Types Of Business Structures: The Complete Guide

If you’re starting your own business, one of the first steps is choosing a business structure. The legal structure of your business determines how much you pay in taxes, paperwork requirements for your business, your ability to raise money, and your personal liability for the debts and obligations of your business.

Every business is different, so the legal structure you choose should be based on the specific needs and goals of your business. The best option for one business may not be best for you, even if you’re in the same industry.

Before you make your choice, the first thing on your to-do list should be to have an understanding of the characteristics of each business structure. In this article, we’ll break down different business structures and the benefits and drawbacks of each to help you make the most informed decision for your business.

Sole Proprietorship

A sole proprietorship is the most basic business structure. A sole proprietorship is an unincorporated business that is owned and operated by one person. If you engage in business activities, you are legally considered a sole proprietor. There is no need to formally register your business. However, depending on the type of business you own, you may still be required to get the state and local licenses and permits needed to legally operate your business.

Under a sole proprietorship, you may operate under your own name or a fictitious name — also known as a trade name. This trade name does not create a legal entity separate from the owner.

The owner of the sole proprietorship records the income and losses of the business on their personal tax return by filing a Schedule C form. Sole proprietors also file a Schedule SE for paying self-employment tax. These forms are filed with the standard Form 1040.

Many small business owners choose to operate as sole proprietors because of how quick, easy, and inexpensive it is to get started. However, this type of legal structure isn’t without its drawbacks.

One of the biggest downsides is that a sole proprietorship is not a separate legal entity. In fact, it is indistinguishable from its owner. This means that the business owner can be held personally liable for the debts and obligations of the business. If your business is sued for negligence, for example, your personal assets — such as your bank account and personal real estate — could be at risk. If you default on a business loan, your personal assets could be seized to repay the debt.

Sole proprietorships are best for low-risk businesses. Some entrepreneurs start off as a sole proprietorship when testing out a business idea before reorganizing under another business structure. Most commonly, sole proprietorships are selected by service professionals, freelancers, and consultants.

Pros & Cons Of Sole Proprietorships

Is a sole proprietorship right for your business? Consider these pros and cons before deciding.

Pros

  • Easy & Inexpensive: There are no costly fees associated with setting up a sole proprietorship. In fact, you don’t even have to register at all. Simply buying and selling goods or performing other business activities classifies your business as a sole proprietorship.
  • No Ongoing Requirements: Unlike other business structures, a sole proprietorship does not have requirements such as meetings or voting.
  • Simplified Taxes: You do not have to file a separate tax return for your sole proprietorship. Instead, you simply attach your Schedule C and Schedule SE to your personal income tax return. You will also have your earnings taxed just once, and you can write off your business losses on your personal return.

Cons

  • Unlimited Personal Liability: As a sole proprietor, you would be responsible for the debts, obligations, and liabilities of your business. Your personal assets could be put at risk, and lawsuits can be filed against you.
  • Financing Difficulties: Getting extra capital when you need it can be difficult as a sole proprietor. Banks, credit unions, and even some alternative lenders are hesitant to loan money to sole proprietors. You also will be unable to sell stock to raise money.

Partnership

Businesses that have two or more owners may consider forming a partnership because it is quick, easy, and inexpensive. A partnership is the simplest business structure for businesses that have multiple owners. Like a sole proprietorship, you are not required to register your partnership. Simply coming to an agreement with other owners and engaging in business activities is enough to establish a partnership. However, you may still be required to obtain the appropriate licenses and permits required to legally operate your business. You may also be required to register your partnership with your state depending on the type of partnership you form.

When it’s tax time, a Form 1065 is filed with the IRS to report income, losses, gains, deductions, and credits. The partnership does not directly pay income taxes, but instead, “passes through” profits and losses to each partner, who report this information on their personal tax returns. Profits or losses are recorded on a Schedule K-1, which is filed with personal tax returns. All partners are also required to pay self-employment tax based on their share of the company’s profits.

Before establishing a partnership, it’s always important to ensure the right partners are selected. Disagreements between partners can hinder business growth and even be the downfall of a business.

While any business with two or more owners can form a partnership, this business structure is best for low-risk businesses and professional groups. Like sole proprietorships, this structure is also a good way to test out a new business idea. If the business is successful, owners may take the next step to growth by reorganizing as a corporation.

Types Of Partnerships

We’ve established the basic definition of a partnership. However, there are three different kinds of partnership to consider. The primary difference between the three lies in the personal liability of each partner.

General Partnership

In a general partnership (GP), all owners are considered general partners. Each partner manages the business and is an active participant in day-to-day operations. Each partner is also personally liable for the debts, obligations, and liabilities of the partnership.

Limited Partnership

With a limited partnership (LP), there is one general partner that is responsible for managing the business and overseeing day-to-day operations. The remaining partners are limited partners that do not participate in managing the business and have limited control. These partners are investors only and are commonly known as “silent partners.” In this type of partnership, only the general partner can be held personally liable for the debts, obligations, and liabilities of the business.

Limited Liability Partnership

A limited liability partnership (LLP) is made up of limited partners. Partners are not personally liable for the debts, obligations, and liabilities of the business. Partners will also not be held personally responsible for the actions of another partner.

Pros & Cons Of Business Partnerships

With the right people, a partnership can be very successful. There are several benefits to forming a partnership. Before you get started, though, it’s also important to understand the risks and drawbacks associated with this business entity.

Pros

  • Minimum Requirements For GPs: General partnerships have minimum requirements and do not require filing with the state. Partnerships are also not subject to the same requirements as corporations, such as holding meetings, recording meeting minutes, and establishing bylaws.
  • Tax Requirements: Partnerships are not required to pay taxes on income, and partners can report their share of profits or losses on their personal income tax returns. Business losses can also be deducted on personal tax returns.
  • Raising Capital For LPs & LLPs: Businesses that choose to form an LP or LLP may be able to raise capital from their investors.

