General Partnerships: Easy to Form but Lots of Liability

Deciding how to legally structure your business is one of the first steps to forming a new company. Your business’s structure informs how you’ll pay taxes and to what extent you’ll be personally liable for company debts or lawsuits. When you’re just starting out, a general partnership can be a good business structure to consider because it’s easy and inexpensive to set up. However, general partnerships also saddle the partners with a lot of personal liability.

Overview of general partnerships

A general partnership is an unincorporated business owned and run equally by two or more people known as general partners. Each general partner shares responsibility for the business’s profits, losses and debts, and managing the business day to day.

If you’ve agreed to go into business with another person, you’re already running a general partnership. You don’t have to register with state agencies to officially form one, unlike limited liability partnerships (LLPs), limited liability companies (LLCs) and corporations.

A general partnership is easy to set up, but it’s also risky because as a general partner, you and the business are one and the same; if the business gets sued or owes money to creditors, it’s as if you get sued or owe creditors. In a general partnership, you’ll also face the challenge of splitting responsibilities, profits and losses with the other partners, unlike in a sole proprietorship, where you’d have full control of business decisions and full responsibility for your business’s financials.

Even if you go into business with a family member or your best friend, it’s smart to create a partnership agreement, a legal document that spells out each partner’s’ rights and responsibilities in the business. Creating this agreement at the beginning of your partnership will help you and your partners think through tough questions like “How will we split profits and losses?” and “What happens if one partner leaves the business?” Putting answers to these questions in writing can help you prevent future conflicts, or at least provide a framework to help you and your partners settle disagreements when they arise.

If you want to go into business with a partner, starting as a general partnership is a good strategy. It’s easy and inexpensive to form, which will save you time and money while you focus on other aspects of starting your business, such as writing a business plan, acquiring funding and finding customers. However, it will likely make sense for you to consider forming an LLC or corporation later on to decrease your personal liability.

Advantages of general partnerships

• They’re easy and inexpensive to form. You don’t have to file paperwork with your state to start a general partnership; it’s automatically in place as soon as you and your partner go into business.

• It’s a straightforward process to convert to another business structure. Since general partnerships don’t require much paperwork, it’s easy to change one to another business structure if you so choose. For example, say your business starts as a general partnership, but two years in, you decide to form an LLC to decrease your personal risk. The conversion process differs by state, but generally it involves dissolving the general partnership and filing paperwork to form an LLC, or simply filing conversion paperwork.

Disadvantages of general partnerships

• You and your partners carry a large amount of personal liability. You and the other general partners are personally liable for all of the business’s debts and lawsuits, and the actions of the other partners. If your business doesn’t pay your supplier or lender, you and your partners are responsible for those debts, and creditors can go after your personal assets, including your home or car.

• Shared ownership can get complicated. A partnership is like a marriage; all partners have equal ownership and decision-making responsibilities, which can become difficult if you and your partners disagree. Experts recommend creating a partnership agreement to formally outline how to handle responsibilities and conflicts within the business.

NerdWallet verdict

You should consider structuring your business as a partnership if you’re a new business and want to test your concept before putting time and money into incorporating. Once you’re committed to the business, give serious thought to converting the partnership to an LLC, LLP or a corporation to lessen your personal risk for the business’s debts and losses.

You shouldn’t form a partnership if your business inherently deals with issues of liability, such as in a medical practice or a roofing company. If your business gets sued, you and the other general partners are personally responsible for paying any damages, and creditors can go after your homes, cars and other personal assets.

How to get started

1. Name your business. The name of your partnership is automatically the surnames of all partners. For example, if your name is Sue Johnson and you and Bob Green open a flower shop together, your business is legally called “Johnson & Green.” To do business under a different type of name, you have to register a Doing Business As (DBA) name to claim your business’s fictitious or assumed name. To extend the previous example, you and Bob would have to register with your state government to be able to go into business using the name “Flowers-R-Us.”
2. Get the proper licenses and permits for your business. Depending on your state, locality and industry, you need certain licenses and permits to legally operate. Use the SBA Business Licenses and Permits search tool to find links to the relevant paperwork you’ll need.
3. Create a written partnership agreement between all partners. A General Partnership agreement isn’t legally required, but it’s highly recommended as a way to document the terms of your partnership and the expectations of all its general partners. Your general partnership agreement should outline how you and your partners will share responsibilities, split profits and losses, solve disagreements, change ownership and dissolve the partnership.

File income taxes as a general partnership

Your partnership itself doesn’t pay income taxes at the business level. Instead, the taxes “pass through” the partnership to you and the other general partners. Your partnership still has to file an annual information return (Form 1065) to report its income, deductions, gains and losses to the IRS.

Your partnership also must file a Schedule K-1 for each of the general partners to report how much of the business’s income each partner is responsible for. You and your partners need to report that income on your individual tax returns.

Top states for general partnerships

In general, Delaware and Nevada are considered to be the best states for businesses because their state laws offer tax advantages. However, since general partnerships don’t need to register with a state to form, state doesn’t matter as much as it does for an LLC or corporation.

Next steps

If a general partnership makes sense for your business, work with an attorney to create a partnership agreement between you and your partners, or create your own agreement using an online template.

If you’re still unsure about how to structure your business, read about your other options, including a sole proprietorship, limited liability partnership, limited liability company and a corporation. It’s also a good idea to talk to an attorney, accountant or a financial advisor to double check that the structure you choose is the best option for your business.

For more information about how to start your business, visit NerdWallet’s Small Business Guide.

Teddy Nykiel is a staff writer covering personal finance for NerdWallet. Follow her on Twitter @teddynykiel and on Google+.

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Advantages and Disadvantages of Sole Proprietorships

A sole proprietorship is by far the most popular business structure in the United States. More than 70% of U.S. companies can be classified this way, according to the Small Business Administration. They include restaurants, online Etsy shops and even freelance consultants.

One reason this business type is so common is because it’s practically the default for entrepreneurs. If you’re putting time and effort toward an activity for profit, you have a business. And if you haven’t set up a specific structure, such as an LLC or corporation, and you’re not in partnership with someone else, then you have a sole proprietorship. In short, the definition of a sole proprietorship is an unincorporated business owned by one person who pays personal income taxes on its profits.

Running your company as a sole proprietor has many advantages, but there are some drawbacks as well.

Advantages of sole proprietorships

This business type is great for you if you don’t have the resources to do a lot of paperwork. With a sole proprietorship, you don’t have to spend time writing bylaws, issuing stock or making complicated financial decisions, so you can spend more time focusing on your company. When it comes to taxes, income and expenses are simply reported on your personal return, using the form Schedule C.

A sole proprietorship is defined as a pass-through entity because there is no separate tax on business profits. Instead, earnings are “passed through” to you to file on your personal taxes. Other business structures can serve as pass-through entities, but they’re usually more complex to set up and maintain.

Another benefit of sole proprietorships is that you can deduct company expenses on your personal return, even if those expenses are higher than business income.

“Your business might have losses in the first few years until it gets established. You’d generally want to put those losses on an individual return so you could offset them against other income,” says Mark Luscombe, principal analyst at Wolters Kluwer tax and accounting company in Riverwoods, Illinois.

Another benefit: When customers and clients pay you, income taxes don’t have to be withheld. You get more money upfront, which can help with business cash flow. However, you do have to pay estimated quarterly income taxes to the IRS or risk penalties.

Disadvantages of sole proprietorships

If you could easily face lawsuits in your line of work, think twice about a sole proprietorship. Since your business assets are not separate from your personal assets, liability risk is a major drawback. If a disgruntled person sues your company, all of your property could be exposed, including your home and car.

Say an employee of yours causes a traffic accident while working and hurts someone. The injured party could potentially sue you for damages. If you or an employee sends out a tweet that defames someone, you may be sued for libel.

You can limit this risk, however, by buying adequate liability insurance. In fact, some of your customers may require you to carry insurance before they agree to do business with your company.

Other business structures, such as LLCs or corporations, keep your business assets separate from your personal concerns. But you could still face lawsuits regardless of business type.

In addition to liability risk, another drawback of sole proprietorships is that they tend to face tighter scrutiny at tax time.

“For many sole proprietorships where only one person is involved, there’s no one else double-checking what they’re doing in terms of claiming expenses,” Luscombe says.

This could lead to fraud.

“If you look at the audit statistics, the IRS has one of their highest rates for sole proprietorships,” he says.

More than 2% of sole proprietor business returns reporting income between $25,000 and $100,000 were audited in 2014, according to the IRS. That’s compared with an audit rate of only 0.4% for all S corporations and 0.4% for partnerships.

Another downside to sole proprietorships is that when profits increase, you have to pay higher Social Security and Medicare taxes. The current rate for these payments is 15.3% of annual income that exceeds $400.

NerdWallet verdict

Being a sole proprietor is a good idea if you have adequate insurance and you estimate that the cost of paying your self-employment taxes will be less than the cost of creating a more complex business structure (in both time and money). Examples of good sole proprietor entrepreneurs are web designers, IT consultants and hairstylists.

