Project: Liftoff

A lot of experts will tell you, as soon as you start up, “Incorporate!” Well, that’s not the right advice for many start-ups. You need to look at the issue more closely to know if forming an S Corporation, C Corporation, or LLC is right for you, or if you should continue as a Sole Proprietor or General Partner. Often, the main thing you’re told you’ll get from incorporation is “protection” – you’ll be safe from lawsuits. Well, that’s true, but that’s not the whole story. First of all, in many states, incorporating will subject you to a minimum tax; in California, where I work, it’s $800/year, no matter how little you make. That can be a lot more than many small businesspeople just starting up would pay on taxes if they remained Sole Proprietors or General Partners. Then there’s that asset protection. Incorporating means that your own personal assets will be safe from lawsuits – but not those of your business; others can still sue your business and put it out of business. And if you’re worried about being sued for loans or other credit that you can’t pay back, well, if you’re a start-up then you probably had to guarantee them personally anyway, so they’ll go after you, corporation or not. Worst of all, if they go after your corporation and drive it into bankruptcy, then you have no source of income and you’ve lost everything you worked for. No, incorporation alone isn’t the solution. The only way you can protect what you’ve built – not just your own assets, but your livelihood – is to carry proper insurance. For many kinds of business, insurance is relatively inexpensive – maybe just twice that minimum tax – and can give you a cushion against a wide variety of problems and mistakes. So, for many small businesses, it’s not liability that makes them incorporate – it’s either:

• Credit, because a lender or vendor will only extend credit to business entities, or
• Sales, because a customer will only deal with business entities

Before you incorporate, while you’re still thinking of starting your business, talk to potential vendors and customers and see whether or not they will work with a Sole Proprietor or General Partnership, or if you need that incorporation. (For instance, many large companies will only deal with vendors that are incorporated.) And then talk to an insurance agent and a lawyer. They’ll tell you if you can protect yourself against the risks you have with insurance, and if you need the additional protection that incorporation can give you. But do the math first! Blindly incorporating every single start-up is a prescription to pay the most taxes – without getting real protection.

I just got back from a lovely trip to France with my even lovelier wife. We hear a lot about how different France is – 35-hour workweeks, socialized medicine, government-sponsored retirement at 60 – but the fact is that there are a ton of small businesses in that country. Wherever I go, I find it really interesting to see how businesses work and how different situations and different systems result in different outcomes. After all, what could be a more fun way to learn than by traveling around, seeing the sights, and eating great food? Here’s what I learned from many of the businesses I interacted with in France. What’s Your Exit? One thing you always hear about countries like France is that you can find little cafés everywhere. That’s certainly true, and, the smaller and the more off the beaten path, the better the food, coffee, and service. But why should there be so many little places that have been there for decades, when we’re just now getting a place you can plop yourself down, in the form of Starbucks? My theory is that it principally comes down to retirement. France has long had a fairly generous government-provided retirement, so most French don’t need to save much. Social Security in the US doesn’t provide nearly as much. When you don’t need to worry about retirement, you can start a business that’s a nice job, rather than a complex, comparatively risky entrepreneurial venture that will grow and provide you a shot at a nice exit. Many people in the US who start small businesses – especially professional services ones like mine (oops!) – are surprised by how little they can sell them for. These cafés wouldn’t offer enough of an exit to be worth the capital investment in the US, but, in France, they don’t need a big exit to have a comfortable retirement. What’s your exit? Do you have one that provides for your retirement, or do you just own your own job? What’s the Customer Expectation? If you’ve sat in one of those cafés in France, you’ve probably been shocked by how few waitstaff they have. There’s often no busboy, maybe one runner for the whole place, and then a server or two with a section 3-4 times the size anybody would be expected to cover in the US. The result: things move much, much more slowly than they would around here, and good luck if you need a refill on your drink! But then, there are different customer expectations. We regularly took 90 minutes or more for a relaxing meal, and, even when we met French friends for lunch on a workdsy, they never rushed through their meal. When the customer doesn’t expect fast turn-arounds, then slower service isn’t a problem. Heck, it seems like the French didn’t even expect a refill on their waters anyway, so who cares if somebody comes along with a pitcher or not? There was a comparable change in the employee expectation – since they aren’t counting on a tip to make their income, there’s no push-back from servers on having more tables and providing less service. And, I’m sure, as a result of having less waitstaff, the café was able to be more profitable. What’s your customer’s actual expectation of service? What does your employee expect to provide? Can you take advantage of those to be more profitable? The Small Player Can Compete on Cost – In the Right Niche One of our favorite things to drink at meals was the pitcher de vin – a bottle-sized ceramic pitcher of the local wine, for about 6€. The wine was always unique and delicious, if not great, and, best of all, it varied by city and even by restaurant. A lot of start-ups try to compete on price, but it’s hard to do that unless you have a really unique product or process that gives you a cost lower than the big players. These local producers clearly knew how to keep their costs down; they probably operated in a low-capital-investment manner, running older vineyards without a ton of expansion or use of new techniques. They didn’t have to spend on packaging, because their wine was just being served in a pitcher. Distribution is easy, since the wine travels no more than a couple of dozen miles. Would the winery be able to compete on a national basis? Probably the investments required to increase volume would be prohibitive, and their quality – fun at the price and as a local tipple – wouldn’t be notable at any higher price, so no. But locally? It seems like every table had a pitcher on it, just like ours! Can you use your unique cost structure and niche to survive in a world with larger players, like these wineries do? Don’t Overvalue Your Big Investments (Don’t Undervalue Them Either) After we left Paris, we went to the Loire Valley. Countless wars have been fought in this part of the country, and practically every hilltop found itself home to a fortified town or castle. As time passed, and the Kings of France became powerful enough to protect the whole country, the need for the fortifications passed. So the castles were torn down and turned into luxurious châteaux – beautiful centers of local administration that showed off the noble’s wealth and power. When the power of the nobles was broken in the Revolution, the châteaux were sold off by the state and fell into disrepair. But, today, the owners – or the local government, which has taken many châteaux over – have invested money into restoring them, and turning them into jam-packed, cash-generating centers of tourism. Every big investment will eventually turn into an obsolete asset. Are you prepared to tear it down, or repurpose it, to end up with what you need today? You Can Own It Even If You Don’t Own It We finished our trip with an incredible stay on an island off of the south of France. This island is famous for its sandy beaches, but none of those beaches are private. Nonetheless, our hotel had basically taken ownership of one of the best beaches on the island, by offering free umbrellas, cushions, and towels for its guests there. So all of that hotel’s guests spend their time at that beach, and, in fact, many of the TripAdvisor reviews mention just that beach. People from other hotels aren’t blocked or kept away – but, by providing exceptional service, that beach has become identified with that hotel. They own the idea of that beach, even if they don’t physically own the land. Can you own a market by being the most strongly-identified with it? It was great to get out of the country and see how things are elsewhere. But maybe now I’ll have to see what I can learn about business from Los Angeles’s best fine dining restaurants.