Start-up: May 2005 Archives

I often get asked whether a new business should form as an LLC (Limited Liability Corporation) or an S-Corp. My non-lawyer answer has usually been that, generally speaking, an S-Corp is a bit simpler and cheaper to set up, so unless an attorney has specific reasons to go with an LLC go with the simpler and cheaper option.

There is a lot more case law on S-corps so their rules have been ironed out more clearly over time (one of my personal business goals was to never have my name or our company name in a famous case in the tax laws). However, for most businesses the differences are not that significant so if you get set up one way or the other by your attorney don't worry about it too much. Establishing good cash flow is much more important!

If you like to explore the intricacies of the legal pros and cons of each approach to organizing your business, nolo.com has a very comprehensive overview. Reading such things makes my hair hurt, however.

Some states are moving to make forming and maintaining an LLC simpler. For example, Tennessee just enacted such legislation.

It is not a life or death decision, but is one that can be intimidating for first time business owners. You will get conflicting advice. The best course of action is to talk over your long-term business plans with your attorney and your accountant making sure that the organizational form you pick fits your vision for what the company will become. For example, a business that will likely try go public in three years may need a different approach to legal formation than a business that never plans to have more than the original two shareholders.

Also talk through costs with the attorney. There are fees to set up the legal entity charged by your lawyer, fees that the state charges to file your legal entity (different for LLC vs. S-Corp in many states), and on-going yearly fees due to the state (varies by state).

Bryan Freeman, founder of SnackWorks, was the keynote speaker to the Entrepreneurship Academy here at the Delta Epsilon Chi conference I am attending this week with my students. One of his main points was how important it is for entrepreneurs to know how to sell. No other activity is more important for a start-up than getting customers to buy the product or service and get cash flow coming in the door. And yet, many entrepreneurs are not prepared to sell.

The selling process for any start-up entrepreneur is a relatively simple process, according to Freeman, if executed properly:

- Make the call! Get over your fears and start calling on potential customers.

Start-up entrepreneurs hesitate to get out and mix it up with their customers. It may be due to fear of rejection, uncertainty about their product, or inexperience with selling. Selling is a skill that can be improved and honed over time.

- Develop your elevator story. Be able to tell what you do in three sentences or less.

The attention span and patience of any potential customer is going to be very short. Develop a clear, concise message of who you are and what you offer.

- Explain the benefit, not just the features.

For example, a feature is that your product tastes better. The benefit is that it will increase your customers' sales by 20% with an increase in margins on their sales of 10%. Customers will come to your business if you offer clear benefits to them, not just nifty features. They will need to be motivated, so make it easy and make it logical for them to choose you.

- Validate these benefits.

Be able to offer specific examples of how your product or service helped other customers. Testimonials and references do help. Getting the first customer can be the hardest, but it becomes the most important because it begins to build your legitimacy.

- Ask for a relationship. Set up the next contact as you finish up this contact.

You have to manage the relationship with your customer. "if you build it they will come" is a lie when it comes to entrepreneurs.

Bryan founded SnackWorks after leaving school in 1998. He recently sold the company for about $20 million. He must really know how to sell!