Entrepreneur Startup Model > Step 6: Location, Facilities, Taxes, and Insurance

A.- Location & Facilities

Finding the best location for your business is critical to your success. An old adage in real estate is "location, location, location." This applies to virtually all businesses. If your business is retail, you need to be located where your customers shop. If you have a manufacturing company, being located near suppliers or distributors may be more important. The successful entrepreneur considers searching for a location only after the previous model steps are completed and only with the assistance of a commercial real estate agent.

In addition to issues of square feet required, price per square foot and accessibility, the following are also important:

• Lease vs. Buy. Is the space available for lease or purchase? Can you comfortably afford to buy? If you do lease, what are the provisions of the agreement?

To Lease or Not to Lease: Here are some questions to ask before signing a lease:

1. Does the lease specifically state the square footage of the premises? The total rentable square footage of the building?
2. Is the tenant's share of expenses based on total square footage of the building or the square footage leased by the landlord? Your share may be lower if it's based on the total square footage. 3. Do the base year expenses reflect full occupancy or are they adjusted to full occupancy (i.e., base year real estate taxes on an unfinished building are lower than in subsequent years)?
4. Must the landlord provide a detailed list of expenses, prepared by a CPA, to support increases? 5. Does the lease clearly give the tenant the right to audit the landlord's books or records?
6. If use of the building is interrupted, does the lease define the remedies available to the tenant, such as rent abatement or lease cancellation?
7. If the landlord does not meet repair responsibilities, can the tenant make the repairs, after notice to the landlord, and deduct the cost from the rent?
8. Is the landlord required to obtain nondisturbance agreements from current and future lenders? 9. Does the lease clearly define how disputes will be decided?

Learn the Lingo

Lease terms you should know:

Lessor Landlord

Lessee Tenant

Right of First Refusal Before vacant space is rented to someone else, landlord must offer it to the current tenant with the same terms that will be offered to the public.

Gross Lease Tenant pays flat monthly amount; landlord pays all operating costs, including property taxes, insurance and utilities.

Triple Net Lease Tenant pays base rent, taxes, insurance, repairs and maintenance.

Percentage Lease Base rent, operating expenses, common area maintenance, plus percentage of tenant's gross income (most common for retailers in shopping malls)

Sublet Tenant rents all or part of space to another business; tenant is still responsible for paying all costs to landlord

Assign Lease Tenant turns lease over to another business, which assumes payments and obligations under the lease.

Anchor Tenant Major store or supermarket that attracts customers to a shopping center.

Exclusivity Provision Shopping center can't lease to another who provides the same product or service that existing tenant does.

CAM Common area maintenance charges including property taxes, security, parking lot lighting and maintenance; may not apply to anchor tenants in retail leases.

Nondisturbance Clause Tenant cannot be forced to move or sign a new lease if building or shopping center is sold or undergoes foreclosure

Zoning. Identifies what kinds of businesses can be located at a given site, i.e. retail, office, or manufacturing. Make sure the property you choose is correctly zoned for your business.

Use. Is the facility built according to safety code for the proposed business usage? Considerations range from floor loads and fire ratings to electrical capacities.

Local Building Codes & Permits. These provide guidelines for the construction or remodeling of a facility. Check with the local building authority to determine if permits are required for any changes to the facility.

Sign Permits. Addresses signage size and location.

Historic Preservation. Check to see if the property is located in a historic district. If so, it may affect what you may or may not do to a building.

Prevailing Wage. Will you be or are you required to pay prevailing wages on any construction? Government funded projects may be subject to regulation in this area.

Property Tax. Determine what your real estate taxes will be and if any planned increases are pending.

Environmental Issues. Are there currently or have there ever been buried tanks or other environmental contamination at the proposed site? Who is responsible for cleanup? What improvements do you need to make to accommodate any toxic materials used in your business?

Occupancy Costs. Real estate taxes, property insurance, utilities and interior and exterior maintenance costs should be calculated for use in preparing budgets and cash flow statements.

Points to consider:
Does the location add value to the business? Does it hit your target market?
Does the business need a high profile, high-traffic facility? Could the business function well in a low-traffic, lower-cost facility?
Do you know what the traffic count is for the area? You can find this information at local traffic engineering or planning offices.
Is the parking adequate for your employees and customers?
Is the facility large enough to accommodate your business as it grows?
If you need to alter the building for your purposes, have you estimated the costs and timeline for completion? What are the overall costs associated with your location selection?

B.- Taxes

Underestimating how taxes will affect your bottom line can be a deadly mistake. It's important to work with a qualified accounting professional to determine and understand how each tax may apply to your business. That way you can plan for tax obligations and deadlines, and develop a workable tax management strategy.