As your company grows, and if you consider hiring employees, the Nerds suggest you look at other business structures for tax and liability advantages. If you’re running, say, an auto shop, a clothing store or a gym with employees, you should consider filing as a corporation or an LLC.

How to get started

• You might have already begun. If you’re in business for yourself, you haven’t formed any other type of entity and you don’t have a partner, then you’re already a sole proprietorship.
• Get a business license and permits. Contact your city or county clerk for more information on local requirements, and the office of your secretary of state for other licensing rules.
• Apply for a free Employer Identification Number from the IRS. Many clients will require a tax number on invoices. It’s not a good idea to share your Social Security information on these documents, because of the risk of identity theft. Use an EIN instead.
• File for a fictitious business name (also called “Doing Business As” or DBA) with your local municipality if you don’t have an LLC. When you have a DBA, clients can write checks to the name of your company instead of to you, and that makes a better impression. You’d probably get more business as “John Smith Landscaping” than you would as plain old “John Smith”. You’ll have to search local records to make sure your desired name isn’t being used by someone else, and you should also make sure you don’t infringe on another company’s trademark. (You can search for active trademarks at the United States Patent and Trademark Office.)
• Open a business checking account to go alongside your personal account. Even though you will report business and personal income and expenses together, you should keep the money separate, so in the event of an audit you can prove your deductions are for business purposes.
• If you’re married and go into business with your spouse, determine how both of you will file taxes. The IRS would ordinarily view your company as a partnership, and filing requirements would be different. Spouses living in one of the nine community property states can treat their business as a sole proprietorship, and those in the other states can file as a qualified joint venture, which is similar. Each individual would then report his or her share of business income and expense on a separate Schedule C.

For more information about how to start a small business, visit NerdWallet’s Small Business Guide.

Margarette Burnette is a staff writer covering personal finance for NerdWallet. Follow her on Twitter @margarette and on Google+.

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Texas Hill Country Wineries Find Success Amid Growing Pains

California and Oregon may be the first states you think of when it comes to U.S.-produced wine, but Texas is hoping to earn its place on that list. The largest wine-growing region in Texas, the Hill Country, is home to more than 70 wineries.

Keith Wallace, former winemaker, wine consultant and founder of the Wine School of Philadelphia, began noticing Texas Hill Country wines 10 to 15 years ago. “Even a decade ago, it was clear that parts of Texas were really doing something interesting,” Wallace recalls. “They were looking at grapes that weren’t really planted anywhere else and were being successful with grapes that nobody else was growing successfully.”

California still dominates the industry, producing 90% of the country’s wine, according to Golden State advocacy group Wine Institute. Texas has fought its way to being the nation’s fifth largest wine producer, though Wallace says about 90% stays in the state. Experts say wineries in the Texas Hill Country aren’t yet able to grow enough grapes to produce the volume needed for national distribution, and Texas has such a large demand for wine, almost all made is easily sold in-state. And the local demand continues to increase: The Texas wine industry is now so large, it contributed $1.88 billion to the state economy in 2013, says Debbie Reynolds, executive director of the Texas Wine & Grape Growers Association. She projects it will exceed $2 billion by 2016.

Entrepreneurs are jumping into the booming Texas wine industry, and although it’s possible to make money, it’s a costly and complicated endeavor. “The wine business is pretty well everything — it’s an agricultural operation, it’s a production operation with winemaking, it’s hospitality, it’s retail,” says Julie Kuhlken, co-owner of Pedernales Cellars in Stonewall, Texas. “There are a lot of moving parts, and a lot of experimentation is needed to know what you should be growing and what’s going to work.”

Types of wine grown

Winegrowers in the Hill Country have found huge success with tempranillo, which Wallace says was rarely grown outside of its native Spain, but is exceptional in Texas. Hill Country wineries are also succeeding with grenache, syrah and mourvedre — Rhone varietals grown in the Mediterranean area of France that thrive in Texas heat, he says.

Viognier has also been a hit, and local winemakers are experimenting with other French and Spanish varietals, Kuhlken says. Although cabernet is grown in Texas, it’s hard to make well every year due to the climate, she adds.

Benefits of opening a Hill Country winery

Experimentation and innovation

Kuhlken says Texas winemakers originally thought they’d have to plant the same grapes as California since that’s what consumers are used to, but they realized the same grapes wouldn’t be successful there.

This led to an environment of experimentation, she says. Kuhlken points out that this is unlike California, which is highly regulated and stuck with certain grapes that have proven profitable, even if the climate and resulting wine aren’t ideal.

Jeff Ogle is the general manager of Duchman Family Winery, a 10-year-old operation in Driftwood, Texas. He says since the state is still nailing down varietal selection, these experiments are expensive gambles as new vines typically take years to produce viable grapes, and not everything works out. However, Ogle believes it’s gratifying to learn more each year about how to successfully grow grapes in Texas and consistently improve with each harvest.

A tourist hub

One of the Hill Country’s main wine trails follows Highway 290. It starts just west of Austin and ends in Fredericksburg, which has long been popular for beautiful scenery and attractions like the LBJ Ranch. Reynolds says as Fredericksburg has grown as a travel destination, it was a natural progression for wineries to arrive. With their opening, an influx of tourists followed. Ogle says the proximity to Austin, the state capital, also provides exposure to a large nearby population. The area is now so highly trafficked, some wineries from other areas have opened satellite tasting rooms along 290.

The wine industry in the Hill Country can attribute much of its success to being oriented toward selling directly to consumers rather than going into distribution, Kuhlken observes. She says this is partially due to tasting rooms along wine trails and wine clubs.

Old World style

The California wine industry focuses on creating wines that are the same year to year, Kuhlken says. “It’s a success, but it’s also not traditional to winemaking to try to make them taste exactly the same from year to year,” she says. Kuhlken believes if Texas wines continue to become more successful, vintages will matter in a way they don’t in California. “Texas is Old World in this way; you could never make them taste the same year to year since the growing conditions are so different each year.”

Downsides of opening a Hill Country winery

Lack of infrastructure

As a newer wine region, the Texas Hill Country doesn’t have the infrastructure you’d find somewhere like in Napa, California, Kulhken says. There are not yet vineyard management companies that can help someone plant and manage a small vineyard since there isn’t scale to justify it.

She says lack of warehousing space is another infrastructure challenge. Having air-conditioned storage is vital, and many wineries don’t find out until too late that they don’t have enough room for their cases. She opened a warehousing facility a year ago, and other Hill Country wineries rent space from her when they run out of room.

Unpredictable weather

“I would say our biggest issue in Texas is the weather, which isn’t consistent or predictable, so we struggle with predicting how much we’ll be bringing in each year and managing those inventories,” Ogle explains. He says two of the last four years were tough weather ones with very low yields, and this irregularity requires flexibility with inventory handling.

Kuhlken points out that the Texas Hill Country has additional concerns some wine regions don’t, such as light spring frosts, occasional hailstorms and grape-eating animals (deer fences are required).

Massive time and financial investment

When someone asks Ogle about opening a winery, he tries to dissuade them because of the high barriers to entry, including start-up expenses that can run into the millions. “It’s such a young industry that a lot of those expenditures in terms of equipment and acreage haven’t been fully capitalized yet, so the costs are still very high,” he says.

Reynolds says the investment in the equipment alone is substantial, leading some neighboring wineries to combine efforts by sharing storage or producing the wine at someone else’s winery (she advises choosing neighbors strategically). Additionally, winemaking is a complicated craft usually requiring years of hands-on experience to succeed. Unless you are already seasoned, you must also spend money on staffers who know how to grow grapes, make wine and operate your business.

This isn’t a business you can enter overnight, Reynolds says — it takes major planning, including obtaining federal approval and numerous state permits. She recommends finding an attorney knowledgeable in liquor law before making the leap. If you plan to make your own wine and sell your own brand, know that it will likely take years to grow, age and bottle wine before you have anything to sell, she says. Some new wineries open a tasting room and sell other local wines until they have their own.

Resources for starting a winery

The Texas Wine & Grape Growers Association advocates for members of the industry and offers educational opportunities for those interested in the business. The Texas Department of Agriculture also has an online guide for starting a winery in the state. The Texas Winegrape Network is another treasure trove of information on grape growing and winemaking in the Lone Star State.

Although Texas Hill Country winemaking is an expensive and challenging industry to break in to, its spirit of innovation and growth holds promise for a bright future.

Emily Starbuck Crone is a staff writer covering personal finance for NerdWallet. Follow her on Twitter @emstarbuck and on Google+.

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For more information about how to start and run a business, visit NerdWallet’s Small Business Guide. For free, personalized answers to questions about starting and financing your business, visit the Small Business section of NerdWallet’s Ask an Advisor page.

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5 Ways Teens Can Start Managing Their Money

Corbin Atack sees some classmates putting little thought into managing money.

