Mentoring Your Child's Business Plans

Let's say that your kid has what he thinks is a great idea for a business. Before he puts in time and money, clear some hurdles first.

• Make sure it's legal. If he wants to run a business from home, check local zoning regulations to see that the business is permissible. You may need to get permits or obtain a variance to operate, and you may have to pay fees for the privilege of doing so.
• Make a business plan. Your child doesn't have to write a lengthy or formal term paper. The purpose of making a business plan is to map out a course of action that he can take to start up and grow the business. Make sure that the plan contains certain key elements: a good description of what the business is all about, how much money it will take and where it's going to come from, and how the business will function from day to day.
• Get all necessary licenses. Check with your town hall or county clerk to see whether the business must register. This is called a DBA (doing business as). You tell the government the name of your business (it can be different from your child's own name) and who owns the business. For example, your child might call his pet care business Animal Friends. You don't need a lawyer to file a DBA; the county clerk can provide the forms and tell you how to fill them out.
• Check with your insurance company. If your child's business will be run from your home, make sure that your homeowner's policy will cover things. You may need to add coverage for liability and equipment, or you may have to buy separate business insurance to cover things.
• Make partnerships official. If your child thinks that two heads are better than one and decides to team up with someone else, make sure that they think through the arrangement, called a partnership.

On the positive side to having a partnership, both people can share responsibilities and may have complementary skills to make the business a success. On the negative side, they may not always agree on how things should run, or one partner may do more work than the other. Partnerships are no guarantee of success.

Also be sure to consider these issues before setting up a business:

• Deciding to incorporate. For a 14-year-old's lawn care business, it's probably not necessary to go through the legal steps of setting up a corporation. But if your 21-year-old is starting a full-time business, think again. A corporation doesn't come into existence until it's formally set up (incorporated) under state law. Corporations cost money: There are fees to incorporate, annual state franchise taxes to be paid, attorney's fees for preparing the corporation's minute books and issuing stock, and accounting fees for preparing the company's financial books and tax returns (unless your child does this himself).
• Setting up a limited liability company. Instead of incorporating the business, you can have it organized under your state's limited liability company laws. In this way, your child enjoys the same personal liability protection offered by the corporate umbrella, but business profits (or losses) are taxed in the same way as a partnership (they're passed through to partners and taxed on their individual income tax returns).
• Put the money together to start up. Whether it's going to take $100, $1,000, or even $10,000 to get started, decide where that money's coming from. Your child may have saved up from a job or gifts to get started, or you may become an investor in your child's business and make a loan of seed money.
• Make a marketing plan. Big businesses have formal plans in which they plot out how they'll bring their company to the public's attention. But even the smallest business needs a plan on how it's going to get customers. Spread the word. The best form of advertising is word of mouth. Tell neighbors and friends what your child has to sell. Ask existing customers for referrals. Another cheap and effective way to get customers locally is to post signs in the supermarket and other local stores. A third, although slightly more costly, way is to advertise. Local Pennysaver or other weekly circulars in your neighborhood can bring attention your child's business. The cost of a weekly ad may be about $15, but you'll probably have to run the ad for some time before the business has an established clientele. Yet another way is to advertise on the Internet.

Finally, as a parent, be prepared to help your child overcome the practical limitations of his age in running his business. For example, you may have to drive him to see customers or suppliers or to deliver his wares. You may have to sign purchase orders or other agreements because your child is under the legal age for making a binding contract and sellers may not want to risk having only a child's promise to pay or perform.

Excerpted from The Complete Idiot's Guide to Money-Smart Kids © 1999 by Barbara Weltman. All rights reserved including the right of reproduction in whole or in part in any form. Used by arrangement with Alpha Books, a member of Penguin Group (USA) Inc.

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