How to Start a Small Business: A Step-by-Step Guide
If you’re interested in the specifics of starting a business, you probably already have a concept in mind that you think would be profitable, marketable, or beneficial to society. The first step you should take toward starting your business is to dissect that concept.
While a well-run startup can create lasting impact and profits, the U.S Bureau of Labor Statistics reports that close to 20% of new businesses don’t last beyond the first year. Beating that statistic will take extensive research and preparation on your part.
It all starts with your idea. Before you can even consider financing your business, you need to refine your concept to perfection, conduct market research, and plan your brand expansion strategy with precise detail. The more prepared you are from the start, the greater your chances of gaining traction, receiving financing, and achieving sustainable success. Read on for our step-by-step instructions on how to start a small business.
1. Conduct Market Research
The first step to ensuring your business is successful is to conduct extensive market research on potential competitors and customers in your prospective industry. By understanding your potential competitors, or lack thereof, you’ll gain valuable insight into the viability of your business concept.
If there are no other businesses offering your services, you’re free to pursue the market without competition, but keep in mind that others may have tried and failed. A lack of competition is sometimes synonymous with a lack of consumer demand. If the market for your product is hyper-competitive, you’ll have more rival brands to compete against as it relates to marketing strategies and customer acquisition and retention. That said, healthy competition is typically a signal that there is ample interest in your offering.
Using public data, you should gather as much information as possible about the field. Gather figures on the number of businesses operating in your market, their success in recent years, their pricing models, and any promotional offers or special deals they may offer. Take care to examine the success of different products and services across your industry. Discovering which existing brands and products are the most successful (and why they are thriving) can help you refine your services to fill the right niche in the market.
Researching SEO trends related to your potential business can give you an idea of what keywords and phrases to target in digital marketing, and can provide data on search volumes related to your industry. These search volumes can give you an early glimpse at the size of your market, and not just on a local scale. Well-conducted market research can help you paint a complete picture of your potential clientele, market size, and help you refine your goods and services based on those findings.
2. Write a Business Plan
Once you have gathered information on your industry, competitors, and potential customers, you can begin to map out exactly how your business will fit into the market. For this, a well thought out business plan is the key to your company’s survival.
In addition to the insights you gained during your market research, consider things like sales goals, marketing strategies and costs, and potential options for financing your growth. Doing so will allow your launch to proceed with as few question marks as possible, and can help you prepare for emergencies in the months ahead.
Many lenders and investors will also want to see that your business is well thought out and has growth potential before they agree to finance your operation, so having marketing strategies, sales projections, and growth targets ready for examination is a must.
3. Get Business Funds
With a business plan outlined, you should have an idea of the costs you’ll need to cover in your first months of operation. You now need to consider how you will fund your business, as there are many options available. Based on your personal wealth, your network of potential investors, and your business’s mission, there are a variety of financing options that may help your operation get off the ground.
For those who can afford it, one business financing option is to rely on your own personal savings. If you have the personal wealth to afford an investment in your own venture, doing so can be a great option as it does not require you to lose control of your business or commit to debt payments as you would with equity or debt financing.
If your business goes south, however, a self-financing plan will result in losses to your personal wealth in addition to your business. So, if you have the means to fund your business venture with your own personal savings, you should consider investing in yourself, but with caution.
Loans from Friends/Family
Another commonly relied upon source of funding for small businesses is loans from friends and family. Similar to relying on your own savings for financing, borrowing from those closest to you will allow your finances to be negotiated in a less restrictive manner than if you were engaged with a traditional lender.
However, accepting a loan from a close friend or family member runs the risk of souring relationships should you default or should their investment not return a profit. Informal lending can be a lifesaver for owners without prior experience or positive credit histories, as friends and family members will likely offer much more favorable and malleable terms than banks and investment firms. Again, however, owners should tread carefully when engaging in financial agreements with those in their life.
Another great solution for small businesses and startups in need of funding is to apply for grant financing. Grants are, essentially, free money given out by government agencies, nonprofit organizations, corporations, and research institutions to provide for the growth and development of a company or initiative.
