How to Start A Small Business

Our business startup attorney provides step by step instruction on how to start your own small business.

By Brad Nakase, Attorney

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Have a quick question? I answered nearly 1500 FAQs.

Starting A Small Business

Starting a small business is a stressful but exciting time. An individual who has an idea for a small business should likewise understand that no matter how much you prepare, things can always go differently than planned. The key to starting a successful small business is to be adaptable. An owner has to be ready to deal with changing circumstances and any unexpected situations that might pop up. In this article, you will learn how to start a small business.

When getting starting a small business, it is always a good idea to do market research to see what is already out there in one’s field. Take a look at competition and get a sense of one’s potential clientele and their demographics. This might involve taking surveys, holding focus groups, and researching public data. For example, if one is starting a cookie company, it might be a good idea to take a look at the success of Mrs. Fields. What are the customers like? What kind of cookies are popular? What do clients like about shopping there? These questions will help a new owner understand the market they will soon be entering.

Even before you start a small business, they should work on building up their brand and finding a following of customers who will bolster their business once it opens. For instance, maybe our cookie shop owner decides to give out free samples on the street. Whenever someone takes a cookie, the owner gives out a Twitter handle or a GoFundMe for the customer to reference. Perhaps the owner also takes out ads or puts signs up on local billboards. This will generate interest in the business and create a customer base before even opening the doors.

Every entrepreneurs who wants to learn how to start a small business looks forward to the fun stuff: naming the company and creating a logo, for example. But there are other less recognized steps that are equally, if not more, important in making a small business. As any small business owner knows, a lot of work goes into the process, from structuring the company to marketing. Let’s go over some steps that every entrepreneur should know about how to start a small business from from an idea to reality.

Refine the Concept

A small business owner usually starts a small business with an idea of a product or service. He or she will likely also have a concept of the general market – who would buy this good or service? Once an idea is formed, the entrepreneur should do research on current companies in the field, or future competitors before starting a small business. He or she should look at current leaders in the industry, and even more importantly, how he or she can do it better. The key is to figure out what one’s business offers that other do not. This factor will set one’s business apart from all the others.

It is always a good idea to know why one is starting a particular business. Is there a gap in the market? Are current businesses not meeting demand, or are not performing how they should? Identifying the reason for one’s business existing is critical in narrowing down a focus and a purpose.

Before choosing a name, one should have this focus and purpose in mind. What is the value of the business? This should be expressed clearly in the company’s name.

An entrepreneur should also have a good idea of who their target customers are before starting a small business in the community. A small business owner needs to know what sort of people will hire or buy from them and why. Knowing one’s customer base helps clarify the business’ mission, its purpose for existing.

While still in the idea phase of starting a small business, an entrepreneur should make sure that their idea is not only something they are passionate about, but something that has a market or guaranteed customers. Let’s take out cookie business example. Perhaps our master baker lets people design their own cookies online and he bakes them for pick up at his location. This is a service not offered at Mrs. Fields or other cookie companies. He goes about his city advertising this business, handing out samples and raising money on a GoFundMe account. He gains followers on Facebook and Twitter, giving him proof of a potential customer base. His idea has merit and is worth pursuing.

Create a Business Plan

The next step in start a small business is to write a business plan. This means that an entrepreneur needs to ask him or herself a few important questions. First, they need to identify the purpose of the business. They also need to know who their customer base is. More than that, what are the goals of the business and how will it be financed as it gets up and running? These are the sorts of questions that a business plan will address.

It is tempting to immediately open a business without doing this kind of necessary planning. Without knowing if there is a customer base or a demand for one’s service or product, what is the point of going into business? Therefore, it is a good idea for business owners to first do market research. This is an important part of creating a business plan. One needs to research the market, including big competitors before starting a business in the same community. One also needs to understand the customers, including their demographics, needs, preferences, and behavior. It is recommended that people with a business idea conduct surveys or a competitive analysis to see if there truly is a gap in the market.

