister. Asmallannualfeeisusuallyrequired.

Thestepsareasfollows,forexample,fortheCityofSanJose:

Gotohttp://www.sanjoseca.gov/index.aspx?NID=2812

FollowstepsforBusinessTax

Mailordelivertheformwithpaymentto:CityofSanJoseFinanceDepartmentRevenueManagement13thFloor200E.SantaClaraStreetSanJose,CA95113‐1905



5. Obtain a Local Tax Registration Certificate (continued)

SanJose 200E.SantaClaraSt,1stFlrTower,SanJose,CA95113408‐535‐7055http://www.sanjoseca.gov/DocumentCenter/View/11998

Campbell 70NorthFirstStreet,Campbell,CA,95008408‐866‐2117http://ca‐campbell.civicplus.com/35/Doing‐Business

Cupertino 10300TorreAvenue,Cupertino,CA95014408‐777‐3308http://www.cupertino.org/index.aspx?page=175

Gilroy 7351RosannaStreet,Gilroy,CA95020408‐846‐0221http://www.cityofgilroy.org/cityofgilroy_files/business/business_license/Business_Lic_App.pdf

LosAltos 1NorthSanAntonioRoad,LosAltos,CA94022650‐947‐2760http://www.losaltosca.gov/financeit/page/business‐license‐application

LosAltosHills

26379FremontRoad,LosAltosHills,CA94022650‐941‐7222http://www.losaltoshills.ca.gov/docs/browse/doc_download/381‐02‐business‐license‐application‐form

LosGatos 110EastMainStreet,LosGatos,CA 95030408‐354‐6834http://www.town.los‐gatos.ca.us/421/Business‐Licenses

Milpitas 455EastCalaverasBoulevard,Milpitas,CA95035408‐586‐3102http://www.ci.milpitas.ca.gov/business/biz_license_app.asp

MonteSereno

18041Saratoga‐LosGatosRd,MonteSereno,CA95030408‐354‐7635http://www.montesereno.org/index.php?src=gendocs&ref=Businesses&category=Main

MorganHill

17555PeakAvenue,MorganHill,CA95037408‐779‐7237http://ca‐morganhill.civicplus.com/index.aspx?nid=577

MountainView

500CastroStreet,MountainView,CA94041650‐903‐6317http://www.ci.mtnview.ca.us/civica/filebank/blobdload.asp?BlobID=2262

PaloAlto 285HamiltonAvenue,PaloAlto,CA650‐329‐2441http://www.cityofpaloalto.org/business/business_licenses_and_permits.asp

SantaClara

1500WarburtonAvenue,SantaClara,CA95050408‐615‐2310http://santaclaraca.gov/Modules/ShowDocument.aspx?documentid=1001

Saratoga 13777FruitvaleAvenue,Saratoga,CA95070408‐868‐1260http://www.saratoga.ca.us/cityhall/admin/forms/business_license_forms.asp

Sunnyvale 650WestOliveAvenue,Sunnyvale,CA94086408‐730‐7620http://sunnyvale.ca.gov/Portals/0/Sunnyvale/FIN/Application.pdf

IfyourbusinessislocatedintheunincorporatedareaofSantaClaraCounty,thereisnobusinesslicenserequirement.



6. Obtain a California State Seller’s Permit

Youmustobtaina seller’spermit if youareengaged inbusiness inCaliforniaandintend to sell tangiblepersonal property thatwouldordinarilybe subject to salestaxifsoldatretail. Ifyoudonotholdaseller’spermitandwillmakesalesduringtemporaryperiods,suchasChristmastreesalesandrummagesales,youmustapplyforatemporaryseller’spermit.

The state seller’s permit will allow you to collect sales taxes from customers tocoveranysalestaxthatyou’llowetothestate.TheprocesstoobtainaStateSeller’sPermitisasfollows.

Registeronlineathttps://efile.boe.ca.gov/ereg/index.boe.

ThereisnofeeforobtainingaStateSeller’sPermit.

You may want to consult an attorney for assistance with filling out the StateSeller’sPermitinformation.

Youmustobtainausetaxaccount(inadditiontoobtainingastateseller’spermit)if

youhavereceivedmorethan$100,000ingrossreceiptsfrombusinessoperationsinanycalendaryear.Whatisusetax?Usetaxapplieswhensalestaxdoesnot.Whena business located in California makes a purchase of tangible merchandise to beused, consumedor stored inCalifornia fromanout‐of‐state vendorwhodoesnotcollectCaliforniasalestaxonthepurchase,thepurchaseisliableforusetax. Thishappensfrequentlywhenabusinessbuyssomethingovertheinternet.

The California State Board of Equalization lists the conditions that mandate a use taxaccountathttp://boe.ca.gov/info/reg.htm.To register, go to https://efile.boe.ca.gov/ereg/index.boe and click "Register a businessactivitywithBOE."Thereisnofeeforobtainingausetaxaccount.



7. Obtain other Federal, State, County and Local Business Licenses as Required

Thisisthetrickypart.Thereareinnumerablelawsandregulationsthatmaypertaintoyour business. For example, there are environmental regulations and obscure localregulations.Youmayhavetoobtainlicensesfromothercompanies.Itisimpossibletolistallthepotentiallicensesyoumightneedinthisguide,butthissectionwillalertyoutosomeofthecommonlicenserequirementsandpointyouintherightdirection.

Federal Licensing: Most federal licenses are designed to protect the public in

certainindustriesthatareregulatedonanationallevel.Mostsmallbusinessesarenotsubjecttofederallicensingrequirements.

State Licensing: Whether you are subject to California licensing requirements

depends on the business. The fees can be nominal or substantial. The types oflicenses or permits may depend on education, experience, an examination, orbonding. For example, attorneys, CPAs, cosmetologists and real estate andinsuranceagentsallrequireastatelicense.

Local Licensing or Permits. Almost all businesses are required to obtain a local

registration permit in the county or city in which they operate (see Section 4,startingonpage20). Formanybusinesses, this simply entails completinga formandpaying a fee. Special requirementsmay apply to certain types of businesses,suchasthoseengagedinliquor,food,andtransportation.Oftenmunicipalitieswillrequire contractors to be licensed and bonded before they will issue buildingpermitsorconductanynecessaryinspections.

Theeasiestway to findoutwhat licensesare required is togo to theCalGOLD(California Government: On‐Line to Desktops) website for information regardingbusinesslicense/permitrequirements.Thewebsiteis:http://www.calgold.ca.gov/

Entering your business type, the county, and the citywill tell youwhat city, county,state,federal,andotherpermitsarerequired.YouwillhavealreadyobtainedsomeofthepermitsbyfollowingthestepsinSections1through5above.Thiswebsiteisagoodchecklistforotherpermitsandlicensesthatmaybenecessaryforyourtypeofbusiness.Failure to obtain the appropriate federal, state and local licenses and permits mayresultinsignificantpenalties,includingtheclosingofyourbusiness.Licensingcanbeacomplex and frustrating process, but it is essential that you comply with theappropriateregulations.

8. Register with the County Assessor’s Office

Youmayhave to fileaproperty tax statement. SeeChapterFive,Section8,PropertyTaxes.


Chapter Four

Setting Up Operations

1. Choose a Business Location

Dependingonwhattypeofbusinessyouhave,siteselectioncanplayanimportantroleinthesuccessofyourcompany.Somebusinessessurviveordiebasedonthelocationalone. For other businesses, location is not too important. Examples includewholesalers,servicebusinesseswhodoalltheirworkatthecustomers’sites,mailordercompanies, and Internet‐based businesses. If you plan to operate your businessprimarilyfromyourhome,contactASLfortaxadvice.

Whenchoosingalocationforyourbusiness,considerthesefactors:

Economics. Callacommercialbrokertodeterminehowmuchrentsaregoing for.Squarefootageratesareusuallyquotedincostperyear. Tocalculatethemonthlyrentdividebytwelve.Atriplenetleaseisaleaseagreementonapropertywherethe tenant or lessee agrees to pay all real estate taxes, building insurance, andmaintenance(thethree‘nets’)onthepropertyinadditiontoanynormalrentfees.Insucha lease,thetenantor lesseeisresponsibleforallcostsassociatedwiththerepairandmaintenanceofanycommonarea.Inafull‐servicelease(grosslease)thelandlordorlessoragreestopayfortaxes,insurance,andmaintenance.Considerwhether an expensive location would pay off. Howmuch can you really afford?Whenyoudoyourbusinessplan,determineyourrentbudgetandtrytoholdtoit.

Determinethefacilityfeaturesyourbusinesswillneed.TenantImprovements(TIs)canbeveryexpensive.

Proximitytothemarket.Cancustomersgetthereeasily?Isthereenoughparking?Willmorecustomerscomeifyoulocatetosimilarbusinesses?Doesthereputationoftheneighborhoodaffectyourcustomerbase?

Availabilityoflabor.Willemployeeswanttoworkatyourlocation?

Traffic flow. Consider accessibility to transportation arteries. This may beimportanttobothyourcustomersandemployees.

Proximitytocompetition.Thismaybeimportantincertainsituations.

Physicalsuitabilityandadequacyofutilities.

Parkingfacilities(safetyatnight).

Municipalservices(adequatelighting).

Chapter Four Setting Up Operations


2. Comply With Zoning Laws

Local zoning laws and ordinances regulate activities by area or districts. Differentdistricts may be zoned for heavy‐industrial, light‐industrial, commercial office,residential,ormixeduse.Neversignaleaseuntilyouknowiftheareaiszonedforyourbusinessactivity.However,youcouldsignacontingentlease,pendingzoningapproval.Don’t assume the previous tenant was in compliance. They may have been“grandfathered” in under older zoning laws that are not applicable to new tenants.Evenifyouhaveahomebusiness,youmaybesubjecttozoningrestrictions.

Zoning laws may have parking requirements. You might have to provide moreparking than theprevious tenantdid. Also, theremightbe traffic flow issues. Thesethingssometimessurfacewhenthereisachangeintenant.

