Author: QnA

Dear Consultant,
I have what I’m told is a great idea to improve some software that our company sells to a number of very large clients.  My colleagues and I believe that by making some fairly extensive changes, we will make our product most marketable and usable and thereby more profitable.  I’m the only champion of this change, and I’m not sure how to try to gain acceptance of my idea or to drum up support.  Persuasion has never been my thing; do you have any suggestions about how to sell my idea with my company?

The issue of persuasion is a complex one.  There are a number of situation specific variables that will come into play, but there has been some very interesting research that describes what seems to be effective in the general case. 

The act of “selling an idea” or “convincing others” to support your initiative has been called “proactive influence tactics” in the leadership literature.

Below I’ve paraphrased the 11 tactics that are used to influence people in organizations described by Yukl, Seifert and Chavez (2008).

1)      Use logical arguments and evidence to show what you’re suggesting is feasible and desirable.

2)      Show how your idea is directly beneficial to the person that you’re trying to convince. Perhaps for their career or to lower their workload or increase their commission.

3)      Highlight the emotional appeal of your position, focus on their values and ideals.

4)      Include the person you’re trying to convince in the formation of the idea.  Ask for their feedback and make sure that their feedback is included into the proposal.

5)      Put some skin in the game.  Offer to help if the idea is accepted.

6)      Do your best to express your confidence in the person you’re trying to convince, do some favours for them, make them feel good about you.  Do it authentically though, people may see through false flattery.

7)      Pull in personal favours.  Ask people to support your idea because of your friendship on a personal level.

8)      Offer to do something for the person.  Make it transaction, if they support your idea, you’ll help them in some other way.

9)      Get the help of other people who support your idea.  Coordinate with them to strategically show support for your proposal.

10)   If there are any rules, procedures or precedent that supports your idea, make sure that you highlight those to people you’re trying to influence.

11)   In some cases and as a last resort, you can try persistent reminders, demands or even threats. 

Although the long-term repercussion of these types of actions will damage your relationship with the person you’re trying to influence. Depending on your situation, some or all of these influence tactics may help you to convince the necessary decision makers to support your idea. 

It is important to use each one in a thoughtful way that is appropriate for the target you’re trying to influence and that is commensurate with the importance of the idea you’re trying to convince others of.

References: Yukl, G., Seifert, C., & Chavez, C. (2008). Validation of the extended Influence Behavior Questionnaire. Leadership Quarterly, 19(5) 609-621. 

http://www.amazon.ca/Leadership-Organizations-Edition-Gary-Yukl/dp/0132771861 

Dear Consultant, 

I am a small business owner with four full-time and three part-time employees.  As the boss, I’ve always been approachable and we all have a great relationship.  Lately though I think that my employees have been taking advantage of me by showing up to work late unapologetically, and not cleaning up their trucks after a service call, which they are very clearly supposed to do.  When I approach the team about these issues, should I threaten punishment or offer rewards?

 Using a carrot or a stick depends on the situation as well as the number of times that you’ve tried to correct this behaviour.  The problem may simply be a lack of communication or a lack of managerial follow-up to ensure compliance of your rules.  If this is a repeated problem that occurs even after you’ve all talked about it and are on the same page about work expectations, then you’ll want to think about institute a reward or punishment scheme to encourage compliance.

The general rule of thumb is to avoid punishment where possible.  Punishment may encourage your employees to want to leave your company, or to subvert you and your company in other, more subtle ways.  It is fear-based and utilizes coercive power which can create stress and a negative organizational culture.  While it may be necessary, it should be used as a last resort. Rewards may initially be considered more costly than punitive measures, but in the long run I’d suggest that the opposite is true. 

Losing an employee and hiring a new one is a very expensive process, similarly lack of productivity due to low moral/motivation, which is frequently associated with punishment can also affect your bottom line.

Here are some tips for using rewards as a motivator to promote certain behaviours, these are based partially on industry best practices and on Yukl (2013).

1)      Make sure that the rewards you offer are ones that they actually want.  Ask them!

2)      Whatever rewards you offer, make sure that they are fair and equal between employees and that the rewards are ethical in nature.

3)      Don’t offer a reward if you’re not able to fully deliver on what you’ve offered.

4)      Make very clear and simple rules for when rewards are given and when they aren’t.  Make sure that everyone understands.

5)      It is up to you to give out the rewards if the rules are met. Don’t expect the employee to come asking for the rewards.

