How to Start a Business

Consider who your clientele will be. Don’t just say, everyone. Identifying your ideal clientele will help you ask deeper, more meaningful questions, later. Make sure you do some serious research into the following questions:

• Demand: Does demand for your business already exist, or will it need to be created?
• Market size: How many potential people will be interested in your product?
• Economic indicators: What is the income range and employment rate of your ideal client base?
• Location: What’s the potential geographic reach of your company?
• Market saturation: What’s the current market saturation?
• Pricing: What are people currently paying for similar alternatives to your company’s product or service?
• Competitive Analysis Who are the existing businesses in your specific market? What are their strengths and weaknesses? What makes your business stand out from your competition? Do you offer more competitive pricing? Do you have a higher quality product? This is important to determine because it will help you narrow in on your own clientele.
• 6 Common and Devastating Mistakes New Business Owners Make That You Should Avoid

You probably have answers to many of the questions for a business plan floating around in your head, but putting them down on paper is crucial. Do not skip this step. You do this even though you know it may need to change or be rewritten. Business plans often must be adapted. But you do not go to battle without a plan. Good business plans set goals you can keep your eye on when you’re struggling. They define timelines for important bench marks like, when should you be profitable? Good business plans help you predict and plan for risks and obstacles that may arise. They also help investors see the viability of a company.

• How to Write a Great Business Plan, In-Depth

The basic components of a good business plan include:

• Executive Summary: Brief description of your product or service and why it will work.
• Company Description: What are your biggest strengths and assets as a company. What problems does your business solve? Is there an unmet demand for your services? Are there specific details about your plan or team that will allow you to outperform your competition.
• Market Analysis: Layout what you see and your research revealed about the future of your industry and your industry’s market.
• Organization and Management: Define your business’ legal structure and the organizational structure. How will your company be managed?
• Service or Product Line: Describe your product/service. What is it that separates your product or service from your competition.
• Marketing and Sales: Your marketing strategy is going to change over time, but you can still make some goals. Describe what making a sale or closing a deal means.
• Funding Request: What resources will you require and from where will you get those funds. Describe exactly how the funds will be utilized in your business and how long those assets will take to pay off.

The first financial aspect to consider is, do you have enough savings to make it until your business turns a profit? It takes a while. It’s often a smart idea to hold on to your day a job or a part-time job while you build the foundation of your business. This way, if it takes longer than expected, you have a cushion.

There are two different ways you can think about using this:

• You have a set price and you want to figure out how many units you’ll need to sell to cover your costs.
• You need to turn a profit by a set amount of units and you use the formula to determine your unit price.

Watch your expenses. Look, we all like nice things, and the old adage is true, you get what you pay for, but keep in mind, many a business has gone under due to overspending too early. There is an art to riding this line. Maybe you don’t need that giant office space or the top-of-the-line piece of equipment. As a small business, you want to turn a profit quickly and avoid drowning in debt.

Consider your funding options. Startup capital for your business can come from various means. The best way to acquire funding for your business depends on several factors, including creditworthiness, the amount needed and available options.

Small business loan. It’s very common for people interested in starting a new business to inquire about a small business loan. It’s funny that this term is so widely known, because actually securing an uncollateralized business loan is very rare. For most small business entrepreneurs, this is not really an option.

Business grants. A grant is better than a loan, because you don’t have to pay it back (assuming you fulfill the terms of the grant). There are government and private grants available for small businesses. Grants for small businesses are similar to scholarships in that they are many and varied and finding a good one is hard but can change your life. Check grants.gov for federal grants. The key to landing a business grant is finding one that pertains to your exact situation.

Investors. It’s possible an investor could find your business interesting enough that they’d like to be part of it. In exchange, an investor will likely want to own a percentage of your business or receive a princely fixed rate of return.

Crowdfunding. Lots of small businesses have gotten their startup costs covered this way in recent years. Try GoFundme or SeedInvest.

The structure of your business will have big implications on everything from your personal liability protection to how you pay taxes. Take some time to consider which will work best for you.

• How to Start an LLC
• How to Start a Corporation

• Sole proprietorship: A sole proprietor is indistinguishable from their business under the law. A sole proprietor pays taxes on all revenue as personal income and is legally responsible for all debts and liabilities. Get sued? Your personal assets could be on the line. You can only use this one if you’re on your own. No partners allowed.
• Partnership: A business partnership is legally akin to a sole proprietorship for more than one person. The risks are shared, but the partnership still lacks any financial or legal separation between the personal assets of the partners and their business. Taxation is also treated the same as a sole proprietor.
• Limited Liability Company: Gives owners/members the option of being taxed as a Sole Proprietor/Partnership, while offering the liability protection of a corporation. It’s for this reason the LLC is so popular among small business owners. Learn more about LLCs.
• Corporation: A corporation is the first business structure which provides legal protection against an owner’s personal assets. There are two types and the main way they differ is how they are treated for tax purposes:
  • S Corporations: Taxed as pass through entities and generally preferred by small businesses. the S corporation has no tax obligations of its own. Revenue simply passes through the corporation to its owners who pay taxes on that revenue as personal income. Larger companies are not able to form S corporations, because there are strict caps on the size of a business filing as an S corporation.
  • C Corporations: Taxed as separate entities, from which owners are payed income. The main downside of this structure for small businesses is that a C corporation pays corporate tax on its revenue, and then also the owners of the corporation will pay personal income tax on any income they draw from the corporation. This is known as double taxation.

Additional Business Structure Resources:

• Learn About LLCs
• Learn About Corporations
• Learn About Non-Profits
• Read Business Reviews

New business owners are often surprised to learn that forming their business with the state is arguably the easiest part of the process. Online formation companies have made this even easier. They take the guess work out and hold your hand through the process, usually for under $100. It’s kind of a no-brainer if you’re using a good service (We’ve written reviews of our favorites).