Cons

  • Personal Liability: General partners are personally liable for the debts, obligations, and liabilities of the business. Each partner may also be held accountable for the actions of other partners.
  • Financing Challenges For GPs: General partnerships may have difficulties getting loans or other types of business financing if the business is not a registered entity.
  • Costs: While forming a general partnership is easy and inexpensive, forming a limited partnership or limited liability partnership may be more expensive and requires filing with the state.

Corporation

A corporation is the most expensive and complicated business structure. If you plan to raise capital through the sale of common or preferred stock, your business will need to be set up as a corporation.

There are no limitations on how long a corporation can exist. If an owner dies or retires, the corporation does not have to be dissolved.

Corporations are independent legal entities and are separate from their owners. The good news is that this provides the owners with the best liability protection. The bad news is that there are more regulations and tax requirements for this type of legal structure. Most corporations hire an attorney to ensure the corporation is set up and maintained according to state regulations.

Depending on the type of corporation, double taxation may also be a concern. This means that corporations pay federal and state corporate income tax, while shareholders also report dividends on their personal tax returns. Many corporations enlist an accountant and/or tax preparer to ensure returns are filed correctly, which adds an additional business expense.

Types Of Corporations

If you plan to grow your business in the future and want to raise large amounts of capital to fund that growth, a corporation could be the best legal structure for your business. Before you make that decision, though, there are a few different types of corporations. Let’s explore the differences between each type.

C-corporation

A C-corporation, or C-corp, is your basic corporation. This business entity is completely independent of its owners. With a C-corp, owners have the best protection from personal liability. C-corps can raise capital through the sale of stock and make profits, but double taxation, higher costs associated with formation, and more legal requirements are drawbacks of this business structure.

S-corporation

An S-corporation, or S-corp, is different from a C-corp because it is used to avoid double taxation. Profits and losses of the business can be passed through to the personal tax returns of the owners without being subject to corporate tax rates. To form an S-corp, a filing with the IRS is required.

Another way that an S-corp differs from a C-corp is that there is a limit on the number of shareholders. An S-corp may only have up to 100 shareholders, which could limit the amount of capital raised by the business.

B-corporation

A B-corporation, or B-corp, is similar to a C-corp in how it is taxed. However, a B-corp must offer a benefit to the public in addition to making a profit. In some states, an annual report must be filed to prove that the company is providing a benefit to the public.

Close Corporation

A close corporation is similar to a B-corp but is a structure typically used by smaller businesses. Close corporations are generally prohibited from public trading. Shareholders run this type of corporation, and a board of directors is not required.

Pros & Cons Of Corporations

There are big benefits that come along with forming a corporation, but like other entities, there are also negative aspects to consider before choosing a corporation as your business structure.

Pros

  • Ability To Raise Capital: Corporations give you the biggest opportunities for raising large amounts of capital through the sale of stock.
  • Limited Personal Liability: Corporations offer the most protection against personal liability for shareholders.
  • Some Tax Benefits: C-corporations offer more tax deductions than other business entities, as well as lower self-employment taxes. S-corporations also offer the additional benefit of no corporate tax rates or double taxation.

Cons

  • Higher Cost To Form: It is more expensive to form a corporation than any other business structure.
  • More Requirements: Corporations have more ongoing requirements, including holding meetings, recording meeting minutes, and establishing bylaws.
  • Shareholder Restrictions: The number of shareholders is restricted to 100 or less if you create an S-corp.
  • Higher Taxes: C-corps face double taxation. Business losses also can’t be deducted on personal income tax returns.

Limited Liability Company (LLC)

Business owners that want the best of both worlds may consider forming a limited liability company, also known as an LLC. An LLC combines the benefits of other business entities to keep taxes and business requirements lower than corporations while also offering personal liability protection for its owners. All members of the LLC can fully participate in the operations of the business.

LLCs must be registered with the secretary of state in the state where the business will operate. In some states, an operating agreement will also need to be filed.

In an LLC, owners have limited liability, in most cases protecting their personal assets from being taken to pay off business debts and obligations, just like a corporation. Personal assets will also be protected in the event that the business files for bankruptcy.

Owners can select how an LLC is taxed by the Internal Revenue Service. LLCs can be taxed like a corporation, or the profits and losses can be passed through to the LLC members and filed on personal tax returns. Members must file a Form SE to pay self-employment taxes.

An LLC is best for any business that wants to protect the personal assets of its members. It’s also a good choice for businesses that want the benefits of a corporation without paying corporate tax rates.

Pros & Cons Of LLCs

Will forming an LLC best meet the needs of your business? Only you can answer this question, but make sure to fully evaluate the pros and cons of forming an LLC before making your decision.

Pros

  • Limited Liability: One of the biggest benefits of an LLC is that all members have limited liability, meaning personal assets aren’t at risk in most cases.
  • Tax Benefits: With an LLC, you have the option to choose how your business is taxed.
  • Fewer Requirements: There is less paperwork and fewer ongoing requirements for an LLC when compared to a corporation.
  • No Shareholder Limits: An LLC has no limits to its number of shareholders.

Cons

  • Expensive & Time-Consuming To Set Up: Because you will have to register with the state where you conduct operations, setting up an LLC is more expensive and time-consuming than forming an entity like a general partnership or sole proprietorship. You may also need to hire an accountant to help ensure you’re complying with the rules and regulations of your state — adding an additional expense to your list.
  • Limited Life: If a member quits, dies, or retires, the LLC may be dissolved. Some states even have laws in place that require an LLC to dissolve after a set number of years.

Nonprofit

Most businesses have one primary goal: to make a profit. One business structure is the exception: nonprofits. A nonprofit — or 501(c)(3) — is a business that is beneficial to the public.

Nonprofit corporations follow a set of rules and regulations similar to other types of corporations. However, nonprofits also have additional rules governing how profits are used. For example, profits can’t be distributed to members of the corporation.

