Music Business Fundamentals: Part 1: Monetizing Your Music | J. Anthony Allen | Skillshare

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Music Business Fundamentals: Part 1: Monetizing Your Music

teacher avatar J. Anthony Allen, Music Producer, Composer, PhD, Professor

Watch this class and thousands more

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Taught by industry leaders & working professionals
Topics include illustration, design, photography, and more

Watch this class and thousands more

Get unlimited access to every class
Taught by industry leaders & working professionals
Topics include illustration, design, photography, and more

Lessons in This Class

    • 1.

      Introduction & Overview


    • 2.

      Take Advantage Of Your Ideas


    • 3.

      The Public Favors Small Business


    • 4.

      Age Is Not A Requirement


    • 5.

      Trend Towards Self Employment


    • 6.

      Definitions: Small Business And Entrepneuer


    • 7.

      Typical Problems of a Small Business


    • 8.

      Trends In Small Business


    • 9.

      Family Businesses


    • 10.

      Characteristics Of Successful Entrepreneurs


    • 11.

      Finding Your 4 Objectives


    • 12.

      The Service Objective


    • 13.

      The Profit Objective


    • 14.

      The Social Objective


    • 15.

      The Growth Objective


    • 16.

      Your Business Plan, Part 1


    • 17.

      What Are Business Entities


    • 18.

      Main Differences In BusinessTypes


    • 19.



    • 20.



    • 21.



    • 22.



    • 23.



    • 24.



    • 25.



    • 26.



    • 27.



    • 28.

      What is Best For A Small Business


    • 29.

      Filing Your Paperwork


    • 30.

      Getting Your Documents


    • 31.

      Obtaining An EIN Number


    • 32.

      Certificate Of Assumed Name


    • 33.

      Dont Go Into Business With Friends


    • 34.

      Operating Agreement General Info


    • 35.

      The Operating Agreement Management Concerns


    • 36.

      Capital Calls


    • 37.

      Adding New Members


    • 38.

      Making Decisions


    • 39.

      Terminating A Member


    • 40.

      Closing Down


    • 41.

      What Next?


    • 42.



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About This Class

This class isn't for hedge fund managers, capital investors, or bankers. This is a class designed for the average person who is ready to take their music career (or music interest) and turn it into a business.

Are you ready to get started? Do you have a business idea? In this course, we will focus on the first steps of any business venture: Startup. We will use the real-world experiences of the award-winning instructor and university professor Dr. Jason Allen. But don't be worried - Dr. Allen is best known around campus for keeping things simple, accessible, and useful.

Dr. Allen is the founder of a number of successful businesses and is a top-rated Skillshare instructor. In 2017 Star Tribune Business featured him as a "Mover and a Shaker," and he is recognized by the Grammy Foundation for his music education classes. 

While a lot of business courses focus on getting rich quick, this is a course for those interested in starting and building a long-term business with a firm foundation. You won't find "get rich quick" schemes here - everything we will learn in this class is practical, useable steps to monetize your music career. 

This is the first part of a multiple-course series. 

In this course, we will focus the entire course on the steps to start a business. First, we will focus on the advantages and concerns of new businesses, specifically in the arts. Next, we will walk through the different types of businesses - from corporations to family businesses, to nonprofit organizations. Most importantly, we will learn what is best for your business, and walk through the step-by-step process to set up and register your business. Last, we will walk through the steps needed to create your most essential founding document: the operating agreement. 

By the end of this course, if you follow along, you will have your business officially created and ready to open the doors for business.


Praise for Courses by Jason Allen:

⇢  "It seems like every little detail is being covered in an extremely simple fashion. The learning process becomes relaxed and allows complex concepts to get absorbed easily. My only regret is not taking this course earlier." - M. Shah

⇢  "Great for everyone without any knowledge so far. I bought all three parts... It's the best investment in leveling up my skills so far.." - Z. Palce

⇢  "Excellent explanations! No more or less than what is needed." - A. Tóth

⇢  "VERY COOL. I've waited for years to see a good video course, now I don't have to wait anymore. Thank You!" - Jeffrey Koury

  "I am learning LOTS! And I really like having the worksheets!" - A. Deichsel

⇢  "The basics explained very clearly - loads of really useful tips!" - J. Pook

⇢  "Jason is really quick and great with questions, always a great resource for an online class!" M. Smith

Meet Your Teacher

Teacher Profile Image

J. Anthony Allen

Music Producer, Composer, PhD, Professor


Dr. J. Anthony Allen has worn the hats of composer, producer, songwriter, engineer, sound designer, DJ, remix artist, multi-media artist, performer, inventor, and entrepreneur. Allen is a versatile creator whose diverse project experience ranges from works written for the Minnesota Orchestra to pieces developed for film, TV, and radio. An innovator in the field of electronic performance, Allen performs on a set of "glove" controllers, which he has designed, built, and programmed by himself. When he's not working as a solo artist, Allen is a serial collaborator. His primary collaborative vehicle is the group Ballet Mech, for which Allen is one of three producers.

In 2014, Allen was a semi-finalist for the Grammy Foundation's Music Educator of the Year.

