Business Starting Out Guide

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A GUIDETO CREATING YOUR OWN

NEW MEXICOBUSINESS

A p ublic atio n of The New Mexi co SmaBusiness Development Center in coo

eration with the New Mexico EconomDevelopment Department.

This publication is sponsored by:

New Mexico Small BusinessDevelopment Center

(a partner of the U.S. Small Business Administration)

State of New MexicoEconomic Development Department

This publication is part of a coordinated effortto promote economic development in New Mexico.

New Mexico Small BusinessDevelopment Center6401 Richards Avenue

Santa Fe, New Mexico 87508(505) 428-1362

ECONOMIC DEVELOPMENT DEPARTMENT


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STARTING OUT

A GUIDETO CREATING YOUR OWN

NEW MEXICO

BUSINESS

Compiled by Tim Goodwin

CREDITS:

A number of people contributed to the update of this publication. Amongthose are Kathy McCormick, New Mexico Economic Development

Department; and Flo Dow and Roy Miller, New Mexico Small

Business Development Center.

JANUARY 2003

VERSION 3


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TABLE OF CONTENTS

INTRODUCTION ........................................................ 3

GETTING IT DOWN ON PAPER:...........................................4The Business Plan

FINDING YOUR IDENTITY................................................. 11Legal Forms of Business Organization

ARE YOUR PAPERS IN ORDER?....................................... 16Business Registrations and Regulatory Issues

HIRED HANDS:...................................................................... 21Employee Information and Issues

KNOW THY BENEFACTOR ................................................28

Financing

LIFELINE: ................................................................................ 33Business Assistance Resources Around the State

DIRECTORY OF FINANCIAL RESOURCES:.....................34Business Resource Directory

NOTE: In the process of compiling this publication, every effort wasmade to ensure the accuracy of the information. Due to the evolvingnature of New Mexico's business climate and economic developmentefforts, some material will be out-of-date or some organizations omitted.If you notice any inaccuracies or desire information to be included infuture publications, please contact the New Mexico Small BusinessDevelopment Center at 1-800-281-7232 (in Santa Fe: 428-1362).


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INTRODUCTION

To avoid failure you must be willingto plan and make adequate preparations.

You must identify each step necessary forstarting a business and not shortcut theprocess. You dont have to go it alone; thereare resources available to help you. In fact,

success is unlikely without some assistance.This guide is designed to help youfind out what steps are necessary to get abusiness in New Mexico off the ground.

Youll learn about the resources bothtechnical and financial available to youwithin the state. And youll meet other NewMexicans involved in the small businesscommunity entrepreneurs, bankers, andbusiness assistance providers and learnfrom their experiences.

Just as important as encouragingyou to pursue a solid business opportunity,we hope this guide will discourage you fromstarting a business that would best beavoided, or for which you are unsuited.Early recognition of when not to start a

business helps avoid unnecessary failureand its emotional and financial conse-quences.

Working with this guide, and thebusiness assistance providers youll meet,you will be able to determine whether youare the right person with the right idea andthe right assessment of the market to jointhe growing number of small businesses inNew Mexico.


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GETTING IT ALL DOWN ON PAPER:The Business Plan

S A FORMAL, written business plan re-ally necessary? No. In spite of all the

rhetoric and hype about the importance ofbusiness planning, a number of successfulcompanies have been launched withoutone. Witness Apple Computer andPatagonia.

Nevertheless, is it likely that you will besuccessful or unsuccessful without a business plan?No. Studies have shown that the failure rate ofstart-ups without business plans is three timeshigher than that of businesses whose owners pre-pared a plan.

One of the great myths about entrepre-neurs is that they love to take risks. On thecontrary, most prefer not to. A successful entrepre-neur knows how to calculate, manage, and mini-mize risk. Where others see risk, the entrepreneursees opportunity. When successful companies arefounded without a written business plan, they aretypically started by gifted entrepreneurs with astrong grasp of their products and markets -- anda well thought-out strategy for connecting the two.Though they appear to be flying by the seat of theirpants, these unusual people are quite focused andhave a keen sense of direction. They are single-minded in their effort to manage and minimizerisk.

Developing direction is the most importantreason for writing a business plan. With little or nofinancial risk, this document allows you to testyour business ideas, assess potential markets, re-fine product or service concepts, and clarify who isgoing to operate the business and how. In short, itis your chart and charter for exploring thebusiness world. Imagine starting a business aslike starting a trip. As your journey progresses,your business plan helps you determine whetheryou are following your route, alerts you to impor-tant landmarks, and reminds you of your scheduleand budget.

The second most important reason to writea business plan is to plot your financial track. Thebusiness plan will help you understand the risksand rewards of the venture you have in mind. Youshould be able to assess, in a fair amount of detail,the costs of starting the business and bringing yourproduct or service to the marketplace. You shouldalso be able to determine the ongoing costs of beingin business, including direct costs of production

and/or sales and indirect costs such as overheadUsing this information, together with projectedrevenue scenarios, will allow you to see what isnecessary to break even, make cash flow forecastsand build pro-forma financial statements. All othis provides you with the analysis needed todecide whether it is in your financial interest to gointo the business.

If you decide to continue exploring the ideathis analysis is critical to obtaining the main thingthat fuels the business world: capital. Your numbers help you decide the most appropriate way tofinance the venture, at what rate you will burnthat fuel, and what return can be made by whoeverinvests with you. All money, whether equity ordebt, carries a cost. It may be finance and interestcharges on a bank loan. It may be an agreedpreferred rate of return to an investor. Or it maybe the lost opportunity cost of your own moneythe profit you would have made had you investedyour dollars somewhere other than in your ownbusiness.

All of which brings us to the final reason forwriting a business plan: raising money. The planor an abstract incorporated into a request for fi-nancing, helps the prospective investor be ityour banker or brother-in-law determine themerits of the deal. They can understand theassumptions and weigh the risks. They can validate your information with their own data or experience. And they can provide feedback that may behelpful in allowing you to fine tune the businessplan.

All of this may sound intimidating. It certainly can take an immense effort. But while thereare many business consultants who will offer towrite a business plan for you (for a fee, of course)most experts agree that the person best qualified todo it is you. You have the most to gain or lose.

There are no rules chiseled in stone forwriting theperfect business plan. Much dependson the nature of your business, its history (if it hasone), the complexity of the organization, the leveof technology, and other such factors. Plans can beas short as one page or longer than one hundredmost are between twenty-five and fifty pages inlength. They can be terse and follow a rigid formator have a fluid narrative that weaves a story. Bearin mind, however, that elegant prose will not masklack of content.


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Whatever length and style is suitable for you,your plan should, at a minimum, contain thefollowing information:

Executive summary Business description and/or history Product or service description Market analysis and approach Competition Operating plan

Key personnel Financial analysis

EXECUTIVE SUMMARY

Many experts argue that the executive sum-mary should be as brief as possible because busy,powerful executives lack time to read businessplans. If most of the people to whom you show yourbusiness plan have time only to read the executivesummary, then you are probably not prequalifyingyour readers, managing their expectations, norpositioning your business adequately.

A well-written summary should be preciseand persuasive enough to entice powerful people toread on. More importantly, however, it forces you the entrepreneur to condense the entire planinto a compact, coherent statement with which youcan articulate your intentions and requirements.This provides you with an invaluable tool thatenables you to prequalify and approach an investorwith an argument that balances their interestswith yours. Many people wont read an executivesummary, much less the entire plan, unless it hasbeen well positioned in advance.

The summary should not exceed five pages.Preferably it will be half that. In any case, if it istwo or more pages, condense it further into a one-page statement. This will be helpful for preparingcover letters and verbal statements that introduceyour business.

In fact, you might open the executive sum-mary with your mission statement: a concise phras-ing of what the business does, where and how itdoes it, and for whom it does it. The missionstatement synthesizes all of the elements of your

business plan.

Be sure to cover the following points in yourexecutive summary:

Business name and description Product/service description and

competitive advantage Nature of your market Overview of the key players Summary of financial projections Financial structure and requirements

Although this will be the first section inyour plan, it should be the last section that youwrite. Without having thought through all of thesubsequent sections you simply dont have enoughinformation to write a good executive summaryFor some reason, though, many people try to writethe summary at the beginning, become frustratedand give up altogether. You would be better advised to first prepare an outline of the plan, and

then begin to fill in the details one section at a timeBUSINESS DESCRIPTIONAND/OR HISTORY

This section provides the background infor-mation on the business. It should fully describe thegeneral nature of the business, giving its name, thedate and place of formation, legal structure, significant past events or anticipated milestones (e.g.,changes in ownership, structure, products, or ac-quisitions) and the key dates or deadlines. Itshould also describe any subsidiaries or sharing of

ownership, as well as the principals and their rolesin starting the business.

Detail objectives you have developed thatwill indicate whether your business is on trackThese objectives should be clearly defined, measur-able targets. They should be representative of yourbusinesss activity, simple to quantify, and easy tounderstand and present.

