Starting a small business can be exciting. But turning a promising idea into a viable enterprise calls for careful planning and plenty of preparation. Before opening your doors — whether real or virtual — you'll need to make a series of important financial, legal and practical decisions. Here are 12 essential steps that can help put your new business on solid footing.
Many entrepreneurs come up with a business idea that seems fresh and feasible. But remember, your assumptions and blind spots can be hard to recognize. Before you get too far down the road, talk about your concept with others who can provide objective feedback.
Family or friends may be an option if you're reasonably sure they won't sugarcoat their assessments. However, networking with other entrepreneurs or established small business owners often proves more helpful. For targeted feedback, meet with professional advisors.
Also, weigh the lifestyle choice. Launching a small business isn't for everyone. Are you prepared for the stress and multitasking involved? Are you still planning to work a full- or part-time job when creating the business — if so, is that realistic and fair to your employer? Will the startup jeopardize personal relationships with those closest to you?
When you're reasonably sure your business idea has legs, gather evidence that there's a market for your products or services. Define your target customers and learn as much as possible about them. Relevant characteristics might include age, income, location and other demographics, as well as buying habits and preferences. Government data and other reputable sources can help you determine the size and characteristics of your potential market.
Next, gauge actual demand. Do those prospective target customers really need or want what you intend to offer — and, more importantly, are they willing to pay for it? Whenever practical, test your concept on a small scale before making a major investment. For example, consider opening a pop-up store or offering a small-scale online promotion. The results may confirm your assumptions or reveal that you need to modify your business model.
Also, study the competition. Identify businesses already serving your target market and learn about what they offer, how much they charge and how they attract customers. The goal is to confirm that there's room in the market for you and, if so, distinguish your business from theirs.
Every small business startup can benefit from a clear, well-written business plan. Think of it as a road map for turning your idea into reality. It may also help you win over future stakeholders, such as lenders and investors. Start by describing your:
Incorporate what you learned from your market research, including the size and characteristics of your target market and the competition you expect to face. Also spell out your marketing strategy for reaching customers and generating sales. Next, address how the business will operate. Depending on the venture, this may include:
In addition, identify the key people who'll manage the company alongside you (if any), including the roles they'll play and their qualifications and experience. Lenders and investors will assess your management team as much as your business concept. Your plan should establish short- and long-term goals, too, and the steps you expect to take to achieve them.
Finally, estimate your startup costs and expected revenue and operating expenses for the first six months to a year. Also consider working capital needs and capital investments. Use this information to forecast sources and uses of cash. Financial forecasts can help you determine how much financing you'll need and may be essential if you intend to find a lender or investors. Base your estimates on reasonable, market-based assumptions — not best-case scenarios or gut instinct. When in doubt, work with a qualified financial advisor.
Important: At least for the first several years, your plan should be a living document. Update it regularly based on actual results and changing market conditions to assess what's working and catch potential problems early.
You may have already chosen a name when developing your concept or even included one in your business plan. But don't rush into this decision or get too attached to any one moniker.
Ideally, you want a name that's memorable and meaningful without being overly generic. Keep it relatively simple and easy to spell and pronounce. Think about how it will look on your website, social media content, signage and marketing materials. Along with settling on a favorite, come up with a few alternatives just in case.
Then make sure you're legally entitled to use the name. Search state business records and federal trademark records to identify existing names or marks that could create a conflict. If your startup budget allows, seriously consider having an attorney conduct a more thorough trademark search.
Depending on your business structure (see next step) and location, you may need to register the name with your state or register a "doing business as" (DBA) name with state or local authorities. Federal trademark registration is a separate, optional step that can provide broader protection. Finally, check whether an appropriate website domain and social media handles are available and secure those you intend to use.
This is one of the most important steps for entrepreneurs. It determines how your business income will be taxed at the federal level, as well as the liability protection available for business debts and legal claims.
The simplest route is a sole proprietorship. With this structure, there's no legal distinction between you and the business. You'll report its income and expenses on your personal tax return and pay income tax on the resulting profits. You may also owe self-employment tax. Importantly, you'll have no protection from personal liability for the business's debts and legal claims against it.
Many small business owners choose a structure that combines "pass-through" taxation with limited liability protection. Here, you're establishing a separate entity whose taxable income, losses, deductions and credits pass through from the business to your tax return. Options include forming:
Note: General partnerships don't provide blanket liability protection.
You could also establish a C corporation. It's a separate entity that provides significant liability protection. But, in this case, the company pays taxes at the entity level, and owners (called "shareholders") may face additional tax when they receive dividends, compensation or other taxable distributions (or sell their shares). These two levels of tax obligation are commonly referred to as "double taxation."
Although C corporations may face double taxation, they're taxed at a flat 21% rate, which is significantly lower than the top individual rate (37%). Then again, sole proprietors and owners of pass-through entities may be able to claim the Section 199A qualified business income deduction, subject to various income thresholds and limitations. Tough calls like this are why you should work closely with your tax advisor when deciding.
Once you've settled on a business structure, take the necessary steps to establish it legally. Depending on your choice, this may mean filing articles of organization for an LLC or articles of incorporation for a corporation with your state. You may also need a registered agent and other internal documents. Requirements vary by state and business structure, so get professional legal advice.
Next, determine whether you 1) need to obtain an Employer Identification Number (EIN) from the IRS, and 2) must register with state or local tax authorities. As mentioned, your tax obligation will depend on your business structure. But where you operate and whether you have employees will also factor in.