Also,beawareofsignageregulations.Localofficialscanbeveryparticularaboutthesize,appearance(suchasneonorflashing),placement(mounted,onapole,orhanging),and even the language (foreign) on signs. Check the regulations before you spendmoneyonsigns.Reputablesignmanufacturersknowtherulesandtheygetpermitsasrequired.

Sometimesyoucangetanexemptionfromzoningrequirements. Ifyoucanpresentacompellingcase for theneedandbenefitsyourbusinessprovides to thatdistrict,youmaybeabletoconvincethezoningboardtogiveyouaconditionalusepermit.

Homebusinesses also have to be careful not to violate local zoning laws. Becausehomebusinesseshaveboomedinpopularity,manycitieshaveadoptedzoninglawstogovern them. Some cities are tolerant of home‐based businesses for authors, artists,attorneys,accountants,realestatebrokers,insurancebrokers,pianoteachers.Contactyourcity’splanningorzoningdepartmentforspecificrules.Theremayberulesagainstpostingsignsandlimitingcustomertraffic. Youmayneedapermit,dependingonthecity.

Todeterminewhetherabusinesslocationcomplieswithzoningregulations,contactthecityzoningoffice.SanJoseandSantaClarazoningofficesarebelow:

SanJoseDepartmentofPlanning,Building,andCodeEnforcement200E.SantaClaraStreetSanJose,CA95113(408)535‐7800www.sanjoseca.gov/planning

SantaClaraPlanning&InspectionKevinL.Riley,DirectorofPlanning&InspectionEconomicDevelopmentTeam(408)615‐2450http://santaclaraca.gov/index.aspx?page=247



3. Consider Federal, State, County, and City Incentives

There are numerous government incentives to consider upon setting up youroperations.Seehttp://www.businesownerspace.com/content/business‐incentives.

Herearesomeoftheincentives:

Federalgrants,taxcreditsandtaxincentives

ForeignTrade Zone incentives in SantaClara,Monterey, SanBenito and SantaCruzCounties

WaterEfficientTechnologyrebatesofupto$50,000

SanJoseStorefrontsInitiative:agranttohelpsmallbusinessesleasevacantspacesbyoffsettingthecostofCitypermits,feesandtaxes.

CaliforniaCompetestaxcredittoencouragebusinessestocometoorstayinCalifornia.

OtherCaliforniataxexemptions,creditsandincentives.

4. Negotiate a Lease

Commercialleasescanbecomplexandtrickytonegotiate.Marketconditionscanswingwidely,resultinginanxiouslandlordsortenantswithhugedifferencesintermsamongleaseseveninthesamebuilding.Significantimprovementsormodificationsareoftenrequired. Terms are almost always negotiable, and you need to pay attention to thedetails.Rememberthatleasecostsmaybeoneofyourlargestexpenses.Thechoiceofyour location and the negotiation of your lease could impact the success of yourcompany. Makesureyougetcompetenthelpandthatyouunderstandthebiasofanybrokersoradvisors.ASLcanintroduceyoutocompetentagentswhocanhelpyoufindspaceandnegotiatealease.Herearesomeleaseconditionstocarefullyevaluate:

Leasetermandrentincreasesandmethodofcalculation

Triplenetlease(netlease)orfullservicelease(grosslease)

Securitydepositandconditionsforthereturn

Responsiblepartiesforcompliancewithcodes,security,andsafety

Renewaloptions

Earlyterminationpenalties

Whatisincludedinsquarefootagerented,commonspace,etc.

Signrestrictions

Plannedtenantimprovements

Maintenanceandjanitorialresponsibilities

Whethersubleasing,orassigningtheleaseisallowed

Whetherarbitrationisrequiredinadispute

WhopaysforAmericansWithDisabilitiesAct(ADA)requirements



5. Negotiate Contracts

Now that you are setting up operations, you will be entering into legal agreements.Suchcontractsarelegallyenforceablesoyoucanbesuedifyoudon’tkeepupyourendofthebargain.Besuretousetheservicesofacompetentattorneyasnecessary.Herearesomeelementaryconsiderationsforentrepreneurstobeawareof: Don’tsignanythingyoudon’tunderstand.Unsignedcontractscanberevised.

Putallcontractsinwriting.

Use standard contracts if possible. Nolooffersmanydifferent standard contracts.Standardcontractscanbemodifiedtofityoursituation.

6. Obtain Insurance

Two formsof insurancearemandatory forbusinesseswithmore thanoneemployee:worker'scompensation(below)andunemployment insurance(seeChapter5,section6).Otherinsurancepoliciesbelowarenotrequiredbylaw,butmaybeessentialtoyourbusiness.Decidewhatcoverageisreasonableforyourcomfortlevel.Occasionally,thecost of a particular insurance policymaymean that no insurance in that area is thebettervalue.Alwaysshopforthebestinsurancevaluebycomparingprice,qualityandcostestimates(including deductibles). Consider investigating the financial stability of the insurer.Major U.S. insurance companies are rated each year; as a general rule, businessesshouldavoidplacingtheircoveragewithcompanieswithlessthanan"A"rating.Spreadingyourinsurancecoverageoveranumberofinsuranceagentsorcarriersmaylessenyourleverageinobtainingbetterratesorservice.Itcanalsoresultinredundantcoverage,orcoveragewithliabilitygaps.Periodicallyreviewyourcompany'sinsurancecoverageasyourbusinessneedschange. ASLcanintroduceyoutoinsurancebrokersthatcanhelpyoushopforinsuranceandminimizeyourcosts.

Workers’ compensation in California is compulsory. Insurance is required of allemployers. If an employer is enjoined from doing business, there is a penalty of$1,000 per employee,with $10,000 for compensable cases. Intentional failure toinsureisafelony.Failuretoobeyastoporderinjunctionisamisdemeanor,subjecttoafineofupto$10,000,imprisonmentforuptosixtydays,orboth. Theinjuredworkermayreceiveworkers’compensationandalsomaysuetheemployerincivilcourt.

Moreinformationaboutworkers’compensationinCaliforniacanbeobtainedat:DepartmentofIndustrialRelationsDivisionofWorkers’Compensation455GoldenGate,9thFloorSanFrancisco,CA94102(415)703‐4600Fax:(415)703‐4716www.dir.ca.gov



6. Obtain Insurance (continued)

Property Coverage: Commercial property insurance may cover buildings,computers,equipment,furnitureandinventoryagainstlosscausedbyfireandotherperils.

Commercial General Liability: Coverage insures a business against accidents andinjuryonitspremises,aswellasexposuresrelatedtoitsproducts.Nomatterhowdiligently you removeall possiblehazards fromyourbusiness, you couldbe suedsuccessfully for accidents resulting from simply the carelessness of a customer.Generalliabilityinsuranceisyourlastlineofdefenseagainstdevastatingclaimsforthingsoverwhichyoumayhavelittleornocontrol.

Commercial BusinessAutomobile Liability: Commercial general liability insurancegenerallydoesnotcoverliabilityarisingoutoftheownership,maintenanceoruseofautomobiles.Twocoveragestoconsiderarenon‐ownedautomobileliabilityandhired auto liability toprovidedefenseagainst lawsuits stemming fromemployeesusing their own personal automobiles on company business (non‐ownedautomobile liability) and employees renting vehicles in the corporation’s name(hiredautomobileliability).

Umbrella/ExcessLiability:Suchpoliciesprovideinsuranceinadditiontothelimitsprovidedbytheinsured’scommercialgeneralliability,automobileliability,workerscompensation / employer’s liability and perhaps other liability coverages. Forexample, a corporationwith limitsof $1million ingeneral liabilitymighthaveanadditional$2millioninumbrella/excesscoveragelimits.

Professional Liability / Errors & Omissions Liability (E&O): E&O policies protectagainst liability for committing an error or omission in the performance of yourprofessional duties and/or the performance of your product. E&O policies aredesigned to cover financial losses (non‐tangible losses) rather than liability forbodilyinjuryorpropertydamage(tangiblelosses).

Foreign Package Coverages: Consider coverage for foreign workers to coverbenefits required by laws in the applicable jurisdiction, or repatriation expenseshouldaninsuredneedtobeairliftedbacktotheU.S.forimmediatemedicalcare.

Directors&OfficersLiability:Directors andofficers are fiduciaries entrustedwiththemanagementofcorporations.Assuch,theymustexerciseduecareinmanagingcorporate affairs. Should their negligence result in loss for the corporation, itsshareholdersorothers,theycanbeheldpersonallyliable. Adirectorsandofficersliabilitypolicycanbeobtainedasprotectionintheeventofsuitsbroughtagainstthedirectorsandofficers.



6. Obtain Insurance (continued)

Employment Practices Liability Insurance: EPL coverage protects employees,partners, directors & officers against a broad spectrum of employment relatedclaimsincludingwrongfultermination,sexualharassmentanddiscrimination.Newprograms also offer professional risk management & legal services which helpcontroltheexposure.

FiduciaryLiability:Afiduciaryisanypersonwhoexercisesdiscretionarycontrolorauthority over themanagementor disposition of funds in the administration of apension or welfare plan. The Pension Reform Act of 1974 or ERISA imposedstandards and permits the indemnification of trustees and fiduciaries ONLY byinsuranceplans.Thus,corporationscannotindemnifytheseindividuals.

Internet / Cyber Liability: Internet technologies and e‐Business opportunitiespresentmanynewandcomplexrisks.Thereisvulnerabilitytonetworkdisruptions,security breaches, introduction of computer viruses, electronic espionage, andpersonaldatatheft.Additionalrisksincludeinfringementofcopyright,trademark,trade secrets, privacy violations, libel and slander, errors or omissions that cancausefinancialdamagetothirdpartiesandsoftwarecodeinfringement. Start‐upswithaWebsiteore‐Businesswillneedtoaddresstheseexposures.

Patent Infringement: More appropriately referred to as “Intellectual PropertyInjury,” this coverage will respond to claims alleging infringement of patent;copyright or trademark; misdesignation of origin; or misappropriation of tradesecrets or proprietary information. Pricing, terms and conditions are dependentupon, but not limited to, type of company, revenues, litigation history, internalcontrolsandfinancialcondition.Sometimesapatentsearchwillberequiredbeforecoveragewillbeafforded.Theapplicationprocesscanbeonerous.