The most successful small businesses offer goods or services that are unique from the rest of the competition.

Even though starting up a business can be exciting, entrepreneurs should still consider an exit plan. This has to do with thinking about the company’s goals. What does the business owner want to achieve? And when will they feel ready to leave the business? The answers to these questions not only affect the business and its structure, but also the life of the owner. Will this be a short-term project or a lifelong commitment? Thinking about the future is therefore a critical part of creating a business plan.

Think About Finances

Starting a small business takes not only time, but money. It is essential that an entrepreneur think about how to cover the costs of starting his or her business. Perhaps the would-be owner already has the financial means to cover the startup, or maybe he or she will secure a loan. Especially if an individual is leaving their current job to run the startup, it is essential that they have a plan to support themselves financially.

Often, small business startup does not succeed because they run out of cash before getting off the ground. Therefore, it is recommended that an entrepreneur overestimate how much capital will be needed, because it takes time before a startup can turn a profit.

But how do you know how much money you will need?

One way to determine this is to perform a break-even analysis. This type of financial planning can help small business owners learn when their business will turn profitable before starting a small business.

To do a break-even analysis, one should use the following formula:

Fixed costs (Average Price – Variable Costs) = Break-Even Point

The result of this equation is the minimum performance a business must achieve in order to avoid losing money. There are three main reasons to conduct this kind of analysis.

  1. It determines profitability. If an owner wants to know which services or products are profitable and which ones are sold at a loss, this equation is useful.
  1. It allows an owner to price a service or product. An owner should know how much their product costs to create and how competitors are pricing their own products.
  1. It allows an owner to analyze the data. An owner may determine how many goods and services need to be sold to be profitable.

It is important not to overspend when starting a business. Even if that fancy new machinery looks cool, it may not be the right move for your business to buy it just now. Only purchase what is essential for the initial operation. The idea is to spend as little as possible to get the business up and running. Fancy machinery can be bought down the road, once the business is profitable.

When it comes to funding for starting a small business, there are a few options. To determine the best way to fund a small business, an entrepreneur should consider creditworthiness, how much capital is needed, and the available options. These options include:

Business Loans

If a small business needs financial help, then a commercial loan through a bank may be a good option. That said, they are often difficult to get. However, if unsuccessful in getting a business loan from a bank, an owner can apply for a small business loan via the U.S. Small Business Administration (SBA) or another lender.

Business Grants

Business grants for starting a small business are like business loans, but they do not need to be paid back. Grants are typically very competitive. In order to get a business grant, a business needs to meet certain requirements. A business owner should look for a grant that is suited to his or her particular situation. For example, there are grants for minority-owned businesses and women-owned businesses.

Investors

If a small business needs a significant amount of funding to get off the ground, then it might be wise to bring an investor on board. Through an investor, a startup can be provided with millions of dollars. It is expected, however, that the investor would have a say in running the business.

Crowdfunding

A business owner can also launch a crowdfunding effort to raise smaller donations for starting a small business. There are many legitimate crowdfunding platforms suited to different kinds of businesses.

It is also important for an entrepreneur starting a small business to choose the right bank for his or her company. For a smaller business, a smaller bank is recommended. This is because local banks are familiar with the local market conditions. They will also agree to work with a small business based on its profile and character above all else. Big banks, by contrast, will look at one’s credit score and be more selective about whom they loan money to. Smaller banks would prefer to build a personal relationship with the business owner and are more likely to help in case of a problem or missed payment. Another benefit of smaller banks is that because decisions are made in local branches, they are often quicker than larger banks at processing loans for starting a small business.

It is a good idea to schedule appointments with various banks of different types to ask questions and find out if they are suitable for one’s specific needs.

