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In this three-part series, we describe the primary methods a small business can use to pay its bills and examine the advantages and disadvantages of each

Part 3: Online/Electronically

By Christopher Freeburn

The rise of the Internet has created myriad opportunities for small businesses to save money and compete with their bigger competitors in almost every area of business operations. Paying bills is no different.

As Internet usage spiked among consumers and businesses over the last decade, online financial transactions exploded. Driven largely by consumer pressure, online banking-financial transactions conducted almost completely over the Internet-has become common. According to Jupiter Research, more than 50 million U.S. households and businesses use some form of online payment system to purchase goods or services or to manage checking accounts.

You can make online bill payments from any of several different kinds of accounts, including checking, credit card, and electronic accounts like PayPal. These accounts allow you to manage your overall account, as well as make payments with a few clicks of the mouse. One of the biggest benefits of these accounts is 24-hour access to your financial data. You can login at any time-and in an age of WiFi-equipped laptops and smart phones-from virtually anywhere and check your account balance, transfer funds between accounts, or pay a bill electronically. You can even take note of which payments have been credited to your account.

The number of businesses and utilities that accept some form of online payment has grown dramatically as consumers and businesses embrace the technology. "Convenience is one of the factors driving online bill payment," says Boston-based banking consultant Jim Sheridan. "It's a big plus for small business owners to be able to track payments and make changes to their accounts whenever they feel the need. You just can't do that with a traditional checking account."

Flexibility and savings
Another reason that many small business owners have chosen to use online payment systems is the flexibility they offer. Many online payment systems permit you to choose the method of payment, meaning that you can shift between paying with credit cards, bank accounts, or other electronic accounts (like PayPal). This permits small businesses to select the right payment option to best manage the business's cash flow when paying a bill.

Online bill payment systems can also be configured to function automatically, charging a periodic bill to a specific bank, credit card, or electronic account at specified intervals or on certain dates. This feature frees the small business owner from the task of having to remember the upcoming bill, write a check, and mail it, thus conserving the business owner's time and eliminating the risk that the bill will be forgotten, or the payment lost in the mail. "The ability to automatically pay monthly bills is a great feature," says Sheridan. "It takes one more task off the business owner's plate and makes sure the business is never hit with fees or penalties for late or missed payments." Additionally, online payments are generally free, thus eliminating the postal costs of mailing payments. With postal costs rising sharply, this is a savings that can add up over time.

Easy to start
As more and more companies have adopted online payment systems, it has become a lot easier to get started. Virtually every bank now offers an online account system that allows you to access your checking and saving accounts, and keep track of account activity. "Online account access is something that banks are increasingly encouraging their customers to adopt," says Sheridan. "Most online account systems are relatively simple to use, and most banks are looking to steer their customers away from paper checks, which are costly for the bank to process, and toward cheaper, electronic payment systems." Credit card companies have adopted online account management as well, permitting small business owners to access their business credit card statements online with ease. For small businesses that have distributed credit cards to their trusted employees, online access permits the business owner to check the charges made on individual cards, as well as the overall account information, at any time.

Many utilities and most major companies-office supply vendors, retailers, and insurance providers, for example-will allow you to pay bills via electronic checks. Typically, this means creating an online account with the company in question and providing certain financial information: the name of the bank from which you wish to draw funds, the number of the account, and the routing number that appears on your checks. The online bill payment system then uses this information to withdraw the funds directly from your account. Alternately, most of these systems also permit payment via credit cards or other electronic accounts.

Security concerns
Small business owners who refrain from using online bill payment methods usually cite fears regarding the security of their accounts online as a reason for not participating. While hacking remains something of a concern, most of these accounts are password protected and very secure. Companies that maintain online payment systems have invested a considerable amount of time and money to put significant security measures in place designed to thwart hackers and identity thieves.

Five good reasons to launch your startup in today's economy (and two reasons to think twice).


by Reed Richardson.


In a still fragile business climate marked by stubbornly high foreclosure rates, uneven consumer demand, and tight credit markets, budding entrepreneurs might consider right now to be one of the worst times to start a new business. But launching a startup in the midst of ongoing economic struggles can actually be a roadmap to long-term success.


According to studies by the Kauffman Foundation and the outplacement firm Challenger, Gray & Christmas, the rate of entrepreneurial activity rose significantly between 2007 and 2009. But since the start of this year, the Challenger Job Market Index has found that the pace of new startups has cooled considerably, falling to 3.4 percent in the second quarter of 2010 from 9.6 percent in the last quarter of 2009. Clearly, the earlier statistics show that many people believed there were opportunities to be seized in a struggling economy, but perhaps a fear that it's now too late to take advantage of them has scared off some more recent entrepreneurs.