Patent Enforcement: A relatively new insurance product designed to pay outsidelegalexpensestopursuepatentinfringersforlegalactionswithintheUnitedStates.Can include the costs of expert witnesses and other outside costs. Lengthy andexpensiveapplicationprocess.

Loss of Project Research & Development: Technology companies face a uniqueexposuretolossofresearchanddevelopmentefforts.Suchalosscoulddelayyourproduct’sentry intothemarketplaceandpotentially threaten itsviability. LossofProject coverage can reimburse a firm for additional expenses required toreconstructlostR&D.

Earthquakeand/orFlood:Thereareavarietyofoptionsforearthquakeand/orfloodcoverage.Generallythesecoverageshaveahighdeductibletomakeitmoreaffordablewhilestillinsuringforamajorcatastrophe.


Chapter Five

Running Your Business

1. Open a Bank Account and Get a Business Credit Card

It is important to separate your business transactions from personal or otherbusinesses. Separationfacilitatestheaccountingandhelpsshowthegovernmentthatyoureallydohaveabusinessandnot justahobbyyouare trying towrite‐off for taxpurposes.

Theeasiestwaytocreateseparationistoopenaseparatebankaccount.Youmightaswelldothisupfrontbecauseyouneedtotrackexpensesfromthebeginning.Ifyouusecreditcards,thengetaseparatecardforyourbusiness.Youcanhavethecardinyourindividualname,sincestart‐upsmaynotbeeligibleforacreditcard.Youcanindicatethe business name on the first line of the address of your card. Do not use yourbusiness bank account and business credit card for personal purposes. It causesaccountingproblemsandisahugered‐flagtotheIRSiftheyseepersonaltransactionsrunningthroughyouraccounts.

2. Set Up an Accounting System

Youraccountingsystemcanbemaintainedwithinyourbusiness, in thecloud,oryoucan hire an accountant or accounting service to keep necessary business records foryou. Thenatureofyourbusiness, thevolumeof transactions,andyourcomfort levelwiththeprocesswillinfluencethetypeofsystemyouadopt.

Entry‐level systems: If you have various types of assets and liabilities in the

business,suchasreceivables,payables,fixedassets, inventory,etc.youwillneedageneral ledger system. There are several entry‐level accounting systems toconsider,suchasQuickBooksandPeachtree.YoumightwanttoconsiderQuickBooksOnline, which would give you the option to access your records from anywhere.Cloud computing is gaining popularity. Quicken is acceptable if you have astraightforwardbusinesswithonlyrevenuesandexpenses.BeawarethatQuickenisnotadouble‐entry,generalledgersystem.Sinceitisnotageneralledgersystem,itisveryeasyforerrorstooccur.IfyoupreferQuicken,besuresomeonepreparesamonthly or annual “proof of cash.” The proof of cash reconciles your beginningcheckbookbalanceplusrevenues,lessexpensestoyourendingcheckbookbalance.

Chapter Five Running Your Business


2. Set Up an Accounting System (continued)

Mid‐levelsystems:Ifyouexpectyourbusinesstogrowrapidly,considerinstallingahigher‐endaccountingsystemat thebeginningtoavoidhavingtodoaconversionlater. Someof the recommended softwarepackages formedium‐sizedbusinessesarePeachtreeQuantum,QuickBooksEnterprise,MAS90orMAS200,andMicrosoftDynamics.WewouldalsorecommendthatyouconsiderIntacctforcloudcomputing(SoftwareasaService).

3. Make Tax Elections

Thereareseveralelectionstobemadeorqualificationstoconsiderasanewbusiness.Herearesomeofthem:

S Corporation Election: The election of S corporation status is one of the mostcriticalelectionsavailabletocorporationsandtheirshareholders.Thetimingoftheelectioniscritical.

Electtobetaxedonacashbasisoraccrualbasis:Thisdecisiondependsonwhetheryouexpectthebusinesstobeprofitableandthenatureofoperations. Youcanbecash basis for tax and accrual basis for financial statements (if more profitablefinancial statements will attract lenders or investors). Generally acceptedaccounting principles (GAAP) requires accrual basis unless you disclose theexception.

Section1244Stock:Althoughnotanelection,everynewcorporatebusinessshouldconsiderqualifyingthestockunderSection1244,whichallowseligiblestockholderstotreatastocklossupto$100,000asanordinarylossratherthanasacapitallossfortaxpurposes.Thequalificationsmustbemetupfront.

Section1202Stock: Althoughnotanelection,Section1202allowsstockholderstoexclude from gross income 50% to 100% of gain from the sale or exchange ofqualified smallbusiness stockacquiredandheld formore than5years. Considerissuingstockthatmeetsthecriteria.

4. Implement Governing Principles and Internal Controls

Wehaveobservedhundredsofstart‐upsovertheyearsandhavenotedthatthekeytoastart‐up’sbusinesssuccessisexcellingatfivegoverningprinciples.Theseprinciples,describedinmoredetailinExhibitD,are:

RetainCompetentIndividuals SettheTone‐at‐the‐Top CaptureRelevantInformation DoaRiskAssessment ImplementControls



4. Implement Governing Principles and Internal Controls (continued) Withregardtothefifthprincipleabove,implementcontrols,everybusinessneedsbasicinternalcontrols.Donotmakethemistakeoffailingtocontrolyourfundsfromembezzlementortheft.Whatcouldbemoredeflatingforayoungbusiness?Astheowner,ataminimumyoushoulddothefollowing:

Controlallexpenditures:Approveandsignallchecks.Avoiddelegatingthisresponsibility.Neversignblankchecks.Youneedtocontrolthebankaccountuntilthebusinessislargeenoughtoimplementmoreextensivecontrols.Makesureyouaretheonlyonewhocanapprovewiretransfers.Reviewthepayrollbeforereleasingit.

Openandreviewthemonthlybankstatements:Scanthestatementforunusualitems.Makesurereceiptsandexpendituresarewhatyouexpected.

Controlrevenues:Thenatureofyourbusinesswilldeterminehowyoudothis.Thepointis,youneedtoestablishaccountabilityassoonasrevenueisearnedandcashcomesinthedoor.Makesureeverysaleisnumberedandrecorded.Ifyoudon’tdothat,youmaynotevenbeabletodeterminehowmuchyouhavelost.

Other internal controls: If the owner handles all of the company's financialtransactions, preventing embezzlement is simple. But as the start‐up grows,additionalcontrolsneedtobeimplemented. Considersuchcontrolsasemployeefidelitybonds, controlled‐accessstorerooms,budgeting, increasedsupervisionandreviewandtestingforaccuracy.Goodinternalcontrolsdonothavetobecomplex.In fact, the more straightforward the controls, the more likely they will remaineffective.

Controllingandsafeguardinginvestor’sfundsmustbeapriority.Alwaysrememberthateventrustworthyindividualscanbetemptedtotakeadvantageofineffectiveinternalcontrolsbystealing,embezzling,orcommittingfraud.Avoidtroublebysettingupgoodinternalcontrolsnowandstickingtothem.ASLcanhelpyouestablishagoodsystemofinternalcontrols.

5. Understand Personnel Issues

Manybusinessesbeginwithonlyoneperson,buteventually,mostgrowlargeenoughtowarranthiringoneormoreemployees. Meetingpayroll requirements isonlyasmallportion of the legal requirements that go with hiring that first additional employee.Onceyouhireemployees,youopenyourselfup toawholehostof regulations. Makesureyouhaveaccesstoahumanresourcespecialist.TalktoASLandwecangiveyousomerecommendations.Herearesomeissuestoconsider:

CompulsoryEmployeeRecords:Aslongastheyareinbusiness,employersare

requiredtokeeptwoformsonfileforeveryemployee:aW‐4andanI‐9.



5. Understand Personnel Issues (continued)

Employee'sWithholdingAllowanceCertificate(W‐4)Formscanbeobtainedfromyouraccountantorpayrollconsultant,orfromtheIRSwebsitewww.irs.gov.

Employment Eligibility Verification (I‐9) Forms can be obtained from theSuperintendent of Documents, U.S. Government, Washington, DC, available atwww.uscis.gov.

Hiring Practices: It is against the law to discriminate against any applicant oremployee based on his or her race, color, religion, national origin, sex, age ordisability. Employmentapplicationsshouldavoidanydirectquestionsaboutsuchfactors and should also avoid questions about marital status or union affiliation.This includes questions that indirectly solicit such information, such as thecandidate'splaceofbirthorancestry. Becauseinterviewsarebasicallyextensionsoftheapplicationprocess,theyarealsosubjecttoanti‐discriminationlaws.

Besuretodobackgroundchecksandreferencechecks. Conductreferencechecksover thephonebecause formeremployersareoften reluctant toprovidenegativeinformationinwriting.

Personnel Policies: If your business has more than one employee, you shouldconsider formulating personnel policies, aka a personnel manual. The lack ofwritten policies about job evaluations and promotions, for example, could exposeyour company to legal action. Policies to be considered include job descriptions,compensation,fringebenefits,workinghours,overtime,vacationpolicy,sickleave,maternity leave, leaves of absence, paid time off, evaluations, and promotions.Consider thatemployees inCaliforniaareentitled topaidsick leave. Yourhumanresourcespecialistcanhelpyouwithdraftingapersonnelmanual.

Alternatives to Employees: A start‐up business may not have the volume ofbusiness to justify the expense of a full‐time work force. You might considercontract labor, employee leasing, outsourced services, and part‐time employees.Theuseof contract labor can reduce the costof fringebenefits andpayroll taxes.However, if the contractors are de facto employees, you may be exposed to asignificant risk. If the IRS or FTB characterizes thoseworkers as employees, thebusinessandsometimeseventheownermaybeliableforunremittedpayrolltaxesand penalties of up to 100% of the taxes. The liability can even extend tounremitted federalandstate incometaxwithholdings. Therulesarecomplicated.BesuretocontactASLforguidanceinthisarea.