“A lot of them like to go out and buy lunch, because it’s a new thing you get to do in high school,” the Seattle ninth-grader says. They also spend on goodies like video games and basketball shoes.

But Atack and other teens have started setting money aside for pricier purchases and even as investments for the future.

Financial habits — good or bad — are established early. Financial experts and educators recommend five ways teens can start building good ones.

1. Practice first, then budget

Teens don’t get to take off alone with the car after a written test, says Brian Page, who teaches personal finance at Reading High School, in Reading, Ohio. “They need experience first. Managing money shouldn’t be any different.”

He suggests teens practice using programs like the H&R Block Budget Challenge.

Next, look into smartphone apps that help manage money, advises Rebecca Wiggins, executive director of the Association for Financial Counseling and Planning Education. “This encourages mindful spending and provides a feeling of accomplishment as goals are met.”

2. Make some money

“Do something to earn a little money,” suggests Laura Levine, president and chief executive of the Jump$tart Coalition for Personal Financial Literacy. “It is a great place to start building that work ethic and that focus on money as something earned, not something you’re entitled to.”

Atack does yard work around the neighborhood to earn cash. Olivia Sterne, a Seattle 11th-grader, has babysat and acted for money, and just applied at a diner for her first regular job.

“I think it’s good to learn how to do that stuff now, when it’s not of catastrophic importance,” she says.

Unlike school, work comes with a boss who will fire employees who don’t meet expectations, Page says. But he advises teens to limit jobs to 15 hours a week or less: “It should never impact their academics.”

3. Open checking and savings accounts

Sterne and Atack’s parents opened bank accounts for them. Now, Sterne is about to get her first debit card.

“As I’ve gotten older, I’ve been more responsible for paying for my own stuff,” she explains.

Page advises teens to find a federally insured bank or credit union with low or no fees, open both checking and savings accounts, and set up direct deposit of paychecks, automatically dividing money between the accounts. This helps ensure that some pay is set aside.

“It’s important to begin the habit of saving,” Page says. “It’s something as simple as saving for a prom dress, or it could be saving for a car.” This way, he adds, kids “experience the rewarding feeling that comes from saving for and reaching a financial goal.”

Atack recently saved up for a new snowboard. That involved sacrifice, like when friends went out for a soda.

“You totally want to go with them, but you can’t,” he says.

Teens who want a car should check out a cost estimator to better understand what they’re getting into, Page suggests. “It’s a really expensive decision.”

Teens also should think really long-term and put some money into a retirement account, Wiggins says. “This not only starts an important conversation of long-term savings and retirement, but it is an opportunity to teach them the value of compound interest.”

Atack started investing in index funds a couple of years ago, after reading about them in a book his dad recommended. Such funds track market gauges like the Standard & Poor’s 500 Index of shares.

4. Start building credit, and know the terms

After turning 18, teens should get a savings-backed credit card with a low spending limit, strictly to build credit, Page advises. “Borrow no more than 10% of the limit and pay it back on time and in full every time.”

People should request free credit reports from all three major credit bureaus through annualcreditreport.com on their 18th birthdays and get new ones every year, Page says.

Younger teens don’t need to rush to build credit, but should learn the difference between credit, prepaid and debit cards, and understand the terms of each financial instrument, Levine says.

5. Research decisions about the future

Teens nearing the end of high school should complete the Free Application for Federal Student Aid, or FAFSA, to understand their college financial aid picture, compare schools, prioritize subsidized loans and not borrow more than what they’re likely to earn in the first year of work after graduation, Page says. Check the Bureau of Labor Statistics’ Occupational Outlook Handbook to see what different careers pay.

Finally, teens shouldn’t worry about making mistakes. The point is to learn now, while the stakes are low. That will help them avoid much costlier adult missteps.

Aubrey Cohen is a staff writer covering insurance and investing for NerdWallet. Follow him on Twitter @aubreycohen and on Google+.

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From Food Truck to Restaurant: 6 Who Made the Leap

When it comes to opening a food business, some entrepreneurs start on wheels before expanding to a brick-and-mortar location. Food trucks can give aspiring restaurateurs a chance to perfect menu items, build a customer base and establish a brand before investing in an expensive permanent location.

“The nice thing about a food truck is it’s a lower barrier to entry, and you can make a lot of adjustments — where you’re vending, your menu, your customer base,”  says Matt Geller, founder of the National Food Truck Association, which represents regional food truck groups around the country.

When food truck owners eventually do open restaurants, many decide to keep their vehicles operating as an advertising tool. “Your food truck just ends up being a moving billboard,” Geller says.

Regulations for food trucks vary by location, but all operations need a health permit and a business license, Geller says. In some places, food trucks also need parking permits, and some cities require all food to be prepared off the truck in a commissary, or production kitchen.

NerdWallet talked to six successful entrepreneurs from around the U.S. about making the transition from food truck to restaurant.

Skillet

Seattle

Skillet began selling classic American fare in 2007 out of a vintage Airstream trailer. Since then, the company has expanded to include two additional trucks, three brick-and-mortar locations and a catering company.

“Running a food truck is profitable, but the margins are on the low side because of gas and parking permits,” Skillet Group President Jon Severson tells NerdWallet. “In a brick-and-mortar, you need more money to start up, but you have more opportunities to create a complete guest experience.”

Skillet also has a line of products, including its original bacon jam, spreads and pumpkin ketchups, sold in specialty food stores and some Costco and Whole Foods locations. Travelers on Alaska Airlines will find Skillet’s bacon jam slathered on the grilled cheese sandwiches offered on the in-flight menu.
 
 

Curry Up Now

San Francisco Bay Area

Curry Up Now began as a single food truck in 2009 and has since grown to five trucks, three brick-and-mortar restaurants and a catering business. It has plans to open three additional locations later this year. Although they had always been aspiring restaurateurs, owners Akash and Rana Kapoor had no experience in the restaurant business prior to opening their first truck.

“We wanted to prove our concept on a truck with a low budget,” says Akash, a native of northern India.

Curry Up Now puts a new spin on Indian street food, with menu items such as “Naughty Naan,” which Kapoor describes as pizza on Indian naan bread, and “Sexy Fries,” sweet potato fries topped with cheese, fried leeks and meat.
 
 

The Peached Tortilla

Austin, Texas

 The Peached Tortilla started its food truck in 2010. It later added a catering company and then opened a permanent restaurant location in December 2014. Founder Eric Silverstein considers each component integral to his business: The food truck was the catalyst, the restaurant is the art and the catering company is the moneymaker.

“With a restaurant, it’s more about painting your own masterpiece.” Silverstein tells NerdWallet. “Catering is more lucrative. It’s less about ego and more about making the customer happy.”

A fusion of Asian cuisine and Southern comfort food, The Peached Tortilla serves bahn mi and BBQ brisket tacos, pork belly bowls with kimchi, egg and pickled daikon carrots, and “Southern Fun” — an item with braised brisket, kale, bean sprouts and rice noodles.
 

Chef Shack Ranch

Minneapolis

Chefs Carrie Summer and Lisa Carlson started the Chef Shack food truck in 2008. They opened a brick-and-mortar restaurant, Chef Shack Ranch, four years later, partly because they were uncertain about the future of the food truck trend.

“What if people get tired of it? What if gas prices shoot up to $10 per gallon?” Summer recalls wondering. “We really wanted to be ahead of that.”

Having worked in professional kitchens prior to the Chef Shack, Summer and Carlson bring a level of sophistication to the otherwise traditional barbecue menu. In addition to the usual suspects — smoked brisket, biscuits and slaw — the Chef Shack serves Indian-spiced donuts, creme brulee and chocolate mousse.
 
 

Korilla BBQ

New York City

The Korilla BBQ food truck began rolling in 2010, with owner Edward Song essentially learning on the job. In the food truck’s early days, Song didn’t know how to turn on the truck’s propane grill, which led to lost eyebrows, singed eyelashes and even third-degree burns. Song got slammed with parking tickets and, like all food truck owners, had to deal with frequent truck repairs.

 “Trucks break down at the worst times possible,” Song says. “It’s what we call a double whammy: Not only do we have to pay for the repairs, but we also miss out on that revenue.”

 Korilla BBQ survived those struggles, and Song opened a brick-and-mortar location in October 2014 in New York’s East Village. He says running a restaurant is easier than running a truck because now there’s a permanent location where customers can consistently find Korilla BBQ’s burritos, rice bowls, noodles and salads.
 
 

Mei Mei

Boston

Mei Mei Street Kitchen is a sibling-run food truck that began in 2012. Andrew, Margaret and Irene Li wanted to source ingredients from local farms, and that was easier to pull off on the smaller scale of a truck than in a full restaurant. It was also less expensive, and it allowed them to test their menu and build a brand before opening their brick-and-mortar restaurant in 2013.