J. Anthony Allen tea... See full profile

Level: Beginner

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1. Introduction & Overview: my name's Jay and welcome to slam a Cat. This is Liam Academy. We're a diverse family of working musicians with one important common bond, a deep love for the creative process of making music. I hate every preset I've ever listened to. I just want to, like, make all my own sounds. You have to have your own son. Otherwise, you're not gonna stick out United by your passion for creating the Slam family exists to educate and support musicians of any age. Any level at an Eddie genre had been more creating electronic music once I stepped into sound design. This is electronica music. This is like what I envisioned it being like our community lives on and offline with Livestream group classes as well as in person programs in Minneapolis. Our instructors meet you where you are and work to accelerate your musical journey to where you want to be. There's like, frustrating and call it being with all the music majors. You know, you had all these classical musicians, and I'm like over here making beats and I come here and I feel like these last nine months I've learned more way more for what I need to be doing with detailed courses in deejay, music, production recording, sound design and more. Slam Academy is ready to show you what it takes to be an industry professional. I was pleasantly surprised with how much I really could take away. After only 12 sessions. I finished up and I am walking out with exactly the tools that I need to finish projects. We want you to become a part of the Slam Academy family. Hey, everyone, welcome Teoh Music business class In this class, we're gonna be focusing on the entrepreneurship around being a musician, something that's been very important to me as a professional musician my whole life. Um, if you are a musician or any artist really, and have found that you're often trying to figure out how to monetize what you're doing, this is the right place for you. What we're gonna be focusing on in this class is the entrepreneurship piece of it. How to start a company and don't get freaked out when I say, like starting a company. What we're really talking about here is how to take what you're doing and wrap it into a company. Why you would want to do that. There are some cases when you might not want to do that. I will talk about those a little bit too. But for the majority of people, what you might want to do is take what you're doing rapid in a company because it gives you certain legal protections, certain tax protections, and helps you grow it into a bigger and more lucrative income. So in this class, we're going to talk about all that. We're gonna talk, and we're not gonna like sugar coated here. We're not gonna be like, uh, I'm not dumbing it down for you because this is for musicians. We're gonna be talking about, um, different business entities the you know, the different objectives, which is something that's really important to me and most musicians, the paperwork that you're gonna need. We're gonna walk through filing our forms for creating the business with the government, will get a tax I D. Number will do all of that in this class, step by step. In addition to explaining why you want to do all of these things and what it means for you . So, um, I hope you decide to take the class, watch the videos. I had a good time making him, uh and, um, yeah. So let's dive it 2. Take Advantage Of Your Ideas: Okay, So why should you start a business as a musician or any kind of artist? Really? In this section, we will be talking about the idea. Um and the idea is whatever you imagine being the income stream related to your music, it might be making records. It might be teaching lessons. It might be licensing to other media, like film, television or video games. Whatever it is, that's the idea. Okay, so throughout all of this section, we're gonna be talking about taking advantage of your idea. And that idea is the thing that you imagine to be your income stream. So to kind of bullet out, Um, a couple of reasons that you should Some things you should think about the 1st 1 that comes to mind for me is to take advantage of your idea. This means you have a really good idea, right? And you want to do it before somebody else does. Now, that kind of leads you down the road of patent getting a patent. A lot of people ask about getting a patent. Don't worry about getting a patent right away. Um, here's why. It's really expensive to get a patent. I've gone through the process twice. And the first time I had a lot of funding and a lot of lawyers, and it was fairly smooth. But, you know, probably a good 40 grand to do it the second time, I just did it all myself. Ah, and I didn't really get the patent. It got denied. Um, and that was, you know, probably because it was not a great idea to begin with, but also, you know, and we might have got a patent if it was a brilliant idea. And I still didn't myself. I don't know, but, um, you want to take advantage? Your idea. So let's say you want to start a company. I don't know. I'm just looking around my office here, selling socks. Okay, So I'm looking down at my feet and stocks on. What's your great idea? What if you you know you need a better idea than just selling socks, because people already do that. And just because somebody already does something doesn't mean you shouldn't do it. But, um, let's say you want to sell socks online, Um, that have this design on it that you've created. Okay, so now you've got something really unique. So nobody has the design. That is a good reason to start a business. You got this idea. Nobody else has the idea. The reason I say don't worry about a patent is because the odds of someone coming up with the exact same idea in a case like that ah is minuscule. And that is not a patentable idea. Anyway, Socks with a unique design on it is not patentable. The design is copyrightable. We'll talk about those things later s so don't worry about patents and copyrights for now. Just story about it. But you want to take advantage of the idea. You want to do it before somebody else does. And that brings me to a little story. So, um, I had this idea once and I don't know how much detail I want to go into about what it was because I didn't want to incriminate someone, But let's just say it was a music thing. It was a musical instrument. OK, so I wanted to build this musical instrument. I had this idea for how it would work, and it is very complicated. I was at a music conference, and, uh, I was talking with one of my friends. You know, we had had a couple drinks and we were just kind of shooting the breeze. And I told him like I had this idea for this instrument I wanted to build, and it was super unique and fairly complicated. And he was, like, Tell me about it. So I told him about it. I sketched out on a napkin how it would all work. Um, it was an electronic things so involved computers and, you know, code and the whole thing. And his reaction was I think that's brilliant. And are you really going to do that? Because if you're not going to do that, I want to do that. And I said, no, I'm really gonna do it. And he said, OK. Meaning, um he thought it was good enough idea to do it to invest the time in it, but ah, he was going Teoh, stay out of my way if I was going to do it. But if I was just gonna be say, this is a cool idea, but I'm not really gonna do anything with it. Then he might have moved on it, and that would have been OK, um, but I said, no. I'm gonna do it. So a year later, I go to the same conference. I see the same guy Say, How you doing, Bubba? Blah with chat. And he said he's doing good, you know? About what? Law? In the meantime, I've been working on this idea. It was it was really complicated to build. Um, and so I had collaborated with some engineers and I was working on it and all this stuff, um, I go to a concert where he has a piece being performed, and it's being performed on the thing on the instrument that I described on that napkin to the letter. He went and did it, Um, and he was able to do it faster than me because, ah, he had more money. And he had Mawr engineering. Ah, friends. He had people he could pull in that were engineers. He could pay them better. He could get the work done fast. Ah, whereas I had, you know, books to read about all this stuff. And you know, some engineers that I could bounce ideas off of, but no one I was paying, so he beat me on money and he beat me getting the thing done. So of course, what was my reaction? I was curious. I came pretty close to storming the stage after it to look at the instrument to see how he did it. Um and I went up to him and I said, You know, I've been working on this for a year, and his reaction was, Oh, really? That's weird. And then he went and talked to people because everyone wanted to talk to him about how cool his instrument waas because it was pretty cool. Um, so I kind of go back to my hotel room and just kind of steamed for a while and a year passed and he was still working with that thing. It really turned into his calling card for a while. Um, he got a lot of press. He did really well, using that instrument for probably a good 10 years. He was using it. He probably still is, actually, um, and here's what I figured out. I think that he honestly does not remember our conversations because in interviews about his instrument, he has said someone asked him, Where did you get the idea and his reaction was, I don't know. I just had this idea. Um, and he's a super nice guy. So I honestly think maybe he drank more than I thought he had. And so he doesn't remember where he got the idea. He just remembers that it's an idea. Ah, I give him the benefit of the doubt because he's a nice guy, but the fact remains, he did it before me. I did not take advantage of that idea. What I should have done is and what I learned from this is to keep my ideas quiet, at least not before they're written down in some tangible way. Um, because once a written down there a little bit protected. So, you know, I didn't see the guy. That's not my style. I took it as a learning experience that I didn't take advantage of the idea he did, and I lost. And no, I know. Don't do that. You know, don't let those ideas slip through your fingers. If you've got a good idea, you've got to move on it. Um, and that's a great reason to start a business. Take advantage of your ideas. Okay, That's what wanna talk about Another reason to start a business 3. The Public Favors Small Business: okay, Reason number to the general public likes small businesses. This is a really great time to be starting a small business because we have tools like social media and because of social media. Ah, lot of people prefer to shop at small businesses and local businesses. They want people just in general and not everyone. This is totally not everyone but a lot of people, probably more than have ever. This is more true now than it ever has been in the past. People like to keep their money local. They like to spend it on, you know, produce that was grown locally. Ah, wine that was made locally, if that's possible, where you live. Um, you know all kinds of food that was made locally and clothes that were made locally. I mean, everyone. A lot of people like spending their money in that way, especially when they can see that their money is directly supporting a small business. Ah, and they're even willing to pay a little more for that. We've seen study after study that shows that if I go to Wal Mart and buy something and then I go to the little mom and pop grocery store down the street. And by that same thing, I'm willing to spend a little bit more to buy it from the mom and pop shop. It's true because people like keeping their money local, so it's a really good time. You have to take advantage of show social media, and that's something we'll talk a lot about in this class. Because you can use social media to educate people about where your product comes from, where it's made, how it's made and who it supports. You can say, Look, this is Ah, Jenny. She runs the company. She is the person who, when you buy this thing, you are putting food on the table for her and her family, you know, And people like that, Um, that's generally part of our modern society. Um, is very favorable thing. So it's a really good time to be in the small business world. That doesn't mean throughout risks and all kinds of other things. But the common sentiment from consumers is in the entrepreneurs favor. So what does that mean to you as a musician, right? Uh, well, it means a couple things. One is that there is a trend for audiences. Teoh prefer their music to be local. Um, we see this in the smaller venues in any major city you know are getting good audience good , healthy audiences for local acts. I mean, they're still not topping. You know when Justin Timberlake comes to town. But those small venues are turn a profit on local bands, digital distribution. So when you're selling on iTunes or something like that, if you can get the audience toe, have a personal connection to you, you are in an advantage That means social media, right? So if you could engage your audiences if you can, um, even just have a a public personality, I have a friend who's a singer songwriter who says, Like, Ah, every day I have to post something on Facebook and Twitter. Ah, sometimes I just paste my grocery list in there, but I've got to say something that's usually not about music. It's just like, Hey, here's what I'm up to today I like fed the dog and then, ah, now I'm going to the grocery store. That's how you engage. That's one way that we're engaging audiences in this totally new way, and it's all related to this, right? Like, um, general public likes to imagine that when they support your music by buying it are by listening to it, they are supporting you. They don't like the idea. And this is when I say they this is a big generalization. But in general, um ah, lot of audiences don't like the idea that when they support an artist, it's going primarily to a record label to all these other places. They want to support you as an artist, and you can take advantage of that. We're gonna talk about ways in which we take advantage of that. But in order to do that, we need to kind of have a business set up and a way to take advantage of that so that the money doesn't go to the record label, right? It stays with us. So that's what we're working on here. 4. Age Is Not A Requirement: The next reason that I really believe in entrepreneurship and starting in business is that age and education is not a requirement. So let's talk about education. First, you can start a business without ever having gone to school at all. Um, you don't need to have gone to school. You certainly don't need to have had gone to school for business. You don't need to have gone to college at all. You don't even need to have gone to high school. If you if you know how to add a couple numbers you don't need an education now, in education certainly does help. Um, and it will prevent you from making some mistakes, but it's not a requirement. Um, I know people who Ah, well, I mean, we can look at some of the most famous entrepreneurs in the world, and ah, and they, you know, like Bill Gates. And he dropped out of college, right? So, you know, you don't need big degrees to do it. And I mean, even look at me. I have a bunch of degrees, I have master's degrees and I have a PhD, but they're all in music. They have nothing to do with business, everything to do with business. I learned from trial and error. So that's a whole separate thing, right? And when it comes to age, you know, we see people starting businesses in their parents garage at extremely young ages, people in high school, even younger. I mean, you watch a show like shark tank, which I mean, I'll talk about shark tank a little bit more later, Um, because I have some kind of mixed feelings about it, But it's a great kind of case study in many ways. Well, you look at it shows like Shark Tank and you'll see you know, some 10 year old people coming on that show because they had a good idea and they followed through on it. And they made this this thing, and now it's It's really valuable in great. And they can sell it all over the place. And you see people in their, you know, retirement, you know, in there maybe seventies, maybe eighties, starting new businesses. It only takes one good idea. Ah, and then you can get it off the ground and everything in between. So, no matter where you are in life and what got you there, you can start a business. It's the great equalizer in many ways, right? You can be any age. You can come from any background. You can have any education and you can start a business. It's basically depending on where you live. Starting businesses basically filing one piece of paper with the state and paying some fee . That's usually around 20 bucks. At least it is where I live. Ah, and then, poof, You've got a business. That's all it takes. So you don't need age education. In many ways, you don't need money to start a business. We're gonna talk a lot in this class about start up costs. Ah, and different ways of starting a business with and without money. And I will advocate, um, throughout this class that you do not need money to start a business. Well, you need a little bit of money, but not a lot. You've probably heard about people getting investors, and I'm going to tell you why that's a bad idea. Um, getting investors is not the best route to go. And I think anyone will tell you that if you can start a company without investors, you're better off because it means you keep more of the company. When you get investors, you're selling part of the company to the investors, so you want to avoid that if you can, and there are good ways to avoid that. You don't need to take out debt, although that is an option to make things go faster. But a company like a company like Slam Academy. We started it with no money, and we just built it from the ground up. And I'm going to talk a lot about strategies for doing that. I'll also to walk you through the process of getting an investors and how all that works. But my preferred method is to, ah, start a company small and grow it to get big so that you don't need investors. You don't need a lot of capital and you can get it off the ground all by yourself. I think that's the best way to go, and that's the way I've built most of my companies. One of my companies had the whole investor round and did that whole thing. Um, and I did not enjoy it, but it made things move a little faster. We'll talk more about that later. Okay? One more bullet on this. Why started business, and then we'll move on to the next topic. 