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How to Start a Business: 9 Steps and a Checklist
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To start a business, you’ll need more than a good idea. Starting your own business requires extensive market and competitor research to make sure your business plan meets customer demands. You may be required to register your company and obtain licenses and permits necessary to operate. Don’t forget to build enough funding to cover any startup costs that arise before you’re able to turn a profit.
How to start a business in 9 steps
We’ve broken down the process into nine steps to start a small business, from the planning and financing stages to opening day. Depending on your circumstances, you may take these steps in a different order than they appear below. Following these general steps to starting a business, regardless of industry, could help you avoid joining the 20% of small businesses that fail in the first year.
- Research and refine your business idea.
- Write a business plan.
- Review your source of funds.
- Choose a legal business structure.
- Register your business.
- Find a location.
- Obtain licenses and permits.
- Buy business insurance
- Open a business bank account.
1. Research and refine your business idea.
The first step to starting a business is understanding your ideal customer base and how you could serve those customers better than existing businesses. Research demographic information, such as customer age, income, interests and anything else that would relate to your business. Combine that information with general market research to identify data points for your business:
- Level of demand for your product or service
- Potential market size based on interest in your product or service
- Income range and employment rate for your target customers
- Primary location where you expect to serve or reach customers
- Market saturation based on similar options that already exist
- Competitor pricing for similar products or services
You could start your market research with public information related to industry statistics and employment data. The U.S. Small Business Administration offers a compilation of resources you may find helpful. From there, you could conduct surveys, interviews or questionnaires to collect more specific customer data.
Market analysis vs. competitor analysis
Additionally, a competitive analysis goes hand in hand with market research, but provides a deeper examination of businesses that would be your direct competitors. A competitive analysis would require you to identify your competitors’ strengths and weaknesses, how they acquired their customer base and how they stand out from others. Then, you could determine the best strategy to differentiate your business from competing entities.
2. Write a business plan.
A business plan is a road map for your business, outlining how you expect to manage the company. Your business plan would include the market analysis and competitor research we discussed in the first step, as well as information we’ll cover in later steps, such as your business structure and financing.
You can find a number of business plan templates online. For instance, business mentorship organization SCORE offers a free downloadable template. Business plan templates generally include the same basic components, such as:
- Executive summary: A brief business description, including any mission or vision statements, as well as information about your product or service, the leadership team, employees and location.
- Company description: Detailed information about the problem your business solves, with specifics on the market you will serve and how you intend to serve it. Include individual customers if possible.
- Market analysis: A breakdown of your target market. What’s the size of the market? What does the competitive landscape look like? Answer those questions in this section.
- Organization and management: State your company’s planned legal structure and describe who will be running the business. We’ll talk more about business entities, below.
- Service or product line: Further describe the service or product you will offer and share information about any special intellectual property driving the business.
- Marketing and sales: Illustrate your plans for attracting potential customers and closing sales. Your marketing strategy should also incorporate digital components, such as social media.
- Funding request: If you plan to seek funding, explain how much you need and when, as well as how you plan to spend the money.
- Financial projections: Provide a projected financial outlook for the next five years backed by extensive evidence, including supporting financial statements. The business development organizations such as SCORE mentioned above could also help you prepare these documents.
It’s best to write your business plan before taking any official or legal steps to set up the business. You’d be able to spot and address problems before getting too far in the process. Additionally, a business plan can be an important recruitment tool when seeking business partners, investors or employees who would want to understand your business idea and strategy, as well as the potential return on investment, before getting involved.
3. Review your source of funds.
Expect to rely on your own finances to get the business started, as many startup business loans require at least three months in business. However, you may find other sources of funding to tap into to supplement your own savings.
Crowdfunding platforms like GoFundMe allow business owners to solicit money from friends, family and the general public. Some platforms don’t require businesses to offer anything in return, while others may suggest that you offer products or a stake in the business in exchange for funds.
