The Entrepreneurial Mind

"I don't want a bunch of snot-nosed, twenty-five year old stock analysts with Harvard MBAs determining the future of our business."

I am not sure that is an exact quote, but that was close to what I said to my partners after we had looked into taking our business public. And my father warned us that we would not like our life in a fish bowl, having our every move and most of our decisions in the public record. Add to that today's cost and hassle of Sarbanes-Oxley and you have quite a list of reasons not to go public with your venture.

But, now here is another reason from Red Herring:

Psychologists from Princeton University said Tuesday they’ve found a strong relationship between the short-term success of an initial public offering and how fluently investors can pronounce the name of a company and its ticker symbol....

So strong was this effect that if an investor started out with $1,000 and invested it in companies with the 10 easiest-to-pronounce tickers on the market--those similar to GOOG (Google)--she would earn $333 more than if she had invested in the 10 hardest-to-pronounce tickers, similar to VYYO (Vyyo Inc).

"This research shows that people take mental shortcuts, even when it comes to their investments, when it would seem that they would want to be most rational," said Danny Oppenheimer, assistant professor of psychology at Princeton University.

Ah, yes. The rational decision making process of the public stock market. Another good reason to stay private!

Posted by Jeff Cornwall at 06:53 AM | Permalink | Comments (1)

A new report from the Kauffman Foundation finds that entrepreneurial activity still very high in the US. From the National Dialogue on Entrepreneurship:

The new report shows that there were 464,000 people creating new business each month in 2005 -- a rate of 0.29 percent of the total adult population.

That equates to:

- 5,568,000 new businesses a year
- 107,077 new businesses every week
- 15,297 new businesses every day
- 637 new businesses every hour
- 11 new businesses every minute

Any question that the US is now in an entrepreneurial economy?

Posted by Jeff Cornwall at 07:35 AM | Permalink | Comments (1)

Should I go with an LLC or an S-Corp?

I get this question quite a bit. I am still in favor of using an S-Corp in many situations. For example, if you plan to keep the business small or have limited ownership, I think an S-Corp works great and tends to be less expensive to set-up and maintain.

But, LLCs are are increasing in number while corporations are declining according to this post Ideablog. In fact, this blog's author seems surprised that we even bother to keep the old S-Corp around at all.

The corporate form is hanging on -- it's what most practitioners know. But it's looking less and less like the future of business associations.

If the S-Corp is so simple and cost effective, why is it fading away?

Contrary to what the author of Ideablog asserts, I find that many attorneys push LLCs. Since they offer no real tax advantage for most entrepreneurs, and since they tend to be more expensive, one might wonder why. But, key in on two words from the last two sentences, attorney and expensive, and you get a clue as to one possible reason. Lawyers make more money from pushing LLCs. There are cases where I recommend an LLC, but it tends to be fairly infrequent.

Also, I often get the impression that being able to say "I started an LLC" is thought to be cool. I don't know if it sounds more sophisticated or like they have done something more substantial, but I do get the impressions from many new entrepreneurs that starting an LLC is somehow more significant than starting a plain old corporation.

As always, I need to say at this point that I am not an attorney. You need to consult with one about matters such as this. But, if they recommend an LLC over an S-Corp for your new venture please make sure to ask them very specific questions about differences in costs (short-term and long-term) and also what specific advantages you would get by setting up an LLC.

Finally, remember that the IRS tax code (part of those 60,000 pages I wish would go away) has many more cases that deal with S-Corps than with LLCs. S-Corps are more established in IRS case law. That means that you are less likely to have your name or your business name in some IRS case in the future as a result of an audit gone bad. Just a thought.....

Posted by Jeff Cornwall at 07:10 AM | Permalink | Comments (1)

Although it is coming all the way from Australia, COTC is only a click away.

Posted by Jeff Cornwall at 07:07 AM | Permalink

A pilot will tell you that there are two critical times for a safe airline flight: the take-off and the landing. These are the two time where there is the most strain on the aircraft and when the most things can go wrong.