Choose a Business Structure

Before an owner can register a small business startup, they need to decide what type of company it will be. The structure of a business affects many things, including how taxes are filed and personal liability in the event of a lawsuit. There are a few types of business structures to consider:

  • Sole Proprietorship: This type of entity is suitable for an individual who plans to run the business all on their own. They will be responsible for all debts and obligations, also assuming liability. It should be noted that taking this route can directly affect an individual’s credit.
  • Partnership: This type of entity means that there are two or more business owners who assume personal liability for the company. Often, an owner may choose another owner who has complimentary skills to his or her own.
  • Corporation: Some business owners might wish to separate their personal liability from the company’s liability. In this case, they may consider forming a corporation. There are a few types of corporations, including an S corporation, a C corporation, and a B corporation. There are different guidelines for each type, but there a few basic similarities. A corporation is treated much like an individual: it can own property, pay taxes, assume liability, enter contracts, and sue and be sued. A business that would like to seek funding from investors in the future should consider incorporating.
  • Limited Liability Company: This is a very common business structure. It is popular because it combines the legal protections of a corporation with the tax benefits of a partnership.

Register the Business

Before being able to start operations, a small business owner needs to register the business with the federal, state, and local governments. In order to register a small business, certain documents must be completed.

  • Articles of Incorporation: In order for it to be officially recognized as a small business, a small business owner must register his company with the government. Corporations must fill out Articles of Incorporation, which is a document that includes the business name, purpose, structure, stock details, and other information. LLCs will have to file an operating agreement.
  • DBA: For companies that do not have an operating agreement or articles of incorporation, it is still necessary to register the business name. This can either be the owner’s legal name, a made-up DBA name, or the company’s name. It might be a good idea to trademark the business name for added legal protection. Most states make business owners register a DBA when starting a small business.
  • Employer Identification Number (EIN): After registering one’s business, one should then get an employer identification number from the Internal Revenue Service (IRS). This step is not necessary for sole proprietorships that have no employees, but it may still make sense to get one. It will help keep business and personal taxes separate. Also, it makes it easier down the road if one desires to hire an employee. One of the tasks for starting a small business is to register for an EIN online for free.
  • Income Tax Forms: It is also necessary to file forms to meet state and federal tax obligations. The structure of one’s business will determine which forms need to be filled out. The relevant state’s website will have information on local and state-specific tax obligations.
  • Licenses and Permits: Depending on the type of business, federal, state, and local licenses or permits may be necessary to operate. One may obtain a business license at the local city hall. One may also use the Small Business Administration’s database to search for any state’s licensing requirements according to business type.

Certain trades require independent contractors and businesses to have specific professional licenses. For example, some businesses need to have commercial driver’s licenses (CDL). Individuals who have these licenses can drive buses, tractor-trailers, and trucks. A CDL has three classes: A, B, and C.

A business owner should also check with their city and state where you are starting a small business to see if they need a seller’s permit to collect sales tax. A seller’s permit may also be known as: a resale permit, resell permit, reseller permit, permit license, resale ID, reseller license permit, state tax ID number, reseller number, or certificate of authority. Of course, these requirements and names vary depending on the state. It is possible to register for a seller’s permit through the relevant state government website.

It should be noted that not all businesses need to obtain this permit for starting a small business. For example, in New York state, sales tax is not required to sell medicine. So a business that sells medicine in New York does not need a New York seller’s permit.

Get an Insurance Policy

Before starting a small business their business, an entrepreneur should purchase insurance for the company. In the event of property damage, theft, or a lawsuit, the owner will be thankful for the coverage and resulting protection. There are several types of business insurance to consider, but small business can benefit from a few basic plans. If a small business has employees, then unemployment insurance and workers’ compensation are a must.

Additional coverage depends on location and the specific industry a business is in, but general liability insurance is always a good idea. This is also known as a business owner’s policy. This plan covers bodily injury, property damage, and personal injury.

If a business provides some kind of service, then an owner may wish to think about getting professional liability insurance. If the owner makes a service mistake while operating their business, this coverage will protect them.

