Setting up your business

Before you can begin trading you should have a business organization, no matter how small your operation*. This deals with what is involved in establishing a business, from choosing a form of organization to saving money on taxes. Although the information applies to setting up almost any kind of small business, it is of special relevance to the business of importing and exporting.

Sole Proprietorship, Partnership, Corporation

Which of these forms of organization you choose depends on considerations such as* the size of your business, whether you are the only owner or have associates, and your tax position. Look over the descriptions of each type of organization which follow to figure out which best fits your enterprise.

Sole Proprietorship. The sole proprietorship is the simplest organizational form. There is one owner, who usually takes the title of president. He or she can make decisions without consulting anyone.

Partnership. A partnership is almost as simple as a sole proprietorship. A partnership means that there is more than one owner. Each partner simply declares his or her share of profit or loss on the personal income tax return. In a special type of partnership, called a limited partnership, the limited partner is usually not involved in the management of the firm.

This form of organization can be useful in international trade if one partner is well-equipped with purchasing and marketing skills and the other with trade documentation and related skills. Unfortunately partnership businesses often fail quickly when one partner dies or loses interest or when partners disagree with each other.

Corporation. A corporation is a more formal way of organizing. It involves registration with a state department of commerce. There are a number of tax advantages to incorporating*, such as being able to deduct one's personal life insurance, but there are also accounting requirements* and other costs. In general, it is economically better for a business to incorporate when its profit before taxes reaches about $50,000 a year. At that point, the extra savings usually equal the extra cost.

Many importing and exporting firms incorporate at their inception, however, in order for the owners to be protected from product liability. An individual – importer or exporter, agent or merchant – shares in the liability for any harm that may be caused in the distribution of a product. Incorporation limits liability to the assets of the business, unless it can be proved that a person knew the product was harmful and incorporated specifically to reduce liability.

An importer of any size should incorporate if he is dealing with a product that is taken internally or applied to the skin or that could cause harm in any way*. This includes toys with small pieces that a baby might swallow, clothing that could catch fire, etc. For exporters the problem is somewhat less serious, but it still exists. There are cases, especially in Western Europe, where consumers and industrial users have sued American exporters in the United States.

Incorporating to limit liability is somewhat less important if you, or your foreign business partner, carry product liability insurance. Of course, the more potentially dangerous the product, the more expensive is this kind of insurance coverage. In some cases, your foreign business partners may carry liability insurance that will protect you.

Selecting Your Trade Name

In the United States, an individual who imports or exports in his own name does not need to register with any government organization. Most companies that deal with products, however, think it wise to select a trade name and try to make it known. If you do business under any name other than your own, the trade name must be registered. Registration insures that the owner of a business can be located if, for example, one of its products causes harm to someone.

It is wise to pick a short, easy-to-remember name. Be sure it doesn't have a vulgar or uncomplimentary meaning* in the language of any country with which you plan to do business. The most famous example of such a blunder is the Chevrolet Nova, which was introduced in Venezuela before anyone realized that "no va" in Spanish means "doesn't go." The Nova didn't.*

A name can be registered if there is not already a similar company with a similar name operating in the same country. For a corporation, one should have a search done to make sure the name selected is unique in the state of registration. If your corporation is doing business nationally or internationally, it may be wise to research the name at these levels.

Opening a Bank Account for Your Business

To open a bank account for a sole proprietorship or partnership, present one copy of the executed Business Certificate and a check for the initial deposit. For a corporation, you will need a corporate resolution specifying who may open an account.

You should open your business account with a first class international bank. Even a small import or export transaction will be using letters of credit or other specialized international payment instruments. Savings banks cannot handle this kind of transaction, and local commercial banks usually don't have the expertise to do it. You should look for a bank that has a letter of credit department with a staff of at least five persons.

Establishing Your Office

A small import or export business does not take much space, and many persons save money and travel time by working in their own homes.

But there are drawbacks to working out of your home.

• Most residential areas* have laws that restrict the use of one's home for business purposes. Usually there is supposed to be no stock of merchandise, no business visitors, and not more than one employee.

• If you plan to sell directly to consumers in the United States and would like to accept major credit cards, you will probably have to open an office away from your home.

• Homeowner's and tenant's insurance usually do not cover business equipment, supplies, merchandise, or liability. You may want a rider on your insurance policy to protect equipment such as- typewriters and computers.

If you do not want to work from your own home, you may be able to save money by renting space from a business that has more than is needed or by locating a company that rents space complete with basic equipment and office services. An import/export business does not need a prime location, unless the office is going to be used as a showroom.