Examples might include total revenue, in-come, return on investment, market share, produc-tion targets, and employment (numbers, type, wages

and benefit level, employee satisfaction). It is im-portant to ensure that you include some measuresthat directly relate to the interests of your customers. These may include quality and availabilitymeasures of your product or service.

For each indicator you intend to track, statewhat the target is and how you intend to track it. Ifyou are an existing business, provide a base measure based on current performance and your plansfor reaching the target.

PRODUCT OR SERVICE DESCRIPTION

Describe in full the product or service linesof your business. State what distinguishes themfrom other products on the market and outlinetheir competitive advantages. When possible, provide independent product evaluation reports orreviews.

If you are still in the development processprovide the current status and a schedule forcompletion. Discuss relevant information about


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any patents, trademarks, or copyrights that youown or plan on obtaining. If there are any regula-tory or other legal considerations needed, such asapprovals, give the status of those in this section.

Assess the state of the technology used inyour business and the effect new developments willhave in the near to mid-term future. Describe howthe business will take advantage of these changesand how they will impact new product develop-ment.

MARKET ANALYSIS AND APPROACH

Aside from your own ability, the determin-ing factor for succeeding with your business isacceptance by the market. A nebulous, sometimesmysterious concept to define (as in the invisiblehand of the marketplace), it is imperative that youunderstand the market for your product. Further,you must figure out how to present the product insuch a way that it will generate enough sales not

only to break even but to permit a return on yourinvestment as well.

In the section on your market, you shoulddescribe your industry and the industry size andoutlook. Discuss any relevant trends and theexpected growth. If your product and service isrelated to an established industry, there may beplenty of information available to you throughtrade associations, industry contacts, or govern-ment sources.

Identify the main markets for the industry

(consumer, government, commercial, international)and the effects any political, social, or economicchanges may have on those markets as they relateto your product or service. Different markets maybe experiencing different growth rates, so be sureto take this into account.

Where possible, identify major customersand include their sales history or future contrac-tual commitments. State what percentage of yoursales volume these customers represent.

Each segment or major customer group

may have different purchasing habits or policies.Describe how you will approach them, whetherthrough distributors, outside sales representatives,telemarketing, or direct response. Also include thelevel of contact you have identified as appropriate.Many companies and government agencies haveprocurement officers. Others work through depart-ment managers. Or perhaps you are sellingdirectly to the end user or consumer. Include inthis discussion how purchases are to be made,whether they are by the unit, on periodic contract,or through competitive bidding.

If you have conducted any market surveysor polled prospective customers, describe the results in this section. Discuss what product characteristics consumers are looking for and their reac-tion to the proposed product. Assess their pricesensitivity and how that will influence your pricingstrategy. If actual product testing was done, provide the results.

Discuss the anticipated demand. Is it sea-sonal, steady, or perhaps cyclicaltied with someexternal influence that causes demand to rise andfall?

Finally, discuss the strategy you will use foryour marketing and public relations effort. Outline key advertising and promotion plans andevents. If you plan to hire a marketing consultantgive the individuals or organizations name, de-scribe their experience in the industry, and providenames of references such as their past clients.

COMPETITION

Having obtained a solid grasp of your mar-ket and its characteristics, you should next assesshow it is carved up. If you are a new business, youmay be facing formidable competition from experi-enced and entrenched companies. Describe yourmajor competitors and assess their strengths andweaknesses. Discuss their market share and howcustomers perceive them. A word of caution, however: do not take this as a suggestion that youshould malign or take thoughtless digs at thecompetition. To the contrary, your analysis should

be respectful and your conclusions thoughtful.If you are staking out new territory or

developing a separate niche, discuss how yourefforts differ from those of the competition and howthey respond to market demand. If you intend tochallenge the competition head-on, describe howyou will capture market share and how muchbusiness you expect to take away from each keycompetitor. Carefully think this section throughand formulate a compelling argument. Unrealisticassessments of the competition have doomed morethan a few new ventures.

OPERATING PLAN

This section will really get to the heart ofhow your business will run on a day-to-day basis

After writing this section, there should be littledoubt as to what your operations will be like andhow you and your key employees will spend theaverage day. Things to consider in this sectioninclude the facilities, personnel, manufacturing orbusiness processes, contractors and suppliers, andtechnologies or skills required to manufacture theproduct or deliver the service. In short, this section


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should cover your businesss environment, and itsevery input, activity, and output.

You should describe each aspect in somedetail. In the case of facilities, for example, indi-cate whether you will own or lease the premises.Provide a general description, including size, loca-tion, and features. Discuss how it will be laid out,and insert any renderings, or site and floor plansyou may have. If you envision the need to expandin the future, discuss how this will be accommo-dated. Any plans for capital improvements shouldbe described and budgeted, together with somestatement about how and when they will be com-pleted.

You should present your plan for accom-plishing production or conducting your service. Ifyou are manufacturing a product, outline the pro-cess and describe how the manufacturing or as-sembly line will be organized. Discuss your indi-vidual production or operating advantages, your

capacity (current and planned), and your ability tomonitor efficiency and quality.

If you anticipate contracting out parts ofthe operation, describe your arrangements.Whether you are manufacturing internally or ex-ternally, account for how you will obtain raw mate-rials or key components. Are you relying on solesources, or do you have back-up vendors? What arethe lead times for ordering? Will you be operatingon a just-in-time basis (often referred to as just-too-late), or will you or your vendors be carrying aninventory of parts or material?

Your personnel plan needs to detail how thebusiness will be staffed. Indicate the number ofemployees and provide job descriptions, qualifica-tions, and wages and benefits for each position.Provide an organization chart showing how ac-countability will be set up. Also set out a masterschedule of when the business will be open and howthe shift pattern or rosters will likely be struc-tured.

As you can see, this section may becomequite lengthy as you develop the key aspects of your

business. You may want to make each a distinctsection within the plan. For larger or more com-plex operations, each aspect may be a separatedocument in itself. For example, some businessesmaintain a personnel plan, a facilities plan, and avendor plan, and then summarize these into acompany plan with a top-level view. You maychoose a similar approach for your presentationdocument, provided you have the detail to supportit when an investor or analyst poses a question.

While you research and write this sectionaccount for all of the costs involved. Determine

which of these costs are up-front expenses andwhich are on-going expenses of conducting busi-ness. For those that are on-going, determine whichare fixed expenses and which are variable. Fixedexpenses will be those that are required to keep thedoors open, regardless of whether there is anyproduction or sales activity. These will includesuch things as rent, utilities, general and administrative costs, and minimum staffing levels. Variable expenses will be those that can be tied directlyto production or sales. These will include the basiccosts of the product sold or the components oringredients of the product produced. Additionallythese expenses include packaging, commissions orroyalties, piece-work or production wages, and soforth. By keeping track of all of these costs youwill be able to establish the foundation for yourfinancial analysis section. You will be able to plotout the costs involved in operating the businessand assess the break-even point by looking atvarious production and sales scenarios. All of thiswill tie together with your estimated revenues

from the market analysis to become the basis formaking a go/no go decision.

KEY PERSONNEL

This section is different from your person-nel plan in that here you are highlighting theprincipals and key management personnel whobring special talent to the business. Indicate theirqualifications, the contribution they will make tothe enterprise, and the level of position they willhold within the organization -- but dont make itsound as though you have a complicated and hier-

archical organization structure. If there are special salary or stock arrangements, outline these aswell.

When discussing the background of keypersonnel it is not necessary to include resumes forthey can always be appended. Nor is it a good ideato overhype the individuals. Instead, you shouldpresent a straight-forward, brief biographicalsketch of each. The idea is to get the reader to wantto meet the individuals and become better ac-quainted. If the company sounds like a collectionof ego-maniacs the reader may be put off.

Finally, if you know there will be a changein key personnel, then say so. Describe its likelyimpact on the business and how you intend toaddress the situation.

FINANCIAL ANALYSIS

Earlier, the idea of calculating, managingand minimizing risk was presented. It all comesdown to numbers.


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For most people, coming up with a descrip-tion of the future expressed as a financial model ischallenging at best, and more likely exasperating.

Analyzing the future consequences of businessdecisions is a significant test of ones abilities as abusiness planner. For some people, this is a test ofintelligence, for others a test of imagination, andstill others a test of honesty.

While predicting the future may be in therealm of mystics, you must justify the existenceof your business to a group of serious, decidedlynon-mystical, financiers. You are required topredict the financial result of a series of eventsthat you anticipate will take place over a periodof five years. You will attempt to control most ofthese events, but any one of them can be thrownoff by unforeseen occurrences that may wreakhavoc on your basic business assumptions.

The fact that few businesses actually meettheir five-year projections should neither shock

you nor discourage you from undertaking the exer-cise seriously. Remember, this will be the mostcritically analyzed section of your plan. Not sur-prisingly, it is the section most often criticized bybankers and investors as insufficient. Approachwriting this section thoughtfully and, above all,honestly.

