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SMALL BUSINESS | Enterprise Zone: Lessons and Insight
on Southland Businesses

Starting an Employment Agency Will Require Some Working Capital

November 24, 1999|KAREN E. KLEIN | SPECIAL TO THE TIMES

Q: I am considering operating an employment agency to service the clerical and industrial fields. How do I figure out my initial start-up costs?

--Joseph Harrison, West Covina

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A: There are many factors to consider when setting up a temp or placement service. Some people mistakenly think it doesn't cost much--and they may be right if they plan to start off small-scale, doing things very low-budget. However, as it grows, this kind of business requires additional working capital. Realistically, to launch a substantial employment agency, it takes $50,000 to $100,000. When we set up a new office, we allocate $100,000 for start-up expenses, which includes a few months' worth of staff expenses and mailings to prospects in the area.

The first expenses you'll face are for rent, equipment and supplies. A home office reduces rent, but it presents other difficulties. Do you really want to interview strangers in a home office, for instance? You could try an executive suite, spending anywhere from a few hundred to several thousand dollars per month. Remember to budget for first and last months' rent and a security deposit.

When it comes to phone set-up costs, figure $1,000 per line, adding fax, computer and toll-free (800) lines, plus rental or purchase of equipment. Get specific quotes from vendors to compare costs, and don't forget to order voicemail. You'll need testing computers and testing software, which runs $500 to $1,500, for your job applicants. A Web site can cost anywhere from $1,000 on up to hundreds of thousands. Do a nice one and make yourself look substantial.

You'll need testing supplies, advertising and sales brochures, time cards and orientation booklets for employees or applicants. Allow a minimum of $10,000 for used furniture and start-up supplies, including artwork on your business cards, brochures, set-up and printing.

Next is insurance. Legitimate businesses need plenty, including general liability and errors and omissions. Workers' compensation usually requires a mandatory deposit. If you plan to provide staff for government agencies, you'll need to purchase separate bid/performance bonds. Find a good broker and get a few quotes, as coverage and costs vary.

Recruiting expenses can be major, especially now when unemployment rates are at a 30-year low. Allow funding for advertisements in the Los Angeles Times, on Internet boards such as Monsterboard.com, fliers and literature to send out to recruiting sources. In today's climate, you'll need to budget for referral bonuses on hired applicants, which can range from a low of $50 to over $1,000 per candidate hired.

If you're running a temporary help agency, you've also got to fund payroll until your accounts receivable come in. Allow a four- to six-week sales period as a cushion for carrying your payroll costs until the client pays. If you ask for payment upon receipt, you should be able to get them to pay in 30 days.

To be prudent, I always calculate expenses and then take 50% to 75% more and set it aside for contingencies. Things always come up that you didn't plan for.

--Patty DeDominic,

CEO and founder,

PDQCareers.com, Los Angeles

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Q: I'm starting a part-time business where I will be the sole owner, and I doubt that I will have any income during the first six months. I know I have to declare the business on my personal income tax, but do I have to start paying estimated taxes now or do I wait until the business begins generating revenue?

--G.B. Wilkins, West Covina

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A: When you work as an employee, your employer regularly withholds a portion of your income to cover taxes. But when you are self-employed, you must do your own withholding by paying estimated taxes quarterly to both state and federal tax agencies. If you do not file estimated payments, you will face tax penalties.

The estimated payments are not due until your business begins generating a profit. You'll want to calculate your business expenses and revenues at least once every three months and, when you begin to show a profit, apply the appropriate tax rates and make an estimated payment based on them. The estimated payments won't always cover all your tax liability in a given year, but the general rule of thumb is that if you pay in as much in estimated taxes in one year as your liability was on your return the prior year, you won't be penalized.

Estimated taxes are paid four times a year, on April 15, June 15, Sept. 15 and Jan. 15 of the following year. Use estimated tax form 1040-ES to file your federal taxes and form 540-ES to file your state taxes to the California Franchise Tax Board. The payment vouchers can be downloaded from the agencies' Web sites, http://www.irs.gov (click on "forms and publications"), and http://www.ftb.ca.gov, or obtained from your CPA or local tax office.

You'll have to report your self-employment income on your individual tax return, using a Schedule C. If your business generates a profit, you'll pay self-employment tax of 15.5%, using Schedule SE.

--Donald Lucove, CPA,

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