Office Equipment. You don't need a lot of fancy equipment in an import/export business. Desks and chairs, filing cabinets*, and a good typewriter are the basics. A photocopier helps also because international trade requires numerous documents. There will be many occasions when you'll want to make a copy or two.

A small postage meter* is also useful because international postage uses so many different denominations of stamps. You should have a separate telephone for your business. Limit the number of people who may answer it and be sure it's answered in a businesslike way; keep the children away from it during office hours. It should be hooked up to a telephone answering machine, which is much cheaper than an answering service and, I think, better. Buy the kind of machine that lets you call in from anywhere and get your messages.

Mailing Address. Communication is a very important part of the import/export business. If you have a formal office, you'll probably get your mail there. If you're working out of your home you may want to keep its address a secret, either to avoid unwelcome visitors or to keep from giving away the fact that you are working from a private home.

You can use a post office box if there are any available in your area, but that has disadvantages. You will have to go to the post office every day to pick up your mail, and in some countries only very small fly-by-night operations* use post office boxes. It could hurt your reputation.

There are also companies in most cities that offer mail box services. These usually have prestigious addresses, such as "100 Broadway." For a fee, these companies will receive your mail and either forward it to you or hold it for you to pick up. Still another alternative is simply to find a friend who has an office, and will let you use his or her address.

Cable Address. The cable, or international telegram, was an important way of sending international messages for many years. Now it is less so. Do not get a cable address. It will cost you about $50 a year and, if anyone wants to send you a cable, he can always send it to your postal address. Likewise, if you should want to send a cable to anyone, you can do it from your telephone without needing your own cable address.

Telex Number. A huge volume of international communications is now sent by telex. If you're going to be an importer or exporter, you must have a way to send and receive telex messages.

Telex is a system of electronic communication that is both faster and cheaper than telegrams. Also there is an answer back system by which you know immediately that your message is received. (When you send a cable or a letter you don't know if your message was received until you get a reply.) There's even an open line system that lets you actually converse by telex. You receive a message (it is typed out on the telex machine in your own location), and you type in your reply, your correspondent answers, etc.

An advantage to telex over the telephone is that it gives you a written record* of all communications. If you're working with companies in the Far East, there's no time during our business day that they are working, and vice versa. It's easy to send a telex before you stop working in the afternoon, and a reply will be waiting when you go to work the next morning.

Your Company Logo. If you don't want to have a custom logo you can order stationery and related supplies inexpensively by mail.

Remember, though, you aren't IBM or General Motors. Most of the people you do business with will never have heard of you. Their first impression of you will be from the quality of your correspondence. Therefore I think it's worth the money to have a local artist design a logo for your business. I suggest not using a plane, a ship, or a globe, because these are much too common and will mark you as an amateur.

For stationery in small quantities with custom logos, as well as envelopes and business cards, the instant printers are usually the cheapest and fastest. Ask for lightweight paper if you think you'll be doing a lot of international correspondence, because postage to most of the world costs 44¢ per half ounce.

The letterhead* should also include your telex number, which you will have with any of the three systems just discussed.

You may not want to put much information on your stationery about the kind of business you're in. That way you can still use it if your business takes off in unexpected directions. The same holds true for your business cards.

Business Forms. For importing, you will not need any business forms that can't be purchased in commercial stationery stores*. To save money at first, you can buy stock forms and type in your company name and address.

Exporters, however, often need specialized forms such as the Canadian Customs Invoice* or the Nigeria Certificate of Origin*. These can be obtained from the consulates of your market countries.

Accounting

In this business, like any other, you should keep accurate and timely financial records. It's important to know, for example, which product lines or which representatives are giving you the most profit.

In the beginning you probably will not need an accountant. You can go to a stationery store and buy a recordkeeping system. One of these is the Dome Monthly Record. This is a very simple system that lets you do all your accounting in about an hour a month, if your business is small. (The Dome system* has no place for Accounts Receivable or Accounts Payable, but you can keep track of these elsewhere.) This kind of system puts you on a cash basis. That means you recognize income only when you actually receive the money and recognize expenses only when you actually pay out the money. This can be an advantage if you have a merchant business and are working in such a way that you have to pay for merchandise before you are paid for it. On a cash basis, you will show somewhat less profit at any given time. Less profit on the books on December 31 can reduce your taxes.

If your business is incorporated, your state law may require you to abandon the cash method and use the accrual method of recording income and expenses*.

If you decide to use the services of an accountant, try to find one who has had experience with import and/or export business. He or she will know the laws better and may be able to save you money on taxes.