At this point, you will realize how impera-tive it is that the previous sections are put togethercarefully and the assumptions tested rigorously. Ifyou have doubts, reconsider each section. Thinkthrough not only your costs, but also your ideas, the

state of your industry, and the affect of economicchange on your customers.

The next step is to determine how yourbusiness will account for its finances. Here youmay want to obtain assistance in choosing abookkeeping system and a set of financial con-trols that are appropriate to your needs. Con-sider establishing a preliminary chart of ac-counts. A chart of accounts is like a filing cabi-net: it allows you to file every transaction of yourbusiness into a folder or account according totype.

Once youve defined how you will accountfor all capital, revenue, and expense transactions,you can take the numbers generated in the previ-ous sections and begin to categorize them. Youmay decide to account for revenue by tracking salesaccording to different product groups. Or youmight track sales to different customer groups.

Expenses can be accounted for in a num-ber of different categories. You will want to beable to track your costs of sales based onthe inventory you will be purchasing, or the

TAYING AFLOAT:

Your Business Plan as aManagement Tool

Once you open your business dontthink that you have finished with yourbusiness plan. The plan should be adynamic working document, helping youto stay afloat and remain focused onprogress during your journey.

Business planning is a continuouscycle. Examining your position againstthe chart and making course correctionsis part of the process. Sometimes, youwill find that youve strayed off course orare out of the bounds of your budget. Inthese instances, you will need to take

actions necessary to bring things undercontrol and to get back to your plan. Atother times, in working the plan, you maybe forced to change it because youroriginal concept just doesnt square withreality, or because unforeseen marketchanges or product innovations makeyour assumptions invalid. In any case, atleast an annual review and update of theplan will enhance your success.

As part of this review you will wantto reconsider some of your major assump-tions. What external influences havechanged? Consideration should be given tosuch things as competitors, current andpotential customers, suppliers, technology,trends, demographic changes, governmentpolicies and regulations, and, of course, theeconomy.

Against this backdrop, think aboutyour strengths and weaknesses. What newopportunities do you see? What factors area threat to your business? Ask yourselfwhat your competitors could do to driveyour enterprise out of business.

Given this review, think about anychanges you should make regarding your

assumptions of market share, revenuegrowth, inflation, and expenses. If neces-sary, rework the calculations on yourfinancial projections.

Take a close look at your perfor-mance objectives. Are they still relevant?

Are there others that would be moreappropriate? Are you achieving yourobjectives? Have you met key deadlines?

Are your financial controls working?


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Identify any barriers that may inhibit orprevent your reaching your goals.

Once you have completed this step,ask yourself a series of questions with thepreface How to.... Broad answers to thesequestions should provide you with strate-gies that you may consider forimplementation. For example, How to

increase sales to 500 units within sixmonths?, will result in a list of possibleanswers. Initiate a telemarketing program,increase advertising visibility, and so on.(You may end up with dozens of answers...the more the merrier).

Select the two or three of theseanswers that best utilize your strengths,and begin to look at steps or actions youneed to take in order to put your strate-gies to work. Check your business plan tosee if this will result in any changes toyour operating, manufacturing, person-nel, facilities, or marketing plans.

By undertaking such a process, youshould be able to monitor not only theperformance of your business, but alsothose accountable, including yourself, for itssuccess. Nonetheless, you will never beable to eliminate every problem in yourbusiness. There will always be room forimprovement and the need to push forchange.

By following your plan, however,you should be able to respond quickly toboth external factors, such as changes inthe business environment, and internalfactors, including poor performance or a

decrease in quality. You will be able tomake improvements and cope with change.Most importantly, you will continue toreduce your risks and to find new opportu-nities.

miscellaneous account in which to place transac-tions that are not otherwise categorized.

Because you will likely be asked to defendthe numbers in your presentation, this is a goodtime to outline your assumptions. Annotate eachcategory in your financial analysis with a shortstatement about how you determined the numberyou set forth. Was it based on industry averages?

Your own calculations of local wage rates andanticipated scheduling? Average market rates forrent? Energy estimates from your local utilities?Did you factor inflation into your projections? Doyou anticipate a real price rise above inflation foryour product during the course of the proforma?

You may decide to present a best-casescenario, a worst-case scenario, and a somewhere-in-between scenario, which many people refer to aslikely even though it rarely is. Each scenarioshould be logical and realistic. Your assumptionsshould be stated as well.

The general requirements for the type offinancial statements to put in the business plan aresimilar to those required in a financing request(See Financing). You should have:

Profit and Loss(or Income) StatementsCovering a three- to five-year periodOften the first year is presentedmonthly, years two and three quar-terly, and years four and five as annualsummaries.

Balance SheetsOne for the beginning, and year endbalance sheets for each period of yourprojections.

Cash BudgetsIt is highly probable that your cashflow will differ from your profit andloss analysis. This is the one area thattrips up many businesses. How oftenhave you heard someone cry Sales aregreat, my accountant says Im makinga profit, but I never seem to have anymoney in the bank! Cash flow is diffi-

cult to manage because we buy goods either with cash or on credit thensell these goods to our customers, some-times for cash and sometimes on creditThe amounts due to suppliers neverseem to be the same as what is owed tous, and are certainly never payable atthe same time that customers want topay us. You should have a cash flowprojection that takes these discrepancies into account and allows you to plan

materials and labor that go into manufacturingyour product. Deducting your cost of sales fromyour gross sales will then give you a gross profitfigure from which you can pay operating ex-penses.

Your operating expense accounts will in-clude such things as payroll and related expenses,rent, interest, depreciation, auto or truck expenses,utilities, office supplies, advertising, professionalfees, and whatever else you or your accountant orbookkeeper find relevant to the business and wishto track in a separate account. In the end, everysingle transaction must be placed into one andonly one account. Most businesses have a


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for the cash demands of the business.You should then prepare a separateFunds Flow From Operations state-ment that shows the relationship be-tween the business cash flow and thedemands on (or return to) capital. Theseshould be prepared for that same pe-riod and on the same basis as the In-come Statements.

Key RatiosWhen you go for funding, you may beasked What is your quick ratio? Cur-rent ratio? Gross profit margin? Inven-tory turnover? Return on Capital?Ratios are helpful to bankers in deter-mining the health of a business in com-parison to others in the industry.Equally, ratios should be used by youto keep a check on the pulse of yourbusiness.

If all of this is beginning to sound too com-plicated, dont worry. The financial analysis shouldbe kept on a level appropriate to the needs of yourbusiness. Each of the analytical tools presentedhere can be modified to meet your needs and can bemade easily understandable. Your nearest SmallBusiness Development Center has someone whocan help you develop the spreadsheets. They alsohave pamphlets and workbooks suited to yourexperience and background in finance, even if youhave none.

Writing a business plan can be hard work.It is especially difficult if you are unfamiliar withwhat one looks like, or like most people, you havetrouble writing out ideas and strategies. Sampleplans are available at the Small Business Develop-ment Centers. Many centers offer courses or work-shops in writing business plans. All offer coachingand feedback that is constructive and non-threat-ening. These are good reality checks.

As you look at plans, listen to ideas, and findresources, dont lose sight of what sparked yourinitial interest in the business: your vision. Re-member that your business will be a unique combi-nation of your talents, as well as those of yourpartners or employees, blended with the character-istics of your suppliers, customers and community.

You may be tempted or encouraged to borrowheavily from other business plans, or to mimicexisting enterprises. After all, why reinvent thewheel?

Feel free to use available non-proprietaryinformation, but not at the expense of losing theopportunity you have envisioned. You need toretain ownership not only of the business conceptbut also of the ways and means to make it a realityWithout having articulated your plan for successand thereby gained an understanding of the intri-cacies that will make it happen, you handicap yoursubsequent management ability from the start.

Having explored the variables involved inyour business you will have identified, calcu-lated, and learned to manage and minimize inherent risks. Where others see risk, you see and can now realize opportunity.


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AVING DECIDED TO go into business,your next important decision is the legalstructure of the business. In short, who is

the business and how is it owned? Theanswers to these questions are importantbecause they affect such issues as taxation,

legal and financial liability, and decision-makingauthority.

The decision on which form to choose will beinfluenced by the nature of the business, capitalrequirements, risk assessment, management con-trol, the participation of others, and personal needs.This section describes the options available to youin New Mexico. It outlines some of the advantagesand disadvantages of each to help you assess what

best fits your requirements. If you are uncertainabout determining the legal structure of your busi-ness it is a good idea to discuss these options withyour business advisory team especially yourattorney and/or accountant.

SOLE PROPRIETORSHIP

Most business owners choose sole propri-etorship when they start out for one reason: sim-plicity. It is easy to set up and easy to manage. Asole proprietorship is owned by, and benefits, oneperson. As a sole proprietor, you alone are respon-

sible for the businesss liabilities. You (and yourspouse) profit from its endeavors. This money isconsidered personal income and is taxed as such.Tax losses, if any, are applied against any othertaxable income you may have.