Venture capital. If your business is poised for rapid growth, you may be able to secure venture capital from investors. Venture capital is generally cash in exchange for a percentage of ownership in your company, which means you’d typically need to give up full control of your business. The benefit of this type of equity financing is working with investors to take risks that may generate high returns.
4. Choose a legal business structure.
In the eyes of the government, all businesses are classified in a way that affects their taxes, legal protections and documentation requirements. Your business type might matter to your bank or lender, too. Common business entities include:
- Sole proprietorship
- Limited liability company (LLC)
- C corporation
- S corporation
- B corporation
- Nonprofit corporation
Anyone conducting business activities is initially classified as a sole proprietor and will remain that way until you register as another entity. Doing so would most likely require you to register with your state, including owners of LLCs and corporations. Though this may be a hassle, registering an entity would separate you from the business and protect you from personal liability.
5. Register your business.
You would need to register in any state where you conduct business if you operate as an LLC, corporation, certain types of partnerships or nonprofit. In most states, you would need to register with the state’s secretary of state office or similar business agency, either online or in person.
The documents you file would depend on your entity. For instance, LLCs must file articles of organization and corporations must file articles of incorporation. The fees to submit these documents vary by state, but generally cost less than $300.
In many states, registering your business doesn’t end at the secretary of state’s office. You may need to register separately with your state’s taxing authority and employment office. Some states offer a one-stop shop where you can do all of this and obtain any necessary licenses and permits. We’ll talk more about licenses in a minute.
Don’t forget a federal EIN When legally registering the business, you may also want to get an Employer Identification Number, or EIN, from the IRS. The IRS requires corporations and partnerships to have an EIN. Any type of business that pays at least one employee would also need an EIN, which is a nine-digit identification number to be used on tax forms and applications for business bank accounts and loans.
Do I need to register my business name?
Registering your business name would prevent anyone else from using it, and may be required in your state. You could register your entity name for state-level protection and register a trademark if you also want protection at the federal level.
It’s common for sole proprietors and general partnerships to use a “doing business as,” or DBA instead of their personal names. Also known as a trade name or fictitious name, you will most likely need to register it at the state, city or county level. A DBA doesn’t come with any legal protections, but it would allow you to conduct business under a different name without setting up one of the business entities we talked about earlier.
6. Find a location.
When choosing the right location for your business, consider your business model. If you run a brick-and-mortar retail store or restaurant, you would need to take details like local foot traffic or parking spaces into account. Or, if you expect to have clients visiting frequently, you may want to focus on the building finishes and amenities to ensure the office makes a good impression.
As a startup, renting a space may make more sense than buying property. You wouldn’t have to make a down payment, other than a possible security deposit, and you may be able to find affordable rent in an area where it would be too expensive to make a purchase. Once the business has been operational for a while, you could save funds to buy a more permanent place.
Check your local zoning regulations to make sure your type of business can legally operate in your desired location. Zoning laws also apply to home-based businesses and commercial activity may not be permitted in certain residential areas. Your city planning department or similar office should be able to provide zoning information for your area.
7. Obtain licenses and permits.
Depending on your specific business and location, you may need to have local or state business licenses and permits to legally operate. There are two general categories of licenses that may apply to your business:
- Professional licenses: Professions such as accountants, barbers, doctors, lawyers, mechanics and real estate agents need state licenses to practices. In some cases, an individual would need to obtain the license rather than the business as a whole.
- Product licenses: Businesses selling certain items, such as liquor, lottery tickets, food and firearms need a state license to operate. Some products may require a federal license as well from a government agency, like the Alcohol and Tobacco Tax and Trade Bureau.
Local permits may be required for activity outside your regular sales and operation. For instance, you may need a building permit if you want to make any changes to your space, and you would need a permit from your local health department if you plan to handle or sell food. Be sure to research your county, city and state regulations to acquire the proper permits and licenses for your business and industry. Again, some states may guide you through this process when you register your business.