SafetyStandards:FormoreinformationaboutoccupationalsafetyinCalifornia: OccupationalSafety&Health

Department.ofIndustrialRelations455GoldenGateAvenue,10thFloorSanFrancisco,CA94102(510)286‐7000,Fax:(510)286‐7037www.dir.ca.gov



5. Understand Personnel Issues (continued)

Workplace Postings: California requires employers to post certain information.Checktherulesforcompaniesinyourindustryat:www.dir.ca.gov/wpnodb.html

Employer Law Resources: The California Chamber of Commerce provides some

employerlawresourceswithmembership:www.calchamber.com 6. Set Up a Payroll System

Because payroll tax rules are cumbersome, and the penalties for late payments andmisfilings are very punitive, we recommend that you use Paychex, ADP or anotherpayrollservice.Thecostsassociatedwithsuchservicesareusuallyfaroutweighedbythepersonnelandmanagementtimerequiredtooperatethepayrollsystemin‐house.

The annual federal government has strict requirements and schedules regulatingpayroll tax deposits and income reporting. Failure to file the proper formswith theInternalRevenueServiceortomakeappropriatemonetarydepositsmayresultinstiffpenaltiesorfines.Thelawsaffectingpayrollandbookkeepingrequirementsfrequentlychange. Thefederalcommunication,Employer'sTaxGuide(CircularEPublication15),notifiesbusinessesofregulationchanges.

ForrequirementsinCalifornia,youshouldobtaintheCaliforniaEmployer'sGuide(DE‐44)publishedbytheEmploymentDevelopmentDepartment. Arecent2015copycanbefoundhere:www.edd.ca.gov/pdf_pub_ctr/de44.pdf.

Asummaryofthepayroll taxreportingformsisshowninExhibitE. Becausepayrollmaybeyourlargestbusinessexpense,youshouldhaveageneralunderstandingoftherules.Herearesomeimportantthingstoknowevenifyouuseapayrollservice.

FederalPayrollTaxDepositRules: The federal taxdeposits consist of the federal

withholding, Social Security withholding, employer match, and Medicarewithholding.Failuretocomplywithgovernmenttaxdepositruleswillresultinstiffpenalties.Depositsarerequiredasfollows:

MonthlyDepositor:Under$50,000.Duethe15thofthefollowingmonth.

Semi‐weekly Depositor: Over $50,000. Due the following Wednesday if paidWednesday, Thursday, or Friday. Due the following Friday, if paid Saturday,Sunday,Monday,orTuesday.

One‐DayRule:Accumulatedemploymenttaxesof$100,000ormoreareduethenextbankingday,regardlessoftheemployer'sdepositstatus.

Penalties: Penalties of 2% to 15% may apply if you do not make requireddeposits on time. You can be held responsible for failure to timely depositpayrolltaxesevenifyouuseapayrollservice.



6. Set Up a Payroll System (continued)

CaliforniaPayrollTaxRules:

Unemployment Insurance (UI) is paid by employers. UI provides temporarypaymentstoindividualswhoareunemployedthroughnofaultoftheirown.

Employment Training Tax (ETT) is paid by employers. ETT provides training

fundstoempowerworkers,promotebusiness,andboostCalifornia'seconomy.

StateDisabilityInsurance(SDI)isdeducted(withheld)fromemployees'wages.SDIprovidestemporarypaymentstoworkerswhoareunabletoperformtheirusual work because of a pregnancy or a non‐occupational illness or injury(work‐related disabilities are covered by workers' compensation). SDI alsoincludesPaidFamilyLeave(PFL),whichprovidesbenefitstoworkerswhoneedtocareforaseriouslyillfamilymemberortobondwithanewchild.

California Personal Income Tax (PIT) is withheld from employees' wages and

credited toward the amount due for the employees' annual California stateincometax.

For specific information, call EDD's toll‐free number at 888‐745‐3886 or visit yournearestEmploymentTaxOffice.

Information Returns (1099s): In addition to payroll taxes, businesses are also

required to report other types of income and payments to the IRS. Informationreturns (commonly called 1099s) must be filed if you make certain types ofpaymentstoallnon‐corporateentitiesinthecourseofyourtradeorbusiness.Themostcommonpaymentsforwhichyouwillhavetofileare:Interestof$10ormore;Dividendsof $10ormore;Rent of $600ormore;Royalties of $10 ormore;Non‐employee services of $600 or more; Subcontractor payments of $600 or more,whetherornotservicesareprovidedincombinationwithmaterialandequipment.

Theabovelistisnotall‐inclusive,soconsultwithyouraccountantifyouareunsureifapaymentmustbereported. Alsobecertainthatyouunderstandthereportingduedates. Penaltiescanalsobeassessed for failureto furnisha tax identificationnumberforeachpayee. Withholdingofincometaxismandatoryata28%rateonamountspaidtopersonswhodonotfurnishtheirtaxidentifyingnumbertoyou.

Maintain records throughout the year to enable you to prepare the informationreturns.Doingalittlebitofworkeachmonthisfareasierthandoingitallattheendoftheyear.



6. Set Up a Payroll System (continued)

Federal Unemployment: The Federal Unemployment Tax Act (FUTA), with stateunemploymentsystems,providesforpaymentsofunemploymentcompensationtoworkerswhohave lost their jobs. MostemployerspaybothaFederalandastateunemploymenttax.

To determine your quarterly liability for FUTA: Add the first $7,000 of eachemployee'sannualwagesyoupaidduringthequarter,multiplythatamountby .006.If the tax reported on the Federal Unemployment Tax Return (Form 940) lessdepositsfortheyearismorethan$100,youmustdepositallofthetaxbyJanuary31.Ifitislessthan$100,youmaypaythetaxeswithForm940.

CaliforniaUnemployment:Moststates,similartothefederalgovernment,alsohave

anunemploymenttax.TheEmployerTaxRateforCaliforniaUnemploymentvariesbycompany.RefertotheNoticeofContributionRates(FormDE2088)youreceivefromtheCaliforniaEmploymentDevelopmentDepartment.

Your Unemployment Insurance (UI), Employment Training Tax (ETT), and StateDisabilityInsurance(SDI)taxratesarecombinedonasingleratenotice(DE‐2088).TheDE2088willbemailedtoyouinDecember.Employerswillhave60daysfromtheDecember31mailingdate toprotestany itemontheDE2088exceptSDIandETT,whicharespecificallysetbylaw.

For information on California’s unemployment laws, contact the EmploymentDevelopmentDepartmentatthefollowingaddress:

EmploymentDevelopmentDepartment800CapitolMall,MIC83Sacramento,CA95814(888)745‐3886www.edd.ca.gov

FringeBenefits: Fringebenefitswhichqualifyforexclusionfromgrossincomeare

exemptfromincometaxandSocialSecuritytaxwithholding(FICAandpaymentofFederal Unemployment Tax). All other benefits are subject to these taxes. Acommonnon‐qualifyingbenefitwhichissubjecttotaxistheautomobileallowance.However,actualbusinessautoexpenses(notanallowance)arenottaxable. Otherfringebenefitsexcluded fromthese taxesarenoadditionalcostservices,qualifiedemployee discounts, working condition fringe benefits, and de minimis fringebenefits.



7. Maintain Proper Records

Good record keeping is everything! Save valuable time and energy in the future bysettingupabasic filingsystemnowbeforeyourbusinessgets too fardowntheroad.Deviseafilingsystemandpoliciesforbothelectronicandpaperfiles.Ifyoudonothingelse,getafireproof,lockable,filingcabinetandlabelfilestoorganizeyourdocuments.Somerecordscanbemaintainedelectronically.BepreparedtoprovideinformationasrequiredtotheIRSorCaliforniaregulatoryagencies.Manyemployersfailtorealizetheimportanceofrecordretention.

8. Pay Your Taxes

IncomeTaxes:Everybodyknowshowcomplicatedincometaxescanbe.Therulesare not always logical, because they are often motivated by politics, lobbying,government incentives, or crisis economics. So don’t try to understand the logic.Wehave twostrongrecommendations in thisarea: (1)Getcompetent taxadvice,and(2)Payyourtaxes.

Althoughmanynewbusinessesoftenoverlookit,regulartaxplanningoftenresultsin significant tax savings. Because most management decisions have taxconsequences, planning for your business' income tax return should begin wellbeforetheyearly taxduedate. Youshouldknowhowyourday‐to‐dayoperationsaffectyourtaxableincome.Beawarethatbusinessdecisionssuchasinvestmentsinproperty,equipment,andinventory;acquisitionsandmergers;ownershipchanges;equity or stock contributions or stock compensation; and business relocation canhavesignificanttaxconsequences.

Generally, every businessmust pay taxes on its income in quarterly installments.Thequarterlyinstallmentsareestimatesandyouwilleitheroweorbeentitledtoarefundwhenyoufilethetaxreturnaftertheendoftheyear.

If the business does not have taxable income, then no quarterly installments arerequired.Youdon’tneedtostartmakingestimatedtaxpaymentsuntilyoubecomeprofitable.Eventhen,estimatedtaxesarenotrequireduntilbusinessesexpecttooweatleast$1,000infederaltaxesforanyparticularyear.Generally,thismeansthatyouwouldhave profits of $3,000 to $7,000. Be aware that California requires an $800minimumpayment.



8. Pay Your Taxes (continued)

PropertyTaxes: SantaClaraCounty imposesapropertytaxonbusinessproperty,such as real estate, improvements, equipment, furniture, and a separate tax onvehicles. Youmust file aBusinessProperty Statement (Form571L)byApril 1 ofeachyearif:

A. TheAssessor’sofficehassentyouapropertystatement,OR

B. Youhavetaxablepersonalpropertywithatotalcostof$100,000ormorelocatedwithinSantaClaraCountyasofJanuary1ofeachyearevenifnopropertystatementissenttoyou.Toobtainthepropertystatementcontact:AssessorBusinessDivision–GeneralInformation70WestHeddingStreet,EastWing,5thFloorSanJose,CA95110email:[email protected]

Phone:408.299.5400Fax:408.298.9441

SalesTaxes:Retailsalesaresubjecttostate,countyandlocaldistrictsalestaxes.Itis paid all at once, so it is referred to as a state sales tax. It’s up to California todistributethecollectedtaxestothecountiesanddistrictsinthestate.Thesalestaxrules are complicated. See Chapter Three, Section 5 for sales tax registrationinformation.Besuretocheckwithyouraccountanttoavoidproblemsinthisarea.

