Banker, lawyer, city offer small-biz advice
By Jon Hawley
Sunday, January 28, 2018
It's not a secret, but it bears repeating: building a successful business is hard.
That's why the Pasquotank County Library hosted its first Small Business Workshop on Thursday night.
The two-hour session allowed local entrepreneurs to hear from experts on the legal, financial and regulatory pitfalls that come with opening a business. It featured attorney Andrew Howle, Xenith banker Will Thompson, Elizabeth City City Manager Rich Olson and Elizabeth City Downtown Inc. Executive Director Deborah Malenfant.
The speakers agreed that aspiring entrepreneurs have to answer fundamental questions before starting a business. It's not enough to have a marketable skill or product; entrepreneurs need to know if there's demand in the market for them and what will separate their offerings from the competition.
Thompson used the example of someone deciding to open a landscaping business. People may already like their current landscaper. Others may be content handling that job themselves, he said.
“How does he get the person who isn't spending money to spend money?” Thompson asked.
Another fundamental question is one of resolve: small business owners may need to work 80 hours a week for many months before turning a profit.
“Is that something you've got the stomach for?” Thompson asked.
If someone has a potential business and the will to see it through, they next need to figure out startup costs. That's where a bank or other financial institution may come in, Thompson said.
For a financial institution to consider giving someone a loan, Thompson explained it's a given that the entrepreneur needs a solid business plan, a good credit score and other documentation, such as tax returns, showing they can make the business's numbers work.
But an entrepreneur’s proposal also should show planning for setbacks, such as employee illness and injury, and extra expenses, Thompson said. Even in its “tight” first couple of months, a business should have cash reserves on hand, he noted.
Thompson also said there's a misconception that banks will always give a loan if someone offers collateral. While unsecured loans are becoming the “leper” of the lending world, he said, a bank's goal is to make money off loan repayments, not repossess houses and vehicles.
While “under-capitalization” is one of the primary reasons businesses die, legal problems can kill them as well. Howle said it's critical people choose the right legal structure for their business.
He explained the default business structures include a “sole proprietorship,” which has one owner, and a general partnership, which has more than one. However, those structures can leave the owners fully liable for the business's debts and other liabilities.
Instead, he said businesses commonly form “limited liability corporations” or other corporations to help limit liability to what someone's invested in the business. He noted LLCs are extremely popular because the laws defining them allow owners to get “more creative in crafting the deal between themselves.”
LLCs and “S Corporations” also allow the owners to avoid paying both corporate and personal taxes on the company's profits. The Internal Revenue Service is the agency defining “S Corporations,” which have benefits over “C Corporations” but face restrictions on their number of shareholders and may only have one class of stocks.
Howle also stressed to the audience that no business structure eliminates the risk of personal liability. Courts will “pierce the veil” and hold owners liable when a business commits wrongdoing, such as fraud, and is substantially under-funded, doesn't follow corporate rules, or is engaged in “self-dealing,” he said. Owners can be liable if they buy or sell things from the business at unreasonable prices, he noted.
Howle also urged entrepreneurs with partners to establish agreements defining their ownership and rights in the business — they should also do so early, in the business's “honeymoon” phase, he said. He also noted those agreements should define how ownership is transferred or sold, so someone doesn't end up with bad business partners or loses clout as more people gain shares in the company.
Howle also urged entrepreneurs to maintain close financial oversight of their company — no matter how much they trust their employees or partners. He said he's seen instances where friends or relatives, whether accidentally or purposefully, start mishandling finances and kill a business.
Though he joked it may sound “self-serving,” Howle also urged entrepreneurs not to do their own legal work. Attorneys can prevent small issues from becoming large ones down the road, he said.
During their remarks, Olson and Malenfant discussed how the city supervises, and tries to assist, business development. They discussed the city's Business Improvement Grant Program, which can support business development that also serves public interests.
Malenfant also noted that, as part of the BIG review process, city staff will meet with entrepreneurs and even visit the proposed location for the business to work through the regulatory concerns, including building codes and zoning restrictions, that may affect them. She said even business owners who aren't seeking city grants may request those consultations.
After Thursday's event, Pasquotank Library Director Jackie King deemed it a success, based on audience members' engagement and interest in starting their own businesses. She said she hoped to host the workshop every January.