Thousands of small businesses receive grant funding each year, but that does not mean it’s easy to come by. Many grants carry strict application requirements or are reserved for certain causes. For example, hundreds of thousands of dollars in grants are offered to women founders each year to promote gender equity, or to businesses specifically addressing public health issues.
While the choices of grants are abundant, you should take care to research which organizations offer grants to businesses that fit your profile and to apply to as many grants as you think you may qualify for.
More traditionally, you can look to lenders for assistance in launching your startup. Small and large banks provide loans to small businesses, however, they also carry more defined requirements for eligible borrowers than nontraditional lenders would.
In order to receive a loan from a bank, your business should indicate projected growth, consistent revenues, and a low risk of defaulting on a loan payment (based on the lender’s underwriting criteria). If you have a low credit score, or if your operating history indicates a higher risk, banks and credit unions may not approve you for financing. Alternatively, they may approve you for financing but with less favorable rates or collateral requirements in the case of default.
While the benefits of startup loans from banks and credit unions include consistent interest rates, longer payment terms, and sometimes support from professional agents, obtaining a startup loan requires preparation on your part and confidence from your lender.
Alternatively, you could obtain startup financing from investors. While loans are up-front payments to your business that are paid back in interest over the long term, investors are paid back with equity in your company. When you accept an investment in your company, you offer an investor a percentage of control, proportional to their investment amount as it relates to your company’s present valuation.
When a person or group invests in your company, they earn a percentage of ownership in your company and the more equity held by outside investors, the less independence you have as an owner. However, there are a number of benefits to accepting investments in your company. For example, by giving up equity in exchange for an investment, you do not run the same risk of amassing debt that is inherent to accepting a loan.
Additionally, investors are likely to be invested in your company’s growth. Positive returns for the business lead to a larger valuation, and in turn, greater profits from their initial investment. This means that you are not only receiving funding for your business but that you may receive valuable guidance and networking opportunities from people or groups that hope to grow your company.
4. Select a Business Structure
With an idea of your financing strategy and a projection of where you want to take your business, you are ready to decide on which legal structure is right for your business. There are multiple options for structuring your business that vary based on your size, financing, and purpose.
Most commonly, small businesses that are started by an individual are organized into sole proprietorships. In essence, a sole proprietorship means that there is no legal separation between you, the owner, and your business.
You will include the business in your own tax filings, retain complete ownership of your company, and hold responsibility for all assets and liabilities of your company. That last point is the biggest risk in organizing a sole proprietorship, as a failed venture means incurring debt and loss as both an individual and owner.
If you hope to join forces with other individuals or organizations in launching your business, you may qualify as a partnership. A partnership is classified as a business set up in cooperation between multiple parties that agree to pursue a common best interest.
You may also classify your business as a Small Business Corporation, or S Corp. An S Corp, like an LLC, protects owners from liability in the case of lawsuit or loss, and passes corporate income, losses, and credit through shareholders for tax purposes. While setting up an S Corp gives you similar protections to an LLC, the costs of setting up a corporation, filing necessary paperwork, and holding required corporate meetings can make it difficult for some owners to justify registering as an S Corp.
You also have the option to classify your business as a c corporation, or c corp. C corps offer similar liability protections to shareholders as s corps, though there are some important differences between the two business structures. First, s corps receive a significant tax break compared to c corps. While owners of s corps are taxed on their business finances on their personal income statements only, c corps are taxed both at the business and personal level. Officers and shareholders at S corps have their personal salaries, stock dividends, and company revenues taxed on their personal statements, while a c corp’s shareholders and corporate officers pay both personal and business-related taxes.
Other differences between s corps and c corps are the fact that c corps can have an unlimited number of shareholders and may issue stock in varying amounts based on an investor’s credentials. It’s also important to note that all businesses applying for c corp designation must first file as an s corp and that a vast majority of those s corps applying for c corp designation fail to meet the eligibility requirements.
Another option for certain new businesses and initiatives is to register as a nonprofit organization. Nonprofits are incorporated organizations that serve some educational, religious, scientific, or charitable cause. Instead of accruing profits for the company and its shareholders, a nonprofit organization reinvests its profits into its cause.