Entrepreneurial ventures have two similar critical points for success. The first is aligning your business to the market properly before you even open the doors. This is the process of opportunity assessment. The second critical point is when the business hits its growth phase. StartupJournal has a good case study of the challenges entrepreneurs face when they try to prepare a business for successful growth.

During growth, both the business and the entrepreneur have to go through transitions. For the business, the entrepreneur has to build systems and processes that can handle processes that the entrepreneur managed himself when the business was smaller. And that leads to the second transition. As the entrepreneur builds more and more of the day-to-day details into systems and delegates responsibility to the expanding team, his job must change. As seen in the case at StartupJournal, the transition from being mostly a "doer" into becoming a "real CEO" can be one of the biggest challenges an entrepreneur can face.

Posted by Jeff Cornwall at 06:50 AM | Permalink | Comments (1)

The SBA is a mess. Outgoing Administrator Hector Barreto is only part of the problem. The very concept of the agency itself is flawed.

Now let me be clear. Not everything about the history of the SBA has been bad. The most important legacy of the SBA, from my point of view at least, has been its impact on educating small business owners. For years universities shunned entrepreneurship education. I will always remember the day over twenty years ago that I learned this lesson as a young Assistant Professor at the University in Wisconsin - Oshkosh. A very senior Full Professor began screaming at me in the hallway about the new entrepreneurship program I was trying to help get launched.

"Cornwall!! What in the *&%# do you think you are doing? We are a College of Business! Our job is to educate and prepare future corporate leaders, not train a bunch of merchants!!"

During the 1960s through the 1980s, the SBA supported groundbreaking entrepreneurship education programs such as the Small Business Institute (offered consulting to small businesses using teams of business students). The SBA's SBDC and SCORE programs offered free consulting and support to entrepreneurs. The SBA believed in entrepreneurship education long before entrepreneurship education was cool.

But, times have changed. That old professor has retired and entrepreneurship education has exploded to the point that it is now offered in thousands of colleges and universities.

Richard McGill Murphy in his article at Fortune Small Business argues that even the SBA loan programs don't work effectively as a tool for economic development. A very small percentage of businesses have benefited from 7(a) loans, and the 8(a) loan program (for minority owned businesses) has been plagued by allegations of corruption for years.

The agency's primary victims are the entrepreneurs who don't use SBA loans but face competitors who do, and so enjoy lower interest rates and longer repayment schedules. "The SBA is in the discrimination business," Jonathan Bean--a professor at Southern Illinois University at Carbondale and the author of Big Government and Affirmative Action: The Scandalous History of the Small Business Administration--recently told the Senate Committee on Homeland Security and Governmental Affairs. "It takes wealth from all taxpayers and awards loans and contracts to [relatively few] small and minority business owners."

So what to do?

It is time to do to the SBA the same thing that I advocate for the IRS. Tear it down and start over. However, I would not argue for a "new SBA." Rather, I would use this as an opportunity to rethink how we address the needs of our entrepreneurial economy from a much broader perspective.

A good starting point would be the five point plan Steve Forbes has been advocating. (Taken from a recent address at Hillsdale College.)

1. Break Apart the Corporate/Government Complex

Without individual equality before the law, entrepreneurs cannot challenge already existing businesses. Alliances between the latter and government regulators who place barriers before entrepreneurs must be guarded against.

2. Property Rights

We take for granted in this country that if you buy a piece of property, everyone acknowledges that you own it.

3. Low Taxes

Taxes are not just a means of raising revenue for government. They are also a price...When you lower the price of good things -- things like work, success and risk-taking--you tend to get more of them.

4. Deregulation

Getting bureaucracy out of the way will inject a new vibrancy in the economy.

5. Free Trade

Expanding markets and creating greater opportunity for trade benefits all.