5. Trend Towards Self Employment: Okay. Last but not least in my top four reasons to start a business Self employment. Let me tell you what a typical day looks like for me. I wake up when I feel like waking up. I never set an alarm. I go for a walk with my dog. I get to my computer when I get there. I work until I don't feel like working anymore. And then I'm done. One day a week, I go into my office, uh, at slam academy. I have an office there, but I only go in one day, a week, every other day. I work remotely from home because I prefer to work at home and I'm more productive here. If I wanted to change that, I just change it. Ah, I'm the boss. So I could do whatever I want. Self employment is great. You don't have, you know anyone to answer to in terms of anyone above you. You do have people underneath you that you have to answer to. But this is another thing that we see in study after study. Where since the collapse of the not the collapse, but since the what I guess we're calling now the great recession, where the bottom kind of fell out of the market and now things are starting to pick back up . We're seeing a new emphasis and self employment. Ah, and a lot of people prefer self employment to going to a job, which seems obvious. But it's not because self employment is not for everyone. There are a lot of people that just want to, you know, go to their job clock in, do their thing clock out and come home. Ah, self employment has sometimes very long work hours. Ah, and sometimes very short work hours. It all depends on how you decide to set it up. But a lot of people are preferring self employment and moving into what is now being called the gig economy. Meaning, ah, starting your own thing and doing that all over, essentially starting your own businesses. Um, that's kind of what the gig economy means. More on that later. But we do see a lot more people than historically we ever have wanting to get into self employment, and I'm one of them. I am greatly prefer self employment to working for somebody else. Now, when it comes self employment. There are a lot of tricks. Um, it takes discipline because you don't have anyone just breathing down your neck, too. Get things done. You have to have a lot of discipline. You have to have a system you have to have schedule. You have to have ways of knowing what all your employees are up to at any given moment and ways of reaching out to them. And there are tons of tools for this later in this class will get to a section where I talk about tricks for self employment. These are just kind of life hacks that I've figured out, Um, where how I how I run my life and how I run everything because, you know, I've always got four or five businesses going that I'm trying to always keep up with. I need to make progress on them every day. And how do we keep track of everything? There are ways that I do it and things that I figured out that work well for me. Ah, and I'll go through all of those in this class. We'll talk about how all of those works. Okay, so that's kind of the summary of kind of the main things that come to mind when I think about you know why someone would want to start a business. All of these are pretty obvious, but I kind of just want to introduce these topics and kind of get them in your head because they're gonna frame a lot of our discussion as we move on to some of the nitty gritty. So with that being said, let's move on to some of the nitty gritty, shall we? Off we go. 6. Definitions: Small Business And Entrepneuer: Okay, let's talk about a few things you should know before you get started. Um, first, I want to define a couple of terms that we're gonna be using and have already been using. Small business and entrepreneur. Let's talk about small business first. Okay, So, legally, the definition of a small business is and independently owned and operated business that is not dominant in its field. So what does that mean? So an independent or business? An independent business. Meaning you're not part of a larger conglomerate. Something like that. You're your own freestanding thing, and it is not dominant in its field. Meaning, Ah, you know, if my small businesses a restaurant, it's not, You know, McDonald's. It's not like the biggest thing that everyone knows. So it's a quite a subjective definition, right? Both those two terms are fairly subjective or could be subjective. And that's fine. Small business is kind of a fluffy word. Ah, it's you know when it's not necessarily something we're gonna even strive for. When I go to strive to be a small business, we're going to strive to be the dominant force in our field, right, but kind of, by definition, when you start a business, it is a small business, Uh, even if you're Henry Ford. When you first started your car company, it was a small business until it became what it is now, which is definitely not a small business, although it's maybe getting smaller. I don't know. OK, entrepreneur, this is a more fun word. This doesn't have a strict definition, and there's no real legal definition of an entrepreneur. You are one or you're not one. It's kind of like, Ah, in my world, it's kind of like musician, like anyone can call themselves a musician doesn't mean you're good musician or a bad musician. It's just a word. But typically we think of entrepreneurs as being more motivated by money, then social causes. Now that's kind of the textbook definition, and I think it's kind of dated. So in the next section, the next kind of big section of this class, we're going talk about objectives like business objectives, things that you should be thinking about with your business. But one of them will be well, basically, we're gonna look at four objectives. The service objective, profit objective, social objective and growth objective. The Classic definition of entrepreneur means that they put all their weight in the service and the profit meaning they're going to think about first and foremost. How can I make a thing that people will buy? And how can I make a lot of money selling that thing? And perhaps the goal is to sell the company, not necessarily grow the company, but get it to a point where you can sell it to a bigger company. And again, it's the fluffy word. Ah, that's not a strict definition. And I think definition of entrepreneurs changing wildly. I wouldn't think of mice. I do think of myself as an entrepreneur, but I don't think it myself is that I think of someone who thinks about Yeah, I think about profits and service the thing I'm making. But I also think about social objectives and growing and all these other things, too. So take that one with a grain of salt. But those are two words that we need to think about now. They work together, right? So you are an entrepreneur. If you are starting small businesses or just one small business, you can consider yourself an entrepreneur. Um, even if you're taking this class, you could consider yourself an entrepreneur if you like. That is all fine. It's not the case that you are either a small business owner or an entrepreneur. I think at one time that was the case for how we just use those words in our language. But it's not really the case anymore. Um, someone who starts a small business isn't entrepreneur, especially if you started more than one small business or currently have more than one small business. Then you are definitely not. Ah, the word entrepreneur comes from I believe it comes from an old French adaptation, meaning to undertake. So entrepreneur ooh is like under undertake Ah, and not undertake as in like the undertaker, like bring something to its death. That would be, ah, poetically brilliant if that was the origin of the word. But I don't think it is. I think it's like to undertake a venture to start something. Um, I think is where we we get that word. So in entrepreneurs, someone who starts things, it actually goes back to a music definition. I think the oldest use of the word that we have, If I remember right is someone an entrepreneur was someone who liked put on plays and operas and things like that. Ah, producer basically what we now call a producer of an event in kind of 18th century France. I think the word entrepreneur kind of meant that So is someone who mounted these big scale performances of shows. Ah, And now we've kind of adapted it for the last 100 years or so to me and someone who starts businesses. So, strictly speaking, that's what it means. So congratulations, you are an entrepreneur, and you are very soon to be a small business owner. In fact, by the end of this course, if you're not already, you will be a small business owner because we're gonna file the paperwork and do the whole bloody mess. So let's move on to, Ah, a couple other things that you should know before you get started. 7. Typical Problems of a Small Business: okay, Some typical problems that small businesses face, and in particular, ah, problems that we face as a small businesses that large businesses don't. So where large businesses have a leg up over us as the little person, the small business, right? The biggest one is obviously money, right? Those big companies, they have money and us as a small businesses, we have less money. Maybe we have no money. That really boils down to an element that we call risk. And we're going to talk a lot about risk. But what risk means is how freely you can spend money on an experiment. For example, let's say you have a shoe shop right in. You sell shoes and you want to try and advertising experiment, like putting a commercial on TV. Okay, so and you're thinking I don't know how many people watch TV anymore, and I don't know if it's gonna be worth it, but, you know, you call the local cable company, you get a quote and you find that it's actually feasible for you to do. You can put a commercial on TV for, um, amount of money that you have, right? Um, side note. You'd be surprised it's not that expensive. Um, I just did it. And, um, I think I spent I spent about $5000 for three months worth of commercials running. Um, so maybe about 1000 a month. It's not as much as I thought it was gonna be. So you say OK, I've got $5000 I could spend, but I have $5000 I could spend and not a penny more. That's gonna break my budget if I spend $5000 so you have to weigh the risk here. You have to say, I'm going to risk my $5000. And if it works, I'll make maybe 10 maybe 20. I'll make some good money off it. If it doesn't work, then I'm broke, right? A large business. That risk is way smaller because for them, if it works, then they make a bunch more customers. If it doesn't mean it's $5000 they've got a lot more so you can compete with those large businesses. But you're going to do it at a much higher risk. So you've gotta have a little bit tougher stomach if you're gonna go after competing with large businesses because you're gonna be taking big risks all the time. Um, until you've succeeded in competing with them and have as much money as they do, and then the risks get smaller and smaller. So that's our biggest problem when we face when we kind of try to compete with some of these large businesses. Other problems that come up it's management, just experience of management. You might have five or six employees, but you might not be as experienced as a manager, as some of these other places are. You'll be surprised. And I was surprised at how much management plays a role in the success of a company. We'll talk about that in the future. But having good managers and even teaching yourself to be a good manager is crucially important. Ah, to the success of your company. So in a small business, we, the business owner, has to become the manager. Usually, I mean, usually we don't have the money, just a hiring manager, so we have to manage everybody. Um, so you've got to get good at being a manager, but in a big business, just hire a really experience manager to run the show, and everything's fine. So more about management in the future. The last thing that we have to face that big businesses don't have. As big of a problem with is, um, let's just call it paperwork. Ah, government stuff. And you might think, Oh, I don't have to deal with government stuff. That's not an issue in my business, But you would be surprised. And I'm not talking about taxes here. We're gonna talk about taxes in the future. Taxes are thing. Ah, and we'll talk about those. Ah, very soon. But what I'm talking about here is regulation. Big businesses have sway. Big businesses employ a lot of people so they can call up their local Congress person and say, Hey, this rule that's on the books This law doesn't jive with my company very well. Can you change it? And because they employ a lot of people, Congress person might be more likely to listen to them. Whereas if you who don't employ any people or maybe two or three people, if you call your legislator, they might they might listen to you and they might not. But you don't have the kind of sway that these big companies have, so that could be a problem. I had to deal with this problem, this exact problem. And luckily, my local representative was willing to step in and help me out. And it was a godsend because the problem went away. You know, we just don't have this way that the small that these big businesses do. So that's something to keep your eye out for, um, something to consider. 8. Trends In Small Business: Okay, let's talk about a couple trends that we see happening in the small business world. The obvious one is technology, right? So I think actually, it's not necessarily that it's just technology in general. It's the accessibility of technology. It's that doing highly technical things for a small business is becoming easier and easier . For example, I started a company to build in, Ah, an iPhone app. Just maybe six or seven months ago. I had an idea for an app, and, you know, I can program at very tiny bit, but I couldn't make a nap. Ah, that would work. Well, it would destroy your phone, probably start on fire. So what I did is, um I sketched out the app just unlike a paper basically and kind of outlined how it would work. And then I was able to hire a programmer for not very much money at all. Actually, I hired a guy in the Ukraine to build it. It took him a couple of weeks, and he built exactly what I wanted, and it's out and for sale. Now, you can totally do that. So, technology, even if you're not a very high tech person, is totally within our grasp. There are a lot of high tech people out there that are willing to work for you for very cheap. Another trend worse Talking about which I kind of just did in the previous thing is, um, global operations. In a small business, it's becoming very easy for you to work on a global scale. And that's not just sales. That's, ah, your product line also, Um, like I just said, you know, I hired a program in the Ukraine was great experience. Um, I've also done work with factories in China where I've essentially rented the factory for a couple weeks to have them built me, build me a thing. Ah, and then put it on a ship and ship it over here. That was quite an interesting project, and maybe I'll talk to about that in detail later. But all of these things are much easier and not as expensive as you might think. So if you have an idea for a thing that needs to be made like shoes, keep going back to the shoe analogy. Today. Let's say you wanted to start a shoe company, but you want to make your own shoes. So what you can do if you want to, you don't have to do it this way. But if you want to, you could, you know, get someone local who you know is how to sew and work with, you know, rubber and all that stuff and make a prototype of your shoe. You know, make one shoe or one pair of shoes. I suppose that is exactly what you want. Then you can outline how to make it, and then you can send it to a factory in China and have them send you back 5000 pairs of shoes. It's cheaper than you think, and it's much more doable than you think. Um, it's totally easy to do now there. There are advantages and disadvantages to doing that. The one advantage is that it's gonna be cheap. The disadvantage is that, um, if, ah, there there's always something to be said for keeping the manufacturing in your home. Come country. If you are in the US, you can sell things at a little bit higher price tag. If you can say it's made in America, people will pay a little bit more for that also. Ah, that might fall into some of your social objectives that we'll talk about later. Um, employing people. Ah, keeping jobs and money in your home country wherever you may be, And that is totally, totally legit. So you don't have to send things over to be done cheaply in another country if you don't want to. But it's something we consider that when you hear about people doing that. Uh, it's really not that hard. You would be surprised at how easy it is. In fact, the hardest thing about that process was getting the products back to the United States, Um, because I had to deal with shipping. But even that, you know, I just hired a company that's in charge of shipping. And then, ah, they had to you know, I had to sign a bunch forms because, um, the cargo has to be searched and all that stuff, and it's a long story, but it wasn't that hard. So a couple trends to keep an eye out for 9. Family Businesses: Okay, let's talk about family businesses. There's a couple things I want to point out about family businesses now. I could do a whole separate class just on the intricacies of a family owned business. Now, what that means is that perhaps you're in business with a family member, either by marriage or, you know, a son or a parent, or some or a daughter or something like that, or you are the business owner and you intend on handing this business down to your Children or nephews or whatever. There's a lot of special considerations for that kind of stuff. Um, and I'm not gonna go into it in super detail in this class, although we will talk about it a little bit in the next chunk or we're talking about business types are not the next chunk, but soon the biggest thing that you need to worry about his taxes and taxes and the existence of the business, which sounds dumb. But many business entities are pinned to the founder of the company, and the business is legally dissolved when that founder dies. So in a family business, you want to be sure that you have protections and you don't have it set up in such a way that that's true, because you want to be able to hand it down to your Children and the business to exist longer. If that's what you want to do and the taxes becomes a problem. If you give a business to your Children, it's, Ah, you get taxed on it as though it was a gift, and that's Ah falls into the state tax stuff, and it gets complicated anyway. If you have a family business, here's the best advice I can give you. Get a lawyer to help you set it up, because there there are some intricacies that can help you avoid these problems that happen . The other issue in family businesses is in a partnership situation. So let's say, Ah, husband and wife start a business. Ah, and there 50 50 owners in the business, right that can get not pretty fairly fast. That situation has broken up a lot of marriages and a lot of businesses. The typical advice there is, too, and a lot of people say to not make it a 50 50 split, make it a 49 51 so that there's a person in charge. Um, but I think that you and causes more problems, So I'm not an expert on these situations. I've also heard a lot of people talk about before a wife and husband starts a business together. They should preemptively start marriage counseling just to make sure that they're on the same page and everything's gonna work. Fine. I don't know. That doesn't seem like a bad idea to me. Um, but just keep in mind that there are some special rules that go along with family businesses will talk about a little bit when we get into the business types, But just keep that in mind, so I just want to point that out now. Cool. 10. Characteristics Of Successful Entrepreneurs: Okay, Um, some characteristics of successful entrepreneurs, what we see in some of the most successful people. Um, in this I think this kind of stuff is interesting to look at. Um, I spend a lot of time reading about other entrepreneurs and successful people, and and I get really fascinated by, like, you know what? What do they have for breakfast every day and what are their sleep patterns? I really read way too much about their sleep patterns. Ah, fyi Ah, really successful entrepreneurs don't sleep a lot, but you should not try to model that behavior. It's not real healthy. Some of the more typical things that we see in some of these entrepreneurs is some of them are maybe not what you expect. Ah, one of the biggest ones that I find is that they tend to expect quick concrete results. And you know, when you're thinking long term, a lot of times you're not thinking quick, but when you're working with a group of people, you expect things to get done quickly and efficiently. This is one of the things that I struggle with, um at Slam Academy. All the time is I I have people doing something, and I expect it to take, you know, three or four hours. So I check in with them three or four hours later and say, Is it done when they say No, I get grumpy But that's just one of those. I mean, we'll talk later about how I deal with that, but that's one of the things that we see a lot in entrepreneurs. They they expect a strong work ethic, and they have a strong work ethic, and they expect that out of everyone that they work with. Another characteristic is the ability to adapt quickly to change. So something will talk a lot about a term called pivoting. Um, businesses pivot all the time, and you need to be quick on your feet to see when a pivots coming. What that means is, if your business isn't working, you might need to change your business, and you might need to make a quick decision to do that on that's called a pivot. For example, Ah, friend of mine had a company that started off building a Internet enabled lightbulb. That was their plan. They were gonna make a light bulb that you could control with your phone, you could turn it on enough with your phone, So there are tons of these out there now. But this was before there were tons of them out there. They tried to make one. They did it. They had a hard time getting. It's small enough to fit in a traditional light socket. They had some other engineering problems. But what they found is that they could make a small little microchip that could talk to the Internet better than anyone else. So what they did is they pivoted their whole company. They ditched the light bulb and they just started marketing that little microchip. So now all of the other people making little lightbulbs that talk to the Internet are using their microchip, and they're doing very, very well. Um, in fact, your refrigerator and your microwave and all these new devices that can talk to the Internet. Um, a lot of them are using that microchip. So they've done well by making a quick pivot and making a quick decision to ditch their entire business idea and focus on something else that was working. So not every decision is going to be an entire business one. But making quick decisions is important. Another characteristic I see in a lot of successful entrepreneurs is they've pretty much entered business by chance. Um, it seems very common that people that set out you don't read so much about people who have set out and said, I want to start a business. What should I do instead? What we see is a lot of people who have started off saying I do this thing and it ought to be a business now, right? And they sort of decide to make it a business out of out of necessity rather than just wanting to start a business. That's not true all the time. If you just want to start a business, that's fine. Um, but we see that a lot. So just a couple things to keep in mind, Ah, that we see in some of our some of the more successful entrepreneurs around and typical habits that they have 11. Finding Your 4 Objectives: okay, in this next section, we're gonna do a little exercise. And the point of this is to start to put together your business plan. This isn't gonna be, um you know, all the nitty gritty stuff you need in your business plan. But this is gonna help us start to formulate how we want to start thinking about our business plan and how we want to think about our business. This is a great, um, little project. It doesn't take long to do. You're gonna be done with it by the end of these this video. I'm gonna do it with you. Um, er this