LLCs and corporations are formed at the state level by filing registration paperwork (Articles/Certificate of Organization/Incorporation) with the secretary of state. Each state has its own specific rules and fees surrounding this process, but the basic steps are similar across the board:

• Choose Your State: You can form your business in any state you want, but you’ll also need to register your business in every state you do business in. So if you have your an electrician in Iowa, it won’t do you much good to form an LLC in Wyoming, since you’ll just have to register in Iowa anyway, paying fees and taxes in both states.
• Name Your Business: You’ll need to include the words “Limited Liability Company” or “Corporation” or “LLC” in your name. Your name also may not already be taken (most states have searchable databases available). Lastly, your name can’t imply you’re doing business that you’re not legally authorized to be doing.
• Assign a Registered Agent: A registered agent receives service of process for a business. It can be a private person or a commercial registered agent. They’ll generally be required to have a physical address in the state you’re forming your business in. They’ll also be required to be available at that address during all business hours to receive communications from the state. Almost all state require a registered agent for LLCs and Corporations.
  Learn About Registered Agents, In-Depth
  Learn About Registered Agent Rules by State
  Learn About the Model Registered Agent Act
  Read Registered Agent Reviews
• File Formation Docs with the State: Whether you’re forming an LLC or a corporation, filing formation documents with your secretary of state is what brings your business structure into being. States vary on the total cost (but generally $100-$200).
• Pay Your Annual Report Fees: Each state has its own version of an annual report, but it’s essentially an annual tax you’ll need to pay to keep your business in good standing.

Doing Business As (DBA)

If you are operating as a sole proprietor or partnership and want to use a name other than your own legal name, you may need to register that you’re Doing business as (DBA) another name. This is also known as an assumed, trade, or fictitious name. You may also need to do this if you are opening a franchise. As a sole proprietor, having a DBA will also allow you to open a business banking account under your business name, which is a very good idea.

Employer Identification Number (EIN)

An EIN is like a social security number for your business. All corporations and multi-member LLCs, or LLCs with employees are required to obtain an EIN. It’s a good idea to get one even if you are a single member LLC as it helps bolster the separation between you and your business. EINs are free and are assigned by the IRS. The application process is quick and you’ll receive your number immediately.

Business Licenses: Federal, State, County, City

What licenses you’ll need to operate depends entirely on what type of industry you are operating in. The best thing to do is contact your city hall. If your industry is a trade, you’ll want to contact the Department of Labor & Industries. Federal licenses are reserved only for those industries that are regulated at the federal level. This includes: agriculture, alcohol, aviation, broadcasting, firearms, commercial fisheries, maritime transportation, mining and drilling, nuclear energy, and transportation.

You’ll want a business bank account to run all customer payments through, even if you’re a sole proprietor, so that you can keep your business and personal finances separate. This is crucial for good bookkeeping and accounting.

You’ll also need a business banking account to set up any kind of debit or credit card processing.

• How to Open a Business Bank Account

A Good bookkeeping system is imperative to a successful business. You can take complete control of this system by tracking all your financial transactions on a spread sheet, or you can hire a bookkeeper to do it all for you. But for most small business owners, the best option is to spend a little time familiarizing yourself with the basic concepts of bookkeeping, and then employing a high quality accounting software to help you get it done.

Regardless of how involved you are in your own bookkeeping and accounting, you’ll want to familiarize yourself with the basic concepts of double-entry bookkeeping.

• Small Business Bookkeeping for Beginners

Double-Entry Bookkeeping

Double-entry bookkeeping is the standard bookkeeping method for modern business accounting. In double-entry bookkeeping every financial transaction is first recorded in a journal and then a general ledger. Each transaction is recorded twice—for every credit recorded in one account, an equal debit is recorded in another account and vice versa. This way, the total credits will always equal the total debits, and if they don’t, a bookkeeper knows an error has occurred.

Chart of Accounts and General Ledger

The chart of accounts is like a table of contents for the general ledger. It makes it easy to find the name of an account, its number, and a brief description. The general ledger is set up the same way, but it is in the general ledger that transactions are recorded and balances kept.

Credits and Debits

Credits and debits are crucial to understanding bookkeeping, but they often confuse beginners who assume debit simply means subtract and credit means add. Before you can understanding bookkeeping, you’ll first need to alter your concept of these terms.

All businesses can benefit from general liability insurance, but some businesses are required to have certain other types of insurance. General liability insurance covers property damage, bodily injury, and personal injury to yourself or a third party.

If your business provides a service, you may also want to consider professional liability insurance. It covers you if you do something wrong or neglect to do something you should have done while operating your business. Small businesses often also carry Business Property Insurance and Business Income Insurance. Many insurance companies offer packages that include these three policies.

If your business has employees, you’ll need to carry workers’ compensation and unemployment insurance.

Third party vendors are an essential part of a small business. You’ll need partners to set up credit card processing, book keeping, and Running a business can be overwhelming, and you and your team probably aren’t going to be able to do it all on your own. That’s where third-party vendors come in. Companies in every industry from HR to business phone systems exist to partner with you and help you run your business better. Be discerning with third party vendors, though. They’ll have access to sensitive data and often that of your customers.

Branding is an essential component of a new small business. Brands build trust and recognition. Once you have a brand logo established, you’ll be able to use it on your website, social media platforms, and everywhere else that potential customers come into contact with your services or product.

A critical new component of small business marketing is setting up good Customer Relationship Management (CRM) software. Do this early. You’ll have a much easier time and become more comfortable with the process of collecting and storing your customer information for marketing purposes if you do it from the start.

A good marketing plan is also essential to develop and implement early on. Spend some time developing one before you open your doors.