Mei Mei, which means “little sister” in Chinese, serves seasonal dishes, including green coconut curry, pumpkin spice fritters, dumplings, soy ginger noodle salad and steam buns. Even before opening the truck, the siblings rented space in another restaurant to host a pop-up event where they tested recipes and passed out surveys for guests to give feedback.

“There’s so much you can do to build a brand these days with pop-up events,” Margaret tells NerdWallet. “You don’t have to have your own space to get your name out there.”

For more information about how to start and run a business, visit NerdWallet’s Small Business Guide. For free, personalized answers to questions about starting and financing your business, visit the Small Business section of NerdWallet’s Ask an Advisor page.

Teddy Nykiel is a staff writer covering personal finance for NerdWallet. Follow her on Twitter @teddynykiel and on Google+. Contact her at teddy@nerdwallet.com.

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Images courtesy of Skillet, Curry Up Now, The Peached Tortilla, Chef Shack, Korilla BBQ and Mei Mei. 

 

 

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Small Business Success Story: How Daily Greens Grew From Niche to Nationwide

A decade ago, Shauna Martin was 33 years old and terrified when she was diagnosed with breast cancer. As a busy mergers and acquisitions lawyer, she took off only a few days around chemotherapy and surgeries.

Even after undergoing a grueling year of treatment, the Austin, Texas, resident was still at high risk for recurrence and even death. She felt physically broken from the toxins and multiple surgeries.

“I decided to take matters into my own hands, and I went on my own journey of self-health,” Martin says. Her mission to feel better and avoid recurrence led her to explore the connection between food and disease, and she began drinking green juice daily and eating a vegan diet. “It moved the dial for me very quickly back to thriving,” she recalls.

She says the green veggie juice felt like a magic pill as it flooded her body with nutrients. Her family began juicing, too, but after a few months they quit due to the hassle and asked Martin to make it for them. She continued since she believed everyone deserved access to it, and she experimented until she found recipes even skeptics loved.

Around three years ago, Martin began questioning her career path and decided to turn her passion into a business called Daily Greens. She continued working as a lawyer to bootstrap the organic, cold-pressed juice operation and faced challenges, such as having to procure uncommon equipment and lacking distribution options in her town. But a year later, she was able to leave the law and focus fully on bringing green juice to everyone.

“Daily Greens is a great example of a local food company with a product idea that was created and incubated out of Austin and worked its way up from a small niche product in the farmers markets to a well-branded national brand,” says Daniel Heron, organizer of the Food + Tech Austin community.

Entering a new market

Martin knew juice was expensive to make, especially since local juice shops charged $10-$12 per drink. She knew it could be more affordable if produced at scale. She started researching technology, cold-calling around 50 people to learn more.

She discovered high-pressure processing machines, which remove bacteria through pressure rather than heat — leaving the juice raw with nutrients intact while extending shelf life. The equipment wasn’t available locally, but she was introduced to someone who had one of the machines 200 miles away in Dallas. Martin decided to try producing juice with his equipment and selling it at a farmers market.

“He took me under his wing and let me drive 60 bottles up there and take them to the farmers market in Austin the next day,” she says. The night before her farmers market debut in December 2012, she was up late preparing, with her son and husband helping her with labels. The hard work was worth it: “It was a massive hit, and we sold out immediately,” she says.

Expanding into retail and distribution

Martin got serious and found a shared kitchen with fellow food entrepreneurs. She couldn’t afford to hire anyone the first few months, but she had in-house help: Her husband owns a branding and packaging agency focused on food and restaurants, and her background in mergers and acquisitions helped her land investors. She bought increasingly bigger juicers and experimented with recipes featuring flavors such as vanilla, jalapeño and cilantro.

Her next goal was to secure placement at major retailers. Within just weeks of her first farmers market appearance, she scored a meeting with Austin-based Whole Foods. “We hit the shelves before any other cold-pressed juice companies hit the shelves in Texas, so it was great timing,” Martin says.

Since Martin’s products required refrigeration, she knew she needed a distributor with refrigerated transportation. “It would be impossible for us to deliver to more than just a few stores directly in our single refrigerated truck,” she says.

Options are limited, but it was no matter: When Martin began approaching retail grocers, they told her their preferred distributors, so she used their picks rather than seeking them out herself. “Retailers pull a lot more weight with distributors than we do, so with their request we were able to get national distribution very quickly,” she says. “Once we were in these distribution warehouses, other retailers could begin to pull our product from those same distributors.”

Whole Foods helped set her up with United Natural Foods Inc. and KeHE, two of the nation’s largest food distributors. Daily Greens also uses Dora’s Naturals, a smaller distributor. Christopher Psuik, vice president of business development at Dora’s Naturals, says the juice industry has become a very competitive category, so partnering with the right distributor is key for businesses like Daily Greens.

“If you’re a small brand, you can destroy your brand overnight by going to the wrong distributor,” Psuik says.

“Most distributors make money just off selling cases, so they just want tonnage on the truck,” he says. “You just become another item in their warehouse, and if you don’t have enough resources to support your product through their system, you’ll fail.”

Dora’s Naturals is a full-service direct store delivery distributor that services very few brands, he says. This allows them to ensure their brands are in the right locations with the best deals. By partnering with a company like his, “Daily Greens gains a focused, experienced sales and distribution team with access to detailed sales information, staff and trade relationships,” he says.

Daily Greens flourished, and about a year ago Martin opened a permanent manufacturing facility in East Austin. She purchased a large, commercial-grade juicer that crams six pounds of produce into each bottle of juice, resulting in nine servings of fruit and veggies. This facility also has a nutrition studio where consumers can taste juice and ask questions. Her product line continues to expand, and her drinks are now in over 1,000 retail stores nationwide, from big grocery chains to mom-and-pop shops.

Considering locations

Martin believed Austin was an ideal location for her business, but one of her seed investors (now full-time business partners) initially tried to convince her to move operations to Dallas.

“A challenge of Austin is it isn’t a tier-one city like Dallas, so shipping and distribution are out of Dallas — we have to get product up there for our major distributors,” Martin says. But now that Daily Greens has accomplished so much there, they’re in agreement Austin is the right place to be.

Heron says the Austin food community embraces entrepreneurs like Martin. “Austin is a great platform for food and technology innovation, because people here love food and are willing to try new things like Daily Greens,” he says. He notes that when Daily Greens first came out, some weren’t sure whether people would spend that much on a bottle of green juice. “But they created an industry locally, and Daily Greens is now one of the businesses people think of when they think of an Austin food startup in the beverage industry.”

Giving back

Martin appreciates that her success allows her to give back to her community. She co-founded Pink Ribbon Cowgirls, a support group for young cancer survivors, and gives 1% of all sales to the organization. Daily Greens also supports the Whole Kids Foundation, which provides resources to schools to promote healthier eating.

As she celebrates almost a decade in remission, Martin still credits her complete recovery to her daily regimen of drinking green juice. And with the success of Daily Greens, she’s able to bring her “drink your veggies” philosophy to the nation.

Emily Starbuck Crone is a staff writer covering personal finance for NerdWallet. Follow her on Twitter @emstarbuck and on Google+. Contact her at emily.crone@NerdWallet.com.

For more information about how to start and run a business, visit NerdWallet’s Small Business Guide. For free, personalized answers to questions about starting and financing your business, visit the Small Business section of NerdWallet’s Ask an Advisor page.

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Photos courtesy of Daily Greens.

 

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Friends American Grill knows the secrets to expansion

If you own a single restaurant and are thinking about opening a second one, make sure you take the time to build your first location into a success. That’s the advice from Ray Stanjevich, co-owner of Friends American Grill in Dacula, Georgia.  He and co-founder Suzanne Cartwright reached their dream milestone of opening a second restaurant 2 1/2 years after opening the first.

“It wasn’t an overnight success,” he says. “It took a lot of tender, loving care and hard work.” By the time the duo cut the ribbon on the second restaurant, they found they had a formula, and it was much easier to open their next locations.

Today, there are five Friends restaurants, a spot at a local baseball stadium and plans to open two more locations by the end of the year. Stanjevich said he learned a lot from opening the second restaurant. “We had to get our system right, and it took time to figure out what worked and what didn’t work,” he says. “But now, we can just take all that information and copy it to a new location.”

Here’s his advice on how restaurants can reach the milestone of going from one unit to two or more.

Show lenders a good financial track record

You probably already know that capital is one of the most important factors in opening up a successful second restaurant. But to get funds from a lender, you have to prove that your first restaurant is making money, and you need good cash flow, Stanjevich says.

Don’t be discouraged if you can’t get a small-business loan on your first try. “We tried to borrow some money about a year after starting,” he says, “and the bank’s attitude was, ‘Let’s see a three-year track record of success.’ ”

Not having a lender, he says, could actually work in your favor. “When your own funds are in it 100%, you will be a lot more intelligent and careful about taking care of your business, compared to if you borrowed money,”  Stanjevich says. “When you borrow, you just don’t have that same level of ownership.”