6)      Try not to be manipulative with rewards, these should be an expression of gratitude for good behaviour.

If on the other hand you feel the need provide punishment for poor behaviour, here are some suggestions, based partially on industry best practices and also on Yukl (2013).

1)      Make sure everyone understands the rules and that punishment is the consequence of not following the rules.

2)      Always provide the same punishment for everyone consistently when rules are broken.

3)      Take your time before using punishment, get all of the facts and make sure that you’re being quick to judge.  Don’t make emotional decisions.

4)      Offer warnings before punishment, but be clear about when warnings will turn into punishment.  Put the warnings into writing.

5)      Making an example of employees may be tempting, but it is a bad idea for employee morale. Always offer warnings/reprimands and punishments in private.

6)      Always be calm, don’t let the employee perceive a personal attack.

7)      Make sure that you’re supportive and it is clear that you want to help them avoid this next time.

8)      Ask the person how to avoid this in the future, make a plan together and follow it.

9)      Do what you say.  If you warn of punishment, make sure that you follow through.

10)   Make sure that the punishment is equal to the bad behaviour.  Don’t over or under do it.

Dear Consultant,

I’ve recently been told that I have the opportunity to lead a team of five people within my company.  I would like to progress my career in this direction but I’ve never done it before and I wonder if I have what it takes to be a leader?

Leadership is something that we think we understand, until someone asks us to define it.  Usually we think it has something to do with power over others, whether that is the ability influence a team based on positional authority or simply because the team wants to make you happy. 

There is also leadership that is unrelated to positional power within an organization; it can emerge within teams either as an individual who takes control, or as an idea that takes off within a group or organization.  I once wrote a paper and found over 212 different definitions of the word.

I think though, in your circumstance it is helpful to think about leadership in terms of power and influence.  Those aren’t dirty words by the way, in many cases it is your ability to influence others that differentiates “leadership” from “management”.

Let’s think about the different ways that you may be able to influence team members and then you can do a self-check to see how you feel like they may apply to you in your situation.  There are five “power relationships” that are commonly agreed to exist, based on a seminal leadership paper by French and Ravens (1959).  Those power relationships are: 

1)      Referent Power – describes leaders who have the potential to influence followers because followers identify with, and like the leader.  They do things for the leader because they want to help you. 

2)      Expert Power – increases as followers perceive a leader to be competent at a particular task, so they believe that the leader knows what they are talking about and will take their advice. 

3)      Legitimate power – refers to the influence associated with a formal position within an organization.  This is also frequently known as positional power and can be given to anyone who is promoted to a position of leadership.  You’re the boss, so people do what you say. 

4)      Reward power – comes from the ability to provide rewards for followers.  Pay raises, bonuses, time-off, etc. 

5)      Coercive power – is the ability to influence by punishing or penalizing followers in the form of reprimands, demotions, firing, etc. 

Organizations are not democracies, but people vote with their actions.

Simply by being in a position of authority within a team in a traditional organization, you’ll gain the last three power relationships, the tricky ones are the first two.  Remember that organizations are not typically democracies, so followers may say that they will do what you ask of them, but they may “vote” with their actions by dragging their feet or actively defying your wishes. It is for that reason that it is important to convince, rather than order followers to do tasks.  With respect to expert power, you may ask yourself; do I have the subject matter knowledge to lead the team?  If not, do you need it or can you rely on your team for that subject matter knowledge?

 

Followers are going to want to logically understand the rationale for doing a particular action so that will frequently require subject matter knowledge to justify these actions.  Referent power is the aspect of leadership that most interests leadership researchers and practitioners. To assess your potential for referent power, think about whether or not you already have a working relationship with this team?  If not, how can you create a strong personal relationship to encourage a connection that may help team members have an intrinsic desire to do good work and to help you on a personal level.  Sometimes this is a matter of building mutual respect and friendship.

Leadership is a deeply complex issue, but in a traditional team context, if you’re able to call on all of the types of influence listed above at appropriate times during the work day, then you have the basic recipe for providing good leadership.

Dear Consultant, 

I’ve been working in summer camp for the last five years as a camp counselor.  This year I’ve been asked to coordinate the activities of over 30 of my former colleagues.  Up until now, I’ve always been on the same level as them, how can I change the way I act at work to be seen as an authority figure?