Points to consider:
The location of your business may affect the percentage of property tax you pay.
Estimated federal, state and local taxes must be paid quarterly.

I. Employer Identification Number (EIN)
An Employer Identification Number, (EIN, sometimes called Federal Tax ID Number) is a nine-digit number assigned by the IRS. EINs are used by employers, sole proprietors, corporations, partnerships, nonprofit associations, trusts, estates of decedents, government agencies, certain individuals, and other business entities.

You are required to obtain an EIN if you do one or more of the following:

 • Form a C or S corporation or partnership (in this case the EIN serves essentially the same purpose that a social security number does for a sole proprietorship)
• Pay wages to one or more employees
• File pension or excise tax returns
• A sole proprietorship with no employees, pension plans, or excise taxes does not need an EIN. A sole proprietor can use the social security number for income tax, self-employment, and other tax purposes.

II. Payroll Taxes
Withholding Taxes
Employers are responsible for withholding taxes from employees’ paychecks, sending them to the proper government agencies, and other employer tax obligations. The major employer paid taxes (FICA, federal unemployment, and state unemployment taxes) will be explained later in this section.

Social Security and Medicare Taxes
The Federal Insurance Contributions Act (FICA) provides for a federal system of old-age, survivors, disability, and hospital insurance. The first three are financed by the social security tax, while hospital insurance is financed by the Medicare tax. To learn more about the five major benefits covered by Social Security taxes (retirement, disability, family benefits, survivors and Medicare), please refer to the Social Security Administration’s Web site.
Employers must withhold social security and Medicare taxes from employees’ wages and pay a matching amount. These taxes have different rates and only the social security tax has a wage base limit. There is no wage base limit for Medicare tax; all covered wages are subject to Medicare tax.

Federal Unemployment Tax
The Federal Unemployment Tax Act (FUTA), together with state unemployment systems, provides for payments of unemployment compensation to workers who have lost their jobs. Most employers pay both a federal and a state unemployment tax. Only the employer pays FUTA tax; it is not deducted from the employee’s wages.

Generally, employers can take a credit against FUTA tax for amounts paid into state unemployment funds. This credit cannot be more than 5.4% of taxable wages. Those entitled to the maximum 5.4% credit have an effective FUTA tax rate of 0.8% after the credit. The IRS has tests to determine whether a particular business must pay FUTA tax.

State Unemployment Tax
State unemployment taxes are also paid by the employer and are not deducted from the employee’s wages. Each state has a different rate and different wage limits from which the taxes are calculated. For information on state-specific unemployment taxes and contact information for the agency that administers your state’s unemployment tax, use the Business Owner’s Toolkit.

Payroll Services
Generally, hiring a payroll service is a good idea for businesses in which payroll isn’t the same from pay period to pay period. Businesses with hourly employees or employees earning commissions can save time and money by using a payroll service. One of the chief benefits is avoiding costly mistakes in payroll processing like failing to remit payroll taxes in a timely manner. Payroll companies calculate the amount of each paycheck and the tax obligations for each employee; print the checks; and provide payroll reports.

III. Federal Income Tax
Different business structures (sole proprietorship, partnership, corporation, or limited liability company) have different income tax requirements regarding filing dates, forms required, and tax rates and calculations. The IRS lists the various business taxes and forms required for each legal structure:

• Sole Proprietorships
• Partnerships
• Corporations
• S Corporations
• LLCs or LLPs

Federal income tax is a pay-as-you-go tax. Business owners generally pay income taxes in quarterly estimated income tax payments. For more information on estimated income tax payments, refer to IRS Publication 505, Tax Withholding and Estimated Tax.

 IV. Self-Employment Tax
Self-employment tax is a social security and Medicare tax for individuals who work for themselves, similar to social security and Medicare taxes withheld from the pay of wage earners. Social security benefits are available to self-employed persons just as they are to wage earners. Like federal income tax, self-employment taxes are paid through quarterly estimated tax payments. For more detailed information on self-employment tax, refer to IRS Publication 533, Self-employment Tax.

V. State Taxes
Every state levies some form of tax on small businesses, but in some states some business structures (especially sole proprietorships) have little to no tax imposed. To learn more about tax structures in any given state, visit the Business Owner’s Toolkit site or a list of taxing authorities in each state.

VI. Local Taxes
Local authorities may tax personal property like machinery, equipment, furniture, supplies, leased equipment, and even movable machinery used in a business. Some cities and municipalities also levy income taxes on any business operating within their borders. Your county government or local municipality can provide information about the specific taxes that apply in your area and instructions for registering your business.