After your eatery is established, however, there are times when it can make sense to get a small-business loan, and it will probably be easier to get approved if your company has a track record of success. Stanjevich says by the time Friends had been open three years, he and Cartwright had self-funded the opening of three restaurant locations.

“It became more of a sure thing to be approved for a loan,” he says.

To increase expansion efforts, the co-owners recently took out a 10-year SBA loan to help pay for real estate, which required a 5% down payment, Stanjevich says.  “We don’t borrow money to keep the business going,” he says, “but we have borrowed money for property.”

Identify your second market before you open your first location

After studying the local community, Stanjevich and Cartwright strategically chose to open their first restaurant on a street that was reasonably well traveled but far from the congested mall areas where they’d have to compete with large chain restaurants.

“We knew that every Friends location would be in smaller neighborhoods, instead of large shopping areas,” Stanjevich says. The owners determined that less competition from big-name brands would help business thrive. It also meant cheaper rent, helping them to keep more money in the business, which they needed when the time came to expand.

Erica Bracey, a business consultant with the Small Business Development Center in Atlanta, says these are the types of decisions entrepreneurs should make before opening their first location. “My conversation with every entrepreneur always starts with the target market,” she says. “Who are you targeting? Why will they patronize your restaurant?”

Once you understand your target market, you can create a marketing plan—which is a part of the overall business plan—and put together a strategy to reach customers and draw them into your restaurant, she says.

Document everything

When you have just one restaurant, you can change a recipe or procedure on the fly. New restaurant owners have a unique ability to be nimble and tend to their local customers in a way that sets them apart from large franchises, says Rachel Kalt, senior strategist at The Culinary Edge, a restaurant consulting business in San Francisco.

“Starting small has its advantages,” she says. “It allows you to be more flexible. You can think about the guests that you’re serving and be adaptable to their needs.”

For example, you may have thought your business would stand out from its competitors by offering large salads. But if you find that customers are buying more of your sandwiches than your salads, or your costs for the types of salads you’re making are too high, you may have to adapt by increasing the number of sandwich options on your menu, she says.

When you expand your business, Stanjevich notes, such changes for the better need to be documented.  Have a process for documenting everything — alterations to recipes as well as how you will receive shipments from suppliers.

Teach your company’s culture to employees

Hiring good managers and employees is crucial, because you can’t be in two restaurants at once, Stanjevich says. Once you find people who are smart and have experience, he says, you need to make sure they understand your business culture.

“We spend a lot of time in our restaurants, and we interact with our managers and employees and customers,” Stanjevich says. “Through that interaction, people can pick up on our approach and frame of mind.”

For more information about how to start and run a business, visit NerdWallet’s Small Business Guide. For free, personalized answers to questions about starting and financing your business, visit the Small Business section of NerdWallet’s Ask an Advisor page.

Margarette Burnette is a staff writer covering personal finance for NerdWallet. Follow her on Twitter @margarette and on Google+.

 

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Images of Friends (at top, Coolray Field in Lawrenceville, Georgia) via Friends American Grill.

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Best Money Moves for May

From shelling out thousands of dollars for a trip abroad to breaking the bank to pay for summer camp, the next few months can derail smart spending habits in more ways than one. Although everyone deserves some R&R, making the most out of the warmer weather doesn’t have to set you back financially.

The following money moves can help you get ready for an enjoyable summer without placing too much strain on your wallet.

Plan a “staycation”

The average price tag of a weeklong vacation in the Caribbean for a family of four is over $7,000, according to TripAdvisor. Although it might not cost you as much in the summer due to less demand, you’ll still dish out plenty. Instead, consider a “staycation.”

“If you’ve had unexpected bills since the start of the year, or just haven’t been that diligent about sticking to the budget, cutting back on vacation expenses can be one way of righting the ship,” says Carrie Houchins-Witt, a financial advisor in Coralville, Iowa.

“There are many affordable options right outside your door that won’t break the budget,” she says. “Stay at home and visit all of the museums, parks, and attractions in or near your hometown.”

Invest in your health   

Going for a walk last winter was simply out of the question for many Americans because of snow, ice and cold. Even hitting the gym may have seemed like a tall order.

But now that you won’t get stung by a harsh wind the second you go outside, consider taking daily strolls through your neighborhood. Walking can go a long way in improving your health and, over time, can help reduce medical costs.

“If you made a New Year’s resolution to lose weight or become more fit, this is a good time to think about getting back on track,” says Celia Brugge, a financial advisor in Memphis, Tennessee. “With nice weather this time of year, it’s easy to find ways to be physically active.”

Once you’ve shaken off the rust, consider ramping up the intensity of your activities or workout by incorporating more demanding exercises into your routine.

Use your flexible spending account

To lock in at least a few hours of peace and quiet every day, you might jump at the opportunity to send your children to summer camp. But before you whip out your credit card, keep in mind that a dependent care flexible spending account, or FSA, could cover some of those costs.

“Parents should remember that they can use their FSA through their employer to fund summer camps with pretax dollars,” Houchins-Witt says. Employers can divert as much as $5,000 of your pretax earnings into a dependent care FSA, according to federal tax rules.

To use FSA funds this way, children must be under age 13 and parents must be working, looking for work or in school during the hours that their children are in camp, says Houchins-Witt. While day camps are eligible for the dependent care credit, overnight camps generally aren’t. Consider checking with a tax advisor to confirm which child care expenses qualify for tax breaks.

Add to your home’s value

Sometimes, spending money is in your best interest. Certain additions and improvements to your home can be great long-term investments, and now is a great time to complete those projects. A new wooden deck, for instance, can recoup up to 80% of its original cost in a subsequent sale, according to Remodeling magazine. Other improvements can even be deducted from next year’s taxes.

“Tax credits related to energy efficient products, including certain new doors, new windows, and adding insulation can help reduce the final cost to the homeowner,” Houchins-Witt says.

Solar energy systems, she says, are becoming increasingly popular and qualify for a federal tax credit of up to 30% of the installation costs.

The bottom line

Although the weather may be ideal for kicking back and unwinding, you may not want to be too nonchalant about some habits like exercising and spending. These tips can help ensure that you’ll stay healthy and won’t have to take the rest of 2015 to dig your way out of debt.

Tony Armstrong is a staff writer covering personal finance for NerdWallet. Follow him on Twitter @tonystrongarm and on Google+.

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Merchant Cash Advance Gives L.A. Bar Breathing Room

Andy Fiscella, an actor and owner of The Dime, a bar and lounge in Los Angeles, knows that running a small business is much like being a player on the Hollywood scene.

Just as a movie can turn out to be a hit or a flop, or an actor can be in demand one day and struggling the next, a small-business owner must be prepared for the unexpected.

“You just never know when you’re going to get hit,” he tells NerdWallet.

His bar took a huge hit after the 2008 financial crisis, yet he found a way to roll with a punch the way it’s done in the movies.

He did it with help from small business lender AmeriMerchant, which offered a deal that went something like this: We give you money fast, and you pay us back by giving us a cut of your small business’s future credit card sales. And if you go out of business, you don’t owe us a dime.

Andy Fiscella, owner of The Dime bar and lounge in Los Angeles, has used merchant cash advances several times as a financial “security buffer.”

 

This type of deal is called a merchant cash advance. Technically, the business receiving the money isn’t taking out a loan; rather, it’s selling a portion of its future credit card receivables. AmeriMerchant is one of the pioneers of this kind of small business financing.

One thing a small-business owner considering such a deal should understand is that merchant cash advances are typically more expensive than traditional business loans. So it’s a trade-off: You get the money faster, but you pay more for that cash. Still, this and other types of alternative small business financing have steadily become more popular.

Quick access to capital

About eight years ago, AmeriMerchant founder and CEO David Goldin gained a measure of fame for winning a patent fight in court over the merchant cash advance system.

Merchant cash advances are aimed at helping out cash-strapped but solid small businesses looking for quick access to capital. It’s a much better deal than those small businesses could get from traditional banks, Goldin says.

AmeriMerchant CEO and founder David Goldin.

“I’ll use this example,” he tells NerdWallet. “If you have a $60,000 business loan with a $55,000 balance with a bank (and the loan) goes bad, and you have a $55,000 merchant cash advance with us and you go out of business legitimately, you owe that bank $55,000. You owe us zero.”

Bar owner Fiscella, whose credits as an actor include appearances on the TV series “CSI” and in the horror-thriller “The Final Destination,” says the merchant cash advance system works well for small businesses going through a rough patch.

That’s what happened to his bar following the housing market crash and a Hollywood writers strike, when some of his regular customers, mainly midlevel movie executives “lost their expense accounts.”

“Our revenue dried up,” he says. “We were kind of getting behind on bills.” That’s when he turned to AmeriMerchant.

Eligibility requirements

The company offers two kinds of merchant cash advances.

If you’re just starting out, and have been in business for at least two months, you can get a standard cash advance of $5,000 to $500,000. Some key requirements:

• Your business has processed at least $7,500 a month in credit card sales from customers for at least 60 days, and transactions take place on at least 12 days each month.
• You are current on your rent and have at least 12 months left on your lease if you are renting.
• You have no open bankruptcies in the last 12 months and a FICO personal credit score of at least 500.