9. Obtain Additional Loans

Onceyourbusinessisofftheground,youmayfindtheneedforadditionalfinancing.Agrowingbusinessmayneedaloantoexpand,forexample.Aswithstart‐upfinancing,toobtainaloanfromabank,youneedtopresentthecommercial lendingofficerwithevidence of your ability to repay the loan. Before you begin the loan applicationprocess,youshouldbeabletoclearlystateyourreasonsforwantingaloan,howmuchyouneed(andforhowlong),andidentifyhowtheloanwillhelpyourbusiness.

A financial statement is a loan officer's primary tool in assessing your financialstrength.Afinancialstatementsummarizesfinancialinformationaboutyourbusiness'assets, liabilities,andcash flows. Somebankerswill alsoask foryourbusinessplansand objectives, a marketing plan, financial forecasts, and data on your business'sownershipandhistory.

YourCPAcanassist you inplanning foryour loan, and inpreparing the loan requestpaperwork.Additionally,yourCPAshouldbewillingtoaccompanyyoutothebankformeetings with the loan officer, and to aide in the negotiations of terms of the loanagreement.



9. Obtain Additional Loans (continued)

Alwaysbehonestaboutyour financial situation. If someof the information thebankrequestsofyourbusinessisunfavorable,includedocumentationofmanagement'splansto overcome the problem. Your CPA can help you to compile the data, prepare abusinessplan,andpresentinformationtoselectedlenders.

You only get one chance to make a great first impression, so it's wise to have anindependent thirdparty, suchas aCPA, evaluateyour financial statements andotherfinancialdocumentsforpresentationtothebank.

The5C'sofLendingabanker,orlender,willconsiderare:

1. Character

2. Capital

3. Condition(ofthecompany,industryandeconomy)

4. Capacity

5. Collateral

AtypicalCreditPackageusuallyconsistsofthefollowingitems:

Twofullyearsfinancialstatements(bothBalanceSheetandIncomeStatement);andcurrentyear‐to‐datefinancialstatements.

Threeyearsofcompanytaxreturns,orCPA‐preparedfinancialstatements.

Threeyearsofpersonaltaxreturns.

Accountsreceivableagingreport.

Accountspayableagingreport.

Entity/Organizationdocuments,i.e.ArticlesofIncorporation,OrganizationAgreement,etc.

10. Raise Additional Venture Funding

If youneed additional funds to grow thebusiness there aremany sources. Considerprivateequity,orventurecapital. SeeExhibitB forpossiblefundingsources. Oneofthebestways to get in frontof these investors is tobe introducedbyaCPA, lawyer,banker, angel investor,or socialnetworkcontact. 90%ofVC’sdeal flowcomes fromtrustedproviderswhofilterdeals.Havethemsendanemailintroduction.Ifyouhaveawebsite,itshouldbeinterestingandcompelling. Yourpitchshouldanswerthesefourquestions.Thenfollowtheoutlinedsteps:

1. WhatbighairyproblemamIsolving?2. Howbigisthepotentialmarket?

3. Whatisthebarriertoentry?

4. Dowehavetherightteam?



10.Raise Additional Venture Funding (continued)

Prepareapackettoinclude:

A. Coverletter(includeyourpitch—4questionsfromabove).

B. OnepageExecutivesummary(seeChapterTwo,Section1).

C. Realisticassumptionsandforecasts.(SeeChapterTwo,Section7,E).

D. Customerreferences(bepreparedforthemtobecalled).

E. Executivebiographies(2‐3perpage).

Makeasuccessfulpitch:

A. Dressappropriately(foryourbusinessandyouraudience).

B. Preparefortheunexpected.

C. Beconcise&clear.

D. Preparetobackupeveryclaim.

E. Confidencesells.

F. Passionisakeyingredient.

G. Practice,practice,practice.

H. Activelylisten.

I. Takeconstructivecriticism.

J. Don'tbediscouraged.

K. AttendVCtaskforcepitchestoobserve(andcritiquethem). Negotiateanagreement:

A. Getappropriatelegalandfinancialhelp.

B. Listentocounselfromtrustedadvisors.

C. Raisemoremoneythanyouthinkyouneed.

D. Trytoorchestrateabiddingwar.

E. Considerthedownsidescarefully.

F. Negotiatefromstrength. BeawareofthetypicalVCtimeline:

A. Lookingfora10Xreturnoninvestmentinfivetoeightyears.

B. AlwayslookingforanExit.Mostfundedcompaniesgetacquired,buttheywouldreallylikeanIPO.

C. Looking for a company to get to (an average) $50 Million in revenue in fiveyears.



10. Raise Additional Venture Funding (continued)

Watchforpotentialpitfalls:

A. Investorsareinitforthemoney;it’saboutbusiness,notaboutyou.

B. Investors will replace a CEO on a whim, (if the VC agreement allows this—watchforit).

C. Investorsareexpectinganexitevent—ASAP.

D. Investorscanbebrutalmicromanagers.

E. Don’texpectinvestorstohelpthebusiness;althoughsomewill

F. Civilitymatters—Don'tdobusinesswithrudeorbad‐manneredindividuals.

G. Don’tmakeadecisionbasedonshorttermcashneeds. 11. Monitor Your Financial Forecast

Monitor the actual revenues and expenses generated by your business compared toyour financial projections that you created in your business plan. React quickly tocorrectnegativevariancesinyourcompany'srevenuetokeepyourbusinessontrack.Yourplanwillprobablyneedtoberevisedandupdatedperiodicallyduringyourinitialyearsofoperationstoadjustforunexpectedcostsorunexpectedgains.

12. Create a Marketing Plan

Amarketing plan is also an important part of new business start‐up. This goesbeyond the market analysis you may have done as part of your business plan.Marketingdoesnothavetobe"bigandexpensive"inordertobesuccessful.Infact,asuccessful marketing plan will be small and flexible enough to be used as amanagementtoolandasareminderdocument.

Use your business plan to structure your initialmarketing plan. In yourmarketingplan, statewhat specific steps youwill take to fulfill the objectives in your businessplan.Determinehowyouwillbringinnewbusiness.Willyouuseonlineadvertising,telemarketing,television,radiocommercials,ordirectmail?Howfrequently?



12. Create a Marketing Plan (continued)

Themostcommontypesofmarketingandsalesmethodsare:

Location: For some retail stores, location is themost important consideration inreachingyourmarket.Youmightidentifyaneedinacertainarea.

InternetandSocialMedia: Thesedays,an internetpresence isavirtualnecessity,even for traditionalbusinesses. Website searchengineoptimization is important.Don’t ignore social media marketing, which should be an integral part of yourmarketing plan. To use this medium effectively, study your target customerdemographics. There are several hundred social media sites, with the numbersincreasingdaily.Thesesitesvaryintheirinterestsandservicesprovided,aswellasin their user base. Think about your target customer and their characteristics indetail, and look at how your competitors are implementing their social mediamarketingstrategies.Startengagingin“listening”atthesiteswhereyouseemostofthe activity for your prospective customers. Social media takes many forms,includingsites fornetworkingandsocializing(i.e.,Facebook,LinkedIn),news(i.e.,Twitter,Digg), bookmarking (i.e.,Delicious), videos (i.e., YouTube), andblogs (i.e.,Technorati),tonameafew.Yelpishelpfulforserviceproviders.Youdon’tneedtobeginbydevelopingandimplementingacomprehensiveandintenseplan.Youcanstartsmallandidentifyoneortwokeyareaswhereyouwanttostartestablishingapresence,andevolveyourstrategyfromthere. Alotofinformationisavailableonthewebthatincludesthestatisticsforthevarioussites,suchaswebtrafficanduserdemographics,tohelpyoudecidewhichsocialmarketingvenueisthebestforyou.Therearealsonumerousmarketingconsulting firmsthatcanresearchthemarketforyou,andpresentacompleteplanthatincludestraditionalmarketingelementsaswell as social media. Most importantly, recognize the value of social media andcommittoincludingitinyourmarketingandsalesstrategy.

Direct mail: Brochures, catalogs, and sales letters may be effective in somecircumstances.Responseratestodirectmailareoftenlessthan1%.

Relationshipmarketing: For some businesses, like professional services, this is aproventechniqueforfindingclients.Tobeeffective,gowherepotentialcustomersare,andconsistentlyhavelunchormeetwithnetworkingcontacts.

Salesforce:Asalesforceismosteffectiveforhigher‐priceditems,notitemsbelow$1,000;unlessaninsidesalesforceisemployedsuchasinaretailstore.

Yellow pages advertising: Some companies still find success in printed yellowpages, although it is hard to knowwhich of themany yellowpage alternatives isbest.

Telemarketing: Thisworksbest if someonealreadyhasexpressedan interest, forexample, by responding to a directmail ad. Cold‐call telemarketing can alienatecustomers.



12. Create a Marketing Plan (continued) Spaceadvertising:Youcanadvertiseinperiodicalsorontheinternet. Thisworksbest in conjunction with other methods. It is useful in branding and creatingawareness.Targetingcustomersinatradejournalcanbequiteeffective.

Otheradvertising:Considerradio,television,YouTube,signage,etc.

13. Consider Other Resources

Herearesomeotherresourcesthatmaybehelpful:

Score:Freementoringaswellasworkshopsandseminars. www.svscore.org http://www.svscore.org/ws_2.shtml

NationalSmallBusinessAssociation www.nsba.biz

U.S.SmallBusinessAdministration www.sba.gov

SVForum http://www.svforum.org

Conclusion: WehopeyoufoundthisGuideuseful. Wewelcomeyourcommentsorsuggestionsaboutour NewBusiness Start‐Up Guide. If you discover a phone number or address to be inerror,orifwehaveoverlookedusefulinformation,pleaseletusknowforfutureeditions.Ifyouhavequestionsaboutanyofthetopicsdiscussedinthisguide,pleasedonothesitatetocontactus:MarkSheffield:[email protected](408)377‐8700.