section of videos, but its really useful. And I find that when I do it for my business is it helps me kind of put a lot of things that I'm thinking together into one solid thought. It's like you have these many thoughts about how things were gonna work. And this exercise tends to help clarify those things that gets, you know, seeing get them down on paper. You can convey them to other people. Um, and that's really important when you're starting a business because hopefully you're gonna have employees, and you need to convey what this company is all about. So what we're gonna do is we're gonna find these four objectives. So each of these objectives we're going to try to write kind of like one sentence or so. If it's like two short sentences sentences, that's fine. But we're gonna try to write one sentence. Um, for each of these objectives. Now, the way these work is, each objective, uh, connects to the others. So first we're going to think about them independently. But then we're going to think about how they will work together. So as were coming up with these single sentences. Uh, think independently. Think only about the one objective that we're talking about so far. Okay, so the four objectives are the service objective, the prophet objective, the social objective and the growth objective. Okay, so I'm gonna do this with you. So let's examine each one in turn. Ah, in its own little video. And I'm going to write a sentence for, um my own uses as well, and I want you to do the same. So what's going to a new video for each one of these and then at the end will put them all together and see how how it turned out 12. The Service Objective: Okay, let's start with the service objective. So, this one, I'm gonna make this really easy for you and start the sentence for you. Um, the objective is to sir oops. Serve customers by then, you fill in the rest. Okay. That is what our service objective is. It's How are we going to serve customers? What are we going to do for them? Um, it might be, ah, sort of customers by providing them highest quality shoes. But think about how you want to treat your customers in there as well. Don't think. Don't say I want to serve my customers by putting shoes on their feet. That's not what we're looking for here. Because we want to have as a core of our business of giving customers the best experience because they're not They're not gonna come back. If we're just putting shoes on their feet, they're gonna go down the street to the guy who's ah. Giving them a great experience and putting high quality shoes on their feet or low cost. She was on their feet. Whatever you want to do, you could put that in there, But don't. You could put, you know, low cost shoes on their feet. Ah, and that could be a worthy objective. If that's what you want to do is focus on low cost. Um And then we'll figure out more details about the cost later when we get into the profit objective and the next one. But for now, how do you want to serve customers? So for me, I'm gonna focus on Slam Academy. I'm going to say I want to serve customers by providing the highest quality music education , um, available will say just so that it makes dramatic sense. Um, I'm gonna put I will There. That makes a lot more sense. I will serve customers by providing the highest quality music education available. Available. Seems like a weird word in this context, because it makes it sound like I'm gonna be better than anyone around me. And I don't want to be better than anyone around me. I want to be the best in the world. So, providing the highest quality music education possible, that feels better because, you know, I want to aim high. You know, this is my objective, which you can think of it as a goal is my goal. I will serve customers by providing the highest quality music education possible. So going back to the shoe store, I will serve customers by providing the lowest cost. No, I will serve customers by providing the best prices of quality shoes. Ah, possible or something like that. That was a weird sentence, but you get the point. Um, say exactly how you're going to serve what you're going to do if you are a cleaning service . If you're gonna start a cleaning service Senator later, I'm going to run out of hypothetical businesses and over the course of this class, But for now, um, if you're a cleaning service of service, you will serve customers by providing top notch cleaning services, the absolute best cleaning service, uh, available or the absolute best cleaning service possible or the lowest cost cleaning service. However, you want to differentiate yourself, put that in there. OK, so that's our service objective. Um, that's maybe not bold everything, so that it doesn't hurt our eyes. Okay, so let's go back to a music example. Um what if you are a producer of beats and you're trying to get established in a way that to sell your beats too. Uh, other people to rappers. Um, that's a common business venture that I see cropping up all over the place lately. Um, what would be your service objective? In that case, I think your service objective would be something like, um, I will serve customers by providing the highest quality beats at the most affordable price or prices. That would be a good service objective. It could just be. I will provide the highest quality beats. What if you're a musician who, looking Teoh, establish yourself as a performer? Because you're like a singer songwriter or something like that? You could say your service objective is I will put on the best show this organization has ever seen because you're always working for an organization, in that sense, a venue of some type. So maybe venue is a better word there. I will put on the best show this venue has ever seen. That's your goal. Aim high. Um, don't be shy about it. This is to a large extent just for you. You might not ever publish this anywhere for anyone to see, but, um, remember what I said earlier. This is going to go into the basis of our business plan, which, if you need a business plan, um, which is to say you're going after investors or alone or anything like that, then this is all really important stuff that you will put in there. But even if it's just a mental exercise for you, it's important and really useful. So stick with it. Okay, let's move on to the profit objective. 13. The Profit Objective: okay, The profit objective. Now, this is more than just making money, because what we need to say and our profit objective is how are we going to make a prophet and a profit is doing this at cost Just pays the bills. We need to do this in a way that generates more than just the cost of this. In other words, in my shoe store example, if I'm going to sell the lowest cost shoes in my neighborhood, then I need to do it in such a way that I sell them low enough to that so that they're the lowest in our my neighborhood, but not so low that I don't make something off them. I can't sell them for just what I get them for, right? So what is that extra thing that makes our profit beyond our cost of goods? Right. Another way to think about this is the risk. Like we've talked about the risk before in this this is where the risk comes from. Where am I willing to take risks because we associate profits with risk profits come from risk. So for me, I'm going to say so. Let's start our sentence like this. I will take risks in blank and profit from the successes of Blank. And those two blanks could be the same thing. Okay, so for me, I will take risks in offering innovative ah classes and profit from the success of those classes. That's what I'm going to say for me. So what that means is I am going to take risks by offering classes and trying to get people to take classes that no one else is offering totally innovative stuff. And when those run, I'm going to profit from the success of those classes, I'm not gonna profit very much from the everyday classes that everyone else is offering. Right? Um, I'm gonna profit from innovative classes, and that might not be what you want to do. You might not want to profit from innovative stuff. Um, another way to think about this would be Let's go to our shoe store. Example. I will take risks in offering the lowest cost shoes and profit from the success of I will take risks and offering shoes at the lowest possible price and profit from the success of Well, let's change that sentence a little bit and profit from the number of customers I acquire. In other words, my risk is that I'm going to you be offering shoes for pretty close to my cost. And I'm gonna profit when a lot more customers latch on to that than they are latching onto the shoe store down the street. Right? That's the risk. The risk and the reward is what we're talking about with the profit objective. So think about how that applies to your company or your potential company. I'm gonna underline the kind of fill in the blank part. All right, let's move on to the social objective. 14. The Social Objective: Okay. The social objective. This is one of my favorites. This might be my favorite, um, of all of them, because I'm a big enough nerd to have a favorite objective of these four. Here's what we're talking about with social objective. Now, you might not like it at first, but bear with me. Just trust me on this from it. Social objective is kind of like what? What do you want? The impact of your company to be on your community Now, you might be thinking that sounds like hippy nonsense to say, uh, my company is going to make the world a better place because we're gonna give 10% of our profits. Did some charity. That's not what I'm talking about. It is, in a small sense, like, yes, that would be a perfectly good social objective, in my opinion, to say we're going to give 10% of our profits to build a park or whatever. Um, but the social objective is related to what is at the core of your company. What do you want your employees to know that they're working for If the social objective is to purely make money and destroy anything that stands in our way. That's fine. That's a social objective. I don't think I'm gonna patronise your company. Um, personally, but no. Sure, whatever. Let's before we get any farther with this one, let's define this word community because it could mean anything. Actually, take that back. Let's first start our sentence. I like to do it this way. You don't have to write them in this way that I'm doing them. You can write it however you want, but this is what I like. I will enhance my community by so or we could even simplify it. I say I will make my community better, but it so that's a little simpler. I like it. I will make my community better by now. Community? What does that word mean? You can define this however you want. You might define it as your neighborhood. You might define it as your city. You might define it as your state. You might define it as your country. You might define it as your culture. You might define it as your religion. Ah, you could define it as your ah community of friends, your social community. You could define it. However, you want. That's part of the objective, is what is that community. So for me Ah, at Slam Academy, my community is the makers and fans of electronica music write music fans, people that like music and like making music. So I will make my community better by providing groups. This was easy for me, providing a ah, I don't use the word community twice, but I typically do in this, so that's fun in every way providing a voice and advocate for it. That's a bad sentence, but I will explain it. I will make my community better by providing a voice and an advocate and being there 20 missing and advocate for it. So what I'm doing is using Slam academy to be ah, voice and an advocate for my community, which is Elektronik music makers, which means as the company builds, I will be able to have a bigger voice than any of these individual producers and music makers could by themselves. And I can use that voice to advocate to make the community better. So why does this matter? Why is this not just hippie, you know stuff? The reason is, if all my customers and no whether it's explicit or not explicit, that this is my social objective that is marketable. I hate to be a sleazy person that thinks about marketing stuff, but it's totally marketable. More people will be a part of my little school if they know that this is what I stand for. Standing for something is totally, totally marketable in our current economy of social media. All this stuff, how often have you heard of situations where, um well, actually, this just happened here in Minneapolis, in my city a couple months ago, where there was a bar downtown? Well, that it came to light. There was an article written that the owner of that bar had donated $500 to the presidential campaign of David Duke. If you don't know who this is, David Duke was at one point I believe the head of the Clu Klux Klan is a racist organization here in the United States. Um, So what happened? As soon as the word of this got out to social media. Ah, people protest ID. Hey, 500 bucks. He didn't give a ton of money, and I'm not defending him. I'm just saying he'd made a bad move and people protested the bar. Within three or four nights, the bar had permanently closed down, which, if you think about it, ah is really unfortunate for all the good people that worked there. But, um, there's now there's been at other bars in town, a push to hire these otherwise good people. So it kind of has had weird residences. But the point is, that person had a very bad social objective, sort of one that got out, and that's that people found out he was a racist. So imagine what would happen if word got out that you were your company was and you as its leader, were Ah ah, good. A good person. Let's just say that you can define good person however you want what would happen. Um, well, the reaction to good is slower than the reaction to bad. When people hear bad things, they tend to rise up in protest and good is more of a slow burn. But, um, it's definitely something you want to have happen in your company. So stand for something. Be ah, an advocate for something because ah A it's good for your soul and be, um it's good for your company. Okay, that's the social objective. Let's go into the growth objective 15. The Growth Objective: okay, The growth objective. This one is a little harder because there's a couple different ways you can look at it. What we're talking about here is think about the future of your company. How do you want to grow? And to what extent do you want to grow? To say I want my company to grow to be growing all the time is not actually true for everybody. And there's nothing wrong with that. If you are starting, um, let's go back to the cleaning service. Maybe you're starting a cleaning service that's going to serve a specific neighborhood, and it's just gonna be you by yourself. And you don't want to hire more people. And you don't want to grow the business to compete with some huge, you know, cleaning company in town or something like that. You just wanted to be you, and you just want to make money doing it, and that's what you want to do forever. That's totally okay. You don't have to compete with, you know, the biggest companies in the world to be successful. You can define success however you want. I won't go into that right now, but how do you want to grow. And to what extent do you want to grow? So I'm going to say that we we meaning my company, we will grow by. And so how will we grow? We will grow by And to what extent? It's kind of hard to put into words. Um, I could do it by actually how I do it. Um well, this is gonna make a weird sentence, but I'm gonna tell you exactly what my objective here is. And ah, we will grow by and by, um, a factor of 1.5 per year. This is actually the way that I do it. I don't think this is universal for everyone. Um, let's do that. Um, what I say is, I want Slim Academy too. Be half again. As big as it was the previous year. So if our profits were half a 1,000,000 last year, I want our profits to be 750 million the next year. Er sorry. 750 million. Debbie. Great. Um, 780,000. So take half of my prophet. Add that on. That's the goal for next year. My goal was if I made a 1,000,001 year my goal next year will be a 1,000,005. Ah, if I made 10 million, My goal of the following year is 15 million. That's how I think about it. That's a goal that's been reasonable for us to achieve. Um, not without a lot of work, but with a good amount of work. Um, we've been able to stick to that every year except for one, and we were really close that year, so it's definitely nothing that's easy. It's something that we strive for, Um, which is what you want. I think in that kind of a statement. But you could say, um and you know, not grow is totally fine to say there, so don't be afraid of that. Now. Let's talk about how we will grow. We will grow by. This is a little tricky. How will you grow and try to outline and objective here? That's kind of specific, like, what is something you're going to do that's unique? That's going to lead to your company growing. And don't worry, if you change your plans totally fine, you'll find and we'll talk about this. That plans change all the time. Um, in a business so you're not. You know you're not obligated to this at all. This is just something to get us going. Organizer thoughts. So the way I think about growing is by educating, can't spell the word educating, which is funny and UK teeing the public. Um, now what that means is to me what that means is there's a whole bunch people out in the world who could use our product but just don't know it yet. This is kind of the apple computer method. So, like, what Apple computer does is they invent a new thing and they say, Here it is. Here's the iPad. You didn't know you needed this. But now you do. And they educate the public by saying you now need this. Ah, and this is why. And they try to convince us that we need this thing that we didn't need before, and they're particularly good at it. So that's kind of our approach where we say you don't think you needed to take a class in this thing, But you do. And I'm gonna tell you why. So we do that by making a bunch of videos, doing much advertising, doing free classes, doing seminars in libraries and parks and things all over the place. Um, a lot of free stuff, um, and it's worked pretty well for us. So that's our growth objective. That's how we like to grow one way that we like to grow and the rate that we like to grow at. So think about how that applies to you. Think about one way in which you're going to go after. It's more customers. It's a bit of a marketing question, really. At least the first part. Second part, is not a marketing question so much. Okay, those are four objectives. Let's go to a new video now and try to synthesize this together a little bit. 16. Your Business Plan, Part 1: Okay, So what did we learn? We learned that my company will serve customers by providing the highest quality music education possible. It will also take risks and offering innovative classes and profit from the success of those classes. It will make its community better by providing a voice and being an advocate for it. And it will try to grow by educating the public and by a factor of 1.5 per year. That sounds like a great start to a very healthy business. Would have outlined here is really the main things I need to know about this company. Imagine that you were interviewing for a job. You were going in for a job in your profession, but it was at a company you never heard of and you didn't know anything about. And all you knew was when you walked into the interview, it said this right? You read it and you could just from these four sentences, you would be able to look at that and either say cool. This is a good company for me or no, this is not a good fit for me. I don't want this job right. You would be able to know, Um, at least on a surface level. Now, you don't know how that company actually achieve these things, and if they actually do it or they just say it. But at least you would know what they stand for, how their they view customers, how they view their risks. Ah, and what they plan to grow. If I saw a company that said I plan to grow 10.5 a factor of 10.5 per year, I'd say, Whoa, this sounds like, uh, I'm going to be working 100 hours a week and be beat to death. So this might not be for me, but if that's reasonable, but something so it really clearly outlines what your company stands for, what it's about, how it makes money that the key tenets of your company. So these four sentences almost conserve as three opening paragraph of a business plan which will talk about later. For now, I hope you did this. Ah, little project with me. And you've come up with some insights about your future company or your current company, as it were. Great. Okay, let's move on. Keep these handy. By the way, Ah, write this down. Printed out. Put it on your wall somewhere. Then you can look at it every day. Cool. Don't forget about it. Okay, Now let's move on. 17. What Are Business Entities: okay. In this next section, we're gonna talk about types of business entities. What this means is you've seen before I n c right. So you see, like Coca Cola Inc. Ah, that short for incorporated. And that means it's a certain type of business. You might have seen something like Microsoft Corporation and that corporation. Part of it means it's a certain type of business. Different businesses have form under different types, So this is kind of the legal entity we sometimes called. It's just a legal form of business. This means what type of business you are putting together. The the