If you’re a more established business, which means you’ve been operating for at least two years, you could go for AmeriMerchant’s “Platinum” cash advance of $20,000 and $500,000. Goldin says a Platinum advance costs 20% to 30% less “for applicants that score higher on our proprietary credit scoring model.”

The key requirements:

• You process at least $20,000 a month in credit card or debit card sales from customers for at least 60 days.
• You’re in good standing with your landlord and have at least 12 months left on your lease.
• You have no open bankruptcies in the last 12 months and a personal credit score of 640 or higher.

A business can get approved for an advance in about 24 hours, and you can receive the money in seven to 10 days, the company says.

How do you pay it back? AmeriMerchant gets a set percentage of your credit card sales until you’ve repaid what you owe. That percentage is typically 10% to 15%, the company says.

So let’s say you own a bar or restaurant and you get a merchant cash advance of  $20,000. “Repayment is done by deducting 10% to 15% of future credit card transactions,” the company says. In this case, the total payback amount would be roughly $25,000.

Risk-based pricing

Goldin says AmeriMerchant uses “risk-based pricing,” noting that “there are different rates based on the profile of the business and the overall credit score.”

“We take in a variety of factors into our scoring model — both personal credit score and factors related to the business,” he says. “Because these are small businesses, there is a strong correlation to performance between the business owner’s personal credit score and the business itself.”

Cash advances typically are paid back in 10 to 14 months.

Meanwhile, the interest rate on a loan from the U.S. Small Business Administration’s most popular loan program, known as a 7(a) loan, is typically based on the current prime rate plus an additional markup rate, known as the spread, of 2.25% to 2.75%. At the current prime rate of 3.25%, a typical 7(a) loan would charge 5.5% to 6% interest.

A merchant cash advance is “non-recourse” financing. That means, the company explains in an email, “if the restaurant goes out of business and say they owed $18,000 on their advance, they would owe their merchant cash advance provider $0.” AmeriMerchant couldn’t come after the business owner for the money. It also wouldn’t affect the owner’s credit score, Goldin says.

The fact that you wouldn’t get stuck with a big debt even after your business fails may lead you to wonder: Why in the world would AmeriMerchant take on such risks?

One factor is the spike in demand for small business financing. “We’re definitely seeing an increase in borrower demand,” Goldin says, adding that small businesses are “looking to hire more and open locations, to expand their business.” AmeriMerchant also has confidence in its systems to evaluate risk.

Big Data influences market

Another reason: technology, particularly Big Data. That refers to emerging technologies that let companies collect and comb through huge amounts of information, including random stuff like tweets and Facebook posts, and use it to gain insights on consumers, businesses, borrowers and others.

For lenders, Big Data makes it possible to decide fairly quickly whether a small business is a good credit risk or not, says Lisa Nestor, a consultant at the startup Payoff, which develops products to help consumers pay off credit card debt, and an MBA candidate focused on high-tech finance the Anderson School of Management at UCLA.

These technologies give lenders “a detailed and realistic understanding” of a small business, she says. And they’re able to do it “faster and on scale.”

“You have a lot of tech companies that give you access to data,” she says. “It’s a race for gold to make the best bets on potential borrowers.”

Jeffrey Robinson, academic director of the Center of Urban Entrepreneurship and Economic Development at the Rutgers Business School, says alternative online providers, such as AmeriMerchant, offer viable options for companies badly in need of small business financing.

“In some cases, $5,000, $10,000, $15,000 could make or break them because they need money for inventory, to cover payroll, and they don’t have access to it,” Robinson tells NerdWallet. “There was a big problem. To me, this was a case where markets saw the gap for access to capital and figured out a way to close it.”

But Nestor points to potential risks in this competition. “For a small business, when capital becomes readily available, there’s always the risk that you will take more than you need,” she says.

‘Make sure you know what you’re doing’

It’s a risk Fiscella, owner of The Dime, considered when he turned to AmeriMerchant. He offers this advice for any small-business owner considering a merchant cash advance: “You gotta make sure you know what you’re doing. You gotta make sure you understand the percentages,” he says. “It’s gonna disappear from your bottom line.”

He’s already gone through several rounds of merchant cash advances from AmeriMerchant, he says. He views an advance as “a security buffer” that can help him get out of a financial jam, which sometimes happens unexpectedly.

For instance, a bar incident, like a fight, could cause a spike in in business insurance premiums. “If anything goes wrong plumbing-wise or anything, I gotta fix it,” Fiscella says.

But he stresses the importance of discipline in using a merchant cash advance.

“You don’t want to grab it all and spend it,” he says. “You want to make sure that you keep enough money in the bank so that you can cover it.”

So far, many small business borrowers are like Fiscella, according to Goldin of AmeriMerchant, who says, “Our default rates are at the lower end of the spectrum, and our renewal rates are the higher end, which shows that we’re actually helping, not hurting merchants.”

That’s good news, as demand for small business financing remains strong.

“We haven’t even scratched the surface yet,” Goldin says. “There’s tremendous upside.”

Learn more

You can find more information on the AmeriMerchant cash advance products on the company’s website.

Also check out NerdWallet’s report on how merchant cash advances work.

For more information about how to start and run a business, visit NerdWallet’s Small Business Guide. For free, personalized answers to questions about starting and financing your business, visit the Small Business section of NerdWallet’s Ask an Advisor page.

Benjamin Pimentel is a staff writer covering small business for NerdWallet. Follow him on Twitter @benpimentel, on Google+ and on LinkedIn.

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Logo via The Dime Facebook page. Fiscella photo courtesy of Andy Fiscella. Goldin photo courtesy of AmeriMerchant.

 

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Overcoming the Challenges of a Family-Owned Small Business

Rebecca Miller and her mother Jeanne Plumley are equal owners of Peggy Jean’s Pies, a 1,000 square foot pie shop that reopened last year in Columbia, Missouri, after a successful Kickstarter campaign.
It’s a true family-owned and family-run business: Miller assists customers and runs the blog and social media accounts while her husband Jason helps run the website and does all of the hiring and payroll. Plumley bakes the pies and handles the kitchen staff and Plumley’s husband Dale washes dishes. Miller‘s children (Hayden, 12, and Ellery, 9), work at the store during school breaks.
“When I say our lives turned upside down in a year, I mean it,” Miller says. “We took our whole lives, shook it all around, and amazingly what got thrown back at us is way better than anything I ever knew before.”
Family-owned businesses like Peggy Jean’s Pies account for 90% of all businesses in the U.S., according to the U.S. Small Business Administration.
That doesn’t mean starting a family business is an easy task — or even a good idea for every family. Letting personal issues spill into the business, giving special treatment to relatives over other employees and not properly communicating are just a few common issues unique to family businesses. But if you overcome these challenges, the experience can be quite rewarding, according to several small business owners. 

The challenges

Although everything is going smoothly now at Peggy Jean’s Pies, some of the pressures early on made it difficult for the family to work together.
“We would disagree over issues both large and small,” Miller says. “We really sort of struggled with who gets time off, and when.”
Another issue early on was the family members trying to make one another happy constantly, which was “unrealistic,” Miller says.
“We were holding hands for every aspect of the business,” she says. “But if you just sit down and say, ‘OK, who’s the person who’s really good at working the front, and enjoys that? That makes a big difference.”
The biggest problem facing family-owned businesses is the inability to separate business and family, says Bill Babb, a senior consultant with the Family Business Institute, a firm dedicated to serving the needs of family businesses.
“In other words, you got to know when you are wearing your business owner hat, and when you are wearing your family member hat,” he says. “It breaks down to the roles and responsibilities. It’s really important.”
Will von Bernuth is the co-founder of skin care product maker Block Island Organics. He runs the company with his sister Lauren and his wife Kelly.

Will von Bernuth, wife Kelly Hsiao and sister Lauren von Bernuth of Block Island Organics.

“Having been siblings for 30-plus years, there’s obviously things you do well together and things you don’t do well together, and no sibling wants to feel like the other one is telling them what to do and so forth,” von Bernuth says. “So, we also had differences in opinions on basic things, like what size the bottles should be — should they be 6 ounces or 3 ounces? What kind of pricing should they be — $15 or $25?”