Exhibit A

Top Five Challenges Facing Start‐Ups Today

1. Pivoting: Entrepreneursofthepastwrotea longbusinessplan,developedaproductoveroneortwoyears,andhopedtheycouldsellit.Today,becausechangeissorapid,flexi‐planning is the best practice. This is called pivoting, which is evaluating andchanging strategies and tactics every three months as necessary. Iterative andincremental development is a best practice to ensure continuous improvementespecially in technologyandsoftwarecompanies. Thecousin topivoting ispromptlyexecuting. Today’s speedof business and explosionof entrepreneursmeans you cancount on somebody else having already thought of your idea. To succeed today, it’saboutpivoting,execution,speed,anditerativedevelopment.

2. UnderstandingFundingOptions: There aremore funding options today than ever

before. Should you take VC or angel money now or later? Do you understand howdilution works with each round of financing? Is sharing ownership with employeesadvisable?Don’tmakepeer‐pressureddecisionsyoumightregretlater.

3. HavingaUnifiedVision: Areyoucreatingalife‐stylecompanyoracompanytosell?

Istheteaminagreement?Caneveryoneontheteamarticulatethevision? Apositiveattitudeandaunifiedteamwithoutcontentionintheranksiscriticalforsuccess.Createacultureofcivility,witheveryoneontheteamfocusingonwhat’sbestforthecompany.

4. Forming theRightTeam: We recommend three officers to fill the roles of CEO (to

createavisionandleadtheteam),CTO(todevelopyourproductorservice),andCOO(to manage people, operations, and customers). Advisors or contractors cantemporarily fill two other essential functions: CFO (to raise money and managefinances), and CSA or “Chief Start‐up Advisor” (to identify needs and connect you toresourcestohelpyourstart‐upsucceed).

5. Coping with Administration: It is easy to overlook accounting, personnel

management, planning, and the morass of rules and regulations for tax reporting,humanresourcesandlegalissues.Findsomeonetopayattentiontothisstufftofreeupthetimeoftheofficerstofocusonprioritymattersathand,andsavepaininthefuture.


Exhibit B

Sources of Funding

PersonalResources Savings Retirementfunds‐IRAand401(K) Insurancepolicyloans Homemortgage Homeequitylineofcredit Creditcards Personallineofcreditfrombank Saleofassetsandinvestments Loanssecuredbypersonalassets Stockmarginloans Subleaselivingspace Taxcredits,deductions,andincentives Whistleblowerawards(2010Dodd‐FrankAct) Patentorotherinfringementlitigation Consultingfeesforservices RoyaltiesorfeesfortechnologyFriends&Family Relatives Businesscolleagues Socialmediacontacts Friendspastandpresent Neighbors Associations’membersGovernmentGrants&Incentives SmallBusinessInnovationResearch

(www.sbir.gov) SmallBusinessAdministration(www.sba.gov) Federalgovernmentgrants(www.usa.gov):

o Dept.ofEnergyo Dept.ofDefenseo Armyo Navyo AirForceo DefenseAdvancedResearchProjectsAgencyo MissileDefenseAgencyo OfficeoftheSecretaryofDefense

CityorCountynew‐businessincubators City,County,orStatenewbusinessincentives CityandCountytaxincentives Stateincentives(Chapterfour)

SpecialtyFinancing Crowdfunding(eg.www.kickstarter.com) Peer‐to‐peer(www.fansnextdoor.com) Factoring(sellingreceivables) Royaltybased(www.royalty‐capital.us) SaaS(www.saas‐capital.com) Convertibledebt CustomerfinancingAngelFunding Angelinvestors Superangelinvestors Strategicinvestors Highnet‐worthindividualsVentureCapital Venturecapitalfirms Publicpensionfunds Corporatepensionfunds Insurancecompanies Highnet‐worthindividuals Familyoffices Endowments Foundations Fund‐of‐funds(pooledinvestmentvehicles) SovereignwealthfundsBusiness&CorporateFunding Corporateventurecapital Corporatefundingorloans Privateequity Businessincubators Partnership Alliances JointdevelopmentBanking&Finance Assetbasedlending Unsecuredloans Equipmentleases SmallBusinessAdministration(SBA)loans Loansguaranteedbyotherindividuals Loansbrokeredandpackagedbyspecialists


Exhibit C

Entity Perspective:

What type of entity works for you? Attribute C-Corporation S-Corporation Partnerships LLC

Pass-through tax treatment (do entity and owners avoid "double taxation" on earnings?)

May the entity have more than 100 owners?

May the entity have owners other than individuals, estates and certain trusts?

May the entity own subsidiaries?

Only a Qualified Sub-Chapter S (QSUB)

California tax treatment

Subject to California Franchise tax. Minimum tax $800, tax rate 8.84%

Subject to 1.5% tax on net income or minimum yearly tax of $800 whichever is greater

Limited partnership must pay annual minimum tax of $800, general partnerships do not

Minimum tax $800, plus annual fee based on gross revenue Annual Revenue Fee $0 - $250K $0 $250K - $500K $900 $500K - $1M $2,500 $1M - $5M $6,000 $5M and over $11,790

Methods of available accounting

Accrual method, except if gross receipts are less than $5MM and except for personal service corporations

Cash method OK, unless it's a tax shelter

Cash method okay, unless it has a C-corporation partner and gross receipts of more than $5MM or it’s a tax shelter

Cash method okay, unless it's a tax shelter

S corporations and individually-owned partnerships primarily engaged in service activities are allowed to use the cash method of accounting when average annual gross receipts are $10 million or less.

Tax year May select any fiscal year if not a personal service corporation

Generally must use fiscal year of majority interest partners or make §444 election



Treatment of distributions to owner

Not deductible by corporation; generally ordinary income to shareholder; distribution of appreciated property results in gain recognition by corporation

Generally nontaxable to extent of basis in stock; distribution of appreciated property results in gain recognition

Nontaxable to extent of basis in partnership; disproportionate distribution of Sec. 751 assets may trigger gain

Nontaxable to extent of basis in partnership; disproportionate distribution of Sec. 751 assets may trigger gain

Salary to owner deductible

Yes, must be "reasonable" Yes, must be "reasonable"

Yes, but as guaranteed payments which can be subject to S/E tax if general partner

Yes, but as guaranteed payments which can be subject to S/E tax if general partner


Exhibit C (continued)

Entity Effects on Individual Taxpayer

Attribute C-Corporation S-Corporation Partnerships LLC

Self-employment income to owners

No No General Partners - Yes; Limited Partners - No

Dependent upon nature of LLC

Qualified retirement plans for employee-owner

Payments are deductible if plan is nondiscriminatory

Payments are deductible if plan is nondiscriminatory

Payments to a Keogh Plan or SEP are deductible

Payments to a Keogh Plan or SEP are deductible

Life insurance for employee-owner

Premiums for first $50,000 group-term life are deductible and not taxable to employee

Premiums are not deductible. Reportable on partner K-1s.



Health care for employee-owner

Payments are deductible

Deductible by S-corporation as compensation: 100% deductible by more-than 2% shareholder

Typically deductible by partnership as guaranteed payment: 100% deductible by member

Typically deductible by LLC as guaranteed payment: 100% deductible by member

Limited liability for owner

Yes Yes General Partners-No; Limited Partners - Yes

Yes


Exhibit D

Five Governing Principles for a Start‐up 1. Retain Competent Individuals. WerecommendyoustartwithaBoardofAdvisors, twoor

threeofthesmartestandmostexperiencedserialentrepreneursyoucanfind.Thenretain(1)competentmanagementand(2)competentBoardofDirectors’members. Managementinstitutes policies and practices to attract, develop, and retain competent individuals whosupport the start‐up’svaluesandobjectives. Establishperformancemeasuresand incentivesand enforce accountability. The Board of Directors defines authority and reporting lines.Careful counseling in a boardroom setting among wise board members usually results infarsighted business decisions. Be sure to leave some openings for investor‐appointed boardmembers. Effective governing is largely about finding and retaining competent individualsfromthetopondown.

2. SettheTone‐at‐the‐Top. TheBoardofDirectorsformalizesawrittencodeofconduct(code

of ethics) which establishes the start‐up’s integrity and values. The code is communicatedregularlyandadheredtobyallemployeesandadvisors.Thecodeactsasacompasstokeepthestart‐up aligned with its values. In addition the Board clarifies and solidifies the businesspurposeandvisioninwriting(seeChapter1,Section1andSection6).

3. CaptureRelevant Information. Management ensures the discovery of important, relevantinformation about trends, competition, the industry, the market, and customers to supportplanning, strategizing, and assessment of opportunities and risk. Just as important is tocommunicate relevant information. Management instigates a system to communicateimportant, relevant information to the board, advisors, employees, and external parties asappropriate.Theentireteamneedstobeonthesamepage.

4. DoaRiskAssessment. Theboardandmanagementidentifiesriskswhichcouldhamperthestart‐up’ssuccess,suchascybersecurityrisk,intellectualpropertyinfringement,regulatoryriskfrom not complying with foreign and domestic laws, reputational risk from negative socialmedia or ill‐advised strategies, and fraud risk. It is a sad day when a fragile start‐up getsbroadsidedbysomethingtheydidnotanticipateandplanfor.

5. Implementcontrols. Theboardensuresthatcontrolsareimplementedtomitigaterisk. Forexample, external controls such as insurance could be acquired for various types of risk.Internal controls suchas IT controls and financial controlshelp reduce risk. (SeeChapter5,Section4).Managementmonitorsthecontrolsandactivitieswithongoingevaluations,reviews,andmeasurementstoascertaintheeffectivenessofexternalandinternalcontrols.