In the latter part of the 1900s the last economic era ended. It was a great era that saw the emergence of the US as the major economic power. However, while that era is now over, our approach to public policy is stuck in that old economic paradigm.

We are now in a new economic era that is being fueled by entrepreneurs and their small businesses. Many of these will become the large corporations that will carry us through the coming decades. Which ones they are, we do not know. Only the market can determine that. It is time to let the markets work.

Posted by Jeff Cornwall at 07:16 AM | Permalink | TrackBacks (2)

In yet another example of socialized entrepreneurship, a majority of the states across the US (44 to be exact) report on their attempts to get into the VC business. While possibly well intentioned, this is bad policy. Studies have clearly shown that governmental efforts to guide investment have little long-term economic impact. Markets create sustainable economic growth, not bureaucrats.

(Source: National Dialogue on Entrepreneurship).

Posted by Jeff Cornwall at 07:45 AM | Permalink

I commented the other day about my concern over Chile's policy of focusing on high growth, high potential entrepreneurship for economic growth. Such socialized entrepreneurship short circuits the power of small business development within free markets. The National Dialogue on Entrepreneurship has a link to a new study showing a country that seems to get this right: Ireland. The study titled Small Business is Big Business shows the economic force of free market entrepreneurship in Ireland.

Posted by Jeff Cornwall at 07:27 AM | Permalink

The storm forecast is out for this summer, and it is not a good one.
In addition to sending oil prices up, it should be a warning for small business owners to start planning.

I have written often about the need to plan ahead for disasters, be it floods, terrorist attacks, hurricanes, ice storms, and so on. While small businesses are quite vulnerable to the impact of such events, there are steps that an entrepreneur can take to prepare.

Here are some suggestions on how entrepreneurs can prepare for disasters:

1. "Cash is King". There is no better tool to weather a disaster than cash. Having cash reserves allows businesses to make it through the initial economic paralysis of a major event. Thirty days cash reserves (enough cash to cover essential and fixed expenses) would be my minimum recommendation. Even ninety days of reserve would not be too much to have at this period of time. One business owner recently told me that the new goal that many are setting is six months of cash on hand.

2. Manage overhead carefully. Overhead pushes the breakeven point of any business higher. If sales suddenly drop off for an extended period of time, a lower breakeven point that results from lower overhead expenses can soften the impact of any economic shock. It takes less recovered sales to get back to breakeven.

3. Avoid fixed, long-term commitments. Any major shock on a market may require new business tactics, strategies or even models going forward. One reason that the American auto industry reacted so poorly to the oil shock in the 1970s is that they had built their businesses assuming a very static business model. It literally took them years to undo this model and adjust to the new reality that they faced. They had to be able to react much more quickly to changing customer preferences, and operate in a market with many new competitors where there used to be only three.

4. Build in flexibility. Understand that you may need to quickly undo some decisions. Make this as easy as possible for you to accomplish.

5. Watch and manage your inventories carefully. Certainly you should not choke your business growth, but don't go overboard with purchasing either. Purchasing raw materials or other inventory using volume discounts may not be wise. Be as "just in time" with your inventory as possible.

6. Create contingency plans. These need to be major plans for how your operations will be handled given a variety of scenarios, and minor plans that deal with the day-to-day safety and security of your employees and customers.

7. Look ahead. It is critically important to try to look beyond any single event, no matter how devastating. Believe in yourself, your business, and the system that makes it possible. Entrepreneurs need to be bold leaders. As we saw in the Gulf, leadership will not come from the politicians. Instead, it will come from the grassroots of our economic system. Be strong, be brave and be confident and others will follow.

There are some other excellent resources for small business owners for disaster planning. The SBA has a detailed set of recommendations at their website that every entrepreneur should review and put into practice in his/her business. StartupJournal also offers some excellent tactical advice (before and after a disaster strikes) to review with your management team to use to develop specific applications for your business.

