While we realize that incorporation protects personal assets and allows profits beyond an owner's salary to go untaxed, we're doubtful about any other major benefits. Is there a threshold sales or profit figure, and is there a particular type of business that would warrant the cost and red tape involved in incorporating?
McGinnis Heating & Air Conditioning
Reedsville, Wis.* * *
You're probably worried about the additional fiscal duties and paperwork that go with incorporation. Well, banish the thought, says Judith McQuown, author of the definitive guide, Inc. Yourself (HarperCollins, 1993, $12) and owner of a one-person corporation. "You might spend an average of 10 extra hours each month." And don't be discouraged by Wisconsin's corporate tax rate -- which is a full percentage point above the individual rate, says McQuown. "It shouldn't make much of a difference."
Incorporation provides owners and their employees with an assortment of tangible and intangible benefits. Overall, it offers a wider range of tax-advantaged investment tools (pension and profit-sharing plans among them). And the legitimacy conferred by incorporation attracts more discriminating, skilled employees.
If you're like most owners, you'll find that there will be one benefit of incorporation that will tip the scales in its favor. For McQuown, it happened to be the medical benefits. But for countless others, incorporating simply facilitates a company's growing process. If you ever want to raise capital, investors invariably prefer corporations to sole proprietorships or partnerships. And if you choose to expand market share by forming strategic alliances, your corporation can buy stock in other corporations and reap dividends that are largely tax free.
For Larry Harmon, founder of DeMar, a plumbing, heating, and air-conditioning company in Clovis, Calif., the reason for incorporating, which he did back in 1979, was frighteningly obvious: snowballing personal liability. At that time Harmon was wrestling with plenty of what-ifs. "If somebody got hurt in one of our trucks; if a technician didn't see a gas leak; if a faucet wasn't tightened enough. I didn't want to get wiped out." Harmon suspects liability is your main concern, too.
If it is, you should be aware of the courts' efforts to broaden the scope of personal liability. Today it's dangerous for principals of new corporations to continue to think and act like sole owners or partners. There are ways to break those habits and avoid potential fines, says Milton Bordwin, senior partner at the Boston law firm of Rubin & Rudman. One is not signing your own name and title to contracts that require your company's stamp; another is keeping good records of your corporate minutes. And when you file your annual report with the state department of corporations, order a certificate of legal existence. That move can prevent young corporations from having their corporate status dissolved without their say-so.
When you finally decide to incorporate, pick up Ted Nicholas's How to Form Your Own Corporation Without a Lawyer for Under $75 (Dearborn Publishing, 800-554-4379, 1992, $19.95), which includes the necessary forms, a certificate of incorporation, bylaws, and more. Be sure to have an experienced lawyer edit the completed documents before you file them.* * *
Mentoring Made Easy
Being of minority descent can be a disadvantage when you're seeking mentors for your business development. It's difficult breaking the old-boy network. How can I find a mentor?
Seasoned Energy Development
Williamsport, Pa.* * *
If you've done your homework and you're offering a good product or reputable service, people's prejudices shouldn't get in your way, says John Johnson, author of Succeeding Against the Odds (Amistad Press, 1992, $12.95), the inspiring story of his rise from near poverty to the ranks of the Forbes 400 as the publisher of national magazines such as Ebony and Jet . "Make yourself valuable, and show people what you can do to make their lives a little better."
Start relying more on your own solid track record. Henry Nash, CEO of General Scientific, an engineering-service company in Arlington, Va., suggests you turn to past business contacts (maybe a former employer or college professor) for support and constructive advice on an as-needed basis. You'll find those sessions reassuring. And to build your clientele, tell potential clients to call existing ones -- or even your bank -- to confirm your credibility. "No one's going to turn you away if you have the wherewithal to perform," Nash stresses.
You'll also increase your chances of finding a mentor if you join the local chapter of one of the networking groups for small businesses, such as the Executive Committee or the Young Presidents' Organization.
Such groups hold regular meetings that include discussions of specific business concerns. They can help you pinpoint the experienced individuals who are most willing to share their knowledge.
Now identify your strengths and weaknesses and search for people who complement them. Don't expect results overnight. "The best kind of mentor-protégé relationships evolve," says David Thomas, associate professor of organizational behavior at Harvard Business School. Since the people who can open the most doors are usually well-established and secure in their own careers, you have nothing to lose by going straight to the top. Start by contacting directors of trade associations, high-profile industry insiders, respected peers, and customers with clout. "One may have access to resources, and another may have the ability to handle any discrimination issues," says Kathy Kram, author of Mentoring at Work (University Press of America, 800-462-6420, 1988, $20).