Tips for family-owned businesses

Clearly define roles: It’s a smart idea to figure out who is good at what aspects of the business and use those strengths to help define roles, instead of each family member trying to do everything.
Ellen Jovin co-owns Syntaxis, a communication skills training company, with her husband Brandt Johnson. The family dynamic has been successful for Syntaxis because the company has a clear division of labor, according to Jovin.
“We’re not constantly stepping on each other’s feet. … Brandt likes doing the technology and finance things more than I do, and I like doing marketing types of things more,” Jovin says. “Being able to designate areas so that people can have some autonomy while also being collaborative, for me seems really critical.”
Suggests von Bernuth, “Figure out which each person’s strengths are and leverage them. Then also make sure that in doing this, everyone has the same goal in the long run.”
At Peggy Jean’s Pies, Miller works the front desk and the company’s blog and social media accounts, while her mother works more behind the scenes in the kitchen.
“We had to recognize in each other, what are our strengths and what makes each other happy?” Miller says. “She’s an introvert, she doesn’t want to be at the front counter all the time — it causes her a lot of stress. I’m the extrovert — the blog and the Facebook page, that’s all me. We had to look at each other in a whole other way.
“My mom and I were very close before starting our business together — we talked daily and I really felt like I knew her well,” Miller continues. “But after working side by side with her for the past 18 months, I know her on a whole separate level.” 

Ellen Jovin and husband Brandt Johnson of Syntaxis.

Communicate regularly: It’s important to have some formal framework in place for regular communication, Babb says. 
“Whether that’s a business organization, say a board of directors or a family council, it’s a formal time where grievances can be aired and be dealt with in a professional and unemotional setting,” he says.
For von Bernuth and his sister Lauren, it was important to first acknowledge that the problems existed, then communicate about how to best solve them.
“As long as we were willing to both accept that people are right in some areas and wrong in some areas, and adapt to those areas going forward … I think that can be a big learning experience,” von Bernuth says. “It can be a big struggle to get to that point, and you don’t want to ruin a relationship with your sister, your sibling, your wife, to get there.”
Create an operating agreement: If your company operates as a limited liability company, von Bernuth says it may be a good idea to also create an LLC operating agreement, which states in writing each owner’s percentage of ownership in the business, and each owner’s rights and responsibilities in the company.
“We said, ‘this is what we’re going to go after, this is who owns what, and so forth,’ ” von Bernuth says. “If you don’t have it, you’re kind of just operating on good faith, and that can cause a lot of problems between family. I believe having it upfront will help alleviate potential problems down the line. You can say, ‘you know what, we agreed to this.’ ”
Choose family over business: Always remember that the co-worker you feel like strangling at times also is family, and Miller says that through the struggles of running a family-owned business, your relationship with your relatives can grow even stronger.
“We’ve seen each other at our worst and at our best,” Miller says. “We’ve made each other cry and we’ve made each other laugh until we cried. My biggest takeaway is that I’ve been given the biggest gift by having this whole additional relationship with my mom.”

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Small Business Success Story: How Father and Son Worked to Keep Business in Family Hands

If you ask Amish Gupta, joining the family business was never a sure thing.

Five years ago, his father, Virenda Gupta, was ready to step back and travel more to his native India and see other places. He asked Amish to join and eventually take over RETC, a property tax consultancy in Dallas that the elder Gupta founded in 1986.

Before making the move, which had major professional and personal implications, Amish initiated frank discussions over compensation, ownership and authority. The father and son eventually agreed on a succession plan that is working well for the two men and ultimately the business.

“I wanted him to have complete rein and freedom,” Virenda Gupta says. “So I gave him marketing and sales and pretty quickly he became CEO. I took a back seat and he makes day-to-day decisions. … I believe a father-and-son team is only going to work if the son is given responsibilities and complete authority that he can exercise.”

A complicated transition

As a business owner, planning for an exit can be hard enough. But throw in a desire to maintain a family legacy and succession can become complicated — even messy. Your children or other relatives may not have any interest in taking charge or family squabbles over the direction of your business can sink a smooth transition.

What’s more, the business itself may not survive the ebbs and flows of market and industry changes, says Monika Hudson, an assistant professor and director of the Gellert Family Business Resource Center at the University of San Francisco.

The center helps families balance business issues, ownership questions and family dynamics. It’s important that all three factors be in sync for a business’s long-term survival, Hudson says.

She cites the example of an expanding family business with children who did not get along. They fought so badly that it led to attorneys getting involved. The family is now splitting parts of the business.

“We have all the emotional issues that are part of being a family interfacing with those business decisions that need to be made around scale and the future,” she tells NerdWallet.

So it’s no wonder that few family businesses survive for the long haul. Only 30% of family businesses make it to the second generation, according to the Family Business Institute, a consulting firm in Raleigh, North Carolina. Just 12% of them last into the third generation and only 3% are viable into the fourth generation and beyond.

Succession planning is key

What makes family business succession so difficult? For starters, few business founders prepare and train their children or relatives to take over, according to Wayne Rivers, co-founder and president of the Family Business Institute.

“You started the business, you’re the founder. You make all the decisions,” Rivers says. “So now, you have three children, two girls and a boy, they begin to have trouble making decisions. What counsel can you give them? You have no tools in that toolbox. You say, ‘What can’t you just get along?’ ” 

Ensuring your business survives — whether in the hands of family members or outsiders — takes a lot of planning. Give yourself enough time to consider all possibilities, including selling to outsiders or even employees, Rivers says.

It’s important not to confuse estate planning with succession planning, according to Rivers. “And now here is a document saying, ‘If I get struck by lightning, this is what happens to my assets including my family business.’ That is not a succession plan, it’s a drop-dead plan,” he tells NerdWallet.

A survey last year by The Alternative Board, which provides industry guidance for businesses, points to the lack of planning in family business transfers. Less than a third of family business owners have a succession plan.

Of course, your child may not want the business. And maybe it’s the other way around: Your son or daughter may not be the best person to take over the business. Here’s a reality check: 42% of family business owners say nonfamily employees are more qualified, according to The Alternative Board survey.

“In some cases, the parent is the owner and feels like [the children] don’t have the right profile: They don’t love the business. They don’t have a head for business,” says Dave Scarola, vice president of The Alternative Board. 

Establish a game plan

That wasn’t the case for Virenda Gupta. He began thinking about the future of his business when he turned 60 years old. He had faith that Amish was the best person to lead RETC, a 20-person firm that also has offices in Austin and Houston. Amish knew the business well, having worked at the firm during various times as a high school and college student. Plus, Virenda says, he was more confident in his son than an outsider taking over the business.

Virenda also knew Amish would bring skills and experience he gained at other jobs. Amish worked at consumer products giant Procter & Gamble, doing marketing and product management. He also got an MBA at the Kellogg School of Management at Northwestern University.

Sure, Amish felt the pull of family, but he also wanted to make sure joining the family business would make sense for him too. Being an entrepreneur was a big plus. So was having the flexibility to pursue his other business ventures, according to Amish. On the flip side, Amish would be giving up a coveted job with global investment firm The Carlyle Group in Washington.

“It wasn’t a done deal. He was the one who called me and said you should come back,” the now 35-year-old Amish Gupta says. 

Before committing, Amish pushed to establish a “game plan” on major issues such as authority and responsibilities as well as compensation and equity. He hashed out with his father issues such as control over day-to-day decisions and long-term strategic goals for RETC. The company has a third board member who acts as a tiebreaker vote in case father and son can’t agree on a decision. Amish says he recalls only one instance in which they butted heads before reaching a consensus.

Even though talks over money can be difficult, Amish says he wanted to make sure he would be fairly compensated, especially since he had given up a lucrative career path. Pretty early on, Virenda says he gave Amish “a critical share” of the business.

“For folks like me, our opportunity cost is serious. I graduated business school in 2007 and I’m now at an age where my friends are becoming partners at consulting firms and banks. We’re talking folks who are making half a million plus or a million depending on the industry they’re in. That was the path I had given up,” Amish says.

With a succession plan in place, Amish joined RETC as its chief operating officer in 2010. Under Amish’s leadership, the firm has shifted into taking on more sophisticated tax cases for bigger clients. The firm also saw a major staff turnover, a typical occurrence under a new leader in any business. Over the years, Virenda, now 68, has scaled back his work to accommodate his travels.

Words of advice

Father and son say they have learned some lessons along the way about making a transition. They offer these pieces of advice on succession planning for family businesses:

1. Don’t pressure your child or children to take over the business. There is a lot of pressure especially on children of immigrant entrepreneurs, Amish says. But forcing them to come back doesn’t help the business. Even if the child wants to work or take over the family business, it may be prudent to get outside experience. Amish credits his time at Carlyle and other companies for establishing “credence with my employees who respect me and my clients who respect me.”
2. Have tough conversations upfront about how the succession will work. This should be done not just with parents but also siblings who may or may not be part of the business, Amish says. A year ago, a family friend approached him for advice because he was facing a similar decision to the one Amish faced five years ago. Amish told him this: “You have to ask for things upfront and ask for things before you agree to come back. If you ask afterwards, you have no recourse. You can’t really quit. You can, but with any other job, you make a clean cut; you can’t do that with family stuff.”
3. Get your children or other interested family members involved with the business without any commitment, Virenda says. “It’s important to experiment. Even though you know your children and you know their intentions, once you work together, it’s a different matter,” he says.

Hanah Cho is a staff writer covering small business for NerdWallet. Follow her on Twitter @hanahcho, on Google+ and on LinkedIn.