Every small business owner (and homeowner, for that matter) should heed these words from the SBA:

Ask yourself: what if the worst happened? How would it affect my business and my family? Would we survive if the business were closed down for weeks, months, or perhaps my entire revenue season? What can I do to make sure we survive?

Be a little pessimistic now, and assume it CAN happen to you. Develop a Disaster Plan for your home or business now so you can rest a little more easily in the future.

Posted by Jeff Cornwall at 08:05 AM | Permalink

A new report on entrepreneurship in Chile from the Global Entrepreneurship Monitor finds that despite strong efforts to improve entrepreneurship in their economy, there is little progress to report.

(O)ne discouraging sign is that opportunity entrepreneurship has...decreased, which is related to economic development. And that is what is typically found in more developed countries like New Zealand, the United States, Australia, Canada or Ireland. This indicator went from 8.5% of the population to 8.2%. According to Amoros, it is worrisome that opportunity entrepreneurship in Chile, in addition to having fallen, is very focused on not very innovative projects that have a low growth potential, which have a very low economic impact.

The last sentence from this quote is quite telling. Chile has set its sites on major, "home run" innovation projects. Their entrepreneurship agenda includes major government support for R&D projects and financial support for major commercialization.

This mirrors an alarming trend that we are seeing throughout the world. Governmental officials are engaging in socialized entrepreneurship, which is entrepreneurship guided by public policy makers, managed by bureaucrats, and funding through public dollars. In the US we see these examples of this in recent proposals to insert the SBA into angel financing of entrepreneurial ventures (see this recent post).

Socialized entrepreneurship has not worked. While public policy makers and their minions can pick some initial market winners, they have not proven to be successful in sustaining entrepreneurial economic growth and development over the long-term.

Long term sustained entrepreneurial economic development comes from free and open markets.

If Chile wants to become an entrepreneurial success story, their governmental officials should understand that "less is more." Less government regulation and less tax burden will generate more entrepreneurship over the long term. They should also move away from the current Ivory Tower view that the only good entrepreneurship for economic development is that which is high growth, high potential.

Grass roots, micro entrepreneurship is where small business owners can get their start. They learn, they gain confidence, and they find promising markets. In the US we began our current entrepreneurial economic expansion in large part through such grassroots efforts. It may take more time to see the results, but it creates sustainable economic growth. It also helps create an entrepreneurial culture, which is critical for widespread business development.

The lessons from Chile is not that the government needs to redirect their policy toward entrepreneurial development. They need to drop their reliance on socialized entrepreneurship and let the markets build real long-term prosperity.

Posted by Jeff Cornwall at 07:59 AM | Permalink

I am getting ready to take a little vacation. In an article at Inc.com, Ivy Sea recommends that we should treat our vacations like sabbaticals.

Sabbaticals in today's world refer to an extended time completely away from one's normal work. At a university, this is usually either a semester, or in some cases, an entire year. In the corporate world, we hear of executives taking exotic sabbaticals. Some companies (Timberland and Men's Warehouse, for example) even have a form of sabbatical in their company benefits. For an entrepreneur (or a recovering entrepreneur now teaching entrepreneurship), the thought of an extended time away from our business or work is unimaginable, impractical, or even impossible.

Sabbatical comes from the word Sabbath. If we look at the Biblical roots of the Sabbath, we see that it means the day of rest. But the intention was to not only rest the body and the mind, but also to refresh our souls.

If we look at our time off as simply a day to recharge our batteries to get ready to rejoin the battle, we are missing the point. It becomes simply a day to be physically removed from our workplace, but never completely mentally (or in today's world electronically) away from our work. For so many of us, vacations blur with our work. We are never more than a cell phone or an e-mail away. People never think twice about intruding on our time off. Our minds never fully get rest, and our souls, well, we plan to deal with that in a meaningful way in some distant future.

So if we can't take extended time away, and our time away never really seems to be time away, how do we really get a sabbatical from our business or our work?