If you find that informal networking is useless, you should sample some formal mentor-protégé matchmaking programs. Peggy O'Connor, president of Executive Services, a placement firm in Chicago, found her mentor through the state's Women's Business Development Center (312-853-3477). "I was struggling for the first couple of years, and then I found someone to share my feelings of isolation," she says. Barbara Kurowski, owner of Best Messenger Service, a courier company in Willowbrook, Ill., enrolled in the organization so she could aid another small-company owner. "Even though we're in completely different industries, the basics of decision making apply to any business," reasons Kurowski. "Any steps I can save her will keep her ahead of the competition."
To get more information about local mentoring programs, contact your state's minority-business-development agency as well as local small-business-development centers and other educational and matchmaking programs such as those offered by the Women's Opportunities Resource Center (WORC; 215-564-5500). Don't let the name fool you; WORC welcomes men, too. You might also join the National Minority Business Council (212-573-2385; annual membership is $275), which offers matchmaking services and support to its 375 members nationwide.
For more mentor-finding tactics, check out some other publications. Author Kram likes Michael Zey's The Mentor Connection (Transaction Publishers, 908-932-2280, 1991, $19.95). Johnson recommends Think and Grow Rich: A Black Choice (Ballantine, 1991, $5.99), by Dennis Kimbro and Napoleon Hill. It addresses the issues involved in getting ahead as a minority business owner.* * *
Prepping for IPOs
We're thinking about taking our company public and want to learn more about initial public offerings before we approach bankers and lawyers. What are we in for?
Name Withheld* * *
Investment bankers are looking for a good company story, which usually involves a fast growth rate (and a market to support it), profitability, and a plan to uphold consistent performance. "If you're a $20-million company, show that you can go to $100 million in five years," says Peter Gotcher, CEO of Digidesign, a company in Menlo Park, Calif., that designs and makes recording systems.
If you find such demands disconcerting, you should figure out what you really want to get out of going public. Assess your willingness to surrender control of the company. (For more on life after an IPO, see "The First Day of the Rest of Your Life," May 1993, [Article link].) And test other sources of capital, if need be.
Still interested? A preliminary step is to get your books in order. "Lay the groundwork now by starting to manage as a public company," advises Gotcher, who adds that investment bankers will want to see at least three years' worth of audited financial results.
The financier best suited to represent you is the one that doesn't buckle under the pressure of your cross-examination. Mark Cohn, chairman of Damark International, a Minneapolis direct marketer of brand-name merchandise, suggests grilling bankers on the following: What is the quality of their research coverage? What are their market-making capabilities? Can they get the transaction done? How much support will they provide once the deal is complete?
After nearly a year of research, which included multiple interviews with more than 18 banks, Cohn and his board chose 3 banks to take Damark public. One was a "hot hand at getting out IPOs." Another had substantial financial capabilities and a good reputation for its research coverage. The third was a nearby regional bank that would be able to get the surrounding community to gobble up the stock. That mix of expertise was so successful that Damark did a secondary offering 18 months after its IPO.
But you don't need Wall Street's best and brightest to take your company public. There are plenty of brokers who will do multimillion-dollar deals for small players. To find out more, call Regional Investment Brokers (708-433-5800), a national group of dealers in Highland Park, Ill. The group creates informal networks of small, independent brokers that can market your offering for you.
If you decide to sell ownership via a full-blown IPO or a small equity offering, you should expect to spend 60% to 70% of those first six months doing paperwork. "You'll need to show everything from detailed purchase orders to receivables and payables, full audits, and all requisitions," says Alan Freidman, CEO of Encon, an energy-service company in Hopkinton, Mass. (See "Doing a Small Offering," Banking and Capital, February 1993, [Article link].) Since your new life will be dominated by meetings, "make sure you have a strong management team in place, because you'll be totally absorbed in the process," says Gotcher.
For more general information, you should collect free handbooks on going public from major accounting firms. It's also a good idea to read Going Public (HarperCollins, 1992, $11), by Michael Malone and Edward Burlingame. And Buck Goldstein, chairman of Information America, an on-line database-research firm based in Atlanta, suggests attending seminars held by investment banks to get advice from knowledgeable people. "There are experts on the panel who have personally gone through the motions and have taken their companies public," he says.
-- Reported by Karen E. Carney and Vera B. Gibbons. n