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Starting a Business: Step One

Starting a Business: Step One
Pat Dickson - Fri Jun 08, 2012 @ 09:34AM
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I have been a business lawyer for nearly 20 years. Until recently, I have always given my clients the wrong answer to what should have been a pretty simple question. 

"What is the first step to starting a business?"

The correct answer is "Make a Sale."

The plethora of wrong answers I've previously given include one or a multitude of, but are not limited to, and are not listed in any particular order: form a corporate entity, come up with a good business name and reserve it, get a business license, talk to an accountant about this or that, file for a patent, trademark or copyright this or that, protect this or that trade secret, come up with a business plan, spend $10,000 on computers and software, license this or that, go seek investors, build vendor relationships, do surveys of potential customers, apply for a line of credit, get an IRS tax ID number, obtain insurance coverage or surety bonding, research this or that legal issue, do a market survey, talk to professor so and so, find a warehouse, buy equipment, rent a facility, create a website, print business cards, prepare all your standard form contracts, draft a partnership agreement, work on management bios, file for a contractor's license, become a member of the local chamber of commerce, research zoning laws, talk to your mayor or city councilman, attend a bunch of seminars..."

What a boiling quagmire of wrong answers! Sadly, many hopeful new businesses promoters, and even experienced attorneys, get tangled in this complex web. How much would half of this stuff cost you in time and money? That's exactly it! Why should you even bother with any of this nasty, above-listed cauldron of bubbling miscellany, at least not before you are selling your products and services?

Shouldn't you first prove you can make a sale? It will cost a lot less if you fail.

Yes, there are exceptions. In some cases you can't even make a sale until you've done substantial groundwork. But in most cases, the product or service you are offering is already in existence, right? If not, you need to ask yourself whether you are putting the cart before the horse. Why build a business before you even have something to sell? Sadly, many companies have failed because they spent millions of dollars on infrastructure and they didn't even have a product or service to sell in the first place. Don't believe me? There is a reason why the bubble burst in Silicon Valley over 10 years ago. Many companies in Silicon Valley failed because they put the cart before the horse. They started their businesses, and incurred a lot of cost, before they even had anything to sell. It sounds absurd, but it is true.

Nevertheless, my point is this: until you know you can sell your products or services, why waste substantial time and money putting a business entity together? Make a sale first. Generate revenue. Today's businesses unfortunately have to deal will navigating and complying with a costly legal and bureaucratic system. It is only wise to prove you can generate sales first. You want to bear the cost of doing business with the revenue you create, not the money in your savings account.

Put another way, most new businesses fail. Why spend money creating an entire infrastructure before you know whether your product or service will sell?

Caveat, there are cases where you have to be in legal compliance before selling certain products or services. Some professions require licenses to sell services. Some products, like medical devices, require FDA approval before being put into the market. Sometimes you must have a license to sell hot dogs from a cart on a street corner. Sadly, it is only advisable to always consult with an attorney to know the bare minimum legal requirements for making a sale in the first place. My apologies for sounding contradictory.

In closing, my goal with this article is just to encourage business owners/promoters to carefully consider which business formation, legal, and administrative costs to bear before they are selling. Over and over I see cases where business startup costs are a lot greater than they need to be. Nevertheless, I want to emphasize the primary purpose of any commercial entity is to make money, right?

This is why it is my opinion the first step to starting a business is simple:


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