rules of your company is another way to think about it. So there are a bunch of different types, and we're gonna go over all of them in this section. Well, we're gonna go over most of them. In the section there are some, like, really obscure ones that we won't spend much time on. And then at the end of this section, I'll kind of tell you what in like, 95% of cases what you should do. But I want to wait and tell that to you after we go through them, because I want you to try to figure out, figure it out. So think about all the different types of businesses and think about what's going to work best for your business. And then at the end, I'll tell you what I do with my businesses and what is generally the most common way that small businesses start up. One thing that I'll point out now and I'll probably re point out again, is that choosing the right one is important. But it's not final. There are things you can do to transition your business from one to the other, and that's fairly common. You might start off as a business entity that has certain restrictions or certain limitations. Ah, but then you've grown to the size that you think OK, like those restrictions are problematic now, and I need to transition to a new kind of business entity. You can totally do that. There are ways to transition one to the other, but they probably almost always require a lawyer or an accountant to help you do. Uh, probably both, actually, so choosing the right one from the get go will save you a little bit of money and ah dealing with a lawyer and an accountant and an adviser, however, and I'll talk about this morning to second. You should still have those handy those people handy, but okay. Ah, let's dive into, um, what kind of separates these? And then we'll go into each each one. 18. Main Differences In BusinessTypes: Okay, Here's why. You care about the type of business entity that you start your business ass. There are two reasons Number one taxes. That's the biggest one. Probably number two liability. Okay, so let's put a period on that just to show emphasis. So let's talk about taxes, Okay? So when you are starting a business, there is a bunch of different ways that taxes can get handled. Now in in some business forms, the business just pays taxes just like anybody else. In other business forums, the taxes get passed down to the owners so the business doesn't directly pay taxes. But the owners pay taxes, um, for the business. So the taxes that the business would have to pay get transferred to the individual owners in other forms of business. You don't have to pay any taxes when you're looking at like a nonprofit. So the and there are, ah lot of subtleties to this. So we're gonna go over some some of the big ones in just a minute. Let's just say how you will pay the company taxes. That's one of the biggest differences in the different forms of business entities. Let's make that not ridiculously small or build. Okay, Liability. Who is Reese? Sponsor Ble. Well, that's not a great way to think about it. Let me explain this. Then I'll see if I can come up with, like, a one sentence explanation of liability. So liability means you have a shoe shop. Well, shoe shops, a hard one. Let's do an easy one. You have a doughnut shop. There we go. You have a doughnut shop, Someone comes and buys a donut. Um, turned out Ah, there. You accidentally put a razor blade in that doughnut and they ate it, and it put them in the hospital. Okay. Who is liable? That's where the word liability comes from. Who is liable for their hospital bills? Who could be sued? This comes down to a suing kind of thing. So in that case, does the person have the right? The person that ate the donut, have the right to sue your company? Yes. Um, you screwed up, so Ah, you are going to get sued for that. That's totally okay. Can that person sue you as the company owner? Personally? Well, that depends on what kind of business you have. Right. Another way to think about it is if that person comes back to you. The person that ate the donut and says I'm going to sue you for everything you've got. Then what exactly does that mean? Does that mean everything that the business has? Or does that mean everything that you personally have or both? That is a big factor in how a business is formed. Ah, Is the company liable? Are you liable? Are you both liable? You really want some protection here so that someone can not When someone says I'm going to sue you for everything you've got, that means everything the business has and they can't sue you personally. This is why we set up business entities and don't just do things willy nilly because we want a little bit of legal protection for ourselves. Um, so how can we put that into a nice sentence? I I want to say who is liable, but that just uses the word in the sentence. And that seems Ah, too easy. Who? Who can be suit? And for what? It's not really a question, actually. Okay, I think that that does it. Who could be suited for what? So can you be sued? Can the company be sued? Can you both pursued? Can the investors of the company be sued? There's a lot of different variations. Are so within all of our different ah, business entities. We have different variations of these two things. And but these are the biggest, too, that play out when we're looking at the different kinds of business entities. Okay. Ah, one more quick video talking about the kind of region ality of all this, and then we'll go into the different business types. 19. Regionality: OK, A quick word about region ality and what I mean by region ality is everything that I'm about to say in the next handful of videos is specific to what country and even smaller than that, what state or region you are in. So here's how I'm gonna tackle that. I am going to really focus on talking about business entities bythe names that they have in the United States, because that's what I know. If you're outside of the United States, in most cases, all of these same things exist, but they have slightly different names. So you're gonna want to do a little homework. Ah, and searching around for what does you know Germany call a corporation and things like that , um, they have different names, but the properties are really similar, so you'll be able to still follow with us for the next couple videos. But the my new show, What's going on, might be a little different now if you're in the United States, everything about to say should be true everywhere in the United States, however again, some of the little details are different in different states, so I'm gonna primarily be talking from The reference point of my experience is doing this in Minnesota. Ah, and to a smaller extent in Michigan, where I also started a company, there's really only one thing I can think of off top my head that's unique to Minnesota, and I'll mention it when it comes up. But the the rest of it should be almost the same. There are just gonna be very slight, slight differences. Um, and I'll try to point out things that are different in different states as they come up. But in general, just know that you should probably have. If you're going to invest big money in anything right away. You should really check with a lawyer and an accountant because I am neither neither and that's always healthy to do if you've got cash for it. So take everything I'm saying with a note in the back of your head that you might want to double check your states rules on this thing on whatever particular business entity we're talking about, OK? So always check with a lawyer before you make any big moves. That's my official disclaimer. Speaking of liability, that's my liability right there, sort of Okay, that being said, let's get into it. And let's start off by talking about a proprietorship 20. Proprietorship: okay. Ah, business entity number one. A proprietorship. Now proprietorship is an interesting thing. Proprietorship has a single owner, and that's kind of another thing. That's the main difference in the business entities as the number of owners. It's not as biggest taxes and liability, but it's something that will talk about because there are rules on that. But in a proprietorship, it has one owner. The taxes and liabilities are passed to that owner. So it is the loosest form of business entity. We have pretty much in the eyes of the government. The A proprietorship is one in the same as the owner of it. There's no real separation. So if we go back to that example of someone saying, I'm going to sue you for everything you've got, that means everything. You, the business owner, have, um, no legal protections in terms of liability or in terms of taxes. So everything funnels right back down into the personal assets and liabilities of the person. Now it's interesting about proprietorships is that if you've started doing business without formally setting up any business entity, you are a proprietorship. I think that's kind of the default. At least this is the way it used to be, and I'm almost positive it still is. So that's the default. So, like, if you're selling something T people and you haven't filed with your state or any kind of government that your doing business, then when it comes to tax time, you're going to be a proprietorship. So that could be OK. What are the benefits of being a proprietorship? Its single owner? It's low paperwork. Ah, it's easy. So a proprietorship might not be a bad idea if this is something where you're unlikely to be sued. Okay, so that would be, Ah, you know, I wouldn't do anything with food as a proprietorship, whether you're putting razor blades and stuff or not, that was kind of a dark example, but something where you're just very unlikely to be sued. Something really easy like that, like you're making crafts of some kind or something like that, and you're not expecting to make a lot of money at it. In other words, a proprietorship is great, for if you're just starting on something, you don't know if it's going to stick. You don't know if it's going to take off. You don't want to deal with a lot of stuff, just it could be a proprietorship. And then once it starts making money and doing well, then you might convert it to something else to give you a little more protection. But its simple right eso Let's make some notes here. Proprietorship. Taxes and liabilities fall to the owner. It is a single owner organization. You can't have a proprietorship with two owners, or more than any more than one owner. Proprietorship means you are the proprietor, the sole proprietors. Sometimes it's also called. It's also called sometimes a sole proprietorship. I think it's all we need to say about that 10 actually, let's say it's the default business type, so if you haven't done any paperwork, that's what you've got. Okay, let's go into the next one 21. Partnerships: okay. Up next is a partnership. Now. A partnership is a lot like a priority priority worship, except it can have two or more owners. A partnership cannot have a single owner. It's a partnership. So taxes and liabilities fall to the own ER's because there are two. So they get split by the percentage of ownership that you have, which I'll talk about in a second two or more owners. It does require some paperwork. And before I get into the paperwork, let's talk about this percentage thing. And let's put that here. Okay, so there are two types of of partnerships. There is what's called a general partnership, and there's a limited partnership in a general partnership. It is, um, essentially 50 50 or whatever. However many there there are. If there are four partners, it's 25 25 25 25. Um, it's equally you're equally on the hook for everything. In a limited partnership. It can be different, but there is one general partner, not general as in like military but general, as in the leader, essentially so. There might be a lot of partners, but there's one partner that's in charge, and in a limited partnership. The liability falls on the one general partner, but the taxes will fall on all partners by their percentage. So you have a little bit more flexibility to divide this up, How you want. So it could be that one partner has 10% 1 partner has 5% one partner has another 5% and the and the general partner has 80%. Something like that. Paperwork that you need for this is super duper important. This is less of, ah, document for the state and more of a document for you. And this is a document you're gonna need for all business types that have more than one owner. You don't need this if you're going it by yourself, but you need a partnership agreement now with the partnership agreement does is it spells out exactly what happens in all kinds of situations that you don't want to think about. But what you need to do is get this all down on paper while you're calm and level headed with your partners, get everyone to sign it. So this will say such stuff like when you make a lot of money, how does that money get distributed. Do you all get unequal? Cut? Um, that's the most obvious thing, but and when will you distribute it? At what point? Well, that happened. If you and a partner disagree on something, What? How do you resolve that? A common way is to if there's a really extreme disagreement like, let's say, someone else comes in and offers to buy your company, and one partner wants to do it in the other. Partner doesn't. Then you have a problem. And sometimes what happens is people who can appoint a lawyer to be the tiebreaker. Sometimes they appoint an assistant to be the tiebreaker, but you should figure out how you want to do that. So that's in a partnership agreement. What if a partner wants out? Ah, if someone if one partner says I want to do it anymore, I quit. Then can the other partner by out there share? And if so, what does it cost? How is that cost calculated? More accurately, Basically, what happens when the two of you break up? Um, now I'm gonna go over in detail later the specific outlining of a good partnership agreement, um, also called operating agreement. I've been through a lot of these and I made mistakes in them, and I've done some kind of OK, so hold on to that for now. But it is super important. One last thing I want to say about a partnership is that there's some researchers that say that this this 50 50 deal is a bad idea. I'm gonna put bad idea question mark because of that disagreement possibility. If the general partnership was instead formatted as a limited partnership where one person had 51% in the other person had 49% then you never have a disagreement issue because one person always wins the person with 51%. But, ah, if you're starting a company with friends or something, then you have. It's unlikely that someone would be willing to be the 49% but there is some study or people say, don't ever set it up as a 50 50 deal. Set it up is 49 51. In practice, that's really hard to do. But just so you know, if you can get away with doing that, if you could get a partner to agree to it, it's ah much easier Plan Van A straight up 50 50. Okay, let's move on and talk about corporations 22. Corporations: Okay, let's talk about corporations now. Here's the biggest thing for you to remember about corporations you have in your head. Probably if you're like most people, that a corporation is a big giant thing like Coca Cola. Um, and that's true. But corporations can also be little things you could start a corporation. It might be a good idea for you to start a corporation for your business. I don't know your businesses, but it's worth considering. So first, let's talk about the big idea of a corporation, and then we'll break it down into the different types of corporations. I'm gonna kind of break my format here and just write down some highlights. If you see the words Inc or LTD associated with, uh, any company, that means it's a C Corp. Which is a type of corporation. That means it's a generic big corporation. So, uh, Inc or LTD. Means corporation now. The biggest thing about corporations is that I know it's like, totally weird to say this, but a corporation is essentially a person. The Supreme Court early on in the Supreme Court's existence. In fact, it was one of its first, um, decisions that they ever made defined a corporation as this an artificial being invisible, intangible and existing Onley in contemplation of the law. So when you start a corporation, you will get essentially a source of your Social Security number. It's not called that, but it's a unique number, and the corporation can be sued. The corporation can pay taxes. The corporation can be liable for things. But all of that protects the owners. That's kind of its whole job is to protect the owners. You can go after this invisible person the corporation as much as you want, but the owners of it are all hiding behind it. That's the general idea, so liability the corporation can be sued, not the owners. With some exceptions, there are some exceptions to that that are not worth going into here. But in general, it's true. Another important thing is that owners are not required to let's just say hold office what I mean by well, that sounds political pulled office in the company. What I mean by that is you could be an owner and not work for the company. Why do we care about that? We care about that because that means you can sell shares of a corporation. That's what makes it possible to sell shares of a corporation. Because somebody could own a piece of a corporation and not work for it. They could just be an investor. So that's where we get investors from, um, is the idea that someone can own a piece of a company without contributing to it, Um, at all. So corporations air what you need if you plan on raising money because you're going to sell stakes in that company. Okay, here's one of the bad news things about corporations. Ah, double taxation. And we're gonna put a smiley face at that. Okay, this sucks. Um, as the owner of a corporation type double taxation sucks. Basically, it is what it says it is. You get taxed double. Here's why when the company makes money, that money is taxed. When you take money out of that company and put it into your personal account, that is also text. So the money you made in the company gets taxed twice. It's very unfortunate, but that's just the way the law set up. So in a corporation, the double taxation thing really blows, and that's probably the biggest reason to stay away from a corporation. Because in the partnerships and proprietorships, you don't have that because the taxes fall right down to the owner. Um, but incorporations, double Texas. Okay. And then what do you need to start a corporation? Um, you need a couple of for things you definitely need, um, a partnership agreement if you're gonna have multiple owners actually running the company. If this is something you're starting with other people, we call it a little bit something different. But it's same thing. So let's say documents, um, articles of corporation. And that's something you have to file with. The state is articles of incorporation, and that could be really simple. It could be like one sentence. Um, well, I shouldn't say that depending on what type of corporation you are. That could be really simple. More on that in a minute. It's good to include a buy sell agreement. You don't have to, but that's kind of like the part of the partnership agreement that says, what happens if a partner wants to leave, um, Or what happens if you want to take on a new partner? I had, um, one of my companies. Once there were three owners. We each had 33.3% and we decided to take on another partner and that partner we decided we would give 10% to. So that's a problem, because that makes 110% of the company, which doesn't exist. Only 100% of the company exists. So we had all come to the agreement that we were all going to give up 3.3%. Ah, in order to make free up the 10% so that could be covered in a buy sell agreement. What's gonna happen if you decide to take on another partner? Um, where will those shares come from? So I'm just gonna put here partnership agreement because even though this isn't a partnership, actually, let's call it, um, you know, this a partnership agreement is a bit of a luth form document. Um, it's just an agreement with the people you're doing business with, but let's call it, um, an operating agreement here. That way it doesn't get confused with the partnership, but operating documents, same thing, really, as partnership agreement, and most of that will be covered in the articles of incorporation, but it's always good just to have an operating agreement to make sure you're on the same page as your partners on anything that might come up. Okay, now you may also need a board of directors in a corporation, depending on the type of corporation, you may need a board and the job of the board is to represent the stockholders. So it's kind of like, um, the way here in the US we have Ah, it's kind of like the Electoral College kind of the way it works, where we all cast votes. And then those votes kind of get aggregated to the Electoral College, which then cast votes for us. That's kind of what aboard does, where it represents all the stockholders that might own a tiny, tiny, tiny bit of the company. The board is supposed to represent them. If you have a board, you can think of the board as kind of being your boss in a way, so who you appoint to the board is really important. I'll just say this about boards. If you can avoid having aboard, avoid having a board. Um, if you have a lot of investors, you probably need a board. But if you don't have investors, if you're just going bootstrapped and things like that, then which I'll talk more about in a minute. You you don't need a board. Um and then depending