Start-up: May 2006 Archives

A new report from the Kauffman Foundation finds that entrepreneurial activity still very high in the US. From the National Dialogue on Entrepreneurship:

The new report shows that there were 464,000 people creating new business each month in 2005 -- a rate of 0.29 percent of the total adult population.

That equates to:

- 5,568,000 new businesses a year
- 107,077 new businesses every week
- 15,297 new businesses every day
- 637 new businesses every hour
- 11 new businesses every minute

Any question that the US is now in an entrepreneurial economy?

Should I go with an LLC or an S-Corp?

I get this question quite a bit. I am still in favor of using an S-Corp in many situations. For example, if you plan to keep the business small or have limited ownership, I think an S-Corp works great and tends to be less expensive to set-up and maintain.

But, LLCs are are increasing in number while corporations are declining according to this post Ideablog. In fact, this blog's author seems surprised that we even bother to keep the old S-Corp around at all.

The corporate form is hanging on -- it's what most practitioners know. But it's looking less and less like the future of business associations.

If the S-Corp is so simple and cost effective, why is it fading away?

Contrary to what the author of Ideablog asserts, I find that many attorneys push LLCs. Since they offer no real tax advantage for most entrepreneurs, and since they tend to be more expensive, one might wonder why. But, key in on two words from the last two sentences, attorney and expensive, and you get a clue as to one possible reason. Lawyers make more money from pushing LLCs. There are cases where I recommend an LLC, but it tends to be fairly infrequent.

Also, I often get the impression that being able to say "I started an LLC" is thought to be cool. I don't know if it sounds more sophisticated or like they have done something more substantial, but I do get the impressions from many new entrepreneurs that starting an LLC is somehow more significant than starting a plain old corporation.

As always, I need to say at this point that I am not an attorney. You need to consult with one about matters such as this. But, if they recommend an LLC over an S-Corp for your new venture please make sure to ask them very specific questions about differences in costs (short-term and long-term) and also what specific advantages you would get by setting up an LLC.

Finally, remember that the IRS tax code (part of those 60,000 pages I wish would go away) has many more cases that deal with S-Corps than with LLCs. S-Corps are more established in IRS case law. That means that you are less likely to have your name or your business name in some IRS case in the future as a result of an audit gone bad. Just a thought.....

We see start-ups happening in growing numbers among two age groups: The Entrepreneurial Generation (born after 1977) and the Entre-Boomers (born between 1946-1964). So what about those in between? Are the Generation X folks just not entrepreneurial?

According to the data, they are not started businesses at rates equal to those who came before and those who came after them. But, it may be in large part due to their stage in life. They are at the age where they have young families and large mortgages. The thought of quitting the security of their current jobs, although maybe just a illusion, keeps them from taking the plunge even if they have the urge and the right business opportunity.

An article from Business 2.0 offers a plan in "5 ways to start a company (without quitting your day job)."

1. Use Your Salary as Funding

Cut back a little on your discretionary spending and pretend the raise you just got didn't happen and use that money to slowly fund your start-up. I offer similar advice to young entrepreneurs. I tell them that since they are used to living as poor college students, keep living that way for a few years when they start work and they will be amazed at how much they can save or have available for their business. Remember, the average start-up in the US gets us and running with only about $6,500.

2. Turn Common Complaints Into a Business Plan

So many aspiring entrepreneurs come to me wirh the will, but without the idea. I tell them to stop trying so hard and find a business that builds on what you know about. If you are working, find things that are not working right in your company or your industry and try to figure out a business to take care of that problem. As Barry Moltz likes to say, the best business ideas are those that take care of "people's pain."

3. Make Your Boss a Beta Tester

Quite often your good ideas are not in the plans of your employer. If you are honest with them, they may let you develop the business and give you some transition time. Good people are hard to find, so they may be willing to be flexible. It happens more than you'd think.

4. Take Advantage of Your Company's Reputation

Investors want to see a track record when they look at supporting new businesses. Even though you may not have start-up experience, you have a resume and your employer's reputation can rub off on you. Bankers will even occasionally fund a start-up if the resume of the founder is strong enough.

5. Convert Your Employer Into a Business Partner

In 2002, when Jeff Hilbert was managing the design services division of Coventor, a chip-design software company in North Carolina, his unit was slated for the chopping block. However, Hilbert noticed that he had recently been winning a lot of business from wireless chip companies, so he asked Coventor to let him spin off the unit as a stand-alone company.

The board went for it and gave the startup -- now called WiSpry -- $6 million worth of patents and other intellectual property, seven employees, several hundred thousand dollars, and an office in Irvine, Calif., all in exchange for shares in the company.

Although this path to start-up is a little less common, I am currently working with two of our MBA alumni who are pursuing similar deals.

So come on Generation X! Show us your entrepreneurial spirit!