Exhibit E‐1 2015 Individual Tax Rates and Brackets

Federal

California

Single: Single:

Tax Rate Taxable Income Tax Rate Taxable Income

10% $0 to $9,225 1% $0 to $7,850

15% $9,226 to $37,450 2% $7,850 to $18,610

25% $37,451 to $90,750 4% $18,610 to $29,372

28% $90,751 to $189,300 6% $29,372 to $40,773

33% $189,301 to $411,500 8% $40,773 to $51,530

35% $411,501 to $413,200 9.3% $51,530 to $263,222

39.6% $413,201 or more 10.3% $263,222 or $315,866

11.3% $315,866 or $526,443

12.3% $526,443 or more

Married Filing Jointly or Qualifying Widow(er): Married Filing Jointly or Qualifying Widow(er):

Tax Rate Taxable Income Tax Rate Taxable Income

10% $0 to $18,450 1% $0 to $15,700

15% $18,451 to $74,900 2% $15,700 to $37,220

25% $74,901 to $151,200 6% $37,220 to $58,744

28% $151,201 to $230,450 7% $58,744 to $81,546

33% $230,451 to $411,500 8% $81,546 to $103,060

35% $411,501 to $464,850 9.3% $103,060 to $526,444

39.6% $464,851 or more 10.3% $526,444 or $631,732

11.3% $631,732 or $1,052,886

12.3% $1,052,886 or more Head of Household:

Tax Rate Taxable Income Head of Household:

10% $0 to $13,150 Tax Rate Taxable Income

15% $13,151 to $50,200 1% $0 to $15,700

25% $50,201 to $129,600 2% $15,710 to $37,221

28% $129,601 to $209,850 6% $37,221 to $47,982

33% $209,851 to $411,500 7% $47,982 to $59,383

35% $411,501 to $439,000 8% $59,383 to $70,142

39.6% $439,001 or more 9.3% $70,142 to $357,981

10.3% $357,981 or $429,578

Additional Federal Taxes 11.3% $429,578 or $715,962

Tax Rate Tax Description

Single Head of Household

Married Filing Jointly

Married Filing Separately 12.3% $715,962 or more

0.90%

Medicare tax on earnings

Over $200,000

Over $250,000

Over $125,000

3.80%

Net investment income surcharge on modified adjusted gross income

Over $200,000

Over $250,000

Over $125,000


Exhibit E‐1 (continued) Business Tax Rates

C-Corporation Tax S-Corporation Tax

Federal California Federal California 15% $0 - 50,000

8.84%

No Tax (Taxed to owner)

1.5% 25% $50,001 - 75,000

34% $75,001 - 100,000

39% $100,001 - 335,000

34% $335,001 - 10,000,000

35% $10,000,001 - 15,000,000

38% $15,000,001 - 18,333,333

35% $18,333,334 or more

Limited Liability Company Tax

Federal California

California LLC Fee

No Tax (Taxed to

owner) $800

Gross

Receipts Fee

$0 - 249,999

$0

$250,000- 499,999

$900

$500,000 - 999,999

$2,500

$1,000,000 - 4,999,999

$6,000

$5,000,000 or more

$11,790


Exhibit E‐2 Federal & California Payroll Tax Rates for 2015 & 2014

Federal California

2015 2014 2015 2014

FICA(SocialSecurity)

StateDisabilityInsurance(SDI)

Taxrateonemployee 6.20% 6.20% Taxrateonemployeeonly 0.90% 1.0%

Taxrateonemployer 6.20% 6.20% Onwagesnottoexceed $104,378 $101,636

Onwagesnottoexceed $118,500 $117,000 Maximumemployeecontribution $939.40 $1,016.36

Maximumdeductionperemployee

$7,347 $7,254 StateUnemploymentInsurance(SUI)

Maximumemployercontributionperemployee

$7,347 $7,254 Taxrateonemployer(EmployersarenotifiedbystateoftherateapplicabletothemorcalltheEDDat(916)653‐7795forthecurrentrate)

1.5%to6.2%

1.5%to6.2%

Medicaretaxrateonemployee/employer

1.45% 1.45% EmploymentTrainingFundTax 0.1% 0.1%

AdditionalMedicareTaxonemployee’staxablewagesinexcessof$200,0000.90%

Onwagesnottoexceed(peremployee)

$7,000 $7,000

IncomeTaxWithholdingOtherirregularcompensationpaymentsaresubjectto

minimumincometaxwithholdingatflatratesof25%(or39.6%ifpayover$1million)forfederaland6.6%(or10.23%forbonusesandearningsfromstockoptions)forCalifornia.OthertypesofpaymentsreportableonForm1099aresubjecttoa28%backupwithholdingrateforfederalpurposesand7%forCaliforniaifthepayee'sSocialSecurityNumberisnotknown.

Withholdingonregularwagesshouldbetakenfromthe

2015tablesintheEmployer'sGuideprovidedbytaxingauthorities.

Maximumdeductionperemployee

Nolimit Nolimit

Maximumemployercontributionperemployee

Nolimit Nolimit

Self‐EmploymentTaxTaxablewagebase $118,500 $117,000

Taxrate 12.40% 12.40%

Medicaretaxonself‐employmentincome: over$118,500/$117,000to$200,000

2.9% 2.9% DepositsofTaxesBesuretoreadcarefullytheIRSNotice931forfederal

payrolltaxdepositrequirements.Thereareheavypenaltiesformakinglatedeposits.

Withholdingontaxablefringebenefits,includingautomobiles,isrequired

over$200,000 3.8% 3.8%

Maximumtax Nolimit Nolimit

FederalUnemploymentTax(FUTA)Depositsofpensionwithholding

Separatedepositsarerequiredfornon‐payroll(Form945)incometaxwithholding.Generally,thedepositrulesarethesameasforpayrollwithholding.

Grossfederaltaxrate 6.0% 6.0%

LesscreditforCaliforniaSUI(ifcontributionsaremadetimely)

(5.4%) (5.4%)

AddCAcreditreductionrate

1.2% 1.2% DeductionforSelf‐EmploymentTaxOne‐halfoftheself‐employmenttaxisdeductibleincomputingtaxableincomeandself‐employmentincome.Netfederaltaxrate 1.8% 1.8%

Onwagesnottoexceed(peremployee)

$7,000 $7,000

Maximumtaxperemployee

$126 $126


Exhibit E‐3 Payroll Tax Deposit Requirements Summary

RULESFORFEDERALTAXDEPOSITSAllemployersarerequiredtodepositallfederaltaxesthroughelectronicfundstransfer(EFT).QuarterlyDepositor‐Anemployerwhohasanaccumulatedtaxliabilityoflessthan$2,500.00fortheentirequartermaydepositorremittheamountwithatimelyfiledForm941.(ThisistheoneexceptiontothemandatoryEFT.) MonthlyDepositor‐Anemployerisamonthlydepositorfor2015iftheamountofemploymenttaxesreportedonForm941fortheperiodJuly1,2013toJune30,2014was$50,000orless.Depositsaredueonthe15thofthefollowingmonth.Semi‐WeeklyDepositor‐Anemployerisasemi‐weeklydepositorfor2015iftheamountofemploymenttaxesreportedonForm941fortheperiodJuly1,2013toJune30,2014exceeded$50,000.PayrolltaxdepositsforpayrollchecksdatedonWednesday,Thursday,and/orFridayaredueonorbeforethefollowingWednesday.DepositsforpayrollchecksdatedonSaturday,Sunday,Monday,and/orTuesdayaredueonorbeforethefollowingFriday.OneDayDepositor‐Employerswithanaccumulatedtaxliabilityof$100,000ormoreonanydaymustdepositwithinonebankingdayofthepayrollcheckdate.Whenamonthlydepositorissubjecttothisrule,theemployerimmediatelybecomesasemi‐weeklydepositorfortherestof2015andallof2016.

RULESFORCALIFORNIATAXDEPOSITSCategory of depositor Quarterly: A. If your Personal Income Tax withheld during one or more months of a quarter is less than $350

Deposit due Remit payment quarterly

B. If your Personal Income Tax withheld during one or more months of a quarter is more than $350 Monthly: A. You are a federal Monthly depositor and your Personal Income Tax withheld is less than $350 during one or more months of a quarter

15th of the following month Remit payment quarterly

B. You are a federal Monthly depositor and your Personal Income Tax withheld is more than $350 during one or more months of a quarter

15th of the following month

Semi‐weekly: A. You are a federal Semi‐Weekly Depositor and your Personal Income Tax withheld is less than $350 within the pay period B. You are a federal Semi‐Weekly Depositor and your Personal Income Tax withheld is $350 to $500 within

the pay period

Remit payment quarterly 15th of the following month

C. You are a Semi‐Weekly depositor with a Wednesday, Thursday, and/or Friday check date and the Personal Income Tax withheld is more than $500

Following Wednesday

D. You are a Semi‐Weekly depositor with a Saturday, Sunday, Monday, and/or Tuesday check date and the Personal Income Tax withheld is more than $500

Following Friday

One‐day: A. You have a federal tax deposit in the amount of $100,000 or more and the Personal Income Tax withheld is $350 or less

Remit payment quarterly

B. You have a federal tax deposit in the amount of $100,000 or more and your Personal Income Tax withheld is $350 to $500 within the pay period

15th of the following month

C. You have a federal tax deposit in the amount of $100,000 or more and the Personal Income Tax withheld is more than $500

Next banking day


Exhibit E‐4

Payroll Taxes Summary Payroll Tax Forms and Reporting Deadlines

Federal Forms Due Date Description

Form 940 Employer's Annual Federal Unemployment (FUTA) Tax Return

1/31 To report wages subject to FUTA

Form 941 Employer's Quarterly Federal Tax Return

Qtrly - 1/31, 4/30, 7/31,10/31 To report wages subject to federal income tax, social security and Medicare

Form 944 Employer's Annual Federal Tax Return 1/31 To report wages subject to federal income tax, social security and Medicare if tax liability for the year is less than $1,000 - employers must be notified by the IRS to qualify

Form 945 Annual Return of Withheld Federal Income Tax

1/31 To report federal income taxes withheld from non-payroll payments (e.g. pension distributions, military retirement, backup withholding)

Form W-2 Wage and Tax Statement 1/31 To report employee wages and withholding to the SSA