Moving roles into a position of authority can be a mental shift for the leader and also for the followers.  People tend to expect certain things from a person in a role of authority, and frequently it is easiest to just give them what they expect, professional leadership which includes fulfilling your role. 

Below are some tips to help you professionally fulfill your role as an authority figure.  These are based on industry best practices as well as from information Yukl (2013).

1)      Make your requests very clear and concise while still being thoughtful and polite to those you are addressing.  Be respectful when you make your requests, but not apologetic unless there is a reason to be.

2)      Always explain the rationale for the tasks you are asking people to perform.  Especially if the tasks are out of the ordinary.  People always want to know “why” and be convinced what they are doing is worthwhile.

3)      If there is ever a question about whether you’re overstepping your authority, check with your superior about the issue.  Have a clear idea of what you can and cannot do, make sure that everyone understands the boundaries of your role.

4)      Make sure that you do things “by the book.”  If you’re new to a role, and if there is ambiguity around a decision, try to follow what has been done before.  Follow processes if they exist, if not then your good judgement should be followed, while keeping the best interest of the organization in mind.

5)      Remember to follow up on tasks you’ve asked people to do.  A lack of follow-up can frequently be interpreted by followers as a lack of priority, leading to things not getting done.  Follow-up politely but consistently.

6)      If things aren’t getting done, it is your job to insist that it they are completed.  Do it in way that is fair and do it in a way that is consistent between employees.

For someone who has never been in a position of authority before, these six tips may help you to effectively perform your role and hopefully will help you to be perceived as an authority figure to your employees.

References: http://www.amazon.ca/Leadership-Organizations-Edition-Gary-Yukl/dp/0132771861

Dear Consultant,

I work in the Operations Department of a company that doesn’t usually have a lot of turn-over.  This week a long time technical staff member left the company and I need to write a job description to back-fill for her position.  I know what she did, but not the technical details.  How should I go about writing a good job description to bring in the right candidate?

Writing a job description can be a very involved process depending on how thorough you would like to be.  There are many ways to go about this, but the following suggestion is based on industry best practices and partly on the work done by Catano, Weisner and Hackett (2013).  The following steps can be used or adapted to your situation to help you write a job description.

Step 1:

Determine the job tasks and competencies Don’t focus immediately on the education and experience related requirements for the position.  A good starting point is to do some research about what tasks and competencies are associated with the position.  That is, what do people in the job do and how should they behave in situations that they are likely to encounter when working in the position? These are some of the pieces of information that are necessary to be able to write a job description:

  1. A list of tasks that an employee will do in this position.
  2. A list of the competencies, or the types of behaviours that you’d like to see the person working in this position exhibit.  These could be things like “build rapport quickly”, “defuse tension in a high conflict situation”, “exhibits leadership in team situations”, etc.

If you don’t already know much about the job, then there are many ways to gather this information, but the most common ways are to work with the subject matter experts (SME) who either currently occupy the position or are in the same department/team.  Some of these methods include:

  1. Interviews with the SMEs.  Schedule some time with someone who knows the role that you’re trying fill, perhaps the hiring manager.  Ideally speak with someone who is in a similar role to the one you’re hiring for.
  2. You can learn about the tasks and the competencies necessary for the job by creating a questionnaire and sending it out to multiple people on the team.  This is less resource intensive for all parties and allows you to aggregate opinions from multiple people in a relatively short time period.
  3. Observation of other people who are doing the job currently.  This is time consuming, but it can be useful in situations when the SMEs don’t have the time or inclination to help.  It can also help to draw out some of the tacit, or unspoken, aspects of the job.

Step 2:

Determine what Knowledge, Skills, Abilities and Other Attributes (KSAO) are necessary Once you have collected all of the tasks and competencies that are associated with the job, list the KSAOs necessary to successfully do each task and fulfill all of the competencies.  As an example, if a job task is to “maintain a close relationship with a broad client base”, then the skills necessary to accomplish this could be “knowledge of customer relationship management software” and “good communication skills.”  By actually listing each KSAO, and linking it to a job task or competency, you have a strong and transparent justification for the items listed in your job description.  This is helpful in cases where hiring decisions are disputed internally or in human rights litigation.

Step 3:

Determine the proficiency level of each KSAO How proficient will an applicant need to be in each KSAO for them to be able to successfully do each job task or competency?  You can keep this as simple as “fair”, “good” or “excellent”, or provide a scale of one to ten, or some other way of ranking proficiency.  Once you understand the proficiency necessary for each KSAO you can start to talk with SMEs about what actual requirements such as degrees, professional designations or years of experience in particular roles, etc.