Another difference between nonprofits and other corporations is that this type of business entity may be exempt from state and federal income taxes. However, nonprofits must register with the IRS to receive this exemption, in addition to registering with the state.

Religious, educational, literary, and scientific organizations may be eligible for nonprofit status. Charities are also businesses that are formed as nonprofits.

Pros & Cons Of Nonprofits

If the goal of your business is to benefit the public, a nonprofit structure may be the right choice for you. However, if your goal is to make a profit, consider choosing another business structure. Before you make your decision, weigh out these pros and cons:

Pros

  • Tax Exemption: Qualifying organizations may be exempt from paying corporate income tax, as well as state and local taxes.
  • Tax Deductions: Charitable contributions by a nonprofit may be tax-deductible.
  • Limited Liability: All founders, directors, employees, and members of the nonprofit are not liable for the debts and obligations of the nonprofits … in most cases. There are, however, some exceptions, such as when the organization is engaged in illegal activity.
  • Grant Opportunities: Nonprofits may be eligible for public and private grants not available to for-profit businesses.

Cons

  • Paperwork Requirements: Nonprofits must submit annual reports to state agencies and the IRS in order to maintain tax-exempt status.
  • Costs: Starting a nonprofit can be expensive in terms of time and money. Nonprofits must pay fees, and most organizations opt to hire attorneys, accountants, and/or consultants to make sure records are kept up-to-date and all regulations are followed.
  • Stricter Policies: In addition to following state laws and regulations, nonprofits are also required to follow their own bylaws and articles of incorporation.

Cooperative

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A cooperative, or co-op, is a type of business that operates for the benefit of its members. Members of a co-op are known as user-owners and have the right to vote on important decisions surrounding the growth and direction of the business. Officers and a board of directors are responsible for running the co-op.

Any type of business can become a cooperative if the goal of the business is to benefit the user-owners. Businesses that aim to sell their products or services to consumers for a profit would be better suited to form another type of business entity.

Pros & Cons Of Cooperatives

If you’ve thought about your goals and you think a cooperative may work for your business, read through these pros and cons before you make your final decision.

Pros

  • Everyone Has A Voice: Member-owners get to weigh in on key issues and decisions of the business. Regardless of how many shares a member-owner holds, all votes are weighed equally.
  • Member Investments: Member-owners buy into a cooperative, providing a source of capital that can be used for operational expenses or expanding the business.

Cons

  • Funding Challenges: Finding startup loans and other types of funding through traditional lenders may be difficult. Cooperatives have to get creative with other funding sources, such as launching a crowdfunding campaign or applying for small business grants.
  • Slow Decision-Making: Voting and making decisions can be a lengthy process. This can put the cooperative at a disadvantage if a critical decision must be made immediately.

Final Thoughts

Ultimately, the type of business structure you select is based on the current and future goals of your business. You should consider the long term plan before choosing your business structure. While you can always reorganize if needed, this process can be lengthy and expensive. If you’re still having difficulties choosing the right business structure, consider consulting with an accountant, business consultant, and/or attorney to weigh out the pros and cons of each and make the decision that’s best for your business. Once you’re ready to your business off the ground, check out our beginner guides for business to get started on the right track.

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How To Start And Fund A T-Shirt Business

In the world of fashion, trends come and go, but a few select pieces stand the test of time. One piece of clothing that’s found in almost any wardrobe is the t-shirt. From comfy shirts made for the gym to shirts with trendy designs worn for a night out with friends, t-shirts are a staple for men, women, and children.

T-shirts are here to stay, so why not capitalize on this fashion staple? Whether you have a degree in fashion design or you just want to become an entrepreneur, starting your own t-shirt business could be the opportunity you’ve been looking for.

In this guide, we’ll take a look at what it takes to get your own t-shirt business off the ground. We’ll start with basics such as designing and printing your shirts. We’ll discuss the importance of registering your business. Then, we’ll look at startup costs, as well as how you can get the capital you need to start your business and keep it operating. Finally, we’ll look at ways you can advertise your business to bring in customers and revenue.

Ready to take the leap into entrepreneurship? Read on to find more.

Design Your Shirts

Before you begin selling t-shirts to the masses, you have to create designs that people want to buy. The first step is identifying your target market. Are you going to sell t-shirts to men, women, children, or a combination of the three? Are your t-shirts going to be more fashionable, or are they better suited for lounging around the house or hitting up the gym?

Once you’ve identified your target market, it’s time to think about the designs you’ll use. Let’s say that your t-shirts are aimed at the active man or woman. Your designs should incorporate fitness or motivational graphics. You can also determine other features of your shirts based on your target audience, such as the type of material used. If your shirts are designed for the fitness-minded consumer, for example, select a moisture-wicking fabric.

Your t-shirt designs don’t have to be overcomplicated as long as they appeal to your target audience. The key, though, is to make sure your designs are completely original. Not only does ripping off other designs make you look like a copycat, but you could face some serious legal issues if you use the artwork or designs of others without permission.

It’s also important to remember that sometimes a design may be a complete flop. Even the most well-known fashion designers in the world have released items that weren’t a hit with their devoted fans. If one design isn’t doing the job, try something else until you find what works best for your target audience.

Also, it doesn’t matter whether or not you have any design experience. As long as you have some ideas, you can hire a designer to bring your visions to life.

Decide How To Print Your Shirts

Once you have your designs, it’s time to think about how you’re going to bring the design from your computer or tablet screen to the front of a t-shirt. In other words, you need to decide how to print your shirts.

First, you’ll need to determine the method you’ll use to print your shirts. Screen printing is one option; it is a tried-and-true method that allows you to add long-lasting graphics to t-shirts. Screen printing is best for creating large batches of shirts since the initial setup is so time-consuming. Printing smaller batches is not cost-efficient with this method.

Another thing to note is that screen printing is best for very simple designs. Complex designs or multiple colors in one design can be problematic. If you have a more complicated design or pattern, consider direct-to-garment printing.