For those who wish to be their own boss,sole proprietorship offers the most flexibility.Whether you are working at home alone or havelarge numbers of employees, you have the choice ofdetermining how decisions are to be made becauseyou have accepted responsibility for the outcome.

Advantages: Ease of formation Sole ownership, control, and

decision making Flexibility in responding to

business requirements Minimal legal restrictions Minimal start-up and continuation costs

Disadvantages: Unlimited liability Difficult access to capital and financing

FINDING YOUR IDENTITYLegal Forms of Business Organization

Limited viewpoint or experience mayconstrict decision making

Hard to attract some highly skilled,entrepreneurial employees

Continuity of business difficult uponillness or death of owner

GENERAL PARTNERSHIP

General partnerships are the next simplestlegal structure to establish. Essentially, a generalpartnership exists when two or more people cometogether to pursue a trade or business for profit. Ifyou and a friend decide to pool your talents andlook for customers, youve established a partner-ship. There need not be any written agreementbetween you for a general partnership to exist. The

only registrations you might make are the standard business and fictitious business name regis-trations.

In spite of this, it is advisable to have yourattorney draw up an agreement that outlines therights and responsibilities of each partner, themanagement structure, profit-sharing arrange-ments, and provisions for ending the partnershipsaffairs and distributing the assets upon dissolu-tion. Formation of a general partnership is governed by the Uniform Partnership Act, althoughits provisions may be varied under your business

agreement.Each partner in a general partnership is

individually liable for all of the partnershipsliabilities. Even though you agree to split thedebt 50-50 with your partner, from the creditorsperspective you are 100 percent liable if yourpartner doesnt come through. This liability isnot simply limited to the amount a partner hasinvested, but may extend to non-partnershipproperties as well. Additionally, any one generapartner can bind the partnership (and fellow

general partners) to a contractual obligation

For this reason, there are no true silent part-ners in a general partnership. Since each isliable for the consequences, each partner willwant to have a say in the decisions.

Like a sole proprietor, each partner is taxedon his or her share of the partnership income at anindividual personal income tax rate.

Partnerships are not separate legal enti-ties; they have a limited life. They are tied to theindividual partners. Upon death or withdrawal o


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a partner, or the addition of a new partner, thepartnership is terminated. For this reason, as wellas residual liability, it is difficult to step out of orsell a partial interest in the business. A newpartnership, however, may be formed by drawingup a new agreement, should the remaining part-ners choose to continue the business under thislegal structure.

Advantages: Ease of formation Flexibility in management still possible Broader management base than

sole proprietorship Direct share of profits by partners Minimal legal constraints

Disadvantages: Unlimited liability of partners Potential for conflict over authority

and decision making Financing may be difficult

Continuity of business difficult upondeath or withdrawal of partner

Disposition of partnership interestdifficult

LIMITED PARTNERSHIPS

A limited partnership is a variation on thetheme of two or more partners coming together topursue trade or business. In a limited partnership,however, there must be at least one (though some-times more)general partner and at least one (thoughoften more) limited partner. A partner is desig-

nated limited because he or she signs an agree-ment limiting his or her control over thepartnerships affairs. In return, a limited partnersliability is usually limited to the amount of his orher original capital investment. In this instance,the limited partner is a silent partner in thepopular notion of the term. The general partnerstill has unlimited liability, just as in the generalpartnership.

Formation of limited partnerships is gov-erned by the New Mexico Limited Partnership Act.For a limited partnership to exist, there must be a

written limited partnership agreement and a cer-tificate of limited partnership filed with the rel-evant office (see Are Your Papers In Order?) Ifthe appropriate certificate is not filed, the businessis considered a general partnership regardless ofwhat the parties think.

Advantages: Obtain equity without surrendering

control to investors Good structure to raise

investment capital

Ability to raise financing enhanced Direct participation in profits Limited partners risk is limited

Disadvantages: Unlimited liability for general partner Decisions may be restricted by limited

partner agreement Partnership may dissolve upon death,

withdrawal, or bankruptcy of ageneral partner

Disposition of partnership interest maybe difficult, since its sale must complywith state and federal securities laws

CORPORATION

A corporation is the most complex and formal business structure. A corporation exists as adistinct legal entity. As a legal person, separatefrom its owners, the corporation can make its owncontracts, raise capital, assume liability, and

just like the rest of us pay taxes. Corporationsare usually formed by the authority of a stategovernment. In New Mexico, they are governed bythe New Mexico Public Regulation Commission(NMPRC).

If you wish to establish a corporation, spe-cific statutory criteria must be met. (see Are YourPapers In Order?)

Having a corporation may provide you witha vehicle for raising capital through the sale ofshares of stock to either selected individuals or the

general public. While shareholders own the corporation and select the management, they are gener-ally not liable (in their roles as owners) for claimsagainst the corporation beyond, of course, theamount they invested in the stock.

The corporations status as a separate legalentity provides for continuity of existence. Deathof an officer, director or stockholder, or the transferof shares, for example, do not result in the termination of the corporation. Its management can continue to conduct business as before.

Advantages: Limited investor liability Transferability of ownership Separate legal person Continuity of existence Access to investment capital Delegated authority to hired

management

Disadvantages: Complexity of formation Double taxation


14/4113STARTING OUT

Expense of formation and maintenance Charter limitations and

government regulations Administration of corporate structure Dissolving the corporation can be

expensive

SUB-CHAPTER S CORPORATIONS

The issue of double taxation should be aconcern to you if you are contemplating forming acorporation. Double taxation may occur when thecorporation has a profit. Just as you pay incometax when you make money, so does the corporation.For the corporation, however, the tax rate may beeven higher than the current maximum rate forindividuals. To pass on the benefit of its profits tothose who own stock, the corporation declares adividend and distributes the profits to the share-holders. The individual shareholders receive theseprofits as investment income. Even though thecorporation paid taxes on the profit, the sharehold-

ers are now liable for taxes on their additionalincome.... voila! double taxation.

Corporations with thirty-five or fewer share-holders and which meet certain other require-ments may elect Sub-chapter S status. This per-mits the corporation to have its shareholders as-sume the businesss tax liabilities, based on theirshare of the corporate income, rather than to betaxed itself. The corporation still files a tax returnfor information purposes, much like a partnershipdoes. Although profits can be distributed to theshareholders, who then include them with their

individual tax returns, often there may be taxableincome and no profit. As in partnerships, theInternal Revenue Service may limit losses thatmay be claimed for tax purposes by individualinvestors.

PROFESSIONAL CORPORATIONS

A professional corporation, by statute, isone organized for the purpose of rendering aprofessional service to the public, and for whichthe individuals practicing the profession are re-quired by law to be licensed or obtain legal

authorization. Moreover, only a licensee canown stock in the corporation. Under the NewMexico Professional Corporation Act, these pro-fessions include, but are not limited to, certifiedpublic accountants, registered public accoun-tants, chiropractors, optometrists, dentists, os-teopaths, podiatrists, architects, veterinarians,doctors of medicine, physicians, surgeons, attor-neys, and life insurance agents. Shareholders ina professional corporation are subject to both theregulations of their respective licensing boardand the Professional Corporation Act.

CORPORATION....

TO BE OR NOT TO BE

Nearly all entrepreneurs at onetime or another struggle with the ques-

tion of whether or not to incorporate theirbusiness. Many choose to incorporateeven though they may not need to do so.For some it seems a panacea, solvingproblems from liability to credibility.Others opt for incorporating on the adviceof a banker or business consultant be-cause of one specific issue, withoutconsidering their business needs as awhole. With so many changes in the taxcode, tort cases, and financing laws,incorporation may no longer be the oneright answer to some very real businessconcerns.

One Santa Fe attorney suggestslooking at the following key issues inanalyzing why you wish to incorporate.There may be simpler, more effectiveways of addressing your concerns.

LEGITIMACY Some see incorporatingas a way of obtaining instant legitimacy.Being a corporation is a way of saying youare real. Further, being president of acorporation is seen as prestigious andaccording instant respect.

Although only a corporation canhave Inc. as part of its business name,even a sole proprietorship can attachCompany or Co. to the business name.Becoming president of a company is asimpler process than becoming presidentof a corporation and looks nearly the sameon a business card. Thus, a sole propri-etor might have business cards printedwith Andy Gomez, President; The GomezCo. instead of Gomez, Inc.

The public, however, has becomemuch more sophisticated about labels.Businesses are scrutinized more thor-oughly. Simply incorporating will notguarantee respect. Youd do better tofocus on quality, service, price, and other

important areas. In other words, get thebasics right. Respect will follow.

MANAGEMENT Corporations areoften thought of as having a moreformal management structure. True, theshareholders formally elect officers whoin turn select the management. Often,though, the issue of formal versusflexible management structure is more afunction of management style than of

continued


15/41STARTING OUT14

Corporation continued

the choice of business entity. A soleproprietorship can have an elaboratehierarchical management structure, forexample, even though it is owned andcontrolled by and benefits only oneindividual. Conversely, a corporation

can be operated with a laissez-fairemanagement style or even a highlyparticipatory method even though it isultimately controlled by a board.