Step 4:

Understand what requirements are “must-haves” and what are “would-be-nice” The perfect candidate isn’t always going to present themselves.  It is important to recognize that and be clear in your mind about which requirements are necessary and which ones are not entirely necessary.  Being explicit about which requirements are absolute “must-haves” in the job description helps potential applicants to self-screen, so that they won’t bother applying if they don’t have the “must-have” requirements.  This saves everyone a lot of time and effort.

Step 5:

Determine how you would like to “sell” the position to outstanding candidates Realize that you’re trying to sell a “product” to a “customer”, that is you’re trying to convince qualified applicants to apply to your job rather than the jobs posted by your competitor.  Get into the head of candidates who would excel in the position that you’re hiring for, and list out a few points that you can include in your job description to attract those outstanding candidates.  These  points could include things like the image your organization, non-monetary compensation (benefits), office location, job title, flexible hours, opportunities for growth, organizational culture, etc.

Step 6:

Write the description Keep it reasonably short, but still descriptive.  The more specificity you provide, the more self-selecting will occur with unsuitable candidates.  Start with information about the organization, then provide information about the team, then finally the position itself.  Explicitly list the “must-have” requirements for the position as well as the “desired” or “would-be-nice” requirements.  It is also helpful to describe the immediacy of when the position needs to be filled.  If there is flexibility in starting, that may encourage good candidates who are currently employed and need some time to end their current obligations.  Remember that frequently the best candidates are already in a job!

I hope this helps you write your job description.

Dear Consultant,

We’ve recently lost someone on our team, and my manager has tasked me with bringing in a new employee who can do the job as well as, or better than the last person.  Any suggestions about how I should do it?

Hiring a new employee is not as easy as it might seem initially.  Remember that there are a lot of things to think about, not only about writing a job description, but also about marketing the job to the right audience is also important attracting a good pool of applicants. Here is a process that you can follow that is partially based on industry best practices as well as information from Catano, Weisner and Hackett (2013).  Depending on your organization, and the position that you’re hiring for you can adapt this as you deem appropriate.  A more in-depth explanation of each step is also linked below.

  1. If you have a Human Resources Department, consult with them to follow your organization’s procedures for hiring a new employee.
  2. Learn about the job that you’re hiring for if you don’t already know a lot about it.  This is sometimes called “job analysis” and it will help you understand what knowledge, skills, abilities and other attributes (KSAOs) are necessary to perform this job well.  A job analysis involves interviews with subject matter experts who know the job well, or even direct observation of people who are doing the job currently.  It also requires that you itemize the tasks will need to be accomplished in the job and the competencies necessary to excel in the position.
  3. Write a “Job Description” that explains what an employee doing this job will be required to do and how they are supposed to do it.  The job description should also include the minimum necessary KSAOs required for the job, and the desired KSAOs.  Usually the minimum and desired KSAO sections are where you specify previous work experience, education, professional designations, motivations, etc.
  4. Come up with a “Recruitment Strategy” that can either be formal or informal.  This strategy should include some thinking around your budget for marketing the position, what mediums you have available to post your job as well as what “selling points” you’re willing to share in your job description.
  5. Develop a “Screening Process” that will help to save you time.  Depending on the number of applicants, you may not be able to interview everyone who applies to the job.  In this case, an initial screening process can help.  Screening can include looking for minimum qualification and cut-off scores for grades or test, years of experience, professional designations, etc.  These minimum qualifications and cut-offs should be carefully thought through, it is at this stage that you can easily disregard a wonderful candidate because they have one year less experience than you’ve specified in your cut-off.
  6. Next you’ll need to “Create a short list of applicants”.  This list will be used to determine who you’d like to spend more time with and interview. As best as you can, try to come up with objective criteria for evaluating each application against the KSAOs that you’ve already defined in your job analysis.  Be transparent about this, because it will offer insight into your decision making in the case of disputes later on.
  7. Once you’ve created your short list of applicants, you’ll want to reach out to them to “Conduct Interviews”.  The main goal of interviews are to fill in the blanks that are not specified on their resumes/CVs and applications.  They are also useful to determine soft skills not easily articulated on applications as well as organizational fit.  Some things you’ll want to keep in mind:
    • Be careful not to think that someone is a good fit for the job just because you like them, or that they are similar to you.
    • To keep things fair, make sure that you have a standard set of interview questions that are asked to each applicant.
    • Conduct the interviews in a similar manner for each applicant.  Similar room, similar questions (ideally, identical), everyone offered refreshments, etc.
    • All interviewers fill out a standard form that evaluates as objectively as possible, all of the KSAOs required for the job.
    • Ask for contact information for two or three references and get the applicant to sign a document giving you permission to contact and ask questions of the people they’ve specified
    • Keep the standard forms that were filled out during and after interviews on file in case of hiring disputes down the road.  You need to have transparency into your decision making at every point in the hiring process.