on the type of corporation that you are, you may not need a board. So boards can be tricky because they take some of the power away from us. The business owner. You have to get approval from the board to do certain things. Ah, and if you are the business owner and you just want toe, you know, bulldoze your way through some decisions, then Ah, that that could be a problem if you have a board. So I would say, Avoid boards if you can. Okay, that's about it. For general corporations, the general structure. Now let's talk about the different types of corporations, which is important 23. S-Corp: Okay, let's talk about the S Corp. Remember what I said before up here, Inc and LTD. Means C Corp s Corp. Ah, is something a little bit different? The s doesn't really stand for anything, although if you wanted it to, you could call it Small Corp. Ah, it's a relatively small Inc. The advantages of An S Corp is sound the trumpets, no double taxation. So in the S Corp. The taxes Ah, that the company owes falls down to the owners and they so the owners pay taxes on their individual rates. So whatever rate the owner, any particular owner pays for their taxes, that's what they pay on the taxes they owe for the company. And that's the biggest thing about An S Corp is that it's exempt from the double taxation rule. So why wouldn't everyone do An S Corp right? Well, well, one reason is that it must have fewer than 100 members, and that turns out to be a big deal. So what is a member? A member is a fancy term for an owner. So someone who owns a piece of the company it's called a member and less than 100 members like you think of, ah, 100 members. That sounds like a lot of people owning the company. But it's not if you're trading stock. And if you're publicly selling the stock, this won't work at all. If you're trying to raise a lot of money by people investing in your company by buying shares of the company, uh, this won't work. This is not a way to raise money because you need way more than 100 members for that to work. So that is the big limitation of the S Corp This is also designed to be I'm gonna call it less. Paperwork designed to be kind of quick and easy to do are setting up a C Corp can be mountains of paperwork to get filed. The S Corp is designed to be easier supposedly, and that will very on what state you're in. But, ah, that's the biggest difference in the S Corp between the sequence no double taxation, but it could only have 100 members or less, and it's easier to set up. So if you are really interested in starting a corporation, you know, consider don't start just a C corporation unless you have, like millions and millions of dollars invested already. Consider an escort or what of the other ones that we're about to talk about? So let's jump on and talk to one of those talk about one of those other ones right now. 24. LLP: Okay, l l p um we're leaving corporations for just a second Will be back to them in a minute. And LLP is a form of a partnership, and it's called a limited liability partnership. Now, remember this stuff up here under partnership, taxes and liabilities fall to the owners. So if you were going to get sued and you had a partnership, then the person doing the suing is suing you, the owner, not the company. Um, because you need a corporation to stand in between you and the person suing you if you're in the unfortunate situation that that should happen and I'll just mention because I'm mentioning suing a lot Ah, Slam Academy, I shouldn't say this, but slam Academy has been around for five years. We've done absolutely nothing wrong. We do everything totally by the books. But as soon as we started making some money, um, people wanted a piece of it, and we've been sued twice. Um, it's all been things that we were able to work out and settle out of court, but it is no fun. And if we were not protected, I would have been very scared for my house and family. So in a limited air in and L L p, you have a limited liability partnership. So that means that you have still a partnership. So everything about partnership applies, except you are limited in your liability. You essentially have set up a wall that says, if we do something terribly wrong, you can only sue the LLP. You can't sue me personally. Now, these are little. These are kind of rare. You don't see these very often. You may have seen a company called LLP. Not every state even allows thes. These are sometimes allowed in some states and not in other states. And when they are allowed there, typically limited to, let's just say, professional organizations like lawyers, um, medicine stuff. So you might see, like the law firm of Johnny Smithy and Davidson LLP. That might be something because each of those lawyers is probably licensed on their own and carries their own insurance. So the partnership as a whole is that less risk. But setting it up as a limited liability partnership makes it even less risky Yet so it's a good thing to do for those types of things when it's allowed 25. FLP: Okay, One other kind of little one, and then we'll get back to the, um corporation type stuff. But F L P F L P is family limited partnership now. I mentioned earlier that there are special rules regarding family businesses, and if you're starting a business with family, you should read up on those. I'm not super up to speed on all of them, but I do want to touch on this really quick this family limited partnership. This is essentially and LLP with family members. It's most common in farming, and what it helps you with is so it's a partnership number one, so there's no double taxation in it. But there are still big taxes for, like transferring land between family members. There's like a gift tax and all kinds of weird stuff like that, and this helps you with some of that. I don't understand a lot of that kind of stuff. So I was going to say, um helps with land ownership, taxes and other tax issues and was going to say that, So if you are doing a family based, if you are going into business with the family member, look into that doesn't have to be used for farming. That's just when it where it's most common because if it's really well into that. 26. LLC: okay, L L C This is a limited liability company. It's not a limited liability corporation. So LLC is not a corporation. It's a company, which is a weird term that we've given it. But, uh, it's quite similar to An S Corp like we saw up here. So no double taxation must have fewer than 100 members and less paperwork. Um, I would say L C gives us the greatest amount of flexibility for a small company, in my opinion, So it's relatively new. I think it's been around for probably 20 years or so now, but that's relatively new and the world of this stuff. One advantage that it gives, which is hard to articulate. How can I put it in one simple sentence for this document? I could say it's owners, which is members can be paid separately from there. Stake in the company. Okay, let me explain that. So let's say one owner has 10% of the company, right, and you decide that you're going to pay all the owners every month like a salary. And but you want to pay all the owners equally? Um, so all owners get paid, you know, $1000 a month. Technically, an owner with more percentage of the company should get paid more than someone who has only 10% right? Um, but in an LLC, you can pay owners ah differently than what they actually own. So if you want to pay that owner, who on Lee has 10% the same as what someone's getting, who has 50%? You can do that, Um, that's allowed in this type of formation. So it's kind of designed for the owners to be working for the company not designed for the investors. Um, this is not a good platform to have investors, however. The thing about Elsie that is great is that they're super easy to set up. Depending on your state, you can have single member Elsie's exist in some states. Let's just say some states don't allow single member Elsie's. That means that if you want to start a company, you might need a partner to create an LLC because designed to be more of a company. But some of states now do allow single member LLC's and in a single member L C. It is super easy to set up. It's like literally one form. So LLC's air really good for a small start up company. And if the company grows to a bigger corporation, then you know you convert, and that's okay. 27. Nonprofit: Okay, The last one I want to talk about is the non profit corporation. A nonprofit corporation is a little misleading. Uh, calling something a nonprofit corporation doesn't mean that it doesn't make any money. Doesn't mean that all ah, people can get very rich working for nonprofit corporations and owning nonprofit corporations. The biggest difference in a non profit corporation is that you can't be paid to own a nonprofit corporation. What that means is where that down can't be paid to own a non profit. What that means is, let's say I founded the an organization called the Advancement for Online Educators or something like that, and my, that organization charges member dues. So I want all online educators to join my organisation and they pay a bunch of money. I'm a nonprofit corporation, so that means I don't have to pay any taxes. Nonprofits are exempt from taxes like a church, so that's great. I can take in all that money. I don't have to pay any taxes on it. It's awesome, right? Problem is that money can only be spent on stuff for the company, which includes salaries. I could give myself a handy salary, but Let's say in 10 years from now I retire and I say, OK, I'm done running this organization. Keep paying me my salary, though, because I founded this company. No, can't do that. Um, you have to be working for the company to be paid a salary. You can't just found a nonprofit and then retire and collect revenue from it. You gotta work for it. So not setting up a nonprofit is I'm just gonna call it obscenely complicated. Um, I'm sure people that have done this before would say, Oh, it's not obscenely complicated, but I tried to do it once, and I thought, Wow, this is obscenely complicated. Mostly because of the tax exempt stuff. It requires you to do a lot of financial work. You have to work with an accountant. Um, and you have to really make sure all your ducks are in a row in terms of how you're handling money coming in and money going out and all that stuff. There are a lot of rules about it. So obviously this is best for organizations, charities, things like that. That's what it's designed for. So if you're interested in starting a nonprofit corporation um, the best place to start is find another nonprofit corporation and go talk to them in particular. Talk to their their finance person because the first thing you're gonna want to do once you start filing the paperwork is you. You need something called a fiscal sponsor, and that's basically another nonprofit who will vouch for you for a little while. It's complicated, and it's weird, Um, but you kind of need to partner with another one to get started. Maybe that's only a Minnesota thing. I could be wrong about that. But if you want to do this, that would be the place that I would start is go to another nonprofit that's particularly doing well that seems to be well organized, talked to their finance person and just say, What do I do to start a nonprofit? They tend to be not very competitive, so it's perfectly fine to go knock on someone's door and try to get through time. There are more types of businesses than that. There's a couple I skipped over. Um, there is something called a cooperative, which is becoming more and more popular, but still pretty rare. But look that up. If that's something you're interested in. Um, there's a joint venture. There's a fractional ownership. There's some other weird things that are less likely that you'll want to come across. But if none of these fit exactly what you're trying to dio, look at some of the other more niche ones that might not fit. And look at what your state if your state offers anything that's particularly unique. 28. What is Best For A Small Business: Okay, what is best for your company. So at the beginning of this section, I said, I'm gonna outline these types of things that I want you to think about where your company fits in to doing this. So let's go through these and just kind of decide what we want to do. So quick highlights proprietorship. The good side is that you kind of already have a provider ship. If you're doing any business at all, you're already doing it. The bad side is there's no liable protection, so that could be a little scary. A partnership, basically the same deal as our sorry partnership. Basically, the same deal is a proprietorship. Except you can have multiple owners, not neither of those two. I would recommend for any kind of long term solution. They can both be fine to get off the ground and just start doing stuff. You know, start making some sales, making your products, doing what you dio. But once you have a couple of dollars in the bank than it's worth, um, moving on to a more concrete thing. These are a little too loose for my taste. A corporation in particular, A C Corp see Corpus for And this is my own personal opinion. By the way, this is a highly opinionated statement about to make. But, um, it's my class, so I'm gonna be opinionated. See, Corpus, when you've got tons of money, you want to be A C. Corp Until you've got tons of money. Escort is pretty good, but this less paperwork thing I have a little bit of concern with So S Corp is better than C Corp for if you don't have tons of money and buy tons of money, I mean, probably somewhere around like $10 million. Escort can be good, but you need some money. Teoh get moving On An S Corp. You don't need $10 million but you need some an LLP. If you're doing the partnership route and your ah lawyer or someone in medicine field or something like that, that might be a good field for you. But LLP's have never ah worked out for me and the same thing with F. L. P. Because for me personally, going into business with a family member sounds crazy. I would never do that. Um, I've gone into business with friends before, and it's turned into a nightmare on just about every time I've done it. I'll talk more about that in the future. LLC is a mighty filing place to start. That is my recommendation. If you don't have money, you don't have investors and you just want to get started and you want to have some protection. Starting jealousy. It's super easy, this less paperwork stuff of An S Corp Not nearly as true as it is for an LLC, and Ellis EU could get set up. Ah, really fast. Like, Ah, let's see. It's 10:34 a.m. right now. By 10 40 I could start an LLC and have all the legal paperwork filed. Um, it can be really easy to Dio. So all my companies have started as LLC's, and then one of them has converted to An S Corp after it got some investors and some but not a lot of investors, just a few and had some more money. But l see a great place to start. Non profit is kind of its own entity. Like Ah, I I don't even consider a non profit as a viable business option for the types of things that I do. Nonprofits are great. And I love nonprofits there really? For charitable organizations, So be good to your friendly and non profit in your neighborhood. Give some of your money to nonprofits. And if you're interested in starting something that is a charity, then you definitely should do it as a non profit. But for what I do in, you know, general making money stuff, um, Elsie is the way to go. So what is best for your company? I'm gonna say for me, start with an L C. Later convert to and S Corp. If you need. Okay, that is my recommendation. LLC making LLC in the next section. I'm gonna walk you through how to set up a jealousy Super easy. 29. Filing Your Paperwork: Okay, so let's do it. Let's set up a new LLC. I'm going to get as far as I can in this video or in this segment without actually doing it , because I was really trying to think of one that I could set up just for the purposes of this class for something I was gonna do later. But I don't have anything. I'm dying to do it now. I already have, like, five LLC's filed, so we'll get us far as we can. So here I am, on the secretary of state website for Minnesota, your state Probably the same, except substitute mn in that URL for your state's abbreviation. So we do this through the state your way. So on my website, I'm gonna go to businesses and leans business filings online. So I'm gonna score. This is to look up existing businesses and I go down here and I'm going to file a new business or nonprofit. So here are my options assumed name. That means you will also want to file an assumed name. That's a document that a bank needs. If someone's going to write checks or something to your company name, you need to have an assumed name on file. It just says that you know, John Smith is the same person as you know, awesome cheap shoes or whatever. Ah, and so that you can cash those checks. So that's an assumed name. It's just a little farm. It's easy. Corporations Cooperative's limited liability company, domestic or limited liability company Foreign. I'm not exactly sure what the difference between these two is. I mean, obviously this one means I'm operating within the U. S. And this one means I'm operating globally. But, um, can I operate globally If I'm just in a state in a domestic? Elsie, I don't know, actually, don't have the answer that I have always done this domestic, So I'm going to so you can see here. It's very quick, but it's 100 and $55. That's a bit of a stinger, but, um, it's gonna cost us money. So before I do any of this, I have to create an account with them, so create an account just so that you can log in. I already have one. Okay, now I'm back and I'm logged in, so I'm going to go to limited liability company domestic. That's the easiest way to go. Okay. Are we gonna be nonprofit or for profit? We're gonna be for profit. Are we going to do? Professional status is and services. This is Ah. According to some statute, you might not see this for not in Minnesota. I'm just going to say no. This is the kind of thing where if you were doing it, you would know. So if you don't know if you're doing this or not, you're not okay. Now we need a name and to the name you wish to appear on your business except for the entities designation. So the designation means like ink or LLC or, you know, that kind of thing. So just enter the dame without that on it. Choir designation must be chosen from the drop down list on the right. That's this we're going to say, How do you want us to show up? Um, written in what way? I like this one. The best. Something say that. Okay, so let's propose a business name and see if there's another business that already has that name. Um, What did I just suggest? How about super cheap shoes? LLC, um, let's do. It has three different words. Super cheap shoes. Elsie Search. Okay, it's available. View the name. You may wish to add it before filing. Let's see what happens when something is not available. Let's say target Target Elsie is available. That's unlikely. That's so in this case, I could start a company called Target. I'm gonna get my pants sued off. Um, really fast, because target corporations gonna come after me. Um, but there's not an LLC called Target, but let's go back to super cheap shoes. Here are some rules for the name of the business. Um, nothing too weird. I mean, they won't let you have names that are, like, really offensive or something like that. They're not going to register, but, um, pretty predictable stuff. So let's click on file Limited liability company. No, we can do this all online. I'm not gonna file any paperwork. This is, like all of it. So I'm just gonna do I'm gonna get us far as I can. So, individual or organization, So in individual is much, much, much easier to file than an organization. So an individual means a single member. LLCs, remember? So I'm gonna say 1234 This is like a fake address that I use all the time. Um, sure. Save organizer. Okay. I can add another if I want, but I'm gonna do single member. Okay, Registered agent. This is an interesting thing that you'll come across. A registered agent is kind of a throwback Teoh before the Internet age, but it still exists. A registered agent means that if someone has to deliver a legal document to you, um, they need an address to which that legal document can be delivered 24 hours a day, sort of. So there were companies for a while that were that popped up that were, like, registered agents where you could say they are the registered agent and they would accept documents for you in the middle of the night. Um, just because you have to have this on file, but at least in an l c, it can be you. Um, I always just list my home teacher address of my registered agent. Sure. This is not my real address, by the way. Just thought I'd point that out. I do live in Minneapolis, though. We'll make that really okay. Mailing address. Um if you cannot receive mail at the registered office address, refined mailing address so it's gonna put same mailing address in again. Cannot be the same as a registered office. Well, that's weird. Okay, let's make it very slightly different just for the purposes of this. So those have to be different. Wait. If you cannot receive mail, the register's office. Okay. So I don't think we have to input this now that I look at it. Yeah. So by not putting anything there, what I said was the registered office address is correct Address. Okay, If we want to add an attachment, we can add it here. Now. This would probably be our articles of incorporation. It doesn't say what toe ad. So I would I wouldn't add anything. Don't