Put Together a Team

Though it is possible that an owner may be the sole person to start a small business, many startups will need a great team of people. It is not only the product or service that is important. Having a team of talented people to start a small business a critical part of having a successful business. The challenge for the business owner is making this happen. They need to define roles and duties, divide labor, give feedback, and identify talent.

Select Vendors

Third-party vendors offer important start a small businesses. The types of vendors needed will vary based on the business, but there are certain categories of vendors that are useful to every company. For instance, most businesses need to process payments from customers. A business will need to review vendors to find the right credit card processing provider for their needs. Similarly, at some point, a business owner will need to secure an accounting software provider or hire an accountant.

Brand and Advertise the Business

Before starting small business, it is crucial that an owner create a brand and get customers ready to burst through the door upon opening. A jump start can help a business get its feet off the ground.

  • Company Website: It is a good idea to build a company website so that customers can learn about the business. It is a great method of keeping customers updated about the business and provides a sense of legitimacy – proving that the company is real.
  • Social Media: Social media is a valuable tool that can advertise the business far and wide. Through social media, one can offer coupons or discounts to followers. An online following can translate into physical customers.
  • CRM: CRM software allows a company to store data about customers. This helps a business learn about its base and fine-tune marketing strategies. Email marketing is a great way of keeping in touch with customers.
  • Logo: Sometimes, nothing is more powerful than a good logo. It can help people easily identify the brand and increase recognition. Importantly, there should only be one logo, and it should be uses consistently across platforms.

It is important to keep one’s digital platforms up to date and filled with interesting content about the business and industry to keep the attention of one’s customer base. By having engaged customers, one builds brand loyalty, which is necessary to keep a new company alive. A website is not an expense or a hassle, but an investment. In today’s world of smartphones and social media, a strong online presence is critical to a small business’ success. Having a creative and dynamic online presence before even launching a business will set one apart from all the rest. This can be the difference between success and failure for a startup.

It is similarly important to have a marketing plan to start a small business. While a gimmick might get one out of the starting gates, that spark won’t necessarily last forever. It is essential that a small business in today’s world has a consistently creative and relevant presence online. By being active on Facebook, Twitter, Reddit, TikTok, and other social media platforms, one has the ability to exponentially grow a customer base and, importantly, keep them engaged and loyal to the company. Even “old-fashioned” email marketing is a great way of keeping in touch with one’s customers. One cannot simply rely on an initial campaign. The key is consistency.

When it comes to e-commerce, a small business will need to ask customers (and potential customers) for their permission to communicate. By using opt-in forms, or forms of consent, a business may allow a customer to authorize contact with them. Once authorized, a business may send routine info about the company, or other correspondence. Normally, these types of forms apply to email communication. By opting in, customers will receive newsletters, marketing material, and product sales. The opt-in part of the process is actually very important. In the day of spam emails and messages, people appreciate having the opportunity to authorize communication. By providing this option, a company can build trust with its customers. Perhaps even more critically, opt-in messages are required by law. An email in violation of the CAN-SPAM Act of 2003 may be subject to a $40,000 fine.

Grow the Business

Once a small business launches, an owner should focus on growing the business. Already? Yes! Making a profit (and continuing to make a profit) is dependent upon continual growth.

One way of growing a business is by collaborating with other companies. The other established company will provide promotion in exchange for a free sample or service. For example, a startup makeup company may make a deal with Sephora. The startup would provide Sephora with free samples of makeup in exchange for the free promotion of being advertised in the big-name store.

A new small business can also work with a charity organization to get the name of its products out there. Perhaps at a charity marathon, the startup could offer water bottles with their brand name on it.

All of the above tips can help turn your great idea into an even better business. But, again, things don’t always go according to plan. Like every successful business owner, be prepared to adapt when starting a small business.

Have a quick question? We answered nearly 2000 FAQs.

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