Take your time and review these nine steps before starting your small business. It’s a lot of work, but realizing your dream will be worth it!
Conduct Market Research
If you are planning on starting a business, you have probably already heard of market research, but it isn’t just for big businesses. One of the worst things you can do as a fledgling business is step blindly into the market and assume buyers will be breaking down your doors to buy your product.
Market research identifies the overall state of the economy in regards to your target customer and includes information such as the size of the market and overall demand for products similar to yours, the location you will be selling (either physical or digital), current market saturation, and the pricing of comparably products.
Competitive analysis research identifies several of your likely competitors and includes an in-depth analysis of their place in the market.
Preliminary research helps you find your place in the market by allowing you to clearly identify your ideal customer and position your product to appeal directly to that person. It can also help you identify your unique value proposition, which will guide you in answering the “why you” of your business plan.
Why is market research important?
Without market research, you’re stabbing blindly at the market without any context for the impact your product will have. If you can’t identify what need your product is fulfilling, there probably isn’t one.
Write a Business Plan
Your business plan is one of the most important documents you will ever create for your business. It can act as your mission statement, five year plan, your ultimate goal, and as a roadmap for much of the path along your way.
There are several different types of business plans, and you may create multiple versions throughout the gestation of your business.
- A one-page business plan can be used as a summary of your full plan or an overview of your business to catch the interest of investors without bombarding them with details on the first meeting.
- A lean business plan is only a couple of pages long, and is focused more on the strategic execution of business goals than financial information. If you do not need external investors, you can probably get away with only creating this plan for your small business.
- A formal business plan is a detailed professional document that encompasses all the details of your business proposal, including all market research, who will be involved with the operations and oversight of the business, and a full financial plan. This will be necessary if you are attempting to secure an investment or loan to start your business.
Very few businesses are able to get off the ground without some sort of start up capital. If you are starting small and will only have a digital presence and no physical office or storefront, your startup costs will be comparatively small and you may be able to fund your initial launch out of pocket. If you will be renting a business location or require a large chunk of startup capital to manufacture your product, you will need to find outside financing.
The most obvious source of financing for your new business is a traditional bank loan. To apply for a loan, you need to submit your formal business plan, a credit check, any other required documents, and an assessment of the value of your collateral. Unfortunately, only about 18% of small business loan requests are approved because of the very high level of risk associated with a new business venture.
If you don’t qualify for a traditional bank loan, you may be able to get a Peer-to-Peer (P2P) loan through either Funding Circle or StreetShares. These loans typically still require a good credit rating.
Instead of taking out a loan, you may have luck finding private funding through either angel investors or venture capitalists. Angel investors may offer an influx of cash to help you get started or to get over an early hurdle, but you are unlikely to receive further support.
Venture capitalists, on the other hand, usually focus on specific industries and can act as guides when you get started. Venture capitalists tend to move very quickly – which is great if you need money, but less great when repayment is due much sooner than other types of loans.
If you have an idea for a really cool product or something that may potentially be a genuine innovation, crowd-funding may be a great option for getting your business started. Websites like Kickstarter offer a popular platform for backers to search out and support exciting new products.
Find Your Location
At this point, you probably have a pretty good idea of whether or not you want to be online only or have a storefront (at least when you are first starting out). This section will deal exclusively with the so-called brick & mortar aspect of a business. We firmly believe that no business should open without a web presence, but we’ll get to that later.
If you have ever purchased a home, you probably considered things like taxes, traffic, neighborhood, proximity to your favorite grocery store, and maybe even the quality of the school district. Finding a business location comes with a similar set of questions. Before looking seriously at any locations, ask yourself these questions:
- Do I want to build, buy, or rent?
- What is my budget?
- How much will government taxes, fees, etc be? (This is especially important if you are considering locations in different states/counties/cities.)
- Are there any local or federal incentives for me or my business type?
- Is there a similar business or other competitor nearby?
- Are there any apparent issues with the location or traffic pattern?
Choose a Business Structure
Even if you are the only person currently employed by your company, you should choose a business structure and register accordingly. Consider consulting a lawyer or accountant before making the final decision as to which structure is right for your business. I’ve listed the three most likely structures for small businesses below. Keep in mind that these are specific to the United States, but most countries have comparable business types.
A sole proprietorship business is exactly what it sounds like. If you don’t register but are doing business, you are legally considered a sole proprietorship. The tax obligations and registration fees tend to be lower, making this structure a good choice if you want to test an idea before going all in. The key point here is there is not a separate business entity that will be held accountable for any liabilities, and that means your personal assets are on the line for any business debts.
A partnership is formed when two or more people register as owning a business together. In a limited partnership, one partner has unlimited liability while the others have limited liability – in this case, the partner who assumes the most risk also has the most control over the company. In a limited liability partnership all owners have limited liability and no partner can be held responsible for the actions of others (this type of partnership is common in law firms).
Limited Liability Company (LLC)
A limited liability company is the most likely choice for a small business, especially one that will eventually employ other people. Although the taxes and registration fees tend to be higher for an LLC than for a sole proprietorship, the separation of your business and personal assets can be more than worth it.
Claim Your Name
Once you have chosen the perfect name for your business, you need to stake your claim on it.
- Entity name – claims your name at the state level
- Trademark – claims your name at the federal level
- Doing Business As (DBA) – if you plan on using a name other than your business’ full legal name, you may need a DBA
- Domain – claims your place online (you may also want to purchase popular variations)
In addition to legal concerns, you should also create accounts on all social media platforms, even if you don’t have any immediate plans to use them to market your business.
Register Your Business
You’ve already decided the name of your business and chosen the structure; now it’s time to do the paperwork.
In some states, the only thing a small business will need to do is apply for a Tax ID (see below). However, additional paperwork will be required for national trademarks or to apply for a tax exemption if you are creating a non-profit organization.
Depending on your business type and location, you may also need to apply for additional licenses or permits. For information on whether or not your business requires additional licensing or permits (and how to get started applying for them), check out the SBA website.
Request Your Tax ID
Your federal tax ID is basically a Social Security number for your business; it may also be referred to as an Employer Identification Number (EIN). Even if you are not planning on hiring other employees or withholding taxes, it is a good idea to go ahead and get a tax ID, especially since this is one of the very few free parts of starting a small business.
You will also need one if you plan on opening a business account (see below).
Open a Business Account
Once you have your Tax ID number, you can open a checking account, savings account, and credit card for your business.
Your first inclination may be to open a business account with your regular bank, but that is not always the best option. For example, your financial institution may not even offer business accounts, or it may have high monthly fees or balance requirements because it caters to larger businesses.
My recommendation is to contact your local credit union. They are not-for-profit and tend to work very well for small businesses, plus you actually get a vote during the annual meeting instead of being at the mercy of a board of directors.