8.    The next step is to “Do Reference Checks”.  Once you have signed permission to contact references, you can begin setting up times to talk on the phone.  Only check references on applicants whom you’re seriously considering for the position.  Make sure that you follow a similar set of questions for each reference and fill out a standard form based on the answers provided by each reference.

9.    The most important part is the final “Selection Process” in choosing the top two or three candidates, and the order in which you’d like to send out offers.  Even if you don’t have a lot of objective measures in your evaluation process, you can sometime apply a score to each of the KSAOs developed in the job analysis.  This provides a transparent and objective way to rank applicants and provide insight into why one applicant was selected over another.  Avoid “gutt-feel” or “intuition” that is not backed up with further thought and objective justification.  Then send out an offer to your top candidate and await their approval before telling the next candidate that they have not been selected for the position.  If negotiations with the top candidate are not successful, send a letter of offer to your second highest candidate.

I hope that this process helps with your new hire.  Each stage described above can be quite detailed, please click on the links for each stage for further information.

References: http://www.amazon.ca/Recruitment-Selection-Canada-Victor-Catano/dp/0176504370

Dear Consultant,

Our organization has just over 30 people and we find that we’re spending an inordinate amount of time hiring and dealing with HR issues. Would it make sense for us to hire a full time Human Resources Manager?

The question that you’re grappling with is a common issue faced by small to medium sized enterprises (SME).  Full time human resources managers are frequently the last position to be hired, and the first to be fired in SMEs during financial difficulty.  This is mainly because of a lack of understanding of the importance of the HR function within organizations. It is common for managers to say, “Our company is not actively growing, so our management team can handle the HR functions associated with regular attrition. We’ll hire and HR consultant when we can’t handle it.”  This viewpoint assumes that HR is only about hiring new employees.  In fact, progressive organizations recognize the strategic importance of a significantly broader range of functions that a professional HR manager can offer an organization.  Some of which can be fulfilled by professional HR consultants, some of which are best suited for an on-staff HR Manager. Schwind, Das and Wagner (2010) talk about a number of value-adding tasks that HR managers provide.  Some of them include:

  1. Understand can educate the rest of the organization about the legal landscape with respect to management functions like hiring, firing, human rights, pay equity, labor laws, background checks, etc.
  2. Help to maintain harmony in working relationships with employees and managers, including acting as a neutral broker in work-related disputes.
  3. Help to create a work environment that facilitates high employee performance.
  4. Create processes for managers to follow related to discipline and counselling of employees.
  5. Understanding how to attract the right talent to your organization.
  6. Build standard new employee selection processes to ensure equity in employee selection.
  7. Educate and advocate for processes that maintain a positive and productive culture within the organization.
  8. Create standard methods for creating job descriptions that accurately attract the right candidates for your positions.
  9. Help establish equitable compensation strategies to retain talent.
  10. Maintain safety metrics and ensure safety compliance throughout the organization.

HR Managers provide significant value beyond simply hiring and firing.  Many of the value-added functions of an HR Manager are intangible and add to the organization’s bottom line indirectly through improved moral, decreased turn-over, improved employee and manager productivity and through risk mitigation related to labor litigation and human rights complaints.

Dear Consultant,

I have been a software developer at a large insurance company for the last four years.  I’ve had a lot of experience working with web technologies and I have an idea for a web business that I believe could make some money.  I’m getting pretty fed up with my current job, especially the long hours and the office the politics; I really like the idea of working for myself.  I just question whether or not I’d make a good entrepreneur.