Ivy Sea's article from Inc.com offers some insights:

Use the term sabbatical

Words can be very powerful. If we call our two weeks away a sabbatical rather than a vacation, it clearly tells others and reminds ourselves that this is much more than just a physical time away from our work.

Be clear about your goals and intentions

If we go in without a plan, old habits will prevail and it will just be another time away from the office. Commit to actions that will help rest your mind and your body, and refresh your soul. but, set modest goals so as not to recreate the often frantic nature of work. A simple plan is often best.

Prepare your business

This can be one of the more difficult steps for an entrepreneur. It means that you must not only delegate the authority for people to act while you are gone, but to make sure they have the knowledge and confidence to keep things moving ahead without you. A lot can happen even in a week, so make sure that your employees are ready for whatever they will face. Don't fall into the trap of frantically getting it all done yourself before and/or after your time away.

Prepare your self

Determine what you need to do to shift your thinking from vacation to sabbatical. Without this mindset management, it'll be difficult to achieve the goals that you've set.

That is why our worship services on Sunday start with prayer. It is a time to get our minds and our souls ready. For your sabbatical you should do the same: prepare your mind and your soul to be refreshed.

I will be back in about a week. We are off to the Land of Cheese. I hope that my time off will be, at least in part, a short sabbatical and not just a vacation.

Posted by Jeff Cornwall at 07:02 AM | Permalink

You've got to love a good bootstrapper!

StartupJournal has a story about an entrepreneur who took over a former competitor's phone number when they went out of business.

While leafing through the Yellow Pages last fall, entrepreneur Mark Bright saw an ad for a recently dissolved competitor listing an out-of-service phone number. On a hunch that readers would continue dialing the number for some time, he arranged for the line's outstanding calls to be rerouted to his company. Since then, he says, he's turned many unsuspecting callers into customers, thereby boosting sales....

Mr. Bright adopted his former competitor's digits in October, and says his company...now receives about 40 calls a day, double the number of calls from before he added the number. As a result, monthly sales...have increased by an average of $1,400, he says.

The average business line costs about $50 a month. His $1,400 in increased sales is a pretty darn good return on that investment!

(Thanks to Scott Pafford for passing this along).

Posted by Jeff Cornwall at 06:51 AM | Permalink

Many of the myths about small business are being rebuffed. One myth was that although small business employs a growing number of people, the pay rates are sorely lacking. The truth is that small business now pays about 90% of big business, while offering more flexible working conditions. They are able to compete for some of the best people with a combination of good pay and desirable working conditions.

Another myth is that innovation in our economy comes from VC backed high growth ventures, large corporations with big R&D budgets, or government backed research, but rarely from small businesses.

A new study just released from the NFIB (all of their studies can be found here) shows the fallacy of this myth.

"Small businesses produce a significant number of innovations," said NFIB Research Foundation Senior Research Fellow William J. Dennis. "Smaller enterprises appear particularly adept at major breakthroughs in contrast to more incremental or evolutionary changes."

Even small businesses that are not deliberately attempting to discover innovations employ at least one person, including the owner, whose primary job is to develop new products, services or designs, the study found. Twenty percent say they have one or more people assigned in such activity, suggesting that the owners consider the creative function to be valuable to the business.

Three-fourths of those surveyed said they specifically encourage employees to suggest ideas for new products or services, or to seek better ways to produce and distribute what their company sells. More than half of those who do inspire workers to be innovative offer recognition, bonuses or both to those who succeed.

In the year leading up to this study, more than two-fifths (42 percent) of all small businesses surveyed reported introducing at least one new or significantly improved product, service, process or design into their sales inventory.

Design is a major innovative focus, the poll found. Twenty-one percent of small firms market design, which is profitable. Almost two-thirds (60 percent) of those marketing design said it generates half or more of their sales.

"Patents and copyrights often proxy for innovation in business," Dennis said, noting that some 5 percent of small-business owners hold a patent (in their name or the firm's name) that they actively use in their business activities. Manufacturers hold one-third of patents.