VII. Sales and Use Tax
Sales taxes are added to the cost of a product or service and are generally paid by the customer. Most states and local taxing authorities impose a general sales tax on retail sales and certain services. Business owners are responsible for collecting these taxes and remitting them to the appropriate taxing authority.

Goods purchased to resell from manufacturers or wholesalers are exempt from sales taxes because the tax will be paid by the retail customer. This is commonly referred to as a resale exemption.

Every business that sells taxable goods or services must obtain a sales tax license from the state in which it does business prior to engaging in business.

Use taxes are generally levied on the sales price or rental charge for tangible personal property on which no sales tax has been paid. This most commonly occurs when the item is purchased from a business in another state and shipped to the user’s state (most states do not impose sales taxes on products that are shipped to another state).
For more information on the specific tax obligations for your state, contact the tax oversight agency.

C.- Insurance

You need to be adequately insured to protect your business and yourself. Although the expense of having adequate insurance adds to the cost of doing business, it's worth the money and peace of mind. Insurance policies are available to cover virtually everything connected with your business, including you and your employees. An insurance professional can advise and guide you in planning for all of your insurance needs. You may need insurance to cover many of the following:

• Liability Insurance
• Product Liability Insurance
• Business Interruption Insurance
• Disability Insurance
• Property Insurance
• Business Vehicle Insurance
• Equipment/Inventory Insurance
• Employee Health Insurance
• Key Employee Insurance
• Bonding

Points to consider:
Can your insurance professional offer you a discount on an entire package of insurance?
Have you shopped around for more than one insurance quote?
How often are premiums paid?
Who will be responsible for making sure premiums are paid?
What is the procedure for making claims?

D.- Government Regulations and Your Business

It may be inconceivable to you that your homebased consulting service or hand knit sweater business would have to comply with any of the numerous local, state and federal regulations, but in all likelihood it will. Avoid the temptation to ignore regulatory details. Doing so may avert some red tape in the short term, but could be an obstacle as your business grows. Taking the time to research the applicable regulations is as important as knowing your market.

Below is a checklist of the most common requirements that affect small businesses, but it is by no means exhaustive. Bear in mind that regulations vary by industry. If you're in the food service business, for example, you will have to deal with the health department. If you use chemical solvents, you will have environmental compliance to meet. Carefully investigate the regulations that affect your industry. Being out of compliance could leave you unprotected legally, lead to expensive penalties, and jeopardize your business.

Business Licenses
There are many types of licenses. You need one to operate legally almost everywhere. If the business is located within an incorporated city limits, a license must be obtained from the city; if outside the city limits, then from the county. For more information contact the county or city office in your area.

Certificate of Occupancy
If you are planning on occupying a new or used building for a new business, you may have to apply for a Certificate of Occupancy from a city or county zoning department. For more information contact the county or city office in your area.

Business Organization
There are many forms of legal structure you may choose for your business. The most common structures are Sole Proprietorships, General and Limited Partnerships, C and S Corporations and Limited Liability Companies. Each legal structure offers organizational options which are appropriate for different personal situations and which affect tax and liability issues. We suggest you research ach legal structure thoroughly and consult a tax accountant and/or attorney prior to making your decision.

Fictitious Business Name
Businesses that use a name other than the owner's must register the fictitious name with the county as required by the Trade Name Registration Act. This does not apply to corporations doing business under their corporate name or to those practicing any profession under a partnership name. For more information contact your state or local government.

 Protecting Your Idea
If applicable to your business, you may want to apply for trademarks, patents and your copyright. Patents, copyrights and trademarks, as well as know-how or trade secrets, are often collectively referred to as intellectual property. Many firms have such property without even being aware of it or of the need to take measures to protect it.

Many people's notions of intellectual property are unrealistic. Some believe, for example, that simply having a patent on a product will enable one to succeed in the marketplace. Consequently, they may spend thousands of dollars to obtain the exclusive rights to market something that no one wants or can afford to buy. Others may decide that intellectual property protection is not worth the trouble.

People who may not be interested in protecting their own rights must still take precautions to avoid infringing on the rights of others. This calls for more than the avoidance of copying. Some copying is unavoidable; but one can easily infringe on the rights of others without deliberately imitating specific features of goods or services.

Trademarks
Trademarks are names or symbols used in any commerce that is subject to regulation by state government or the U.S. Congress.

State Registration of a Trademark: Trademarks and service marks may be registered in a state for a term of ten years. For more information about Applications for Registration of Trademark or Service Mark in your state, contact your state government.