Direct-to-garment printing works similar to your color printer at home or at the office. The DTG printer prints directly on the t-shirt. With this method, you can use multiple colors and print complicated designs and patterns. Shirts printed with a DTG printer can be extremely detailed.

Setting up a DTG printer isn’t difficult or time-consuming. However, the actual printing process does take some time, so this method is best for smaller batches of t-shirts.

Another option to consider for printing your t-shirts is using a heat transfer machine. These machines transfer designs from heat transfer paper to the t-shirt. Full-color images can be printed using the heat transfer method, and you can easily print shirts on-demand. However, the quality is often lower and the design far less durable than using the other printing methods.

Regardless of which method you choose, there are two ways you can go about printing your shirts. You can use a third-party printing service or you can purchase the equipment and do it yourself. Let’s review the benefits and drawbacks of each.

Hiring A Third-Party Printer

Many t-shirt businesses do not do the printing themselves. Instead, these businesses hire a third-party service to handle the printing for them. There are a few benefits to hiring a third party to print your shirts. The first is that you won’t have to make an upfront investment in expensive printing equipment. You also won’t have to learn how to use the equipment or spend time running it.

However, there are some drawbacks to using a third party. You’ll have to shop around to find a printing company that provides high-quality workmanship. You don’t want your customers receiving t-shirts with graphics that fade or crack or that fall apart after the first wash. Many companies offer low-cost samples so you can check the quality before placing a larger order.

You also need to shop around and compare the pricing of different t-shirt printing companies. Some companies only fill bulk orders, which could put you at a disadvantage if you want smaller batches.

If you plan to only sell your designs online, you can work with an on-demand dropshipper. Once an order is placed on your website, the dropshipper will print and ship out the order to your customer. Before choosing a dropshipper, it’s necessary to place your own order to check out the quality of the shirts. You also need to evaluate pricing to make sure you’re getting the most bang for your buck. The major disadvantage to using a dropshipper is that if an order is wrong, slow to ship, or not printed correctly, the blame will fall on your shoulders, even if you don’t have control over any of these issues.

Purchasing Your Own Equipment

The alternative is to purchase equipment and print your own t-shirts. The advantage of this is that you have total control over both the quality and the number of shirts that are printed.

The major drawback, of course, is that t-shirt printing equipment is very expensive. Expect to spend at least a few hundred dollars for a heat transfer machine. If you want a DTG printer, expect to pay tens of thousands of dollars. You will have to pay for ink and maintenance of your machine. In some instances, you may be able to lease equipment to save on upfront costs.

You also have to take the time to learn how to properly use the equipment or train someone else to take on the job.

Decide How To Sell Your Shirts

Now that you’re closer to getting your shirts designed and printed, it’s time to decide how you plan to sell your items. You can set up an online shop, open your own brick-and-mortar store, or bring your designs to local stores in your area. You may also maximize profits by combining these selling tactics.

One of the easiest sales methods is to open an online shop. Customers can browse your designs and make their purchases directly online. You can ship out the orders yourself, or you can work with a dropshipper to make t-shirts on-demand when an order is placed. This option has low startup and overhead costs.

You can also open your own brick-and-mortar store. While you’ll be able to reach customers in your local area, this option has much higher startup and operating costs. Expenses may include rent for your commercial property, utilities, fees for business licenses and permits, and equipment. You’ll also have to purchase inventory to keep in stock. If you go this route, make sure to consider your local area. For example, if you live in a remote area, you may not have a large customer base. However, if you live in a thriving city or popular tourist destination, opening your own brick-and-mortar store may be a profitable venture.

The third option is to print out smaller batches of your t-shirts and network with local boutique and business owners in your area. With this method, you won’t have to pay for your own commercial space, but you will have to give the business owner a cut of your profits.

To determine what is right for your business, keep a few things in mind. Is this going to be your full-time job, or are you just trying to make a little extra money on the side? If you don’t plan on devoting yourself full time to your t-shirt business, stick to an online shop or sell your t-shirts through other businesses and boutiques.

Calculate Startup Costs

Once you have an idea of the direction you want your t-shirt business to take, you can start thinking about startup costs. The route you’ve chosen with your business will determine how much your startup costs will be.

If you plan to open a brick-and-mortar business, you’ll have expenses including a rent or lease payment, equipment and furnishings, utilities, a point-of-sale system, and inventory. Unless you plan to do all of the work yourself, you also have to hire employees. If your business will be based solely online, your costs will be much lower — think shipping costs, plus the price of a website, software, and ecommerce platform subscription fees.

Startup costs vary significantly based on the goals of your business. You can start big with a brick-and-mortar shop and may pay tens (or even hundreds) of thousands of dollars to launch your business. Start a smaller online shop, and you can get started for as little as a few hundred dollars to launch your website and register your business.

Register Your Business

You’ve started laying the groundwork for your t-shirt business, and now it’s time to make everything legal. The first step is to determine what type of business structure you will form. The business structure you select will determine how much you pay in taxes, as well as whether or not you will be personally liable for the debts and obligations of the business.

Sole Proprietorship

Sole proprietorships have one owner. These are the fastest and most inexpensive business entities to form and do not require registering with the state. The drawback is that sole proprietorships are not separate legal entities, so you will be personally responsible for the liabilities of the business. It may also be difficult to obtain a loan or raise capital as a sole proprietor.

Partnership

A partnership has two or more owners. A general partnership is the simplest form and does not require registration. General partners will be held liable for the debts, obligations, and liabilities of the business.

You may also consider starting a limited partnership, which has a general partner and limited partners. Limited partners are not responsible for the liabilities of the business.

Finally, you may choose a limited liability partnership, where all partners are limited partners and are not responsible for the liabilities of the business.

Corporation

A corporation is the most complex business structure. As a corporation, you will pay taxes at the corporate rate. Shareholders also pay taxes on dividends, resulting in double taxation. Corporations have ongoing requirements, such as electing a board of directors and holding annual meetings.