If you're among the latter, however, take heart; there are still many sound reasons for starting your small business today. Below are five arguments for jumping into the business waters right now.


1. Lower threshold to entry
Entrepreneurs don't need as much capital to launch right now because resource and overhead costs are at or near historic lows in nearly every category. For example, the commercial real estate market continues to suffer from high vacancy rates, so the rent or lease payments on, say, a new retail business's storefront location, might be had for a fraction of the price commanded just a few years ago. Similar gluts in durable goods and office equipment inventories likewise mean that everything from a manufacturer's source for its raw materials to a law firm's need for photocopiers and workstations can be found at pennies on the dollar.


Seth Levine, a managing director at the Boulder, Colorado-based venture capital firm Foundry Group, says that launching a business in this type of low-cost climate impresses upon entrepreneurs the critical importance of leveraging your startup's cash flow as far as it can go. "I think they get a practical advantage from having started their companies in an environment that often requires a certain amount of stinginess, which often serves companies well throughout their lives," Levine explains. "I think businesses have a tendency at all levels to spend too much. There's nothing like a really tight market to make you look more closely at every dollar going out the door."


2. Talent is cheap and available
Another critical small business resource that can be ripe for the picking in today's economy is people. With the Labor Department reporting unemployment rates near double digits and more than five candidates per job opening, now is definitely an employer's market. What's more, the deep and widespread nature of the financial crisis has left many workers, even those still employed at large corporations, uneasy about the future and suddenly more willing to entertain a lower-salary offer from a startup.


"People are finally realizing that we are all self-employed, regardless of our work configuration," explains Pamela Slim, who authored the book Escape from Cubicle Nation and writes about the topic on a blog of the same name. "In my experience as a start-up coach, I have seen a significantly larger number of corporate employees working on a ‘side hustle,' (a small business which provides supplemental income), which can act as insurance in case of a layoff, or as the early testing stage of a full-scale business." In addition, Levine points out that the significant decline-or complete dissolution, in some cases-of many employees' 401(k)s and stock portfolios makes it even easier now to recruit from the ranks of the currently employed for a startup business.


3. Taking a risk isn't so risky
Many a successful business can trace its roots back to a particularly ignominious period in the American economy-16 of the 30 companies in the Dow Jones Industrial Average, including household names like McDonalds, General Electric, and Procter & Gamble, began during a recession or depression. For millions of Americans who have lost their jobs in the past two-plus years, being laid off became the unexpected impetus that sparked their entrepreneurial passions and, just maybe, will lead them to similarly out-sized success. And there's good reason to adopt this ‘never look back' attitude, according to Indiana University business professor David Audretsch.


"People understand that there's something different about this recession," Audretsch explains. "In the past, being laid off might have been a temporary situation, until the inevitable recovery comes. But now people are finding that many of those old jobs were not sustainable. Those jobs have disappeared for good and so they can't count on going back to the same old company and picking up where they left off." Besides, adds Audretsch, a clever business idea is still clever in a boom or a bust cycle. "Real serious entrepreneurs don't pay much attention to the business cycle."


4. Your established competition may be already weakened (or gone)
It's human nature to want to preserve what you already have, and the same phenomenon often occurs within the business world as well. That's why, in tough times, many established companies retrench, pull back advertising, and focus on keeping their current customers instead of pursuing new ones. This pullback strategy sometimes backfires completely, sending a struggling company tumbling into bankruptcy and clearing the field for a startup, or, more often, creating a market vacuum that a new small business can fill and exploit.


Moreover, new startups aren't constrained by past performance, existing infrastructure, and future expectations the way large companies often are. Instead, they are free to experiment with new products and innovative solutions, which can take more conventional businesses by surprise. Some examples of this, startup coach Slim explains, involve early-stage financing and social media marketing. "If you can't get access to credit from mainstream institutions, you have to find a way to get money directly from consumers, without spending too much on materials or infrastructure. This phenomenon is creating highly functional and streamlined business models," she notes. Likewise, she adds, "the dramatic increase in social media users also means that you can expand your market far beyond your own geography."


5. Nowhere to go but up
A small business that makes use of a slow economy as a trial period-to perfect their product or fine-tune their marketing-may be in a significantly stronger position once good times return. "The business cycle has been with us as long as anyone can remember," points out Prof. Audretsch. "When the full recovery does arrive, you want your small business to be positioned to take maximum advantage of it, instead of just moving in, hiring, and starting to set up shop."


In addition, Slim notes that small businesses that survive tough times often gain something of a psychological advantage, one that, she says, can carry over to customers as well. "Consumers are looking for confident market leaders who can help pull us all out of the economic spiral," she explains. "When they see businesses starting and growing in one of the most challenging markets in generations, that instills deep trust. Those businesses who already have trust will be well positioned for growth when things do pick up. And they will."