Flexible management is notdesirable when it is a euphemism fordisorganization and lack of communica-tion. Although partnerships may not berequired to take minutes of meetings,the partners themselves might considertaking notes on those areas of businessactivity for which they are accountable.Corporations, on the other hand, may be

required to take minutes of shareholderand director meetings, but these dontaccount for every action of the business.Determine what management styleworks best for your business. Youshould be able to implement it withinthe framework of your choice of businessentity.

TRANSFERABILITY OF INTERESTCertainly, the ability to transfer interestsis a major advantage of incorporating.This is particularly true when it comes totransferring partial interests. It is easy tobreak down the ownership of a corpora-tion incrementally through shares ofstock, and then to transfer small, me-dium, or large percentages of interest inthe business. On the whole, however,small businesses may find a very limitedmarket for partial interests. Manyinvestors or business buyers preferpurchasing the entire business and itsassets. In this case, having a corporateshell may not add value to the transac-tion.

PROTECTION FROM LIABILITYLiability is often the biggest concerncited by those choosing a corporation fortheir business identity. The types ofliabilities incurred by most businessescan be characterized as debt eitherthrough borrowing, supplier credit, orunpaid bills or tort liability, throughaccidents, product claims, or actions ofemployees.

continued

Corporation continued

When it comes to borrowingmoney, a bank seldom makes a loan to asmall business without requiring personalguaranties in addition to the business'collateral. Likewise, trade creditors oftenrequire personal guaranties from the

principals. Unpaid bills for which thecorporation has sole responsibility may,therefore, be a small portion of the busi-ness debt.

The corporate structure may ormay not protect you from tort liabilities.One Santa Fe attorney suggests antici-pating from where the tort is likely toarise. Is it your act or the act of oth-ers...? We are always responsible forwhat we do. If liability arises from anemployees action, then the employeeand the corporation are responsible, butnot necessarily the owner. If it is youraction, or you were personally supervis-ing the employees action, then you mayhave personal as well as corporateliability.

Even when the liability wouldtypically be corporate, the owner maynot be immune from the other partypiercing the corporate veil, and thusbeing held personally liable as well.There are two common instances whenthis occurs. The first is where theowners have failed to act consistentlywith the existence of a corporation; for

example, by not fulfilling the require-ments that a corporation hold meetings,elect officers, pay franchise taxes, or filebiennial reports.

The second may occur if thecorporation is insufficiently capitalized.While there is no absolute measure ofthin capitalization, a court will look atthe anticipated needs of the individualbusiness. If the business does not haveenough assets to reasonably address itsneeds, including anticipating tortliability, nor does it provide insurance

as an alternative, then the owner maybe held personally liable.

What is the bottom line? Pictureyourself down to your last $500 in start-up money and trying to decide betweenspending it on insurance coverage or onsetting up a corporation. Your best advicemay be to purchase insurance.


16/4115STARTING OUT

NON-PROFIT CORPORATIONS

A non-profit corporation in New Mexico isdefined by statute as a corporation formed for apurpose not involving pecuniary gain to its mem-bers. It pays no dividends or other pecuniaryremuneration, either directly or indirectly, to its

members. Because a business corporation by itsnature is organized to provide pecuniary benefit toits shareholders based on profit (regardless ofwhether it makes one) it cannot be a non-profitcorporation.

Incorporating as a non-profit corporationdoes not immediately qualify donations to yourorganization as tax-deductible, charitable contri-butions. For that, you must obtain recognitionfrom the I.R.S. as a charitable organization underSection 501,(C),(3) of the I.R.S. Code, using Form

1023. For more information, call the District Officein Albuquerque.

COOPERATIVE ASSOCIATIONS

Five or more natural persons or two or moreassociations may incorporate as a cooperative as-sociation for any legal purpose to buy, sell, orproduce goods or services. Each member in theassociation has only one vote, regardless of the

number of shares held. This is distinguished froma corporation, in which voting strength is deter-mined by the number of shares held by each share-holder. Cooperative associations are further dis-tinguished from corporations by the fact that thereis a maximum rate set for return on shareholdersinvestment or membership capital. After the pay-ment of the limited return on capital, net savingsare distributed to members or patrons in propor-tion to their patronage.

EMPLOYEE STOCK OWNERSHIPPLAN (ESOP)

An ESOP is classified as an employee ben-efit plan that can be used for corporate debt financ-ing. ESOP's are empowered to fulfill many differ-ent roles for a business: buy-out shareholders;finance capital; expansion; refinance existing debt;sell off divisions; acquire new operations; and takea company private.

LIMITED LIABILITY COMPANY (LLC)

A limited liability entity is comprised of"members". Liability of members is limited to theamount of their investment similar to sharehold-ers in a corporation. Members may be individualsor entities. The limited liability tax treatment is

determined by the new "check the box rules". Thelimited liability entity files articles of formationwith the Public Regulation Commission. An operating agreement among members is recommendedIf an agreement doesn't exist, statutory schemeapplies.

Advantages: Limited liability of members Flexibility in management -

board of directors not required Members can be entities (unlike SCorp)

Preferential distributors among members(unlike SCorp)

Disadvantages: New entity - many undecided legal and

tax issues Uncertain whether single member LLC

possible under New Mexico law. SomeStates do not recognize.


17/41STARTING OUT16

FTER DECIDING to go into business anddetermining a name, a legal structure, anda place for your business, the next step is to

get your papers in order. You will then belegitimately in business. For most busi-nesses this is fairly simple: it is a

matter of obtaining a gross receipt tax registrationfrom the state and a license or registration from thecity or county within which you will do business.

Depending on your business structure andtype of undertaking, there may be additional regis-trations or licenses required or advised. You maywish to register a fictitious name or DBA (doingbusiness as), or you may be required to obtain apermit for hazardous materials activities. There

are also special state licensing requirements forselected businesses and professions.

This chapter is divided into three parts. Thefirst deals with the general requirements to start abusiness in New Mexico. These vary, depending onthe type of ownership or legal structure of thebusiness.

The second part examines the forms andprocedures that are necessary if your firm requiresspecial regulations governing business activities,as well as Occupational Safety and Health Act

(OSHA) requirements. The third part is a listing oflicensed and regulated occupations and profes-sions, and business or agricultural activities re-quiring special permits, licenses or fees.

Each requirement has a common referencename, form title and code, and the name, address,and telephone number to contact for more informa-tion. If you arent sure whether a requirement isrelevant to your business, dont hesitate to call theagency listed.

PART I

For every business, you must register in the city orcities in which you intend to locate your business.If it will be in an unincorporated or rural area, yougenerally must register with the county. Localbusiness licenses usually cost between $25.00 and$35.00 per year. Call your local city or countygovernment office for more information.

Secondly, you must register with the Stateof New Mexicos Taxation and Revenue Depart-ment. You will receive a CRS-1 Filers Kit, which

contains forms and instructions for filing grossreceipts and state income tax withholding pay-ments.

TAX NUMBER APPLICATIONSForm: RP-31 (+RP.31A for corporations),

Application for RegistrationAgency: New Mexico Taxation and

Revenue DepartmentP. O. Box 5374Santa Fe, NM 87502-5374(505) 827-0951

Fee: NoneWeb: www.state.nm.us/tax

Additional requirements for specific forms of

ownership:SOLE PROPRIETORS

There are no other forms necessary at thisstage. If you are operating under a nameother than your own you can register thebusiness name or DBA with the Secretaryof State. Any business can register at localoffices for licenses.

PRIVATE, FOR-PROFITCORPORATIONS

If you are establishing a for-profit corpo-

ration, there is a series of steps to takeFirst, you should apply to reserve thecorporate name with the Public Regulation Commission (PRC). Then, you shouldmake application for tradename clearancewith the PRC and Registration ofTradename/Trademark with the Secre-tary of States office. You must file Articles of Incorporation and an Initial Reg-istered Agent form. Finally, if you aregoing to issue securities, file Form J, No-tice of Claim Exemption.

APPLICATION FOR RESERVATIONOF CORPORATE NAMEForm: Application for Reservation of

Corporate NameAgency: Public Regulation Commission

P.E.R.A. Bldg., Room 413P.O. Drawer 1269Santa Fe, NM 87504-1269(505) 827-4504 or (505) 827-4509

Fee: $25.00, For-Profit; $10.00, Non-profit$20.00, LLC

Web: www.nmprc.state.nm.us

ARE YOUR PAPERS IN ORDER?Business Registrations and Regulatory Issues


18/41STARTING OUT 17

ARTICLES OF INCORPORATIONForm: Articles of Incorporation

Agency: Public Regulation CommissionFee: $1.00 per 1,000 shares, in no case

less than $100 or more than $1,000

INITIAL REGISTERED AGENT FORMForm: Affidavit of Acceptance of

AppointmentAgency: Public Regulation CommissionFee: None (Fee for later changes)

PARTNERSHIPSIf you are a limited partnership, the lim-ited partnership certificate must be filedwith the Secretary of State. General part-nerships may be registered.