There are various types of nonprofit designations, and it takes a number of different applications sent to your state and the IRS to achieve nonprofit status. Additionally, nonprofits operate under a totally separate set of rules and regulations than for-profit organizations. While many startups in recent years have been labeled “nonprofits”, you should take care to examine your business plan, growth expectations, and exit strategy before deciding on this path.
5. Choose a Business Name
While you probably thought of a name for your business with your initial idea, actually naming your company is one of the last steps in launching a startup. Depending on your preferences and your region’s regulations, you may want to consider establishing a DBA (doing business as) for your new project.
A DBA separates your business from its legal entity title as well as your personal reputation. With a DBA, your company is free to take on new titles based on new initiatives and business changes, without the hassle of establishing an LLC or other corporate structure. Generally, you want your business to resonate with potential customers as authentic and specified, and a DBA can help you tailor your company’s public brand to your location and clientele. As you consider your brand marketing strategy, ask if establishing a DBA is a good choice for your business.
6. Find a Business Location
As you approach your launch date, you may need to find a physical location to house your business. Depending on the size of your operation, the materials and machinery you rely on, and your marketing needs, you may be able to set up shop from home, organize a co-working space with other businesses, or rent an office space. While working from home is a cost-effective way to launch a business, not all operations are fit for a home office. Remember that a pizza shop has much more defined space requirements than an online store and that your business location must accommodate your business operations and customer needs on a daily basis.
When choosing a location for your business, ask yourself how much you’re willing to spend on a mortgage or rent for a location and whether or not you will need to take out a loan to cover these expenses. Zoning regulations for commercial businesses vary by location, so you should consult with your local government to determine which spaces you may qualify for.
7. Register Your Business & Apply for an EIN
In order for your business to hire employees, obtain a business loan, receive business permits and licenses, or file business income taxes (which allow you to write off business expenses), you must receive an Employer Identification Number (EIN) from the IRS. To get an EIN for yourself, and to make your business eligible for loans and deductions, you must first complete the IRS SS-4 form.
8. Apply for any Required Business Licenses & Permits
In order to legally operate a business, there are a variety of authorization requirements you must meet. To start, most new businesses require that their owners hold a business license. Depending on your industry, size, and corporate structure, additional licensing and permits may be required. Your local SBA office or attorney should be able to assist you in finding and applying for the required documents before launching your company.
9. Open a Business Bank Account & Choose an Accounting Method
In order to protect your personal assets from liability, it may be smart to open a business bank account for your company. According to the Small Business Administration (SBA) business bank accounts usually come with a number of benefits that owners would not receive with personal accounts.
Some banks offer special merchant designations for business with open accounts in order to protect customer purchases, and many offer businesses access to an emergency line of credit if needed. In order to qualify for a business bank account, however, you’ll need to present extensive paperwork, including all of the documents mentioned in this article, as well as information about you and your fellow owners. Additionally, you should consider separating your personal and business accounts at an early stage of operation in order to provide a clean slate for your business’s future financial planning.
It’s important to choose the right accounting method for your small business in order to actively and accurately monitor the state of your operation and its profitability and to anticipate possible hurdles before they arrive.
- Subscription income statements offer you and your partners insights into your sales performance as related to social media and marketing expenses.
- Cash accounting, or the cash-in cash-out method, offers you a simple look at your earnings and is best for companies just starting out.
- Accrual accounting is most fit for complex operations that use multiple payment models or have variable expenses and revenues and offers the most detailed look into a business’s finances.
Choosing the accounting method that is most aligned with your business model will help you ensure that your business is profitable, that overhead costs are reasonable, and that the cost of goods sold is not rapidly increasing and damaging your profit margin.
How to Start a Business with No Money
Launching a business without startup capital is essentially the same as starting a business with ample capital, but with added emphasis on obtaining funding. Qualifying for debt financing in pre-revenue stages is very rare, but lending from your friends and family, crowdfunding, and the various forms of equity financing all can jumpstart your operation without dipping into your own pockets. Similarly, the thousands of grants awarded annually may be able to offer you valuable seed capital with no expenses on your end.
If you’re determined about your vision and you carefully follow the steps outlined above, there’s no reason you shouldn’t be able to launch your small business and scale it for sustainable, long-term success.
Director, Marketing & Strategic Partnerships