3.0 What about business organization and raising money?

3.1 What sorts of business organizations should I use?

For the budding ISP, the sole proprietorship is certainly the simplest and most tempting organizational scheme. No tiresome forms to fill out, no lawyers needed, and no thought wasted on the issue.

Many people, however, note the virtues of a Subchapter S corporation. This neat little format has the limited liability protection of a corporation, combined with the more favourable tax treatment of a sole proprietorship - you can still deduct losses directly off your returns.

Unfortuantely, the liability shield, while it looks great on paper, may not be quite so wonderful in practice. In the case of corporations owned by individuals, the courts typically "pierce the corporate veil", considering the individual and the corporation identical in case of liability. So if your solo venture goes bust, you may still wind up in trouble despite all your fancy papers. Thus, to make Subchapter S sensible, it's vital that you have at least one partner.

It's worth noting that any corporation, including Subchapter S, requires a large commitment to maintaining curious rituals, such as annual meetings and elections of directors. If you forget even one small detail in these curious events, you may wind up losing your corporate status. Beware!

Michael Krause summarizes the case for the S Corporation:

* Tax benefits: "Give yourself no salary, take out loans from business, etc. Works out perfect, a nice little loophole in our tax system."

[ Warren Henke [henke_w@cc.dixie.edu] comments as follows: "The IRS has become more strict on this point, and doing what you suggested has a very high chance of triggering an audit. The individual should be paid a fair salary, subject to SE tax. The remaining profits, however, can be creatively distributed. If you want rulings, regs, or other info, contact my firm: Savage & Esplin, LC, 801/673-6195; ask for Warren"].

* Personal Asset Protection: You can take out a business loan and leave personal assets protected - unless they are needed to guarentee the loan. Unfortunately, most banks are too smart for this little trick, unless your corporation has substantial assets and an existance distinct from your own.

* decreased liability. Note that corporations cannot commit crimes; if your corporation is accused of criminal behaviour, you as owner are responsible.

Like virtually all legal advice given on the net, this information comes from non-lawyers. You should consult your own legal experts before making any final decisions.

3.2 What resources can I use to get capital for my ISP?

Obviously, the easiest way to find money is to use your own. No tiresome investors to deal with, no people breathing down your neck when profits don't come quite as fast as one might like, and no delays waiting for people to make up their minds.

So, winning the lottery should be the ideal way to finance your new business. Unfortunately, most of us will admit that this is rather a long shot.

One solution to this problem is to have a full-time job already and live quite frugally. Then the balance of your income can be used to finance your system. I've managed to do quite a bit with this method, but unless you're used to a frugal lifestyle or have a princely income, it's really no fun at all. Worse, there are definite limits to growth; I can afford to fund my 28.8kbps SLIP forever; I couldn't afford even a month's worth of T1 charges without outside help. Unfortunately, as we will find out a bit later in full detail, this kind of plan may not be enough to start a profitable provider.

Parents, friends, relatives and people who have seen you in action are probably the best early investors. They know and trust you through previous dealings with them. Creating a preliminary business plan and walking through it with them will not only help persuade them; it may also yield good advice about what is needed to sell it to them or others. (My most likely source of financing is my day job boss).

A recent book called 'Guerilla Financing' tells how you can locate "angels", individuals keen on investing small amounts of capital ($10-100k) in start-up ventures. Their motivation often comes as much from the glamour of being associated with some prestigeous enterprise as a desire to generate profits; this is, for example, the spirit in which Broadway shows are traditionally financed. The book has some fascinating detail on the precise procedures, and I will have to buy it next time I see it to give some ideas and better pointers. In sum, however, an Internet provider business might be a particulary good field to find an "angel", since they are often interested in the glamour of investing in high-tech ventures.

There are other, more formal, sources of investment.

Venture Capitalists. They take a sizable percentage of your business for the money, but they might be your best chance. This is especially true considering the "trendiness" of this subject. (Someone who has actually dealt with a venture capitalist might be able to help me out a bit with this section. :-) )

Note that venture capitalists are almost always interested in eventually taking your company public and reaping the sizable returns that can be obtained therefrom. If you don't want to eventually wind up with the hassles of running a public company, you may not want to go this route. Keep in mind, though, that it could make you a wealthy person if everything goes right. Netcom went public a few months ago, and Bob Reiger, its founder, is sitting on a mammoth paper profit right now.

Banks. Not really an option until you're a going concern.

The US Small Business Administration (SBA). According to Joseph Lamar Greer , it is nearly impossible to get a SBA loan unless you can qualify as a minority. Many people have gotten loans by taking on a qualified minority partner or partners.

Tom Berdan is an Executive VP of a small bank in Tampa, FL. He has been a SBA lender for the past years, and wants to correct some common misconceptions about the SBA. He writes us as follows:

"Your section on 'What Resources Can I Get For My ISP" quote a Joseph Lamar Greer as saying it is nearly impossible to get a SBA loan unless you're a minority. This is the single largest misconception of the SBA loan programs. In fact, the largest program is the SBA 7a program, which provides loans to SBA businesses. No minority qualification is required, and if the business owners are miniorities, it does NOT factor into the decision process. SBA loans last year totalled over $ 7 BILLION, with projections to approach $ 9 BILLION this year.

"The basic requirements for a SBA loan are that the owners must have some capital, management expeirence, demonstrate that there is sufficient cash flow to repay the loan, and collateral. SBA loans probably are difficult to find for $ 10,000 to purchase the equipment for asmall 28.8 ISP provider, but oculd definitely be available to an ISP after a successful track record as a small ISP looking to expand. It really depends on the lender - which is where one starts the process. The SBA has recently started a low doc loan program. This program is designed for businesses needing less than $ 100,000 in loans, and the amount of paperwork submitted to the SBA is greatly reduced. However, the same 'basic requirements' above still apply, and NO minority participation is required. My advice to anyone interested is to call their local SBA office and ask them to provide a list of lenders in the area. The process starts there, with the lenders, and not with the SBA. Also, the SBA is available on the Internet. If you're interested, drop me a note and I can provide you with the HTTP page address."

[It sounds to me like this is a great deal like a regular bank loan, in that your financial viability needs to be assured before you can successfully pursue this option. As Tom says, the SBA gives loans, not grants or direct investments; as a result, there needs to be a very clear and straightforward path to repayment. I don't think this is something most beginning ISPs have; however, it would certainly be useful for expansion, as he says].

Lottery Funds and other Economic Development Grants: In some states, grants are available from the state (often funded through lottery proceeds) for business development. Note that this is in the form of grants; you don't need to pay this money back.

Department of Commerce: The US Government is investing $ 1.2 billion a year to promote "development and deployment" of the "National Information Infrastructure (NII)". Whether this means anything that can help us is open to question, but you can check out their FAQ on this subject through their BBS (202) 482-1199, or their WWW page: http://ntiaunix1.ntia.doc.gov:70/0/faq/niiques.asc

You would presumably have to be a non-profit or school to get these grants.

Next section: What sorts of returns can I expect making as an ISP?