Form W-3 Transmittal of Wage and Tax Statements

1/31 Transmittal form to report employee wages and withholding to the SSA

Form W-4 Employee's Withholding Allowance Certificate

If claiming exempt, must file new form each year by 2/15

To claim the appropriate withholding allowances for payroll income tax withholding

Form 1096 Annual Summary and Transmittal of U.S. Information Returns

2/28 Transmittal form for all 1099s

Form 1099 (MISC, INT, DIV, many others) 1/31 (to recipient)

Information returns to report payments to individuals and businesses (e.g. payments to independent contractors for services, interest, dividends, sales proceeds, cancellation of debt, and many more)

Form 8109-B Federal Tax Deposit Coupon N/A Form obsolete - electronic payments are required for all taxpayers after 12/31/10

State Forms Due Date Description

DE 9 Quarterly Contribution Return and Report of Wages

Qtrly - 1/31, 4/30, 7/31,10/31 To reconcile tax payments made with wages reported on DE 9C

DE 9C Quarterly Contribution Return and Report of Wages (Continuation)

Qtrly - 1/31, 4/30, 7/31, 10/31 To report wages subject to UI, ETT, SDI and PIT wages and withholding

DE 88 Payroll Tax Deposit Varies To report and pay UI, ETT, SDI and PIT withholding

DE 34 Report of New Employee(s) Within 20 days of each new hire start date

To report all newly hired employees

DE 542 Report of Independent Contractor(s)

Within 20 days of making payments totaling $600 or more or entering into contract to do so

To report independent contractors to whom payments totaling $600 or more were made or with whom a contract for $600 or more was entered

DE 4 Employee's Withholding Allowance Certificate

As needed To claim a different marital status or different number of allowances than claimed for federal withholding purposes

FUTA = Federal Unemployment Insurance Tax

SSA = Social Security Administration

UI = Unemployment Insurance

ETT = Employment Training Tax

SDI = State Disability Insurance

PIT = Personal Income Tax


Exhibit F

New Business Checklist

Instructions:Thisisachecklisttohelpmanagementofnewbusinessesidentifyissuesforconsideration. It is easy to overlook important matters when you are in theentrepreneurial trenches. Use this checklist to find issues that may not be adequatelyaddressed.ManagementandOrganization1.⧠ Haveyoudefinedthecultureofyourcompany?Doyouhavecorevalues?Whatdo

youstandfor?Donewemployees,customers,lenders,andbusinesspartnersknow?

2.⧠ Haveyousuccinctlydefinedyourbusinessfromthecustomer’sperspective?Doyouhaveamissionstatementthatconveysthisbusinesspurpose?

3.⧠ Howdoyoucaptureideasforproductivityandprofit?Istherearecordofideas?Do

youfollowupontheideas?Areyouinterestedinideasfromallemployees?Ifso,howdotheyknowthat?

4.⧠ Isthereapositiveatmosphereinthecompany?Howdoyouensurethat?5.⧠ Areyouthinkingbigenough?Haveyouconsideredhowyoucanleverageyouridea

throughfranchisingorothermeans?6.⧠ Have you taken steps to protect your intellectual property and other proprietary

information,suchascustomerlists,productfiles,andcomputerizedrecords?7.⧠ Doyouhavewrittengoalsandobjectives?8.⧠ Doyouhaveawrittenvisionforthebusiness?Haveyouidentifiedthechallenges?9.⧠ Doesmanagementhaveprioritizedresponsibilitiessotheyarenotdrawntoomuch

intoothers’projects?10.⧠ Do you have an organization chart with clearly defined responsibilities and

reportingstructure?11.⧠ Do you have regular, short, “stand‐up” meetings, to have responsible individuals

reportonprogressontheirgoals?


Exhibit F (continued): 12.⧠ Doyouhaveaneffectiveprocedure for identifyingcompanyneedsand for finding

andselectingindividualstohire?

13.⧠ Haveyoucompliedwithregistrationandlicensingrequirementswithallapplicableregulatory agencies? Do you have systems in place to timely file tax returns andrequiredreports?

RevenueCycle

14.⧠ Doyouhaveamarketingplan?15.⧠ Aretheresalesmanagementreports?16.⧠ Doyouhaveasaleskit includingbasic informationaboutthecompany’sproducts,

suchasvisuals,testimonials,andacatalog?17.⧠ Doyouhavea creditpolicywith credit standards, cashdiscounts,or sales terms?

Doyouhavesomeoneassumingtheroleofcreditmanager?18.⧠ Do you sufficiently monitor customer payments and past‐due accounts? Do you

haveacollectionpolicy?19.⧠ Doyouclassifycustomersaccordingtovolume,profitability,andcredithistory?20.⧠ Doyouhaveacashmanagementprogramtomaximizecollections,interestincome,

andsafeguardingofrevenues?21.⧠ Are you maximizing technology for marketing, budgeting, invoicing, customer

masterfilemaintenance,accountsreceivable,andanalysisofwrite‐offs?22.⧠ Doyouhavesufficientinternalcontrolstoprotectfromlossofrevenue?23.⧠ Doyouhavearevenuebudget? Doyouregularlycompareyouractualrevenueto

thebudgetandtothepriorperiod(monthoryear)revenues?ProductionCycle

24.⧠ Doyouhaveaneffectiveinventorymanagementsystem?Ifyouprovideservices,doyouhaveaneffectivesystemtocaptureyourlaborcosts?

25.⧠ Doyouneedaperpetualinventorysystem?Forservices,doyoucapturelaborcosts

onadailybasis?26.⧠ Doyourestrictaccesstoyourinventoryandvaluableequipment?


Exhibit F (continued): 27.⧠ Doyouhaveadequateproductionbudgetsandreports?28.⧠ Canyouidentifyyourgrossmarginandindirectcostsbyproduct?29.⧠ Isobsolescenceanissue? Ifyouprovideaservice,doyouhaveexcessiveunbilled

time?30.⧠ Doyouhaveacapitalassetplanforpurchasingorreplacingequipment?Whatare

the expected equipment costs? Do you have a budget? When do you need theequipment?Doyouhavesufficientcapital?Haveyoucomparedthecostsofleasingvs.purchasing?Whataboutexpectedrepairsandmaintenance?

31.⧠ Haveyousufficientlyplannedyourspacerequirements?Leasecosts?Energycosts?ExpenditureCycle

32.⧠ Doyouhaveasystemformanagementapprovalofexpenditures?

33.⧠ Doyouobtaincompetitivebids?34.⧠ Doyoutakeadvantageofcashdiscounts,paymenttermsfornoextracost,quantity

discounts,etc.?35.⧠ Doyouhavecleartravelandentertainmentandexpensereimbursementpoliciesfor

employees?Doyouinsistonadequatesupportingdocumentation?36.⧠ Do you have adequate internal controls for safeguarding of checks and cash, and

accesstobankinformation?37.⧠ Do you have an expenditure budget? Do you regularly compare your actual

expenditurestoyourbudgetandtothepriorperiod(monthoryear)expenditures?Payroll

38.⧠ Doyouhaveaneffectiveexecutivecompensationstructurebasedonproductivity?

39.⧠ Doyouhaveaneffectiveemployeecompensationstructurethatwillretainqualifiedemployeesandrewardthehighestlevelsofproductivity?

40.⧠ Haveyouconsideredaqualifiedretirementplan(suchas401(K)plan?


Exhibit F (continued): 41.⧠ Do you have adequate HR help for hiring, firing, performance evaluation, and

employeepolicymanuals,etc.?42.⧠ Is your payroll system bullet proof? It needs to be. Have you prioritized the

paymentofpayroll taxesandall thingsemployeerelated? Nothingcangetyou introuble faster than payroll issues. Have you automated your personnel records,vacationtime,sickpaybenefits,etc.?

FinancialManagement

43.⧠ Doyoupreparecashflowforecaststodeterminecashneeds?

44.⧠ Arefundsinthecompany’sbankswithinthefederallyinsuredlimitatalltimes?45.⧠ Doesthecompanyhaveaninvestmentpolicy?Dotheownersregularlyreviewthe

monthlyinvestmentstatements?46.⧠ Doesthecompanyregularlyconsiderthemostfavorablefinancingavailable?47.⧠ Aretheresufficientinternalcontrolsovercashandinvestments?RiskManagement

48.⧠ Does the company have an adequate riskmanagement plan? Consider insurancecoverage,self‐insurance,andvaluationofassetsincaseofloss,whetherinsuranceisforcashvalueorreplacementcost,etc.

49.⧠ Considerinsurancefor:

a. Businessinterruption

b. Propertydamage

c. Umbrellaliability

d. Fidelityinsurance

e. Cyberspace

50.⧠ Does the insurance broker have malpractice insurance? How was the broker

selected and evaluated? Does the company haveminimumquality ratings for itsinsurers(suchasA.M.BestratingofA‐orabove)?

51.⧠ Isinsuranceconcentratedwithonecarriertoeasesettlementsandlowercosts?52.⧠ Doesthecompanyregularlycompareproposalsfromotheragentsorbrokers?


Exhibit F (continued): Externalfactors

53.⧠ Doesthecompanyregularlyconsidereconomictrends:a. Global economy impact on commodities supply and foreign markets

demand?

b. Nationaleconomyeffectonanticipatedinflationorrecession?

c. Localeconomyimpactonlaboravailabilityandcostsandsales?

d. Relatedindustriesimpactoncommoditiessupplyandcustomers?54.⧠ Doesthecompanyregularlyconsidertheeffectsofpendinggovernmentregulation

orderegulation?

55.⧠ Hasthecompanyconsideredtheeffectsofcompetitionfrom:a. Overseascompetitors?

b. Nationalcompetitorsexpandingintothecompany’smarket?

c. Additionallocalcompetitors?

d. Technologicalchange?56.⧠ Hasthecompanyconsideredthepotentialchangesindemandresultingfrom:

a. Aswitchbycustomerstosubstituteproducts?

b. Priceresistanceinthemarket?57.⧠ Hasthecompanyconsideredtheeffectsofpossiblestrikeson:

a. Thecompany?

b. Suppliers?

c. Customers?

d. Distributors?