Be aware that many small business owners must make quarterly estimated tax payments to avoid penalties. Work with your tax advisor to identify the returns you'll need to file and taxes you'll need to pay — and be prepared to establish procedures for meeting those obligations on time.
Last, determine what licenses, permits or certifications you'll need before opening your doors. Requirements may come from federal, state, county or municipal authorities and can vary widely depending on your industry and location. Some licenses and permits also require periodic renewal. Make sure you understand all the applicable rules before you begin operating.
Before you put a dime into your new venture, set up at least one separate bank account and a distinct way of accounting for your business activities. Deposit business revenue into that account and use it to pay business expenses rather than mixing business and personal finances. Depending on your business structure and the bank's requirements, you may need to provide an EIN, formation documents or other information to open the account.
Keeping the two worlds separate makes it much easier to maintain accurate books and records, track cash flow, and determine whether your business is actually making money. It also simplifies tax preparation by providing a clearer record of business income and deductible business expenses.
Financial separation can be especially important if you've formed an LLC or corporation. As noted above, a primary reason many small business owners establish a separate legal entity is to help protect their personal assets from certain business liabilities. Treating the business's money as your own can undermine this.
Also consider buying accounting software to help you record business transactions. Today, there are many affordable, user-friendly solutions that can automate certain bookkeeping tasks, provide mobile access, and help track your results for financial reporting and tax purposes. Plus, establishing good habits from the outset makes it easier to apply for financing, attract investors, and provide reliable financial information to advisors and other interested parties.
Your business plan should give you a reasonable estimate of how much capital you'll need to get started and sustain operations until the business can support itself. Perhaps you intend to provide most of those funds yourself, possibly with contributions from friends or family members. Self-funding lets you retain control of the business, but it also puts more of your own assets at risk.
If your resources won't be enough, borrowing is one option. Banks and other lenders offer business loans and lines of credit, and qualifying businesses may obtain loans through programs backed by the U.S. Small Business Administration. Carefully compare interest rates, repayment terms, fees, collateral requirements and other conditions. Keep in mind that a new business may have difficulty qualifying for credit on its own, and a lender may require you to personally guarantee repayment or pledge personal assets as collateral.
Another option is to raise money from investors. So-called "angel" investors and, for some high-growth startups, venture capital firms may provide funding in exchange for an ownership stake. That means you won't have to repay the funds they offer like a loan, but you'll surrender some ownership and potentially some control. Other funding sources may include crowdfunding and grants, though their availability and requirements vary considerably.
As a new business owner, you may be especially vulnerable to both legal and financial risks. Even if you choose a business structure that offers some liability protection, the right mix of insurance policies is still essential. Insurance can help protect the business against losses arising from accidents, lawsuits, property damage and other events that could otherwise threaten its survival.
Which types of coverage you'll need depends on the nature of your startup and the risks it faces. Some of the most common types of business insurance include:
You may also want commercial umbrella insurance, which can provide additional liability coverage beyond the limits of certain underlying policies.
Depending on where you operate, the law may require certain types of coverage — particularly once you hire employees. A lender, landlord or business contract may also require other coverage. Work with a knowledgeable insurance professional and your other advisors to choose the right policies.
Now you're ready to prepare for "opening day." Depending on what you want to do, this might mean leasing an office, storefront, warehouse or other commercial space — or simply setting up a home office to run the business entirely online. If location matters, examine factors such as cost, accessibility, proximity to customers and suppliers, and whether the property suits your operations.
In addition, you'll need to acquire the necessary equipment, technology, inventory and supplies. Your requirements could range from computers, software and office furniture to manufacturing equipment, vehicles or merchandise for resale. You may also need to establish relationships with vendors, suppliers and outside service providers. As you make purchases, refer back to your business plan and budget — updating it as needed — so you don't exhaust your startup capital before revenue begins flowing.
Finally, consider staffing. You may be able to handle everything yourself initially, but growing businesses often need employees with skills that complement the owner's abilities. Independent contractors can also fill certain needs, but you can't simply choose to classify a worker as an independent contractor to avoid payroll and other employment obligations. Proper classification depends on the nature of the working relationship. Consult your tax and legal advisors as you build your team.
Many startups begin building an online presence well before they're ready to launch. Open accounts on the social media platforms most likely to reach your target customers. Keep your business name, logo, messaging and other branding consistent across platforms. (If you haven't yet created a logo or other branding elements, you might want to wait until these are ready to ensure a consistent professional image.) Start posting regularly to give prospective customers a reason to follow you — possibilities include product or service previews and behind-the-scenes updates.
Social media should also be social. Respond to questions and comments, interact with followers, and pay attention to which types of content generate the most interest. Over time, platform analytics can help you learn more about your audience and refine your posts. Remember, building a following usually requires time and commitment — an account that hasn't been updated in weeks may make a worse impression than having none at all.
Your website is also important. It should be professional, attractive and functional on any device. Match the branding and messaging with your social media accounts. Depending on your business's purpose, you may also need features such as online purchasing, appointment scheduling, customer reviews or a portfolio of your work. Above all, make sure the site is up and running — and well tested — before you start operating.
Once your operations launch, don't let marketing get lost in the shuffle. Attracting a steady stream of customers is essential to generating the revenue your business needs to survive and grow.
Follow the marketing strategy and budget you established in your business plan, adjusting as necessary. You'll obviously need to maintain a consistent social media presence, but also explore other approaches, such as:
Track the results of each chosen channel so you can devote more resources to marketing activities with the highest return on investment. As your business evolves, continue refining your marketing efforts to attract new customers while strengthening relationships with the ones you already have. Best of luck turning your entrepreneurial vision into reality!
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