Despite the aforementioned reasons in the affirmative, a fair-minded assessment must also acknowledge that there are some obvious drawbacks to starting a small business right now. Here are two significant obstacles that budding entrepreneurs should prepare for before hanging out their shingles.


1. Hard to raise money
Capital is the fuel that propels the engine of business and there's no denying that, right now, much of the economy is still sputtering along on fumes. Credit markets remain constricted, meaning that your startup may have to take a more modest, measured approach rather than rolling out a million-dollar product development and marketing campaign simultaneously. To combat this, many small business owners are embracing a spartan startup mentality known as bootstrapping, but this approach won't necessarily work for every kind of business. As a result, an undercapitalized startup could easily stall out prematurely and fail or be quickly poached by a better-financed competitor, even if it is selling a fantastic new product or the next killer app.


2. Getting lost in the crowd
As the Kauffman Foundation survey found, millions of Americans have decided to strike out on their own and start a new business in the past few years. For many, this moment is the culmination of years of preparation and planning, but for some, launching a startup may simply be a matter of joining in what appears to be the latest fad. "There is a such a thing as an entrepreneurial bubble," notes Indiana Univ. Prof. Audretsch. "If everyone you know is starting a business, a kind of herd mentality sets in."


Pamela Slim agrees. "I have noticed a lot more people trying out business ideas, or launching a small business after being laid off, instead of looking for another job.
Just like you can never guarantee a corporate job will last forever, you cannot guarantee a new business will be successful," she points out. This surge of entrepreneurship will undoubtedly help drive innovation forward, she explains, but, inevitably, it will also leave lots of failed small businesses in its wake. But even in those cases, Slim sees a silver lining. "The way you gain insight and experience as an entrepreneur is by trying a lot of things, failing often, learning, and trying again," she explains. "There is no perfect time to launch, so why wait? Get out there and see if your great idea holds water in the real world."

In this four-part series, we examine the different ways to structure your small business, comparing the various advantages and disadvantages

Part IV - C Corporation

By Reed Richardson

Incorporating a small business can be a shrewd move or an unnecessary complication depending on your company's short and long-term goals. The main attraction of incorporation involves the liability protections it offers to the company's shareholders. Because a corporation is treated as a separate entity from those who run it-both in legal and tax terms, federal and state laws treat corporations as "persons"-corporate officers and stockholders have limited liability when it comes to debts or risks incurred by the company during the normal course of business. The corporate business structure also offers small business owners a myriad of ways to structure partnerships, raise capital, and survive changes in leadership, but its rather high regulatory and tax burdens make it a course of action that an entrepreneur should carefully consider before undertaking.

Operations - Corporations are, first and foremost, statutory structures regulated by state law. So, incorporating your small business will require following the rules of your local state business corporation act. For most small businesses, this will mean incorporating in the state where your company is located or does a majority of its business. Although one can find numerous do-it-yourself "incorporation kits" available on the Internet at the relatively low cost of a few hundred dollars, it's probably worth the extra money to approach a law firm that specializes in this work. Depending on your home state, the cost to incorporate a small business typically runs between $500 and $5,000.

Once incorporated, there are additional cost and time requirements. Most state laws mandate that a corporation hold at least annual shareholder meetings, keep minutes of these meetings, establish a set of corporate by-laws, and document all major company decisions. In addition, most states require the election of company officers such as a president or CEO, as well as a treasurer or comptroller.

All this complexity does bring with it some advantages, however. Well-established company rules and by-laws for dividing shares make it easier to tailor your company's operations to your needs. For example, C corps can issue stock of various classes and, unlike with LLCs or S corporations, there is no limit to the amount of shares or partnerships that a C corporation can have. Likewise, the air of permanence and legitimacy that comes with incorporating often makes a company more attractive to potential sources of outside capital, like venture capitalists or angel investors.

Some of these administrative hurdles can be avoided by incorporating in so-called tax haven states such as Delaware ( or South Dakota ( that have much lower financial and regulatory requirements. But if you do take this tack, it's important to remember that your corporation will still have to qualify to do business in your home state no matter where it's incorporated. For many small companies, this tactic won't be worth the extra hassle as it will require hiring a separate corporate agent to handle official notices and paperwork in the incorporated state.

Tax - Because corporations-and specifically C corporations-are separate legal entities, they are taxed under the IRS's corporate tax structure. Unlike in sole proprietorships, LLCs, or even S corporations, individual partners or shareholders do not have the company's net profits taxed on their individual returns. Technically, there are no "owners" of a corporation, only shareholders and company officers or directors, who are considered corporate employees. And because of this, the officers or directors in a small corporation have the flexibility to decide how much of a business's net profits will go toward employee salaries versus how much will stay with the company. This tactic of "income-splitting" can significantly reduce a company's tax burden and allows for more robust reinvestment back into the business.