This is a question that many people wrestle with at some point in their career.  There is no easy answer to your question, except one that you can answer yourself through personal experience or through close understanding of the realities of starting and running your own business.  Here are some questions that you should ask yourself that may help in your decision:

1)      Are you looking for freedom from your job or are you truly looking to create something?

in most cases entrepreneurs work long hours and are forced to work with anyone who will offer them time and resources

Many people associate freedom with starting your own business, thinking that staring your own business means that you’re able to dictate the number of hours that you work and the people that you’ll work with.  An element of that exists in some cases, but in most cases entrepreneurs work long hours and are forced to work with anyone who will offer them time and resources.  If it is simply freedom that you’re seeking, then other options exist.  Sometimes the root of freedom seeking lies in a need to reduce stress or because you’re bored with your current work.  Think about the core reason that you want to start your own business.  You mention that you’re not interested in long hours and office politics, if these issues are contributing to your decision to want to start your own business then consider addressing those issues directly.

2)      Are you trying to create value for a group of people?

Successful entrepreneurs frequently want to create something first and make money second

Ideally, the desire to become an entrepreneur should come from the desire to create value for a particular group of people.  Successful entrepreneurs frequently want to create something first and make money second.  If you have the ability to build something and create value for a group of people in a way that most other people don’t, then you may have a solid foundation for an entrepreneurial venture.  Think about your own personal skills, relationships and tendencies that make you better suited to create value for a group of people than others.  Entrepreneurship is competitive, and if you can’t say why it is that you’re best suited to start this business then I would think twice about proceeding.  Sometimes the reason that you’re better suited to do it is simply that you’re the only one who is willing to make it happen.

3)      Are you persistent in the face of adversity?

There will likely be long periods of financial and emotional hard times that you’ll need to be prepared for.

Another tough question that you should ask yourself is whether or not you have the persistence to stick with the business, even during hard times.  There will likely be long periods of financial and emotional hard times that you’ll need to be prepared for.  Close friends and family will tell you that you’re making a mistake by leaving a job, or by investing time and money into a risky business.  People who you respect will point out flaws in your plan and you’ll need to listen, adapt but persevere.  Do you have the ability to face adversity and continue without giving up?  In most new businesses, perseverance is a key element of success.

4)      How is your network of business connections?

Most successful businesses will require an open attitude that encourages collaboration with community and business partners.

Unless you have done this before, you’re going to need help.  Help with business strategy, marketing, partnerships, legal issues, technology, etc.  None of us are experts in everything and so you’ll need to start leveraging the relationships that you’ve got and creating new ones.  It is rare that you can start a business entirely by yourself in isolation; most successful businesses will require an open attitude that encourages collaboration with community and business partners.  Think about embracing networking as a pastime unto itself.  Some people dislike this sort of activity as unauthentic or a waste of time, but in the experience of many successful entrepreneurs, their network of business connections and relationships creates real value for their start-up.

There are many other questions that would be specific to your particular context, but these questions may direct your thinking about your potential fit as an entrepreneur.

Dear Consultant,

For the last eighteen months I have been doing contract architectural work for a number of clients.  I’m wondering if I should set my business up as a corporation.  Currently I do my own taxes and keep things simple, but I’ll incorporate if it makes sense to do so.

There are a number of reasons why a business should incorporate, these reasons usually relate to taxes and liability.  There is a point in the life of most profitable, growing businesses where incorporating makes sense, but for small businesses it isn’t always a great idea.  Depending on what jurisdiction you operate your business, this decision can be made more or less complicated based on your local laws.

Shareholders of corporations enjoy limited liability for the actions of the corporation.

First let’s discuss the issue of your own personal liability.  When you incorporate your business, that is switching it from a sole-proprietorship into a corporation, the business becomes a separate entity.  This separate entity can own property, take on debt, be sued and have its own rule (articles of incorporation).  If you have no partners or investors then you’d likely be the only shareholder in this company, and shareholders of corporations enjoy limited liability for the actions of the corporation.  This is frequently perceived to be advantageous because if the business goes bankrupt, you as the primary share holder may not be held financially liable for debts incurred during the operation of the business.  Similarly, if your company is sued then you may not be personally named in the lawsuit, only the corporation.  For small corporations though, where the company is transparently operated by you, you’d be asked to personally co-sign any debt and you would likely still be personally named in the case of litigation.  So the limited liability afforded to corporations is certainly not a way to completely shield you from financial or legal risk.

In almost all jurisdictions, corporations pay less in taxes than do individuals.