REGISTRATION WITHSECRETARY OF STATE

Form: Application for Tradename/ Trademark

Agency: Office of the Secretary of StateOperations Division325 Don Gaspar, Suite 300Santa Fe, NM 87501(505) 827-3600

Fee: $25.00 for registration$25.00 per class code

Web: www.state.nm.us

FORM J (If required)Form: Notice of Claim Exemption

Agency: Regulation and LicensingSecurities Division725 St. Michaels Dr.Santa Fe, NM 87505(505) 827-7140

Fee: $350.00Web: www.rld.state.nm.us

NON-PROFIT CORPORATIONSAs with for-profits, you must file Articlesof Incorporation and the Initial Regis-tered Agent form with the Public Regula-tion Commission.

ARTICLES OF INCORPORATIONForm: Articles of Incorporation

Agency: Public Regulation CommissionFee: $25.00

INITIAL REGISTERED AGENT FORMForm: Affidavit of Acceptance of

AppointmentAgency: Public Regulation CommissionFee: None (Fee for changes)

COOPERATIVE ASSOCIATIONSRequirements for cooperative associationsare the same as for private for-profit corporations: Application for Reservation ofCorporate Name, Application for Trade-mark Clearance or for Registration ofTradename/Trademark, Registration ofCorporate Name, and Form J.

REQUIREMENTS FORCOOPERATIVE ASSOCIATIONForm: Articles of Incorporation

Agency: Public Regulation CommissionFee: $50.00

PART II

The following information relates to activities whichmay take place on your business premises. Alfirms are required to display the OSHA poster. Al

other forms or permits listed are applicable toselected businesses or situations. Depending onyour business activity, these may be mandatoryContact the appropriate agency for more specificinformation.

OSHA ON-SITE CONSULTATIONForm: OSHA On-Site Application

Agency: NM Environment Dept.Occupational Health andSafety Bureau1190 St. Francis DriveSanta Fe, NM 87502

(505) 827-2855Fee: NoneCompliance: Service that is available to all

firms.Web: www.nmenv.state.nm.us

OSHA POSTER REQUIREMENTForm: OSHA Poster Requirement

Agency: NM Environment Dept.Fee: NoneCompliance: Mandatory for all firms.

STATE BUILDING PERMITForm: State Building Permit

Agency: Regulation and LicensingDepartmentConstruction Industries Division725 St. Michael's DriveSanta Fe, NM 87505(505) 827-1030

Fee: Varying, based on evaluation.Compliance: Mandatory for construction.Local: Contact local city offices.Web: www.rld.state.nm.us


19/41STARTING OUT18

VEHICLE REGISTRATIONForm: MVD-10002 10/96, Application for

Vehicle Title and RegistrationAgency: Taxation and Revenue

DepartmentMotor Vehicle DivisionJoseph Montoya Bldg.1100 St. Francis Dr.P.O. Box 1028

Santa Fe, NM 87504-1028(505) 827-2294

Fee: Varies according to vehicle typeand weight

Compliance: Mandatory for firms operatingvehicle fleets.

Web: www.state.nm.us/tax

VEHICLE I.D. INSPECTIONForm: MVD-10861, Affidavit of V.I.N.

InspectionAgency: Taxation and Revenue

Department

Motor Vehicle DivisionJoseph Montoya Bldg.1100 St. Francis DriveP.O. Box 1028Santa Fe, NM 87504-1028(505) 827-2294

Fee: NoneCompliance: Mandatory for firms operating

vehicle fleets.Web: www.state.nm.us/tax

SIGN PERMITForm: Sign Permit

Agency: Highway and TransportationDepartmentMaintenance Bureau1120 Cerrillos RoadP. O. Box 1149Santa Fe, NM 87504-1149(505) 827-5564

Fee: $100.00 + $25.00 annuallyCompliance: Contact Maintenance Bureau to

determine if form is needed.Local: Contact local city office.Web: www.nmshtd.state.nm.us

APPLICATION FORMANUFACTURER LICENSEForm: Application for

Manufactured HousingAgency: Manufactured Housing Division

725 St. Michael's DriveSanta Fe, NM 87505(505) 827-1396

Fee: $500.00Compliance: Mandatory for manufactured

housing firms.Web: www.rld.state.nm.us

NOTICE OF INTENT TO DISCHARGEForm: Notice of Intent

Agency: NM Environment Dept.Ground Water Quality Bureau1190 St. Francis DriveSanta Fe, NM 87502(505) 827-2918

Fee: NoneCompliance: Mandatory for firms discharging

waste water and contaminated soil.Web: www.nmenv.state.nm.us

DISCHARGE PLANForm: Part A, Discharge Plan Application

Agency: NM Environment Dept.Ground Water Quality Bureau1190 St. Francis DriveSanta Fe, NM 87502(505) 827-2918

Fee: $100.00 + additional based on typeof discharge.

Compliance: Mandatory for firms discharging

waste water and contaminated soil.Web: www.nmenv.state.nm.us

FORM 1(CONSOLIDATED PERMITS PROJECT)Form: EPA Form 3510-1, Application

Form 1 General InformationAgency: NM Environment Dept.

Ground Water Quality Bureau1190 St. Francis DriveSanta Fe, NM 87502(505) 827-2918

Fee: None

Compliance: NPDES Permit mandatory forfirms discharging water.

Web: www.nmenv.state.nm.us

NOTIFICATION OF HAZARDOUS WASTEForm: EPA Form 8700-12

Agency: NM Environment Dept.Hazardous Waste BureauP.O. Box 26110Santa Fe, NM 87502(505) 428-2500

Fee: NoneCompliance: Mandatory for all firms with

hazardous waste activity.Web: www.nmenv.state.nm.us

REGISTRATION FORMForm: Notification for Underground

Storage TanksAgency: NM Environment Dept.

Petroleum Storage Tank Bureau2044 Galisto StreetSanta Fe, NM 87504(505) 984-1741

Fee: $100.00 per tank, annually



Bar Fees (Annual License andDisciplinary Assessment)

BanksBarbersBingo and Raffle License Fees and TaxesBirth and Death CertificatesBuilding and Loan or Savings and LoanBuilding Permits (State and local)Burning(Open burning)

Caravan FeesCemeteriesChild Care FacilitiesChiropractorsChristmas Tree TagCigarette DealersCoal Surface Mining PermitsCollection AgenciesCommercial Driver Training SchoolsConstruction Trades:

Contractors LicensesJourneymans Certificate of CompetenceMiscellaneous Fees

Corporation Filing FeesCosmetologistsCredit UnionsDental HygienistsDentistsDental Assistants (Radiological)Diagnostic and Treatment CentersDieticiansDischarge PlanDrivers LicensesElectrologistsEndowed Care CemeteriesEngineers and SurveyorsEscrow CompaniesFamily Day Care HomesFood Service EstablishmentForeign Limited PartnershipsFraternal Benefit SocietiesFuneral Homes, Funeral Director or

Funeral PractitionersGasoline DistributorsHazardous MaterialHazardous Waste Facility PermitHearing Aid Dealers and FittersHome Health AgenciesHorse Racing Occupational Licenses

and Fines

Horse Racing Track LicenseHospices (Freestanding)HospitalsInterior DesignersJunkyard LicenseLandscape ArchitectsLand SubdivisionLibrarianLiquefied Petroleum Gas License,

Permit and Inspection FeesLiquor LicensesLogo Rental Fee

Compliance: Mandatory for all firms havingunderground tanks. Thirty daysadvance notice must be given ifyou plan to buy or sell a tank.


GENERAL INFORMATION(solid waste activity)Form: Part I, General Information

Agency: NM Environment Dept.Solid Waste Bureau1190 St. Francis DriveSanta Fe, NM 87502(505) 827-2775

Fee: NoneCompliance: Mandatory for all firms with solid

waste activity.Web: www.nmenv.state.nm.us

APPLICATION FOR PERMIT ANDCERTIFICATE OF REGISTRATIONForm: Application for Permit and

Certificate of RegistrationAgency: NM Environment Dept.

Air Quality Bureau1190 St. Francis DriveSanta Fe, NM 87502(505) 827-0031

Fee: $100.00Compliance: Mandatory for all firms

discharging to air.Web: www.nmenv.state.nm.us

PART III

Below is a listing of activities requiring businessand occupational licenses, permits, special taxes,or other fees.