While a corporation is more expensive and complicated to form, this is the best structure if you see a large expansion in your future. As a corporation, you can sell stock to shareholders to raise large amounts of capital.

Limited Liability Company

A limited liability company, or LLC, combines benefits of different business entities. Like a corporation, business owners in an LLC are not personally liable for the debts and obligations of the business. However, LLCs do not have to pay corporate tax rates or face double taxation. LLCs also do not have ongoing requirements like corporations.

The type of business structure you select ultimately depends on the needs of your business and your future plans for growth. If you want to build a clothing brand that’s known around the world, choose a corporation or LLC structure. If you just want a smaller online shop that helps pay your bills, a sole proprietorship may be the way to go.

Once you’ve determined your business structure, you may be required to register with your state. Sole proprietorships and partnerships may file for a DBA (“doing business as”) under a fictitious name known as a trade name.

Depending on the type of t-shirt business you plan to operate, you may be required to obtain business licenses and/or permits from state and local agencies. Fees and requirements vary by state. You can contact local agencies including your City Clerk, Department of Consumer and Regulatory Affairs, and state Department of Revenue to learn more about the business licenses and permits required for your business.

Finally, you also need to register for an Employer Identification Number (EIN) from the Internal Revenue Service. This is required if you plan to hire employees now or in the future. Many business lenders may also require an EIN when you apply for funding. If you’re a sole proprietor, you may opt to use your Social Security Number in lieu of an EIN.

Seek Business Funding

“It takes money to make money,” as the old saying goes. As the owner of a t-shirt business, the amount of money you need to start and operate your business will vary according to your business model. If you have a small online shop, for example, your funding needs won’t be as great as if you’re operating a brick-and-mortar store.

Even if you have startup costs covered, there may come a time when you need additional capital for emergencies or operating expenses. If you can’t fund these costs out-of-pocket, it’s time to apply for small business funding. Whether you turn to someone you know or apply with an online lender, there are several financing options available for your business.

Friends & Family

Know a friend, family member, or colleague looking to invest in a new business? Pitch them your business idea. Prepare your presentation carefully to let them know why your idea is a winner. In general, you have two options for getting funded by someone you know. The first is to take out a loan. Your friend or family member provides you with a set sum of money that is repaid over a period of time — along with interest. This is known as debt financing.

The next option is a strategy known as equity financing. With equity financing, an investor provides you with the capital you need to cover startup costs or operational expenses. In exchange, the investor receives ownership in your business. While you may not be required to immediately pay back the investor’s capital, they will be able to take a portion of the profits over time. They may also have some level of control when it comes to important business decisions.

No matter which route you take, always make sure everything is in writing and signed by all parties. Then, uphold your end of the bargain. Nothing can make a good relationship go south faster than a business deal gone wrong.

Small Business Loans

With a small business loan, you can receive a lump sum of money that you repay over time. In addition to repaying your principal loan balance, you’ll also pay the lender interest and/or fees. You’ll make regular payments to the lender, which may be daily, weekly, monthly, or on another schedule.

Small business loans can be used for any business purpose, including funding an expansion, purchasing equipment for your business, or for use as working capital.

Recommended Option: LoanBuilder

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You can fully customize your small business loan when you work with LoanBuilder. The LoanBuilder Configurator allows you to adjust your repayment terms and borrowing amount to create the right loan for your business.

Through LoanBuilder, you may be eligible to borrow up to $500,000. All loans come with one single fixed fee of 2.9% to 18.72% of the borrowing amount. Your fee is determined by the performance of your business and your credit history. Loans are repaid weekly over terms of 13 to 52 weeks.

To qualify for a LoanBuilder loan, you must meet the following requirements:

  • Time in business of at least 9 months
  • At least $42,000 in annual revenue
  • Personal credit score of 550 or above

Vendor Financing

As you build your t-shirt business, you’ll establish relationships with vendors and suppliers. In an ideal world, you’d always have money in your bank account to cover the costs of your inventory and supplies. However, this isn’t always the case. An emergency expense that depleted your account, a seasonal uptick in sales, or some other challenge may leave you struggling to pay your vendors upfront.

Many vendors do not offer their own credit programs, but there are lenders that offer vendor financing. With vendor financing, your vendors will be paid the full amount for their products or services while you’re able to pay off the expense over time. This prevents you from having to pay the full cost out-of-pocket for the inventory, supplies, and services you need to keep your business running smoothly.

Recommended Option: Behalf

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Behalf provides vendor financing of up to $50,000 to qualified borrowers. You can repay your loan on a weekly or monthly schedule for up to 6 months.

Behalf charges a monthly fee for its service. Fees start at 1% and are based on the creditworthiness of the borrower. There are no additional fees to receive financing through Behalf.

There are no minimum credit scores, annual revenues, or time in business requirements, although a soft inquiry will be performed when you apply. You must have a U.S.-based business and a U.S. business bank account to qualify. Funds from Behalf can’t be used to fund existing debt, such as credit card bills or payroll.

Lines Of Credit

A line of credit is a flexible financing option that allows you to access capital on demand. Instead of receiving one lump sum, a lender sets a credit limit. You can initiate multiple draws up to and including this credit limit. Once a draw is initiated, the lender will transfer the funds to your business bank account. Then, you will repay the money over time, along with any fees and/or interest charged by the lender.

Since a line of credit is a revolving form of credit, funds will be replenished as you pay off your balance. This allows you to have continuous access to capital when it’s needed. A line of credit can be used for any business purpose, including funding emergency expenses, purchasing inventory, or using as working capital.

Recommended Option: Lendio

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Lendio is a loan aggregator that gives you access to over 75 small business lenders with just one application. One of the financing options available through Lendio is a business line of credit.

Through Lendio, you may qualify for a line of credit from $1,000 to $500,000. Rates range from 8% to 24%. You could receive funds in as little as one week after you submit your application.