worry about it. You'll be fine contact and delivery information. This is all gonna happen online. So this is just where it's going to send everything client reference information. So this you don't need to worry about this is for like, if you're If I am hiring someone to set up this Elsie for me, they would right here something like, ah, being set up for Jay Allen or something like that. But since I'm sitting at myself, I'm gonna leave a blink email for official notices. Um, at an email address here. I guess I have to put one. Ah, this is where your documents are gonna be sent. So it's important. Okay, now the just a couple questions how many Minnesota based full time employees does this? And to do you currently have between zero and five. Does the owner or a member of the ownership group of this entity self identify as a member of the following communities? Okay. Woman member of community color, veteran number of disabled community member of immigrant community who say no to all those . This is just like a survey for them for their statistic purposes. Please select code that best identifies what you do. This is always a tricky thing. Um, but let's say this is for my shoe company. So I'm going to say, um, wholesale trade, retail trade. Let's say retail is this NT full time or part time endeavor for those primarily responsible for operating this entity. So for you is this full time or part time and we say it's my part time gig for now, if applicable. What were this entities? Gross revenue for this past year. Se zero next. Okay, so here is everything. Um, we're gonna file this. I'm gonna pay 155 bucks. Assumes I hit. Submit. It's gonna So when I hit submitted a new window is gonna pop up where I'm gonna put in my credit card and stuff, I'm gonna pay 155 bucks, and then I officially have an l. C. I think it gives you the info, like, right away. Um, let's go to a new video and we'll talk about what that info looks like. 30. Getting Your Documents: Okay, so after you do all that and pay the money, um, for me and again, different by state. But in Minnesota, they're kind of famous for making setting up in L c. Really simple. So in your email, within a few minutes you're going to get to documents emailed to you, So check your junk mail if you don't, Um, unless your state doesn't do it this way. Ah, the 1st 1 is from these state of Minnesota. It says, dear, your business name. So this is obviously not the one for that one I just made. This is the old one that I got for a slam academy. It says Bubba, Blah and all this one really says is you are a business now. Some legal things you should know and some important people to call if you need help. Nothing really important there. So But it's nice toe. Have I held on to it just because Why not? This one is your official certificate of organization. This is the 2nd 1 we got. Phyllis is secretary of State of Minnesota. Certifies that Bubba blah um, this is the official name of the company. Now note the name of my company is Slam Academy, but the legal official name is Sam Academy. Elsie officially, legally, you have to have that Elsie on their, um it's just the way it works. You don't have to use it all the time. Um, I use it like in contracts and stuff, but, um, that is the official legal name of the company. This is our filing number. Now, this is not our business. Ah, r e i n number is what it's called. We need to get an e i N number, and I'll talk about that in a minute. But this is not that this is just the number of our application eso statutes when it was issued, etcetera. Okay, here is some info about our company, um, official names of people who owns the company and then certified by the state of Minnesota . I like that. This looks like it was signed even though this was just like a generated PdF, like on the fly. So it's clearly not a real signature, but whatever. So keep this document, hold on to it and keep it handy, because that will be a document you need for the next step, which will be getting your e. I am So let's talk about the e i N number and how to get one in the next video. 31. Obtaining An EIN Number: okay, We're part way there. We still need to get an e i n number. So you can think of this like that filing we just did got us filed with the state as a business were a definite business. Now we can do business as that. However, we need to get registered with the feds with the federal government. And the only real reason the federal government cares about our business at all is that it wants our tax money. So, um, it wants an E i n, which is an employer identification number. Now, that's a little goofy sounding because you're gonna want one of these whether you are an employer or not, because, uh, you are an employer. Even if you're only an employer of you, that's the way it thinks about it. So if you are the only, um, person that works for the company, there's still somebody. So they call this an E. I am now on different forms. This number is called a bunch of different things. Here's what I've found. Whenever you're filling out a form for your company and it asks for your company's blank number, Um, that blank, it might say What is your company? Z i n it might say, What is your company's C i n? There's a number of different things that places call this. Whenever you see that, try putting in this number. The number you get, um, for your e i n. It's basically the Social Security number for your company. Um, yeah, right here. Ah, I t I n is another one. Yeah. So, um, in order to get it, I am here on i r s dot gov and right there, it says apply for an employer i d. Number E i n. This one is gonna be a little more complicated if I remember. Right. So we do an online application, and it says it was scary for authorized use only monsters in metering section. Ah, they're saying don't record this form. Oh, no. It's saying they might be recording this form. It's like, um okay, begin application. What kind of company are we? We are a limited liability company. Let's see how far we can get in this. Um says everything I need to know about a limited liability company. How many members remember? That means owners are in the company. If you put the number one here, your life is going to be a lot easier if you put anything higher than one. But, ah, you have to be honest about this. Um, because you're gonna get yourself in trouble. If you don't want to say one for me, please let the state territory where the business is physically located for me, that's Minnesota. Confirm your selection. It looks good. Why is the LSE registering for an E i n ah. Starting a new business. Who is the responsible party? An individual? This is an interesting thing, this existing business because, um, an LLC you can actually own a stake in another company. Um, kind of goes back to the corporation thing, even though in LSE is not exactly a corporation. And l c can while a corporation can own a corporation toe. Weird. Um, so it's saying, is the owner of this l see a person or another company? We're gonna say a person tell us about the responsible party. So I'm going to say me, Oops. I don't have a suffix unless there's PhD in the Alice. Put that on there with the heck. Use that whenever I can and then myself. Security number. Um, I am one of the owners members or the managers of this Elsie? Yes, and it's gonna yell at me for not putting myself security number in there. Uh, I'm gonna do something dangerous and put a fake one. Groups can swim number short. Okay. It's saying this number does not match the information for a name with that person. Course it doesn't just made that up. Okay, so I'm gonna put my real so security number and blanket out okay. Ah, it wants my address. Let's go back to front street phone number. Do you have an address different from the one where you want your mail sent? No, that's fine. Okay, this is saying it tried to confirm that that address exists, and it's saying Ah doesn't think it does, but I can accept it anyway. Okay. Legal name of the LoC must match articles of organization if filed. We haven't filed articles of organization, but the legal name for L. C. Was what popped up on that document that we just had here. This is our legal name. Slam academy. Elsie. So we want to be sure we put that there so I'm gonna call this. I can't remember the name of our shoe company now. Super cheap shoes. Elsie Trade name doing business as only if different from legal name. It is not. That is the same county, not Country county, where is located. So for me, it's I am in Hennepin County, in Minnesota. Ah, state territory where articles of organization will be filed. That is also Minnesota LLC's starting date. Um, so, uh, it started today. So we would say, um, what is it? September of 2017. Continue. Okay, this is the last one. Um, does your business own a motor vehicle with a taxable gross weight of £55,000 or more? I say no. Does your business involve gambling or wagering? No. Does your business need to file form 7 20? Excise tax return. I don't really know what that is, So the answer is probably no. Does your business celo manufacturer, alcohol, tobacco or firearms in the same? No. Do you have her? Do you expect to have any employees will receive form W two within the next 12 months. Um, I'm gonna say no, because if I do, I'm gonna deal with that leader. Um, but right now I don't have any employees. It's just me. So if you answered yes to any of these, like you are a business that sells alcohol, tobacco or firearms, then you probably have to go down in a whole other wormhole of stuff. I've never dealt with that before. Um, so it's easy for me. Okay, Now, what does your business do? Ah, this is kind of the same is what we did in the previous thing. Let's say retail. It might give me another question here. Now. Yeah. Eso wants us to drill down a little bit deeper, selling good goods exclusively over the Internet, selling from a storefront to wreck, sales, auction, house or other. Let's be an Internet only kind of deal. Sure. Okay. And how would you like to receive your e i n confirmation letter? I received a letter online or letter by mail. Um, if we want to be done with this quick, we would say online. Ah, so that's what I would I would do. But you can do it by mail, whichever you like. Okay, so I can't get any farther without submitting this, and then I'm submitting fake information to the federal government, which is a bad idea. So, um, enough of that. But once you hit submit. What you will get is this. This is an official document that says, um, they have noticed your employer identification number. Now it's always gonna look the same. It's going to be two digits and then hyphen. And then 1234567 digits, two digits, hyphen, seven digits. This is also called Form S four. That's what this form is. It just says, Ah, your legal things You need to know Cool. And now you have that number. So keep that number. You're gonna need it all the time. Whenever you go into a bank, whenever you going to do anything weird, you're gonna need that number. Um, that is essentially the so Social Security number of your company. Okay, I want to fill out one more form while we're at it. And, um, that's gonna be an assumed name. So let's go to a new video and talk about that 32. Certificate Of Assumed Name: okay for the certificate of assumed name. We're gonna go back to our state government now, and we're gonna go to businesses and business filings online right back here. Then we're gonna say, assumed name is a $50 form. Okay, so we enter it here. Super cheap shoes already comes up. Okay, File assumed name. Okay, so remember the purpose of this document. This does This is not a business filing, and you don't need to have this, but you really should. What it does is it makes it so that really the only time I really have ever needed it is when I'm opening a bank account. If you're opening a bank account, which you'll want to do, you'll go into the bank with your e i n your letter from the state creating your organization and this document and your personal I d probably. Yeah. Actually, they need your personal i d. So you'll bring those four things in, and they will say Okay, uh, whenever a check comes in for super cheap shoes, we know, and it's signed by because, remember, super cheap shoes can't sign a check. Um, so it's gonna be signed by J. Allen, and that's okay. So they're gonna get your signature on file. Um, that's really all it's for and how it should work. If you have a respectable bank, is they're going to take all those documents. They're gonna scan them in to their system, and they're going to save them. And you're never gonna need to bring all this stuff into the bank again. They'll have it on file. So whenever you go into cash, Jack, you can just sign it handed over and put it in the right account. So walk through. This is just another forum. It's the same stuff that we just did. Right. Um, but this will give you a document that says J. Allen is doing business as super cheap shoes. But I just said something interesting doing business, as I have noticed that this form is called different things in different states. Here, it's called a certificate of assumed name. When I was younger, I lived in Michigan and it was called a d B A, which is doing business as same thing. This different states college of and stuff. I know that because this is the form that, like the first form that you fill out if you're like in a rock band or in any kind of band and you, and like the bartender or whatever wants to pay you for the night with the check, which is rare. But sometimes it happens. Then you need one of these that you can cash that check. So a lot of bands will have, like a DB a. So that they say, like, um, Justin Timberlake is doing business as I don't know. That's bad example. I can't think of a band of top. My head hung out of a terrible musician. Anyway, you get the point. So those are all the documents we need and our company has officially been born. Congratulations. Welcome to the world Super cheap shoes. Let's move on and talk about this operating agreement. 33. Dont Go Into Business With Friends: Okay, let's talk about the operating agreement. Before we do that, I want to point out one thing. There's often a phrase that people use where they say you should not go into business with friends. When I was starting one of my companies on my first ones, I, you know, heard that often like most of you probably do. And I thought, Yeah, but it'll be fine and I went into business with some friends. It was not fine, so I will not do that ever again. I made a very painful, gut wrenching mistake in doing that. So even if you think it'll be fine, maybe rethink it, I strongly encourage you to not or, you know, go into business with friends that are, you know, maybe friends at a distance. But not like your best friends. Here's why. So it probably seems really fun now, and you're like starting a business together, you know, like maybe raising some money. You've got some cool ideas of all these, like, really awesome things you're gonna do. But after a year, two years, three years of doing this, let's say the business is not doing so well Now. The two of you or more are gonna be totally stressed out and you're gonna be overworked and you're going to start to make some rough decisions when you're stressed out and overworked and poor. By the way, you might start to think I'm working harder than this other person is. Why are we getting paid the same? And then everything starts to fall apart. Um, you'll start, you'll get mad at that person. That person will get mad at you and then you've got big problems. Now let's look at it the other way. Let's say the business going really well, then you have essentially the same problem where now you've got money, money is on the table. And you could say, Well, I'm putting in 100 hours a week on this business And you know, my buddy Jane is putting in 20 hours a week like that's not fair that we get paid the same . But if you started the business together and you agreed to certain rules, then um yeah, that's the way it goes. So you might have to Well, you will have to have very tough conversations with these friends, and it might result in you firing one of the friends. If you have set up the company in a way that lets you do that so the whole point of the operating agreement is to make it so that when those tough conversations happen, you can point to this document and say, Hey, look, before we got deep in the weeds on this, this is how we agreed we would handle this situation. This is the agreement that says how you are going to run the company in all kinds of crazy situations, what's gonna happen. And there's a lot of different situations covered in the operating agreement. So if you if you want to go into business with your friends, you're you're welcome to do it. I I couldn't advise you strongly not to. But if you're like me, you're going to do it anyway. So just make sure. Promise me that you'll have a good operating agreement in place because you're going Teoh, give yourself a world of hurt if you don't have this operating agreement set up and written in stone. So let's go over what ought to be in one. So what we're gonna do over the next seven or eight videos is I've kind of broken this down into seven different kind of Maine chunks of stuff that should be in the operating agreement. I want to go over all of these. And then at the end, um, I'm going to post a sample operating agreement, something that you can download and edit and uses kind of a template to get started on your own. This is not an official government form or anything like that. You can kind of freelance it. You can write it on a napkin, although it would take a lot of napkins because there's a lot of stuff in it. But you can. I mean, as long as the two of you sign it and you put it in a vault somewhere, then it work. I suppose eso uh, that being said, let's dive in. 34. Operating Agreement General Info: Okay, The first part of our operating agreement, we're going to just call General Info. So this is stuff like, why it's my fault. So huge, I think because I'm, like, way zoomed in. Ah, this is stuff like the name, um of the business where the business happens. Nothing brilliant goes in here. Just make sure that everything's right. Be sure you have, ah, correct mailing addresses of all members. And remember, members means owners, any partner organizations you can list here. Even if they change later, you can always update an operating agreement. That's another important thing to remember is that if down the road, you say to your partners, hey, are operating Agreement says we're gonna do this. But clearly that's not a good idea anymore. Let's update it. As long as you all agree, you can, you know, remake the operating agreement. You can update it. That's totally fine. But you got to get everyone to agree. So with that, I was going to say partner organizations like, ah, your lawyer, your accountant band, my Microsoft Word is just being a jerk. Why would it do that? Okay, let's do that. All right. Whatever you can list all of those in that general information, so just so that there's no doubt on who to call in what situation. So that first part general information really easy. Let's go on to the management part. 35. The Operating Agreement Management Concerns: okay, Management. How is the company going to be managed? Um, the biggest question you should ask here. Is it going to be what's called? Oh, I thought I fixed all of that. Ah, in between videos, I, like redid all of this and got it all nice and good. Okay. Is it going to be what's called Member Managed or manager managed? What that means is that if it's member managed, that means you the member, the members are going to manage the company. Think of this. Is owner managed, right? That's what that means. If it's gonna be manager managed, that means you are going to hire a manager to manage the company. Okay, So things to think about their is if it's gonna be manager managed. Uh, does the manager need to be part of the LLC? Does the manager need to be elected? Um, and for any election, what's to say? Do managers need to be elected any election? So for any election, you need to specify who votes and what constitutes a passing vote. So who votes what passes that could be for who votes? It could be all members. Oops. It could be, um all present at some meeting. If you wanted to do that a little sneaky, usually it's all members. And then, for what passes, you can say it has to be unanimous. Or it has to be. You could say like, 75%. You could say 2/3. You could just say majority, or you could say anything else that you want. So So what you would do here is, you would say, um, like, if the question is, do managers need to be elected? If so, they need to be elected by all members unanimously. So all the members need to agree on who the manager is gonna be. And then, um, that manager gets elected. So for pretty much all election questions, you need to ask. You need to frame it with these things in mind. Okay, How does the manager get paid? Does the manager have voting rights? Ah, what are the roles and responsibilities? The easiest way there is just to write a job description and put that in. Okay. Other things that might go in the manage section would be, um, can members work in a computing business? This is actually really complicated one so you might say members are not allowed to compete to participate in the competing business. In other words, if we go back to our shoe shop thing, we're starting an online shoe shop and it's gonna be great, and it's gonna sell really cheap shoes. But can my business partner work at the same time for another shoe shop? Your gut reaction might be that no, they shouldn't work for the competitors, however, Consider this. Consider that if you want a really good person as a partner who knows a lot about shoes in this case, then you might want someone whose day job is working in shoes all the time and then at night, their labor of Love project is your new company that they're going to try toe build up to be their full time job. But you want. No matter what industry you're in, you might want someone that's really in the industry, so letting them maintain a day job well, the company gets started. Even if it's in the same field, can be OK. It's worth considering. It's not terrible. So consider that you might say, um, what's a good way to say that Oh God, can members be working for a competitor? Tore. And one thing you might, the way you might choose to answer that is yes, they can buy approval of by unanimous approval of the other members. You know, that's fine. You can say it, however you want to say it. Okay, Uh, so pretty easy. There were going to get into more of the management stuff when we get down to making decisions, but let's call that one good for now. And let's go on to Capitol calls. 