Agency: Taxation and Revenue Department1190 St. Francis DriveP.O. Box 630Santa Fe, NM 87504-0630(505) 827-0700


AccountantsAcupuncturistsAir Contaminant SourcesAircraft DealersAlcoholic Beverages LicensesArchitectsAthletic Promotions and Contests

(Professional)Athletic TraineesAttorneysBar Examination Fees


21/41STARTING OUT20

Logo Sign Permit FeeMaternity Homes and SheltersManufactured (Mobile) Home:

Manufacturers, Brokers,Associate Brokers, Dealers, Sales-persons, Repairmen, Installers

MidwivesMoney Order SalesMortgage Loan Company and Loan Broker

Motor Boat DealersMotor CarriersMotor Vehicle Dealers, Wreckers, DismantlersMotor Vehicle Oversize and

Overweight PermitMotor Vehicle Sales Finance CompanyNotary PublicNursesNursing Home AdministratorNursing Homes

(Skilled Nursing Facility andIntermediate Care Facility)

Nutritionists

Occupational TherapistsOptometristOsteopathic Physicians and AssistantsOutdoor Advertising Sign Permit FeePetroleum ProductsPharmaciesPharmacistsPhysical Therapists and AssistantsPhysiciansPhysicians AssistantsPipeline License FeesPodiatristsPolygraph ExaminersPrivate Investigators

Private (Proprietary) Vocational SchoolsPsychologistsPublic Utilities Inspection and

Supervision FeesRadiation Equipment and Radioactive MaterialRadiation Protection Continued Care

RequirementsRadiologic TechnologistsRafflesReal Estate AppraisersReal Estate Brokers and SalespersonsRehabilitation CentersRenal Dialysis (End Stage) Facilities

Residential Facilities for Adults andfor Children

Respiratory Care PractitionersSavings and Loan or Building and LoanSecurities and Commodities Brokers

and SalespersonsSmall Loan CompaniesSocial WorkersSolid Waste FacilitiesSpecial Fuel PermitSpeech Language Pathologists and

Audiologists

State Police EscortSwimming Pools and Public BathsTeachersThanatopracticeTrade Mark, Trade Name and

Label RegistrationTrading StampsUnderground Storage TanksUniform Commercial Code (UCC)

Fee ScheduleUtility and Carrier FeesUtility Operator Certification

Veterinarians and Veterinarian TechniciansVeterinary Drug PermitWaste Disposal System

(Liquid Waste, Septic Tanks, etc.)Waste Disposal System (Solid Waste)Water Supply Facility PermitWater Well DrillersWeather Control or Cloud Modification

License FeesWeighmaster

Weights and Measures

Special Agricultural Taxes, Licenses,

Permits and Fees

Beef Council AssessmentButcher or Slaughter (Meat and Poultry)Cattle Rest StationsCommercial Fertilizer CompaniesCotton GinsEgg DealersFeed, Commercial Manufacturers

Fertilizer and Soil ConditionerManufacturersFresh Meats Dealers, Sellers,

Manufacturers or Processors orOperators of a Rendering Plant or ColdStorage Locker Plant

Fresh Meat PeddlerFruits and VegetablesHide Inspection (Proof of Ownership)Horseowners Transportation PermitLivestock Auctions and/or Sales RingsLivestock BrandsLivestock Impoundment and Moving of

Trespass LivestockLivestock Inspection FeesLivestock Special LeviesMilk GradingMilk Producers and HandlersPeanut ProcessorsPesticidesPlant ProtectionSeed TestingState Chemist



OONER OR LATER, every owner of a grow-ing business must deal with the issue ofhiring some help. Correctly defining this

relationship is important. There are manylaws and regulations that will affect theemployment relationship. In general, the

relationship between your business and an indi-vidual worker will be either:

Employee, or Independent contractor.

Understanding the distinction between thetwo categories may mean the difference betweensaving your business unnecessary payroll costs onthe one hand, or facing unexpected liabilities fortaxes, wages, and benefits on the other.

New Mexico, which has a long tradition ofusing contract labor, is experiencing increasinguse and abuse of independent contractors.There are a variety of reasons for this. As they facean unpredictable economy, businesses are becom-ing more concerned with maintaining adaptabilityin personnel decisions and with containing em-ployee benefit costs. Many workers, particularlysemi-retired and those in transition, want to takeadvantage of the schedule flexibility and freedom ofmovement that independent contracting offers.

Even where management and worker findthe independent contractor arrangement mutuallyagreeable, these relationships are under closerscrutiny by both federal and state agencies as towhether they are not, in fact, employer/employeerelationships. As you examine this issue for yourspecific business, remember that determination ofa workers status may be made by common lawprinciples or by statute. A person may be anemployee for some purposes, but not for others.Federal and state statutes may define employeedifferently; various agencies may apply other regu-latory tests. There may be special rules, or exemp-tions, for specific occupations like professional ath-letes or salespeople, or for certain situations like afamily business employing a family member.

Confused? This is a complex and rapidlychanging area of law. But that shouldnt dissuadeyou from hiring the help that you need. This sectionprovides some general information on the subject,and explains the difference between employees andindependent contractors. And it provides an expla-nation of some of the laws and guidelines thatgovern these relationships. Bear in mind though

that your specific situation may require consultation with an attorney or another competent advi-sor.

EMPLOYEES

The main factor defining an employer/em-ployee relationship under common law rules is theemployers right to control the manner and meansof performing the work. The amount of discretionor freedom you may choose to give a worker is notthe determining factor. Rather, it is whether or notyou have the legal right to control the method andresult of the work.

How the worker gets paid is another factor

If you pay the individual on a regular basis such ashourly or bi-weekly, or if you provide fringe benefitslike medical insurance, that person is more likely tobe considered your employee than if he or she werereceiving a fixed fee for a specified service.

Whether or not a business provides materials and tools for the work can be another determining factor. A worker providing his or her own toolsand supplies is less likely to be considered anemployee than one who relies on those which youprovide. Similarly, if the work is done at your placeof business, the individual is more likely to be

considered an employee than if it is done on premises controlled by the service provider or a thirdparty.

Finally, the ability of the hiring business todischarge the worker, and under what conditionsmay also be scrutinized.

No one of these factors alone will determinethe existence of an employment relationship. Thereare additional factors that may also influence de-termination, such as whether the worker expects a1099, has other clients, or pays a gross receipts taxEach specific case must be examined in its totalityEven in the event that none of the common lawrules apply, the worker may still be classified as anemployee for such statutory purposes as:

Social Security Tax (FICA) Workers Compensation Unemployment Compensation Fair Labor Standards Occupational Safety and Health Other statutory programs

Note: Many federal and state statutes exempt cer-tain employers and employees from their rules.

HIRED HANDS:Employee Information and Issues


23/4122 STARTING OUT

Employee orIndependent Contractor continued

12. The worker is paid for time on the jobrather than by project.

13. The worker is reimbursed forexpenses.

14. The employer furnishes the necessarytools and materials.

15. The worker has not invested in thefacilities for performing the services.

16. The worker has no risk of economicloss.

17. The worker only worksfor oneemployer or firm at a time.

18. The worker does not make his/herservice available to the general public.

19. The employer has the right todischarge the worker, regardless ofperformance.

20. The worker has the right to terminatethe relationship without incurringliability.

MPLOYEE ORINDEPENDENTCONTRACTOR:

A Twenty-Point Checklist

Determining whether a worker is

an employee or an independent contractoris an important decision. It influences howthe relationship is to be conducted andwhich laws and regulations will affect it.The following true/false checklist is basedon 20 factors the IRS has developed todetermine whether a worker is an inde-pendent contractor or an employee.

A true answer suggests an employeerelationship, a false one suggestsindependent contractor. This is only aguide for determination and does notaccount for other factors that may or maynot be applied by other state or federal

agencies or courts.

1. The worker is required to followinstructions as to how, when, andwhere work is to be done.

2. The worker needs training to performthe job.

3. The worker's tasks are integrated intothe employers normal businessoperations.

4. The workers services are renderedpersonally not delegated.

5. The worker hires, fires, pays, andsupervises assistants in theworkplace.

6. A continuing relationship existsbetween the worker and employer.

7. The working hours are set by theemployer.

8. The worker must devote substantiallyfull time efforts to the job.

9. The work is performed on theemployers premises.

10. The worker complies with a sequenceset by the employer.

11. The worker must submit regular oralor written reports to the employer.

continued

INDEPENDENT CONTRACTORS

There are many terms for an independentcontractor, including consultant, vendor, contractlaborer, contractor, or subcontractor. Independentcontractors may be of any class, such as blue-collarclerical, or managerial. Typically, you would hireand pay a contractor on a project basis. It is notunusual, however, to see contractors hired on anopen-ended basis and paid hourly, daily, or weeklyfees.

There is a growing trend in many parts of

the country to lease employees from a third-partyfirm. Some of these firms specialize in providinglong-term leasing, where the worker may standbeside your worker on an assembly line performingthe same tasks, using the same skills, and wearingthe same uniform. More familiar in New Mexicoare short-term arrangements made through temporary agencies. The availability of many wellqualified managers who have taken early retire-ment has even led to executive leasing for avariety of white-collar positions at all levels, in-cluding chief executive officer.