To qualify for a line of credit, you must meet these requirements:

  • Time in business of at least 6 months
  • At least $50,000 in annual revenue
  • Personal credit score of 560 or above

If a line of credit isn’t what you’re looking for, Lendio offers additional financing options, including:

  • Short-Term Loans
  • Equipment Financing
  • Business Credit Cards
  • Commercial Mortgages
  • Merchant Cash Advances
  • Startup Loans

Merchant Financing

If you need working capital and you use a service like PayPal to receive your payments, you may qualify for merchant financing.

Merchant financing is a short-term loan option for ecommerce businesses. Typically, qualifying is based on the performance of your business. The lender will provide you with a loan that is repaid over time with interest and/or fees.

Funds can be used for nearly any business purpose, from covering an emergency expense to buying more inventory or using as working capital.

Recommended Option: PayPal Working Capital

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If you accept payments through PayPal, you may qualify for the PayPal Working Capital program. Through this program, you can receive up to 35% of your annual PayPal sales as a loan. Your first loan can be up to $125,000.

PayPal Working Capital charges one set fee based on your sales history, the repayment percentage of your choice, and the loan amount. On days when no sales are made, no payments will be deducted. However, you must pay at least 5% to 10% of your total loan amount every 90 days.

To qualify for PayPal Working Capital, you must meet these requirements:

  • Have a PayPal Business or Premier account for at least 3 months
  • At least $20,000 in annual PayPal sales for Premier accounts or at least $15,000 in annual PayPal sales for Business accounts
  • No more than $20 million in annual PayPal sales

Business Credit Cards

Business credit cards work exactly like personal credit cards. The lender provides you with a set credit limit. You can use your card anywhere credit cards are accepted up to and including the credit limit.

The lender charges interest and fees on your balance until it is paid off. You do not have to pay off your balance in order to continue using the card provided you haven’t met your credit limit. A business credit card is a revolving form of credit, so as you pay down your balance, funds become available to use again.

Business credit cards give you on-demand access to capital whenever you need it. You can use business credit cards to pay for an emergency, purchase inventory, or buy equipment. You can also use your credit card to pay for recurring expenses, such as utility bills or software subscription fees.

Recommended Option: American Express SimplyCash Plus

SimplyCash Plus Business Credit Card from American Express



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Annual Fee:


$0

 

Purchase APR:


14.49% – 21.49%, Variable

The American Express SimplyCash Plus card puts a new spin on credit cards. This is because this card allows you to spend over your credit limit without any fees. You can also receive cash back on all purchases – even if you’re over your limit.

The amount you can spend over your credit limit is based on your usage of the card, payment history, credit profile, and other factors. If you go over your limit, you simply need to pay the amount over the credit limit each month as part of your minimum payment. There are no fees for exceeding your credit limit.

With the SimplyCash Plus card, you can receive up to 5% cash back on your purchases. Wireless phone services and office supply store purchases yield 5% cash back on the first $50,000 spent each calendar year. You can also choose one category to receive 3% cash back on, such as advertising, shipping, hardware, or software purchases for the first $50,000 spent each calendar year. All other purchases receive 1% cash back.

There is no annual fee associated with this card. You’ll also receive a 0% introductory rate for the first 9 months. After that, variable APRs range from 14.49% to 24.19% and are based on creditworthiness.

To qualify for the American Express SimplyCash Plus card, you must have excellent credit.

Recommended Option: Spark Classic For Business

Spark Classic From Capital One


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Annual Fee:


$0

 

Purchase APR:


25.24%, Variable

Don’t have perfect credit? Consider applying for Capital One’s Spark Classic for Business credit card. This rewards card gives you unlimited 1% cash back on all of your business purchases. There is no annual fee, and the card has a variable APR of 25.24%.

Additional benefits of Spark Classic for Business include free employee cards, fraud coverage, and extended warranty protection. This card also allows you to build your business credit so you can qualify for additional financing options in the future.

Applicants must have a fair credit score to qualify for the Spark Classic for Business card.

Choose Business Software

You’re one step closer to launching your business. Now, it’s time to choose the software you need to run your business effectively and efficiently. Some of the business software programs you may need for your t-shirt business include:

Bookkeeping Software

Bookkeeping software allows you to keep an eye on the financials of your business. With this software, you can easily track your business expenses, accounts receivable, and payroll. Many bookkeeping programs also allow you to track other aspects of your business, such as inventory.

With bookkeeping software, you’ll always know where your business stands financially. You’ll be able to run and print reports as needed, which may be required when you apply for business financing. Having all transactions reported in bookkeeping software can also help you prevent headaches when tax time rolls around.

No accounting experience? No problem! Check out The Beginner’s Guide to Accounting.

Payment Processing Software

If you plan to accept credit cards or other methods of payment, you will need payment processing software. Your payment processor will act as the communicator between your bank and the bank of your customers, allowing you to process credit cards, debit cards, and other forms of payment.

Point-Of-Sale System

If you want a more sophisticated way to manage your sales, you’ll need a point-of-sale (POS) system. A POS system not only includes credit card processing, but it also offers additional features including barcode scanning, inventory tracking, printing receipts, and reports and analytics.

Mobile POS systems allow you to use your app or smartphone to accept payments and keep your business running efficiently. There are also more advanced systems that include hardware such as monitors, keyboards, printers, cash drawers, and scanners.

Advertise Your Business

You’re almost to the finish line and ready to open your doors … or your online business. Before you launch, though, it’s time to think about advertising. After all, if no one knows about your t-shirt business, how are you going to make any sales? Don’t wait until after you launch to spread the word about your business — start right now with these advertising tactics.

Social Media

From middle schoolers to your own grandparents, it seems like everyone is on social media these days. Use this to your advantage to let potential customers know about your t-shirt business.