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Top: Amish Gupta, left, and his father, Virenda Gupta, at the RETC office in Dallas. Photo courtesy RETC.

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For more information about how to start and run a business, visit NerdWallet’s Small Business Guide. For free, personalized answers to questions about starting and financing your business, visit the Small Business section of NerdWallet’s Ask an Advisor page.

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Small Businesses Have a Stake in Trans-Pacific Free Trade Debate

Headlines in the debate over the proposed Trans-Pacific Partnership free trade deal have focused on its potential effects on overall U.S. jobs and economic growth. But small businesses should be paying attention, too, academic experts tell NerdWallet.

That’s because the accord among the United States and 11 other countries on the Pacific Rim would create new opportunities for some firms while forcing others to face stiffer competition.

“Every change in trade policy creates winners and losers,” says Debra Glassman, a senior lecturer at the University of Washington’s Foster School of Business who specializes in international trade. “There’s no way to craft a treaty or legislation that benefits everybody.”

Debra Glassman of the University of Washington says there’s simply no way to make a trade treaty that benefits all parties. 

Critics, led by Sens. Elizabeth Warren and Bernie Sanders, warn that the Trans-Pacific Partnership would benefit mainly big U.S. corporations while causing a decline in U.S. wages and the loss of American jobs. They also say the deal would weaken environmental regulations and laws related to food safety, and they lambaste the Obama administration for not disclosing details of the proposed accord.

President Barack Obama, who’s asking Congress to approve the deal, rejects such arguments, saying in his April 25 weekly radio address that the pact features “strong provisions for workers and the environment — provisions that, unlike in past agreements, are actually enforceable.”

He also affirmed a key aim of the pact, which does not include China: to strengthen the United States’ political and economic position in the Asia-Pacific region.

“If America doesn’t shape the rules of the global economy today, to benefit our workers, while our economy is in a position of new global strength, then China will write those rules,” he said. ”I’ve seen towns where manufacturing collapsed, plants closed down, and jobs dried up. And I refuse to accept that for our workers. Because I know when the playing field is level, nobody can beat us.”

But for small businesses, that depends on the field they’re playing on and their ability to adapt to the market changes the Pacific free trade pact would bring.

Competitiveness counts

Brent Haddad

“Making it easier to import and export will help small businesses that can compete in the other markets,” says Brent Haddad, director of the Center for Entrepreneurship at the University of California, Santa Cruz.  “Less competitive businesses will have to adapt.”

Glassman cites the example of small businesses that use dairy products in their offerings, such as sandwich shops and delicatessens. Cheaper dairy products from, say, New Zealand, as a result of the trade pact could be good news for these shops, she says.

“If you reduce barriers, any business that uses dairy products as an input may offer cheaper products to customers,” she says.

But there’s a flip side. “Let me turn the dairy argument around,” Glassman says. “If you are a small producer of cheese or a distributor who represents dairy producers in the region, and all of sudden new competitors come in from overseas, you may suddenly find your market not so secure.

“You have to either make some changes or you’re in trouble,” she adds. “The effect on you and your market could be big. It could be life or death for your business.”

Christopher Tang

But such challenges could also force small businesses to be more nimble and creative.

Christopher Tang, a business professor at the Anderson School of Management at UCLA, cites the example of small coffee shops in the U.S., many of which have long been pressured by the big chains, led by Starbucks.

Pacific free trade would give these companies access to cheap coffee beans from countries like Peru and Vietnam, he adds. But small coffee shops could also explore other strategies to meet that challenge, such as forming consortiums to buy coffee beans in bulk, he adds. “Otherwise, they cannot compete,” he says.

Leaning on quality

Adina Ardelean, a lecturer who teaches international economics at the Leavey School of Business at Santa Clara University in California, also paints double-edged-sword scenarios. “Any kind of trade would harm some sectors but would also benefit others,” she says.

Adina Ardelan

For example, she says, small businesses that make clothes, shoes and other footwear will likely face more competition from such countries as Vietnam and Malaysia. But the Pacific free trade accord could also open up new opportunities for some of these firms, particularly those selling higher-quality items made in the United States. In fact, they could leverage that fact and charge “a price premium” for apparel and footwear because they’re “Made in the U.S.A.,” she says.

Haddad, of UC Santa Cruz, also argues that “although we associate weaker competitive businesses with the ‘old economy,’ we can still compete there by meeting customer needs with innovative, attractive products.”

He points to his city of Santa Cruz, where “many small manufacturers have substantial international sales due to attractive designs and innovative features.”

Ardelean identifies another possible U.S. small business winner in the proposed accord: wineries and breweries. Small wineries and breweries currently face stiff trade barriers in trying to sell their products in such countries as Malaysia and Vietnam, she says.

“By removing these barriers, some of these wineries and breweries would have access to these countries,” she says. “They will take advantage of the growing incomes in these countries. Over time, consumers in Malaysia will become richer and will be willing to buy more expensive wine.”

Learn more

Those wanting more information can find plenty of resources arguing for and against the proposed Trans-Pacific Partnership, which would cover the U.S., Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam.

• The White House Blog would be a good place to start to understand the Obama administration’s case for the accord. The U.S. Chamber of Commerce has also endorsed the agreement and offers “10 Overlooked Facts About the Trans-Pacific Partnership.”
• On the other side of the debate, the AFL-CIO labor federation has presented its reasons for opposing the pact. Senator Warren, a Massachusetts Democrat, makes her arguments in a blog post.

For more information about how to start and run a business, visit NerdWallet’s Small Business Guide. For free, personalized answers to questions about starting and financing your business, visit the Small Business section of NerdWallet’s Ask an Advisor page.

Benjamin Pimentel is a staff writer covering small business for NerdWallet. Follow him on Twitter @benpimentel, on Google+ and on LinkedIn.

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Image of container ship nearing port via iStock. Glassman photo courtesy of the University of Washington. Haddad photo courtesy of the University of California, Santa Cruz. Tang photo courtesy of UCLA. Ardelan photo courtesy of Santa Clara University. 

 

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Amortization Basics: How Much Home Do You Own?

When you buy a home, you usually don’t pay the whole price at once. Instead, you finance it with a mortgage and make monthly payments. In this context, amortization is the process of breaking down a mortgage into regular installments. Knowing how it works can help you understand how much of your home you own over time. Here’s a guide to amortization during the life of a typical mortgage loan.

How it works

Let’s say you have a mortgage of $200,000 at a fixed rate of 5% for 30 years, and you made no down payment. The amount you pay each month, $1,073.64, will stay the same over time, so that by the final month your whole mortgage will be paid off.

Within that monthly figure, you pay interest and principal, or a monthly segment of the amount borrowed, $200,000. Together, they equal the monthly payment. So the first few months might look like this:

Month	Payment	Interest	Principal	Amount Owed
1	$1,073.64	$833.33	$240.31	$199,759.69
2	$1,073.64	$832.33	$241.31	$199,518.38
3	$1,073.64	$831.33	$242.31	$199,276.07
4	$1,073.64	$830.32	$243.32	$199,032.75

Every mortgage payment you make has a different mix of interest and principal. From this table, you can see that the interest decreases and the principal increases each month. At first, you pay much more interest than principal, but eventually the proportions reverse.

After that fourth month, you’ve put in only $967.25 toward the home itself. In other words, if you paid $93.70 per square foot for a new single-family house, which is a recent national average from the U.S. Census, then you now own a little more than 10 square feet. That’s the equivalent of about a third of a walk-in kitchen pantry.

Building equity

Each time you pay principal, you add to your equity in the home. Equity is the difference between your home’s appraised market value and your remaining mortgage debt. Toward the latter half of the mortgage, you build equity more quickly since more of your payment goes to reducing the principal than to covering the interest.

In the case above, at the halfway point of a 30-year loan, your monthly interest and principal amounts are almost even, and you’ve paid $64,232.18 of the $200,000 mortgage. From the same U.S. Census metric above, you now own 685.5 square feet, or a 300-square-foot master bedroom, a similar-sized kitchen, one or two closets and the entire walk-in kitchen pantry. Here’s a look at this and other benchmarks:

Month	Payment	Interest	Principal	Amount Owed
180 (15 years)	$1,073.64	$567.81	$505.83	$135,767.82
270 (22.5 years)	$1,073.64	$338.23	$735.41	$80,439.51
360 (30 years)	$1,073.64	$4.45	$1,069.19	$0.00

By the three-quarter mark, or 22 years and 6 months, you have $119,560.49 of equity in the home. In other words, you own another 590 square feet, or roughly enough for a 140-square-foot master bathroom, two 200-square-foot bedrooms and some of the foyer. This is in addition to the previous rooms.

Your final payment consists almost entirely of principal and effectively pays off the mortgage. You now own every square foot in your home.

Understanding how amortization works can help illustrate how much equity you build in your home over time. If you see better mortgage rates down the road, knowing your equity might help you decide whether to refinance or stay the course with your current loan.

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