Usually, independent contractors practice atrade, business, or profession in which they offertheir services to the general public. Architects,building contractors, doctors, and lawyers are goodexamples. Any of these, however, might also beemployees. A business may hire an in-house ac-countant, as well as retain an outside independentaccounting firm. Ask prospective hirees if they

have a business card or a yellow page advertise-ment for their services. Check to see if they areregistered to do business in your locality andwhether they have a gross receipts tax registration.Independent contractors, like your business, areliable for gross receipts tax on most transactions.

Control of the manner and means of thework is again the key factor. You always have theright to control the work result, regardless ofwhether the worker is an employee or an indepen-dent contractor. With an independent contractor,however, you dont have the right to control the

manner and means of accomplishing the result.

MISCLASSIFICATION OF EMPLOYEES

Misclassifying a worker as an independentcontractor may result in unexpected problems foryour business. These may take the form of unpaidtaxes and penalties, back wages for overtime, fines,or compensatory damages. In addition to govern-ment action, your business may be vulnerable tosuch private actions as discrimination, wrongfuldischarge, or pension and employee benefit claims.Unfortunately, there is no clear line to determine

whether the hiree is an employee or an indepen-dent contractor. If you remain confused about howyour business should handle an individual worker,seek advice. If you know how a worker should beclassified, do so properly and always maintainemployment records.

LABOR REGULATIONS

There are various laws and regulations gov-erning your relationship with your worker. Thetwo agencies that you are most likely to contactregarding these issues are the state and federal

departments of labor:

The NEW MEXICO DEPARTMENT OF LABORadministers the states laws relating to labor issues.

301 W. de VargasSanta Fe, NM 87501(505) 827-7434

The U.S. DEPARTMENT OF LABORs Wage andHour Division administers the Fair Labor Stan-dards Act (FSLA).

Western Bank Building505 Marquette NW, Ste. 840Albuquerque, NM 87102

(505) 248-5115

Most labor regulations cover wages and conditionsof employment. The following is a description of themost common of these regulations.

Fair Labor Standards Act (FSLA) is a fed-eral law establishing minimum wage, overtimepay, and child labor standards for employers. Itcovers employees of businesses engaged in inter-state commerce, producing goods for interstate

commerce, or handling, selling or working on goodsthat have been moved in or produced for interstatecommerce.

MINIMUM WAGE AND OVERTIME

The minimum wage is $4.75 per hour forestablishments under the jurisdiction of the StateMinimum Wage Act, i.e. if the firm is a smallemployer not grossing $500,000 per year and notengaged in interstate commerce. Students are ex-empt from minimum wage if they work for anestablishment that falls under state jurisdiction

The minimum wage is $5.15 per hour if the establishment grosses $500,000 a year or more, is en-gaged in interstate commerce or is a named industry under the Federal Fair Labor Standards ActSome of the named industries are schools, hospi-tals, nursing homes, state, county or municipalgovernments.

WAGE PAYMENT

Every employer must designate regularpaydays that are no more than 16 days apartPayment generally must be made within 10 days of

the close of the pay period. Professional, administrative, or executive employees, or outside salespeople may be paid once a month. An employee whois discharged must receive all wages due within fivedays unless it is based on task, piece or commissionin which case 10 days is allowed. If an employeequits or resigns, then wages and deductions duemust be paid on the next succeeding pay day.

MINIMUM AGE REQUIREMENTS

New Mexico law states that no child shall beemployed during school hours, and that no child

under the age of 14 be employed without firstobtaining a certificate from the appropriate schoolor Department of Labor officials. Children betweenthe ages of 14 and 16 must first obtain a certificateif they work during the term in which their schoodistrict is in session. These certificates are oneyear permits issued through the school or schooldistrict, or through the director of the Labor andIndustrial Division of the N.M. Department ofLabor.

Children over the age of 12 are permitted tosell newspapers.


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tion Act defines the requirements for employersand the remedies available to employees. It sets upa framework under which workers compensationmay be provided, primarily through private insurance companies. All businesses, firms, privatepersons, and corporations (among others) thatemploy three or more persons, regardless of full-time or part-time status, are required to carryworkers compensation insurance. One exceptionto this is that any business which is constructionrelated and licensed for the Construction Industries Division must carry workers compensationinsurance if it has one or more employees.

All employers who are required to provideworkers' compensation must post the WorkersCompensation Act poster and provide a supply oftwo-part Notice of Accident forms adjacent to theposter. Employers not required to be covered byworkers' compensation are farm and ranch laborers, domestic servants and real estate salesper-sons.

This system of workers compensation is

sometimes billed as no-fault insurance for workingpeople. Its purpose is to provide employees with aremedy that is expeditious and independent ofproof of fault. At the same time, it limits anddetermines the liability of the employer, providedthey maintain insurance coverage. Once an employer is covered by workers compensation insurance, the worker cannot sue him or her for addi-tional damages beyond those set out in the Act. Forthis latter reason, youas employermay find itadvantageous to obtain workers compensation in-surance, even if you are not required to do so.

Insurance policies are available to the em

ployer based on projected annual payroll. Premiums are based on classification of the employeeaccording to rates established by legislation. Policies are subject to audit, and premiums may beadjusted, due to actual payroll figures or changes inclassification of employees.

The New Mexico Workers CompensationAdministration (WCA) regulates the system to makesure that employers have proper insurance cover-age and that claims are paid fairly. The WCA hasset up an Ombudsman Bureau to provide informa-tion and to clear up problems with workers compensation. Its services are available to both work

ers and employers. While they may not give legaadvice, the advisors who work for the bureau canexplain how the system works and, in some caseshelp resolve disputes. For more information aboutworkers compensation, contact:

Workers' Compensation AdministrationP.O. Box 27198

Albuquerque, New Mexico 87125-7198Telephone: 1-800-255-7965In Albuquerque: 841-6000(841-6816 for the Ombudsman Bureau)

SAFETY REQUIREMENTS

The New Mexico Occupational Health andSafety Act (OSHA) provides for the establishmentof regulations applicable to places of employment,the enforcement of those regulations, and educa-tion and training for employers and employeesabout regulations.

OSHA requires employers to furnish work

and a place of work free from recognized hazardsand requires that the place of work be maintainedin such a way that it complies with the prescribedregulations.

The Workers' Compensation Administra-tion has a staff of safety counselors who can visitemployers' premises at no charge and advise themon how to establish their safety program.

EMPLOYMENT DISCRIMINATION

The New Mexico Human Rights Act prohib-its discrimination based on race, age, religion, color,

national origin, ancestry, sex, physical or mentalhandicap, or medical condition (except that29 U.S.C.,Sect. 631(c)(1)&(2) shall apply to discriminationbased on age).

Title VII of the Civil Rights Act of 1964 is thefederal law that prohibits employment discrimina-tion based on race, color, religion, sex, or nationalorigin. Additionally, the Age Discrimination inEmployment Act, the Equal Pay Act, the Preg-nancy Discrimination Act of 1973, the Rehabilita-tion Act of 1973, the Family Medical Leave Act of1993 and the Americans with Disabilities Act of1993 provide protection for employees from dis-

crimination.The application of these laws may vary

according to the number of employees a businesshas.

EMPLOYEE PRIVACY

Under the New Mexico Employee PrivacyAct, employers are prohibited from refusing to hireor discharge an individual because he or she is asmoker or a nonsmoker, provided he or she com-plies with applicable laws or policies about smok-ing during business hours. Nor can it be a condi-tion of employment that the individual abstainfrom smoking or using tobacco products duringnonworking hours.

WORKERS COMPENSATION

By law, employers are required to pay fortheir workers health care costs and provide indem-nity pay to substitute for lost wages if a worker isinjured on the job. In case of a workers death on the

job, employers must provide compensation to thesurvivors. The New Mexico Workers Compensa-



MPLOYMENT CHECKLIST

Once you have made the determination to hire someone, there are a series of steps you needto take. The following checklist guides you through these steps and refers you to the appropriate

agencies. Forms generally come with instructions for completion and filing. Contact the individualagencies listed below or, for more detailed information, obtain the excellent packet Small BusinessGuide to Basic Employment Taxes by Jim Greenwood and Monica McCoy. It is available from:

Small Business Development Center

UNM-LAP.O. Box 715Los Alamos, NM 87544(505) 662-0001Cost: $10.00

1. If necessary, determine whether the worker is an employee or independent contractor.

Form: SS-8, Information for Use in Determining Whether a Worker is an Employeefor Federal Employment Taxes and Income Tax Withholding

Agency: Internal Revenue Service Taxpayer Assistance Unit

5338 Montgomery Blvd. NEAlbuquerque, NM 871091-800-829-1040.

File with: IRS - 8 DeterminationsP.O. Box 1231Stop 4106 AUCSC

Austin, TX 78767

2. If you determine that the worker is an independent contractor and you pay that person $600 ormore a year for fees, commissions, or other forms of compensation, you must file FORM 1099-MISC with the IRS. Be sure to obtain the contractors home address and social security number.

You must send him or her the employees copy by January 31 following each

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