Copyrights are more common: 13 percent hold at least one. Data from the survey show that once small firms reach the 10-employee level, copyright acquisitions rise notably. Almost 20 percent of firms that grow to this point own one or more. Manufacturers and those in knowledge-intensive industries such as information and professional, scientific, and technical services are the most frequent holders.

It is critical that entrepreneurs remain , in a word, entrepreneurial. In most cases it is change that created the original opportunity for their business. If they fail to remain innovative, the very changes that gave their business birth could soon make them irrelevant in the market.

"Change is the constant, the signal for rebirth, the egg of the phoenix." (Christina Baldwin).

Posted by Jeff Cornwall at 07:00 AM | Permalink

It seems that the federal government is bound and determined to stick their hands into our entrepreneurial economic expansion. The National Dialogue on Entrepreneurship reports on two competing bills beginning to wind their way through Congress.

Congressmen Don Manzullo (R-IL) and Earl Pomeroy (D-ND) have recently introduced H.R. 5198, the Access to Capital for Entrepreneurs (ACE) Act of 2006. This legislation would create a 25% tax credit for individual angel investors or partnerships that invest in qualified small businesses. The credit would be available for investments up to $250,000. Another take on the angel investing issue comes from Congresswoman Nydia Velazquez (D-NY). Along with numerous colleagues, the minority leader of the House Small Business Committee has introduced H.R. 4565, the Angels Nurture Growing Entrepreneurs into Long-Term Success (ANGELS) Act of 2006. H.R. 4565 would create a new Office of Angel Investment at the Small Business Administration. In addition to promoting angel investing as an innovative practice, the Office would make investments (of up to $2 million) to qualified angel groups.

I have a better idea. Stay away from our private equity markets, and instead focus on unwinding the mass of existing government regulations and over 60,000 pages of tax code that only inhibit free enterprise. If government wants to help entrepreneurship all the research shows that they should get less involved, not more involved.

Posted by Jeff Cornwall at 09:39 AM | Permalink

Last month the NFIB Small Business Optimism index took a rather disturbing turn downward. However, the April index (released today) bounced right back on reports of strong profits, sales, capital spending and job creations plans.

More than one-fourth of those surveyed (28 percent) plan to create new jobs over the next three to six months, while just 4 percent plan reductions, a seasonally adjusted seven point rise over March. Overall, job creation plans in all industry groups were strong, especially in manufacturing and construction. The strongest regions were Mountain, Mid-Atlantic and South Atlantic states.

Seasonally adjusted, 11 percent reported employment increases in April, but 14 percent had reductions. Those expanding employment more than offset the impact of reductions, producing a net gain of 0.2 employees per firm. Nearly half (49 percent) hired or tried to hire one or more workers; 84 percent of those could find few or no qualified applicants for unfilled positions; 31 percent reported unfilled openings, an eight point surge from March.

This is good news for our economy, since small business has created 77% of all new jobs over the past two decades in the US.

The NFIB calls the dip in optimism in March a "fluke." However, they do caution that there are some signs of inflation, which could throw a monkey-wrench into current economic expansion.

Posted by Jeff Cornwall at 08:41 AM | Permalink

We see start-ups happening in growing numbers among two age groups: The Entrepreneurial Generation (born after 1977) and the Entre-Boomers (born between 1946-1964). So what about those in between? Are the Generation X folks just not entrepreneurial?

According to the data, they are not started businesses at rates equal to those who came before and those who came after them. But, it may be in large part due to their stage in life. They are at the age where they have young families and large mortgages. The thought of quitting the security of their current jobs, although maybe just a illusion, keeps them from taking the plunge even if they have the urge and the right business opportunity.

An article from Business 2.0 offers a plan in "5 ways to start a company (without quitting your day job)."