As for taxes, in almost all jurisdictions, corporations pay less in taxes than do individuals.  So if your business is currently setup as a sole-proprietorship or if you’re simply operating the business under your name, then you’ll be taxed at your own personal tax rate.  If you are making significant profits and don’t have much in the way of expenses to offset your income, then there could be tax advantages to incorporating.  This is definitely a decision that would be taken in the context of advice from a tax accountant.

Incorporating introduces some overhead and complexity that may not be necessary.

By virtue of the fact that you’d need to engage with a tax accountant brings me to my next point.  If you are currently doing your own taxes, and you’re not billing significant income through your business, then incorporating introduces some overhead and complexity that may not be necessary.  If you choose to incorporate, you’ll need to pay for the incorporation process – the cost of which varies depending on where you live, but it is frequently a non-trivial amount of money.  Each year when submitting taxes, it would be advisable to hire an accountant to complete your annual tax forms.  While not always complicated if you have a simple tax claim, corporate taxes are different from what you’d be used to and there is room for error.

This is a complex question that certainly depends on the specifics of your situation, but there are pros and cons to creating a corporation for your small business.

Dear Consultant,

We’re starting a business that aims to sell a new product that my partner and I developed.  The product is novel and we believe that it can make a significant amount of money if we can get it into the hands of the right retailers.  We already have working prototypes and some retailers willing to work with us, we also have enough funds to do at least one or two manufacturing runs.  We have been told that we should start big, and to do that we need external funding to develop the inventory needed to push our product into retail channels.  Is this a good approach, or should we try to fund this ourselves and not tie ourselves down with debt or giving up partial ownership of the company?

You’re in the enviable position of having a viable product and it sounds like you have some good leads with retail partners.  Getting funding for the manufacturing of orders already agreed to shouldn’t be such a difficult thing.  Some banks would likely be willing to work with you and depending on the nature of your product there are other alternative funding sources such as venture capital funding.  However, you’re also in the position to possibly fund your growth organically from your own operations.  Let’s look at these options.

1)      Take out a loan.

Take on debt to finance your manufacturing.  The least complicated way to fund your manufacturing is to take out a loan to pay for your operations.  You’ll pay interest on this loan for the duration of the time it takes you to pay it back, and the amount of interest that you pay will depend on how risky your lender thinks that you are.  You can get cheaper loans if you have some assets like a building that you can use to secure your loan.  Secured debt can sometimes offer significantly better interest rates than unsecured loans where you offer no collateral to back the money that you’ve borrowed in case you are unable to pay the loan back to the lender.  Likely candidates of lenders may be some more risk tolerant banks, or a banker who has worked with you in the past with whom you have a good relationship.  You could also borrow from friends and family if that option were open and made sense to you.

2)      Give up equity.

You can offer equity in your company to an investor in return for the money.  That is, you can make them partial owners, affording them rights to part of all of your future profits and the ability to have input into decisions about how the business is operated.  Typically venture capital funding works like this, they want a large portion of the ownership of the company in return for money for you to grow your business.  In many cases this makes a lot of sense, but you will relinquish some control of your business.  There may in the option to negotiate the terms of funding agreements like these where the funder may not have decision making rights and will only share in future profits.  Equity ownership partnerships can be made with anyone, not only with traditional venture capital firms.  Family members and neighbours could also be given partial ownership in return for funding.  It is usually advisable to incorporate in situations like these.

3)      Bootstrapping.

If you already have a prototype and enough funding for some manufacturing as well as at least one or two retail partners to sell your product then you may have the ability to remain lean and fund your next round of manufacturing after your first round sells through your retailer.  That is, make profit from the sales of your first round of manufacturing and reinvest all of those profits into the manufacturing of the next round of products.  The term bootstrapping refers to the proverbial “pulling yourself up by your own bootstraps,” or doing it yourself.  The advantage of this is that you maintain complete ownership of your company and you’re not saddled with loan payments.  A disadvantage of this is that you may have to turn down large orders that you aren’t able to fill because you won’t have enough cash from your last sale.  This type of organic growth can be great, but it can also slow down the growth of your organization.  In the case of competitive industries, this could be particularly problematic as your competitors may be able to fulfill large orders that you’re not able to do given your limited funding.

The best decision in your case will depend on the opportunities that come up from retailers and from lenders or funders.  It goes without saying that growing organically is the best route until such time that demand from retail partners outstrips your ability to fund manufacturing.  At that point you’ll want to re-evaluate that strategy.