The great thing about social media is that setting up your profiles is absolutely free. You can also get started in just minutes. Set up pages for your business on Facebook, Twitter, Instagram, and/or Pinterest. Include critical information about your business on each profile including your contact information, website and/or online shop link, and photos of your t-shirts. Later, you can use your profile to share news about your business and new products, advertise sales, or host giveaways.

You can also look into advertising on social media. You can purchase ads for any budget and customize your target audience to get your name out to potential customers.

Another option to consider is talking to social media influencers. Social media influencers recommend products to thousands of followers, helping companies drum up new business. If an influencer wears your shirt and links to your website, you could see an influx of customers.

Some businesses will send a free sample of their products to social media influencers. While this does mean some out-of-pocket costs for you, the exposure you could receive could be well worth the small expense.

Want to learn how to take your social media marketing to the next level? Learn more in our Guide to Social Media Marketing.

Build Your Website

In addition to your social media profiles, you also need a website to build your web presence. Website builders make it easier than ever for you to create your own professional website. You can also easily build an online shop with today’s modern ecommerce platforms.

When you build your website, make sure that it is designed to appeal to your target audience. Don’t forget to include information on your website such as contact info, details on your products, and clear photos of what your business offers. As you build up your website, you can include additional information and features such as online chat options, FAQs, news and updates, and reviews and testimonials.

Word Of Mouth

Never underestimate the power of word-of-mouth advertising. The trick to this one is simple: provide high-quality products and exceptional customer service. If someone buys one of your t-shirts and is pleased with the quality, they’ll be proud to wear it and tell others about your business. If the shirt was poorly made or customer service was lacking, they’ll also tell others.

Word of mouth advertising is an easy and free way to get the word out about your new business. And don’t be afraid to toot your own horn. If someone gave a great review, share it on social media and your website. Don’t be afraid to ask customers to give their feedback, but don’t be pushy. Also, learn to accept criticism. Not all of your reviews and feedback will be glowing. Instead of taking offense, learn from it. Where is your business lacking? How can you make sure that each customer that purchases your t-shirts is fully satisfied? Never stop trying to improve your business, and always provide the best products and customer service to keep your customers coming back for more.

Final Thoughts

Owning and operating your own t-shirt business can be fun, exciting, and lucrative, but don’t be fooled … a lot of hard work is necessary to make your business a success. Don’t rush the process. Instead, take the time to plan out your business, create unique designs, and provide high-quality products and service that will draw customers to your business.

Want to learn more about starting your own business? Download our small business guides for the information and tips you need to launch your business venture.

The post How To Start And Fund A T-Shirt Business appeared first on Merchant Maverick.

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What Is Business Interruption Insurance And Do You Need It?

Do you need business interruption service?

There are many risks to running a business. One of the worries a business owner might have is, what would happen if I had to close the business for a time due to an accident or disaster?

Do you have a plan to deal with a loss of income or pay for utilities that aren’t working? What if you have to temporarily relocate? All of those scenarios cost money, possibly money you’re not earning. With a business interruption insurance endorsement, you don’t have to let a temporary closure result in a full closure or bankruptcy. If your business needs time to heal after a fire, a tornado, hurricane, or even an act of vandalism, this insurance provides the coverage you’ll need to keep moving forward.

Read on to learn more about business interruption insurance, including exactly what it covers, how to buy it, and more.

What Is Business Interruption Insurance?

What Is Business Interruption Insurance And Do You Need It?

If you have to shut your business for any amount of time due to a disaster or accident, business interruption insurance will protect the income you might lose and help you move to another location so you can open your doors quickly. While your property insurance might cover the physical damage of a fire or hurricane, it does not cover financial business losses. Business interruption insurance is limited to either your business’s projected gross income or your net profits.

You may be under-insured if you don’t include interruption coverage in your contract. (Business interruption coverage is an endorsement added to a commercial property policy or can be part of a Business Owners Policy. For more information on those types of policies, visit our article on the types of insurance you might need.)

What Business Interruption Insurance Covers

You can’t buy business interruption insurance by itself, so all businesses will need to bundle their business interruption endorsement with a commercial property policy. However, if you add a business interruption endorsement to your risk management plan, be aware that the policy will cover only specific aspects of your business.

  • Loss Of Profit/Income: If you are forced to close your business because of a covered disaster or accident, any lost profits or income up to a certain amount are covered in your plan. This can be a huge relief to someone in, say, a hurricane zone where a storefront might experience temporary or long-term closing.
  • Relocation: If your business is ravaged by fire or destroyed by a windstorm and you find yourself needing to move to a new location to operate, your business interruption insurance will cover the costs of that move (including moving fees and installation and set-up fees of tech and equipment.)
  • Operating Expenses: This will protect the bills you’ll need to continue paying even though your doors are closed. Employee wages are included under operating expenses, as is your rent or lease payments,
  • Paying Your Taxes: If you owe taxes or are paying property taxes on a location you can’t access, business interruption insurance will help.

What Business Interruption Insurance Doesn’t Cover

As with most policies, each company and policy will itemize exactly what is and isn’t covered. Business interruption insurance is very specific and often will state within the paperwork covered and non-covered events. While each policy is different, for most business interruption insurance policies there are specific losses and risks that are not covered.

  • Undocumented Income: Outdated records may hurt you. If you gave raises or have brought on new employees since you started your policy, your coverage won’t be enough. If you make any updates to employment, update your insurance as well.
  • Partial Closures: Only closed part-time? Business interruption insurance only becomes available once your business is completely closed. If you are still able to maintain some of your business services, then you cannot start a claim for business interruption.
  • Losses From Non-Covered Damages: If your property insurance covers floods, your business interruption will cover floods. If it doesn’t? Then your business interruption may not cover losses.
  • Economic Slumps: Unfortunately, there’s no way to make your business recession-proof.
  • Coverage From Power-Outages: A power-outage is not covered under business interruption insurance, no matter the cause. This type of temporary interruption is too ubiquitous to cover effectively. (Some policies set an amount of time that the power must be down to receive help.)