1. Use Your Salary as Funding

Cut back a little on your discretionary spending and pretend the raise you just got didn't happen and use that money to slowly fund your start-up. I offer similar advice to young entrepreneurs. I tell them that since they are used to living as poor college students, keep living that way for a few years when they start work and they will be amazed at how much they can save or have available for their business. Remember, the average start-up in the US gets us and running with only about $6,500.

2. Turn Common Complaints Into a Business Plan

So many aspiring entrepreneurs come to me wirh the will, but without the idea. I tell them to stop trying so hard and find a business that builds on what you know about. If you are working, find things that are not working right in your company or your industry and try to figure out a business to take care of that problem. As Barry Moltz likes to say, the best business ideas are those that take care of "people's pain."

3. Make Your Boss a Beta Tester

Quite often your good ideas are not in the plans of your employer. If you are honest with them, they may let you develop the business and give you some transition time. Good people are hard to find, so they may be willing to be flexible. It happens more than you'd think.

4. Take Advantage of Your Company's Reputation

Investors want to see a track record when they look at supporting new businesses. Even though you may not have start-up experience, you have a resume and your employer's reputation can rub off on you. Bankers will even occasionally fund a start-up if the resume of the founder is strong enough.

5. Convert Your Employer Into a Business Partner

In 2002, when Jeff Hilbert was managing the design services division of Coventor, a chip-design software company in North Carolina, his unit was slated for the chopping block. However, Hilbert noticed that he had recently been winning a lot of business from wireless chip companies, so he asked Coventor to let him spin off the unit as a stand-alone company.

The board went for it and gave the startup -- now called WiSpry -- $6 million worth of patents and other intellectual property, seven employees, several hundred thousand dollars, and an office in Irvine, Calif., all in exchange for shares in the company.

Although this path to start-up is a little less common, I am currently working with two of our MBA alumni who are pursuing similar deals.

So come on Generation X! Show us your entrepreneurial spirit!

Posted by Jeff Cornwall at 05:39 AM | Permalink | Comments (1)

The Tax Foundation has published its 2006 State Business Tax Climate Index (SBTCI). It is an index that assesses overall tax policy as it relates to business.

Taxes affect business decisions, job creation and retention, plant location, competitiveness, and the long-term health of a state's economy. Most importantly, taxes diminish profits. If taxes take a larger portion of profits, that cost is passed along to either consumers (through higher prices), workers (through lower wages or fewer jobs), or shareholders (through lower dividends or share value). Thus a state with lower tax costs will be more attractive to business investment.

Often public officials cut deals to entice a specific company to relocate in their state, such as the recent Nissan deal here in Tennessee, and then tout their efforts for job creation. But, real long-term job creation and economic growth comes from a consistent and fair tax structure for all businesses.

Good state tax systems levy low, flat rates on the broadest bases possible, and they treat all taxpayers the same. Variation in the tax treatment of different industries favors one economic activity or decision over another. The more riddled a tax system is with these politically motivated preferences the less likely it is that business decisions will be made in response to market forces. The SBTCI rewards those states that apply these principles in five important areas of taxation: individual income taxes, major business taxes, sales taxes, unemployment insurance taxes, and taxes on wealth or assets such as property.

Here are the top ten states:

1. Wyoming
2. South Dakota
3. Alaska
4. Florida
5. Nevada
6. New Hampshire
7. Texas
8. Delaware
9. Montana
10. Oregon

And here are the bottom ten:

41. Arkansas
42. Iowa
43. Nebraska
44. Kentucky
45. Maine
46. Vermont
47. Ohio
48. Rhode Island
49. New Jersey
50. New York

The complete study can be found here. Table 2 on page 9 of this report has a good summary of how each states ranks for each of the five key tax categories. For example, while Tennessee ranks high in corporate and individual income taxes (we have no state personal income tax), we rank low on sales tax, unemployment tax and wealth tax.

Posted by Jeff Cornwall at 05:51 AM | Permalink

Joanne Jacobs has a disturbing post on government reach gone wild.