Federal Registration of Trademark and Patent

To register a trademark contact:

U.S. Department of Commerce
Trademark Office
2021 Jefferson Davis Highway
Arlington, Virginia 22202
(703) 305-8341 or (800) 786-9199

To register a patent, contact:

Asst. Commissioner for Trademarks, Patent Applications
Washington, D.C. 20231
(800) 786-9199
Also, visit their web site at http://www.uspto.gov

Patents
New and useful inventions can be protected by a U.S. patent. Professional assistance from a patent attorney is strongly urged because patent procedures are detailed and technical. A patent search is performed to see if a patent currently exists on the same or nearly the same device and, if not, to make proper application with the Patent Office.

Note: Only attorneys and agents registered with the U.S. Patent Office may represent inventors in related matters. The office has geographical and alphabetical listings of the more than 11,000 registered agents. Only these agents may perform patent searches in the patent office. Inventors or their attorneys can make arrangements with one of those agents. U.S. patents are issued by the Assistant Commissioner of Patents, Washington, D.C.

 Copyrights

Contact:

U.S. Library of Congress
James Madison Memorial Building
Washington, D.C. 20559
(202) 7079100 Order Line
(202) 7073000 Information Line

Copyrights protect the thoughts and ideas of authors, composers and artists. A copyright prevents illegal copying of written matter, works of art or computer programs. In order to ensure copyright protection, the copyright owner should always include notices on all copies of the work.

Tax Information
Business owners are required by law to withhold the following from the wages paid to employees: federal income taxes, state income taxes and FICA (Social Security) Insurance.

 Income taxes will also be levied by the federal and state governments on earnings of any business. Therefore, each business must file an income tax return with both agencies. Businesses may be required to file estimated tax returns and pay estimated taxes on a quarterly basis.

You can go to IRS's website area for business taxes or call your local IRS office to receive a number of publications that are available upon request to small businesses. One of the most helpful is Your Business Tax Kit, which includes data and forms for a Federal Employer Identification Number and a tax guide for small businesses that can be ordered by calling Forms and Publications at (800) 829-3676 or through a visit to your local IRS office.

Federal Self-Employment Tax
Everyone must pay Social Security Tax. If you are self-employed, your Social Security contribution is made through the self-employment tax. You will need to calculate how best to report earnings and pay your business taxes.
Contact the IRS at (800) 8291040, visit your local IRS office, go to the Official IRS Web site for more information. The IRS may seem like a complicated maze, but there are publications, counselors and workshops available to help you sort it out.

Sales Tax Number
In your state there is a percent sales and use tax which applies to the retail purchase, retail site, rental, storage, use or consumption of tangible personal property and certain services. In other words, sales tax must be collected on just about every tangible item sold. A sales tax number is required for each business before opening. The number, plus instructions for collection, reporting and remitting the money to the state on a monthly basis, can be obtained from your state government.

Other Considerations...
All businesses with employees are required to comply with state and federal regulations regarding the protection of employees. For information on state labor laws, work force availability, prevailing wages, unemployment insurance, unionization, benefits packages and employment services contact your state government.
Federal information may be obtained by contacting the U.S. Department of Labor

Unemployment Insurance Tax
Businesses are required by the state to pay unemployment insurance tax if the company has one or more employees for 20 weeks in a calendar year, or it has paid gross wages of $1,500 or more in a calendar year. The taxes are payable at a rate of 2.7 percent on the first $8,500 in annual wages of an employee. Go to your state home page to check the figures for your state.
Unemployment insurance must be reported and returns made to the state.

Immigration Act
The Federal Immigration Reform and Control Act of 1986 requires all employers to verify the employment eligibility of new employees. The law obligates an employer to process Employment Eligibility Verification Form I-9. The Immigration and Naturalization Service Office of Business Liaison offers a selection of information bulletins and live assistance for this process through the Employer Hotline. In addition, INS forms and the Employer Handbook can be obtained by calling the Forms Hotline.

Health and Safety
The Federal Occupational Safety and Health Administration (OSHA) outlines specific health and safety standards employers must provide for the protection of employees. Many states have similar standards.

Workers' Compensation
If a business employs three or more people, workers' compensation insurance must be carried to provide protection to those injured in on¬-the-¬job accidents. The State Board of Workers' Compensation aids people who need claim assistance.

Minimum Wage
Virtually all business entities are subject to the federal minimum wage, overtime and child labor laws. Information on these laws and other federal laws may be obtained from:

U.S. Department of Labor
Wage and Hour Division

Bar Coding The Uniform Code Council, Inc., (not a government agency) assigns a manufacturer's ID code for the purposes of bar coding. Many stores require bar coding on the packaged products they sell. For additional information contact: Uniform Code Council Inc., P.O. Box 1244, Dayton, Ohio 45401, (513) 4353870.