36. Capital Calls: okay. A capital call means, um well, another way to say it would be a capital contribution, meaning what our members expected to put into the business to get it going to get it off the ground. So eso things you might ask. This is basically a big list of questions I'm giving you. That you should answer in your operating agreement is a contribution required of all members like our. If that's true, then let's say later you add another member. They need to invest in the company by giving some money. Or you could say, No, it's not. Can additional calls be made? What that would mean is, let's say, two years from now, the company's doing OK, but you need to update some. You need to update your website, let's say, and you find out that it's gonna be really expensive. It's gonna be like $20,000. So if you have, let's say you have four members, equal members, um, hypothetically in your organization, you could say, Okay, we need to get this done. So we're gonna do a capital call for $5000 that means each member has to contribute out of their pocket $5000. That's not what you're saying here. Explicitly. What you're saying is, Could you do that in the future? Could you in ah extreme situation say, Look, owners, we need to be bailed out here. We need help. You have to contribute more. And then you can specify more details about capital call like who makes it? Is it? Does everyone contribute equally? Or do owners who have less share contribute less etcetera? And what happens if a member does not contribute or decides not to? Next thing is, let's call it let's call it a retiring member. What happens when remember says, All right, I'm out. I'm totally done. Um, what happens to their shares? Is there a process for that member to sell back their shares to the company that needs to be specified in some way? You should say, yes, you will. And a good way to do this is to say something like, You have the right of refusal. You could say so. That means that the member has to try to sell their shares back to you first, and they can't just go willy nilly selling them to anyone who wants them because you're not a public company. And then with that does the member have to work at all meaning? Can that retiring member just retire and keep their shares and keep getting some profits if it's profitable? And that be that, Ah, if you're saying all members have toe work, then you have to figure out a way for someone to not work anymore. And, ah, do something with their shares. Okay, so that's capital calls. That basically means money in the pot. How are you getting some money? All right, let's move on to adding new members. 37. Adding New Members: okay, adding new members. So usually we start off with this with something like, um, new members can be added by unanimous consent. Or so a new member can be added by unanimous consent, meaning all the members have to agree to it. Is there any exception to it? That's what the or means. Could it be that you add a new member with a majority of consent? Um, maybe if that's how you want to do it, you can do it that way. But, um, you should never say no New members can be added period, because you don't know what's gonna happen in the future. But this way just says it's got to be unanimous consent. Or there might be some exceptions. So think about what exceptions you want to allow. You might also say here, um, requirements of new members we kind of already addressed. If there's a buy in for new members, um, I mean you they have to make a contribution to the organization to keep it going. You also might want to consider where shares will be created. And what I mean by that is, if you have three members and they each have 33% and you add another member. Those three members have to give something up, right? I think the example I used a while ago, Um, so that means that if you all agree to add a member, you have to also all agree to lose some. And what happens when it's not an even split? For example, let's say there's three members and it's divided as 40 40 20. So 40% 2 people have 40% 2 people have 20%. And then you add someone who is going to get, ah, 10%. Do you take 3.3% from everybody? Or do the people that have the more lose more Or how do you want to do that? That gets to be a complicated thing, so you might want to address at least how you think you might deal with that. Okay, lets go into making decisions where things get a little more fun 38. Making Decisions: the thing Teoh figure out with making decisions is a relatively simple one. They're not a ton of questions here, but, um, they are important. The 1st 1 to be in general. How are decisions made? Um, it's just right. How are decisions made? Meaning a majority vote. Um, And if you're voting, um, is that each member is one vote or each percentage point is one vote. So here's the difference. Let's say you've got four people, um, that are members of your company. If there's for If you say the 1st 1 each member has one vote than there are four possible votes. That's fine. But let's say you have. If you do it this way, and each person in your company has a 25% share of the company, then these two are the same. Um, but if one person has a 50% share of the company and the other three people have, ah, let's say 2020 and 10 then the person with the if you do it this way, the person with the 50% share of the company gets essentially 50 votes and the other to get 20 votes, and then the last person gets 10 votes, so the votes are weighted by how much you have. I'll tell you from experience this way can be better for morale. Because if you have someone that has 50 votes and someone else who has 10 votes, then the person with 10 votes is going to feel like their vote totally doesn't matter, because mathematically it totally doesn't. So doing it this way makes it so they have, ah, more say. However, if you don't want that to be true, if you want mathematically for them to have no power Ah, you can do it this way. Um, you could have it be as each member's one vote, but make it feel in a meeting like it's this way, right? Like basically, you listen to their vote and listen to what they have to say because they probably have good ideas or else they wouldn't be a member of your company. So either way, I think about how you want to do that. That's an important distinction. And then address if you're gonna be voting. If any decision, any general decision is a majority vote or ah unanimous Miss vote or 2/3 or 75% or whatever you want to do. The other big thing that happens here is salary and distributions. Okay, How are you going to pay yourself? Um, this is a tricky one. Now, one thing that's important to note here is that this is getting into tax law, which is not my specialty, but from what I understand, there's kind of no such thing as a salary. If you're an owner of a company, there's Onley, a distribution. You can set up a salary for yourself, but from a tax perspective, it looks like a distribution from the company. So that doesn't really affect it too much, at least not in an LLC. So I wouldn't worry about it too much. But just when you see your tax, that's gonna look like you pulled this money out of the company when in fact, it was your salary. It's kind of weird. Ask your account about that if you're concerned about it. But, um, don't be too concerned about it. Okay, so how are you going to distribute money once you make it? Here's what I do. There's no good answer to this. You should do this. However, you want to do it, but here's what I like to do. I like to say once operating expenses are saved times three months. So that means once we have operating expenses in the bank for three months or even if you really want to be conservative, say, six months or so. So you've got six months of operating expenses in the bank, which means your company could not make another penny for six months. It would be fine. You could burn through that savings. Once you have that savings then and only then 50% of profit above that savings goes to the company. The other 50% gets distributed two members. So what that means is, once I have six months in the bank, that I'm going to take 50% of new profits and put it back into the company for more growth , more projects down the road, um, and things like that and the other 50% will distribute out to the owners. Uhm, and then how you do that is the easiest way is by their percentage, so an easy math thing you can do to figure that out, as you can say, um, how many dollars per percentage point. That equals out to. So let's say you got $1000 to spend, um, to dish out to members, you could say every dollar equal every percentage point equals $10. So let me just do that math, I'll show you. So if you have let's do an odd number if you have that much 8219 dollars. Ah, in distributable profits, that means we are well above our six months. Ah, burn rate thing. We call it a burn rate. Sometimes we'll talk about that in the future. Um, we're that much above what we need to survive. And we're going to actually were double that because this is the half that we're going to distribute. Okay, so what I'm gonna do is I'm going to divide that by 100 equals a 2.19 Then every 1% is worth 82.1 night. So what that means Oops. If Jane has 30 percent, she gets 82.19 times 30. If, uh, Joan? Yeah, John has 40%. He gets a 2.19 times 40 and that would leave 30. So let's do a different number here. Let's do 35 and 20. It's gonna mix us up a little bit, so we have more interesting numbers. So that equals 55. So we need 45. Um, if, uh, Susan has 45% she gets 82.19 times 45. So those numbers would be and they should all add up. Okay, So here are those totals. Let's put him in bold. So they're a little easier to see. So this is what everybody would get. Um, now, in theory, these would all add up to be 8 to 8219. Let's double check to a 76.55 1643.80 plus 3698.55 equals 8218 and 99 cents. Close enough Where penny off. Um, but that generally works. So just take what you want to distribute. Divided by 100. Every percentage point equals that, um that's the easy math way to do it for me. Okay, so I'll just tuck this at the bottom of this document. I'm gonna give you this document by the way. That's why I'm writing all this out so that you can have it. So how are you going to distribute salaries? Cool. Ah, let's move on to the O fund business of getting rid of a member. 39. Terminating A Member: Okay. What happens when you got a member who, um is just becoming too problematic for you to continue? Meaning they are not only not contributing, but they're actually causing trouble for the company. They're slowing down the company. Um, and you just have to get rid of him. How can you do that? We need to specify it. So there's two kinds of termination. There's a voluntary and involuntary. Let's talk about the voluntary first, remember? Just wants to leave. We've already talked a little bit about buyouts and things like that. You can specify what happens if a member just dies. That's something you should do with that. You can. You can just kind of right in there that on their death Ah, you will buy out there their shares of the company or, um, their company. Their share of the company goes to their next of kin. Or however you want to outline that that should not be in the voluntary section, though usually death is not voluntary. Um, it could be in the involuntary, I suppose. Or it could be up higher when we were talking about that earlier. Okay, So if they're going to leave voluntarily. How is there? Share value calculated. And then I'm also gonna say is valuation required? And by that, I'm gonna put some dollar signs. Okay, here's what that means. If someone says, Hey, everyone, um, I'm out. I don't want to do it anymore. And you all the rest of the company says, OK, cool. We'll buy back your shares, and the first person says, Okay, um, great. Then you have to figure out how is their shares calculated, like, what are they worth? Because you want them to be worth as little as possible so that you can buy them back very cheaply. The other person's gonna want them to be worth as much as possible. So you should specify how you going to calculate it. You can say something like, ah, percentage of revenue for the previous calendar year. You can say, um, you know half the revenue of the current counter. I don't. You can say whatever you want, as long as you can all agree to it. The expensive way to do it would be to require evaluation. This means you're gonna hire an outside firm that specializes in this. They're everywhere to come in and do a big assessment of the company and figure out what the company is actually worth. I'm actually in the middle of one of these right now. It takes about a month for these companies to go through, and it costs about $10,000. So it is not a cheap solution. So you should try to find a way around doing evaluation. Now, if your member contests something, um, then they're going Teoh, ask that evaluation be done. That's why we're doing one right now. If this is rock solid, they and it's in the operating agreement. They can't contest the valuation. They'll just say, OK, well, that's what we agreed Valuation would be calculated at. So that's what it is. You don't want to have to go through one of these firms if you don't have to, because it's expensive. Next involuntary. In what cases would someone be in voluntarily terminated? You should specify these say things like going to jail. If a partner goes to jail, will they be terminated? You conspiracy efi that, um however you would like if they go bankrupt? That is something you can dio. Um, you can just say just gross negligence. Um, just as a general thing, you couldn't go deeper and say violation of the operating agreement. If you want, There's there's a lot of different things you can say. You should just think about what would lead you to have to terminate someone. And the next thing you should figure out is, Ah, who decides that now? This cannot be a unanimous vote necessarily, Um, because the one member who is about to be terminated probably will not vote to terminate himself or herself. So, typically, you could say all members other than the member being removed or a percentage, or however you want to do that. Now if you've way up at the top of this, if you decided to be a manager managed company, then you have to also decide here what happens in the manager like, Can you remove the manager? In what circumstances can you remove the manager and ah who determines that the manager will be removed 40. Closing Down: all right. Closing down. Um, last thing, last kind of big area. What happens when you all just decide to give up? How do you close the company? This is actually really important because there there's money at play. When you do this, there's almost always I think, in just about every situation I can think of theirs either Going to be money left over when you close the company down or there's gonna be debt left over. When you close the company down, you're not going to just close the company when you're perfectly, perfectly at zero to the penny, you've got to figure out what you're gonna do about that money. First of all, the first question, obviously, is the process for closing down how you're going to decide on that vote. Obviously, that should probably be a unanimous vote. What happens to left over cash so that the obvious thing would be equally distributed by percentage shares of the company to the owners. But you can do whatever you want. What happens to equipment? The easiest way to think about this is you could just sell all the equipment. I mean, have a big garage sale, get rid of all the equipment and then the cash distributed out to different to all the members. However, what if some of the members would like to have the equipment? You should figure out how you want to do that. You could come up with some kind of Ah, you know, I would keep it a little vague, and I would probably say something like, You know, equipment can be divided up between members or I don't think about that. It depends if you have a lot of equipment to worry about who is responsible for left over debt. And that should be all the members, um, by proportion, to their ownership stake. So you if the company closes down and it's all in debt, you all owe that debt and have to pay it off. In reality, what will happen if you have debt when your company closes, what you'll do is you'll take all your leftover cash and throw it at that debt. You'll sell all your equipment and you'll throw it at that debt, and then whatever is left over after that is the responsibility of, ah, the owners to pay off. But you could do whatever you want. That's just the most logical way. Okay, We've gone through kind of the main points of an operating agreement. Who? Lots of stuff. So what I'm gonna give you next is, um, a sample operating agreement. I'm gonna find a couple that I think are good. Maybe I'll combine them together, Um, and just kind of used to make them into a kind of a generic thing. You can use this as a template, but be careful. Make sure it has everything you need in it if you're going to use it. And it doesn't hurt to have a lawyer look at it. You don't have to, but I strongly recommend it. Rumor? I'm not a lawyer. So this is not a perfect legal document that I'm about to post, but it'll get you in the ballpark. I think what I'm gonna do is take one of mine and then just kind of distill it down and take out my stuff and and leave some anti stuff in there. Okay? So download that you can study it. You can use it as a template to make your own cool. All right. Moving on. 41. What Next?: Okay, We have almost reached the end of this first class in my new music business industry, Siris of classes. So here's what happens next, there will be more of these classes. I like to make these classes in these blocks like this so that you can take the ones that you want and not take the ones that you don't want. However, they are designed in an order, Um, and with the goal of taking all of them, I think taking all of them is the way to go. Otherwise I wouldn't make all of them because I don't make stuff that you don't need. So what's coming up next? The plan for the next one is going to be on funding your business. So raising money, finding money and ways to build your business without much money. Um, that's been kind of my specialty is going at it without raising a lot of capital and taking on a lot of debt. Um, and there are some good strategies for doing that. Ah, lot of people don't talk about it, but they exist. And there totally okay. And I've had really good luck with him. Ah, after that, we're gonna talk about management of a small business, and then we're gonna talk about business ethics. So I've got a whole plan. I've got a plan for seven different classes on this topic where I'm gonna be drawing from my experience, drawing from some experience says of other experts in the field, and, ah, you know, things I read and studied in seen and done wrong. And every now and then, maybe something I did, right? So the plan is for seven of these, there might be more. Um, as we go through this, I might find another topic that I'm just completely leaving out when? And I'll just say, Oh, my gosh, I need to make a whole class devoted to this one thing. So, like actually, um, I'm gonna mend this right now while I'm recording and say there's going to be a part eight um, which is going to be called Ah, digital tools. So tools that can make your life way easier as an entrepreneur, including building a website that lets you take credit cards quick and easy. Um, all kinds of pos systems that are really cheap. Now there's no reason. I see companies all the time spending like 10 or 20 year 30 grand on a website to get off the ground. And that's so unnecessary. Ah, you should be able to do it for 100 bucks. So we're gonna talk about that and that will be in there somewhere. So, um, having said that Ah, let's move on to one more quick little lecture and then I will send you on your way to the next class, hopefully. 42. SkillshareFinalLectureV2: Hey, everyone want to learn more about what I'm up to? You can sign up for my email list here, and if you do that, I'll let you know about when new courses are released and when I make additions or changes to courses you're already enrolled in. Also check out on this site. I post a lot of stuff there and I check into it every day. So please come hang out with me and one of those two places or both, and we'll see you there.