A Washington state family that homeschools its seven children has moved to Idaho to escape child labor laws after being fined $30,000 for employing their teen-age sons in the family's house-moving business. Father Jude Doty also was fined $100,000 for "unfair business advantage" on the theory he was able to underbid competitors because he doesn't pay his children. In his account, Doty says the family lost their home and business as a result of the case.

Some of the best lessons I learned in life I learned from working in our family's businesses.

Posted by Jeff Cornwall at 07:39 AM | Permalink

In times of rapid change it is often small businesses that find ways to adapt. My partner used to say we were little mammals dancing under the feet of dinosaurs when we were doing this in health care.

This time it is small Mom and Pop record stores. Red Herring reports that they may be part of a major development in the digital revolution in music.

The music industry on Monday signaled its intention to move past its pricing impasse with Apple's iTunes as Warner Music Group announced that it has made a deal with three retail groups to challenge the computer company's position as the digital music retail market leader.

Warner Music, the bellwether of the music industry, said its retail marketing company WEA is working with the Coalition of Independent Music Stores (CIMS), the Association of Independent Media Stores (AIMS), and the Music Monitor Network (MMN) to bring independent, brick-and-mortar retailers into the digital age.

These stores were already considered road kill on the information super highway by many in the industry. But they will now have the chance to play a role in the new age of music distribution.

WEA will offer the retail stores digital bundles, which will include additional content such as videos, bonus tracks, and interactive digital booklets. The company will also offer downloads of in-store performances, downloads from local artists, and coupon-based download promotions.

Posted by Jeff Cornwall at 05:27 AM | Permalink

interim thoughts is this week's host of COTC.

Posted by Jeff Cornwall at 06:01 AM | Permalink

There was a time when outside members of a Board of Directors were fairly common in small businesses. Outside members help broaden the experience and perspective represented on the board, improve its network of contacts, and add an often important "devil's advocate" to the mix in major decision making.

But, more recently the increased cost of adding outside members, the increased disclosure it requires, the dilution of control and decision making, and exposure to liability for the outside members have all made outside members less common.

However, in high growth ventures the requirements of outside investors are that they have the right to add members to the board beyond the founding team of entrepreneurs.

Kauffman e-venturing has a new collection of articles on how to successfully manage a board with outside members and how to properly deal with issues such as D&O insurance and Sarbanes-Oxley.

Posted by Jeff Cornwall at 05:50 AM | Permalink

The Final Report of the Advisory Committee on Smaller Public Companies to the Securities and Exchange Commission has been released, and it is recommending some hope for smaller firms facing heavy and expensive burdens of Sarbanes-Oxley. The Advisory Committee has defined smaller public companies as those firms that are publicly-held with a market capitalization [not] exceeding $787 million, which accounts for nearly 79% of all US publicly-held companies. They define smallcap as firms with market caps between $128 and $787 million, and microcap as those firms under $128 in market capitalization.

From NDE:

The Advisory Committee's detailed plans focus on Section 404 of the original Sarbanes-Oxley law. This provision regulates a firm's internal controls; compliance with Section 404 is costly as it often requires new audit systems and staff as well as outside consulting support. The Advisory Committee recommends that smaller firms be provided a partial exemption from this provision. Very small micro-cap firms (market capitalization under $128 million) could receive a complete exemption. While the Advisory Committee's recommendations are gaining attention, the final say will be determined by the SEC or by Congress.

Before you rush out on this news and start the process of taking your small firm public it is important to note that standard practices now treat any firm that has gotten significant private equity (i.e., venture capital) as if it is already a public company no matter what its size. The theories are that they will then be ready for the day when a public company buys them in term of internal controls and reporting and also better protected from litigation. These proposed changes from the Advisory Committee will probably have little effect on actual accounting practices. The cost of compliance will likely remain high even for the smallest of public firms.

Posted by Jeff Cornwall at 05:18 AM | Permalink