8. Buy business insurance
Small business insurance protects your business assets, including your property, inventory and equipment. A general business owners policy (BOP) would combine property, liability and business interruption insurance in one policy. That would protect the value of your building and its contents, and protect the business from liability if the business mistakenly causes harm to others. Business interruption insurance would keep money coming in during an emergency.
You can also purchase specific policies to protect your business against certain risks. For instance, you may consider buying commercial flood insurance if your business is located in a flood-prone area. Flood insurance is not typically included in a general commercial property policy.
Workers’ compensation insurance.The federal government requires all employers to have workers’ compensations insurance, unemployment insurance and disability insurance. Additional legal insurance requirements would vary by state.
9. Open a business bank account.
Open a separate bank account before you begin accepting and spending money on behalf of your business. You could open a business checking or savings account, or both, as well as a business credit card for daily expenses. It’s important to keep your personal and business finances separate to clearly track business income and expenses, which would be crucial information when filing your business taxes later on.
When choosing a business bank account, compare introductory offers, interest rates for both savings and checking accounts, and fees related to transactions, early termination and minimum account balances. You may need your EIN, business licenses, formation documents and ownership agreements when applying to open a business bank account.
Applying for a loan
Having a business bank account would also come in handy later on when you apply for a business loan. Lenders would likely ask to see your business bank account statements when reviewing your loan application. And once you’re approved for financing, lenders could deposit funds directly into your business bank account.
Starting a business checklist
Starting a small business would require the same basic steps, no matter your industry or business type. Consider using a checklist to monitor your progress.
Click here for a free “starting a business” checklist
Final tips for starting a business
Once you’ve completed the formal steps to start your small business, keep these few additional guidelines in mind.
Carefully classify all employees.
You may hire full-time employees or independent contractors to work for the business, but you must correctly classify them. If you hire full-time employees, you must pay them at least minimum wage and withhold Social Security and Medicare taxes from each employee’s paycheck. Contract workers are considered self-employed and would be responsible for their own taxes. Misclassifying an employee as a contractor could result in consequences from the IRS, as you would then be liable for employment taxes for that worker.
The IRS suggests asking yourself a few questions about your relationship with workers when making classifications:
- Does the company have a right to control how the worker performs their job?
- Does the company control certain aspects of the worker’s job, such as reimbursing expenses and providing tools?
- Does the company provide benefits to the workers, such as vacation days and insurance?
If you answer “yes” to these questions, then a worker is most likely a full-time employee and should be classified as such. But you should review the relationship as a whole, as well as your state regulations for classifying workers, to make your decision.
Keep up with your business taxes.
The structure of your business would ultimately determine the taxes that you owe. For example, corporations are taxed separately from their owners while other businesses “pass through” their earnings to the owner’s personal taxes. In general, most business owners could expect to have these tax responsibilities:
- Income taxes
- Employment taxes
- Unemployment taxes
- Self-employment taxes
- Excise taxes (only for certain services and goods, like alcohol and tobacco)
- Sales taxes
- Property taxes
Federal income tax forms are typically due on March 15 each year, though sole proprietors and corporations have until April 15 to file. Other taxes, such as employment and self-employment taxes, may be estimated and paid quarterly throughout the year. Considering keeping a small business tax preparation checklist to stay on top of your tax obligations.
Promote your business before opening day.
Set up a marketing budget and strategy to generate buzz around your grand opening. Consider advertising your business about two to three months before opening day. Depending on your type of business, you may also want to host a “soft opening” as a test run before officially opening to the public.
You could use paid media to promote your business, such as ads for print publications, radio, internet, television and direct mail. Also, collect email addresses or other contact information from potential future customers to send them newsletters, coupons and other business correspondence. Make sure you follow email marketing regulations to properly contact and communicate with customers.
Look to your successful competitors for inspiration and see how they advertise their products or services. Also, learn from their mistakes. Establishing an effective marketing plan may be hit-or-miss for new business owners, but researching the playing field could help you avoid costly advertising mistakes.