Personal liability - Incorporating your small business provides the strongest protection from personal liability available, shielding the company officers, directors, and shareholders from risks-operational or financial-incurred by the business. However, it's important to weigh the financial and administrative burden of incorporating, against the relative freedom offered by LLCs, which effectively do the same thing without the requisite corporate rules and restrictions.

Benefits - Other advantages to incorporating involve the benefits that a corporation can offer to its company officers and employees. Fringe benefits like health and life insurance policies purchased by the corporation for its employees are not considered taxable salary and so the officers and employees receiving them do so tax-free. And often, the corporation can deduct the cost of providing these benefits.
In this four-part series, we examine the different ways to structure your small business, comparing the various advantages and disadvantages of each


Part III - S Corporation


By Reed Richardson


The notion of a forming an incorporated business that would also enjoy many of the same pass-through tax advantages as a sole proprietorship or general partnership was what prompted the IRS to first create S corporations more than 50 years ago. At the time, S corporations were a fairly effective way for small business owners to hedge against liability while still retaining more control over their companies and profits. However, the popularity of S corporations has waned noticeably in recent years. "Limited liability companies have largely replaced S corporations," noted tax attorney and author Anthony Mancuso, in his book LLC or Corporation? "The LLC provides substantially the same benefits as an S corporation without several of the significant restrictions of S corporations." What are those restrictions and how do the two business structures compare? We weigh these in our point-by-point discussion below:

Operations - Both the S corporation and the more traditional C corporation (for more on C corporations see Part IV in this series) are established using the same procedures. First, the new company must establish a corporate charter naming its shareholders. Only then can the new corporation elect to convert itself to an S corporation through a filing of Form 2553 ( to the IRS. Similarly, S corporations must abide by all the normal rules of corporate governance involving the issuance of stock, election of company officers, holding of regular (at the minimum, annual) meetings of a board of directors, keeping of minutes of these meetings, and following any other rules established by your state's corporation code. While many of these amount to little more than a formality for a very small business, they do add to the administrative burden of the small business owner. LLCs, by contrast, are largely free of these administrative hassles.

Tax - What is most important to understand about S corporations is that there is really no difference between them and a regular C corporation in legal terms. The major difference between the two business structures involves how they are taxed under federal law. (The "S" actually stands for "subchapter S," which is the applicable part of the U.S. Tax Code that covers S corporations.) As with a sole proprietorship, general partnership, LLC, or LLP, S corporation profits can pass through to the shareholders and be reported on their individual tax returns, making for a much easier filing process come tax time. And while an S corporation pays no federal corporate taxes, one must still file a corporate return (Form 1120S) for informational purposes only. However, keep in mind that some states still require payment on S corporation profits in addition to taxing the passed-through profits on a shareholder's individual return-in effect, taxing those gains twice-so it's imperative to check with your state's tax division and weigh the impact before electing to go the S corporation route. Again, LLCs and LLPs typically avoid this potential for an additional tax burden, although some states do require LLCs to pay a roughly equivalent "franchise tax" in addition to the individual income taxes paid on company profits.


One other somewhat arcane, yet important, point related to taxes: Shareholder debt in an S corporation cannot be passed through unless each member has personally guaranteed it. As a result, a shareholder's tax basis in an S corporation does not increase when the company borrows money. LLCs, on the other hand, allow shareholders to enjoy the tax benefits of this business debt whether or not they've personally guaranteed it, making it less likely that they'll be taxed on the business's profits in the long term.

Personal liability - Per the rules of incorporation, an S corporation automatically provides shareholders personal liability from risks-operational or financial-incurred by the business. However, LLCs effectively do the same thing without the requisite corporate rules and restrictions.

Raising capital/adding partners - Unlike a standard C corporation, S corporations are limited to a maximum of 100 shareholders, can only issue one class of stock, and only U.S. citizens or residents may participate. LLCs, on the other hand, let pretty much anyone or anything-U.S. citizen, foreign citizen, another LLC, or corporation-become a member. For most entrepreneurs, the 100-shareholder limit isn't much of an operational constraint, but it is an important consideration if your start-up business is expected to grow rapidly or seek out large sources of outside capital. In that case, the inability to create large private or public stock offerings or issue preferred shares could be a potential drawback. Note, though, that the federal tax code does allow a husband and wife to treat their joint stock holdings as those of a single shareholder.

Be sure to come back for Part IV in our business organization series, which deals with the pros and cons of the C-Corp structure.

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