Types Of Businesses That Need Business Interruption Service

Here’s the general advice out there for small businesses: Any business with a physical storefront or location or any company that relies on manufactured goods and supplies from one or two distributors should invest in business interruption service.

A natural disaster could strike at any time and the stress of not knowing if you will be able to pay your bills or your employees is a stressor that could keep you up at night. Protect your income. Protect your worker’s wages. 

Commercial property insurance will cover your building and the things inside your building in the event of a fire or a storm (some disasters like floods and earthquakes need additional insurance coverage), but that coverage is only for physical property damage. The long-lasting effects of a closure on your business could be disastrous. Many insurance experts recommend looking into a Business Owners Policy (BOP) that can include general liability, property, and business interruption in a package.

If you have to cease business entirely because of a disaster, your business will lose money. The quicker you get back up on your feet, the better chance your business has of surviving an accident.

Beyond that, you should think about adding an interruption policy to your risk management plan if:

  • You have a physical store location
  • You conduct any part of your business on the internet
  • You are located in an area of the world that sometimes experiences a natural disaster (hurricane, tornado, ice-storm, flooding, wildfires)
  • You could not pay your employee’s income if your business closed for a few weeks
  • Your business depends on other businesses for supplies
  • You need other leader properties around you to draw traffic to your store
  • Your business depends on manufacturing from one specific supplier
  • You deal in volatile materials

Why these certain elements? There are situations where one small property disaster for you or for a supplier could also put your business in jeopardy. Your business can be interrupted by a supplier or manufacturing plant suffering an accident or closings its doors. Let’s say you are a brewer who relies on one specific type of barley and your barley supplier has a bad crop and you can’t make your beer. Business interruption service could cover a situation like that, too. If you are a small boutique located near a larger store that drives in most of your foot traffic, if something happens to that leader property your policy could cover the loss of income due to that larger store’s accident.

How Much Coverage Do You Need?

What Is Business Interruption Insurance And Do You Need It?

Once you’ve decided to invest in adding business interruption insurance, you will need to decide how much coverage you plan to purchase. In general, your coverage is determined by profit. How much your business needs will depend on several factors and questions:

  • How easily can you keep doors open at a temporary location?
  • How long will your business be closed?
  • How many employees do you have?
  • How much income will you insure and how much?
  • Does your current location have an updated sprinkler system/is a fire risk?
  • Are you located in an area where you could find another retail space easily? 

If your business is located in an area with a high risk for a natural disaster (known hurricanes, tornados, wildfires) your coverage might need to include entire seasons where you are at risk. If your business is easy to move and relocate, doesn’t rely on outside manufacturing, and has a handful of employees, you will need less coverage than a business that can’t easily relocate, will have to wait for their location to reopen to do business, or relies on other local businesses.

You can feel confident that you are getting the right coverage if the plan fully covers loss of income and payroll expenses, your projected gross income, and your projected net income. 

Buying Business Interruption Insurance

Business interruption insurance is an add-on endorsement to your commercial property insurance, so the first place to go is to the insurance company that currently issues your commercial property insurance. If you are in the market for a new policy or don’t have a commercial policy or Business Owners Policy (BOP), then most places that sell business insurance will offer Business Interruption Service.

There are four easy steps for buying insurance: Know what insurance you need, gather your business documents, comparison shop, and purchase! 

Websites Insureon, CoverWallet, and Coverhound offer comparison shopping so you can view several insurers offers at once.

Cost may be a deterrent for some small business owners. Policies can run from as little as $750 to $10,000 a year. Business interruption policies are very specific on their limit terms: your policy will itemize everything it will/will not pay out and up to how much. Your insurance team is responsible for walking you through the itemization.

To add business interruption coverage, you’ll need current documentation of your net income. Policies tend to pay per incident, but a low per-incident limit may not be enough if you hit your cap before you can open your doors again.

Once you add business insurance, keep careful and attentive records of your income as it fluctuates. If you need to boost your coverage, you’ll have the documents to show the insurance company your income.

Business Interruption Insurance Terms to Know Before Buying

Do I need business interruption insurance

As you sit down with your insurance agent, broker, or team leader in charge of buying insurance, educate yourself on some of the lingo that might come up while you plan your policy. Before you can make decisions about what kind of coverage you need, you’ll need to understand what the policy means. Here are some of the common phrases included in s business interruption insurance plan.

  • Actual Loss: The policy will only cover damage related to the disaster. Not everything will get an upgrade and if you choose to update or renovate beyond the price of the actual damage, the insurance company will not cover updates.
  • Business Income: This is your net income. Lost net income will be the sum of your lost profits and disaster-related expenses.
  • Period of Restoration: This is the time that you might need to get your business back up and running again. Your plan will account for a specific amount of time the rebuild/restoring will take place.
  • Extra Expenses: These are the expenses that occur because of the disaster (you didn’t need a rental truck before, but now you do).
  • Service Interruption: This coverage directly relates to your utilities. You can’t insure specific companies, nor can you insure against service disruption because of earthquakes.
  • Contingent Business Interruption: This is the coverage that helps you if your business is contingent on other businesses to do business. If another company suffers a loss that affects your bottom-line then this policy would protect against your losses.
  • Leader Property: If your business derives its foot-traffic from a more profitable and well-known store, that store is called a leader property. If the leader property suffers a loss and it affects your store, you may be protected from those income losses.

Final Thoughts

An interruption to normal business could happen for a plethora of reasons; even if you can’t envision a worst-case scenario, it doesn’t mean you’re exempt from encountering a loss. Since business interruption insurance can easily be added (or is included in some Business Owners Policies), it’s important to check with your insurance professional to crunch the numbers.

If you need to shut your doors for any reason, business interruption insurance will protect you, your assets, your employees, and the future of your business. Especially if you are a business in a zone with a high probability of natural disaster, this is insurance coverage you shouldn’t skip.

The post What Is Business Interruption Insurance And Do You Need It? appeared first on Merchant Maverick.

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