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Starting a business can be a daunting process. There are so many things to consider—finances, business structure, permits, taxes, bookkeeping, hiring, and providing a great-quality product or service to your clients or customers. How can one person keep track of it all?
Here are 12 steps to use as a guide to make sure you’re checking off all those pre-opening boxes.
Define business concept
You have a business idea. That’s the first step. Next, you’ll need to ask yourself two questions:
- Am I good at it?
- Can I make a profit doing it?
Then it's time to conduct market research to see if your idea is viable. Market research involves a deep understanding of the following:
- Demand: Do people want your product or service?
- Market size: Approximately how many people are interested in your product or service?
- Economic indicators: What are the average incomes in your area and the current employment rate?
- Location: Is your planned location near your prospective customers’ homes or work?
- Market saturation: Are there already competitors in the same market?
- Pricing: What can you charge for this product or service in your area?
Write a business plan
A business plan is useful for your own planning, and it may be required if you plan to access financing through outside lenders or investors. It is the guide that serves as a roadmap for your new business. You should include the following sections in your business plan:
- Executive summary.
- Company description.
- Market analysis.
- Organization and management.
- Product or service description.
- Marketing plan.
- Funding request (if applicable).
- Financial projections.
Consider finances and fund business
Do you have all the money you’ll need to open this business? If you don’t, you’ll need to consider whether you’ll raise the capital through debt financing or equity financing. Debt financing comes from lenders who expect a repayment of the borrowed funds over a number of years, in addition to an interest expense. Equity financing has no repayment obligation, but it allows your investors to become part owners in your business.
Find business location
“Location, location, location.” It’s a common marketing and real-estate phrase for a reason. Depending on the type of business you plan on opening, it may be better to be closer to your prospective customers’ homes or places of business. Since you’ve already done all the legwork in the market-research phase, you should be able to narrow down your focus pretty quickly when searching for a space to rent or buy.
Choose a legal business structure
There are a number of legal business structures to choose from before you open your business. The structure you choose affects the ownership and control of your business, your level of personal liability, and how you file your taxes. Here are the common business structures:
A sole proprietorship is the easiest business structure to form. You will automatically be considered a sole proprietorship if you do not register as any other business type. You will simply file taxes for your business on the Schedule C of your personal income tax return, Form 1040. Sole proprietorship offers no protection from personal liability resulting from your business activities, so it’s a good choice for a low-risk business.
A partnership is a business structure for two or more people who own a business together. There are two types of partnerships: Limited partnerships (LPs) and limited liability partnerships (LLPs). A limited partnership means that one partner has unlimited liability while all others have limited liability. The limited liability partners also have limited control of the business. The partner with unlimited liability must also pay self employment taxes like a sole proprietor. A limited liability partnership, on the other hand, allows limited liability for all partners.
Partnerships have a tax obligation that passes through to the partners. You will file an informational tax return, Form 1065, for the partnership to declare its profit or loss for the year. Each partner will receive a Schedule K-1 with their personal share of the profit or loss. The partners will then report and pay taxes on that amount when they file their personal income tax return, Form 1040.
Limited liability company (LLC)
An LLC protects you from being personally liable for your business activities. You can have a single- or multi-member LLC. A single-member LLC files taxes like a sole proprietor. A multi-member LLC is typically treated like a partnership for tax purposes. The same process is followed with Form 1065 and Schedule K-1, and the LLC members report and pay taxes on their share of the profit or loss. You also have the option to file Form 8832 and file taxes as a corporation.
A C corporation, commonly referred to as a corporation, is a separate legal entity from its owners. As a separate entity, it allows owners protection from personal liability. The corporation is taxed separately from its owners, and it files a Form 1120. The drawback is that some profits are subject to double taxation—first at the corporation level and then on personal tax returns when dividends are paid to the shareholders.
An S corporation, or S corp, is a special tax designation allowed by the IRS that avoids the double taxation of a C corp. It also allows limited liability. There are very specific rules to qualify as an S corp, which the IRS spells out on its website. S corps pass profits or losses through to the shareholders, who pay taxes on their personal tax returns.
Register business name
Once you’ve decided on a legal business structure, you’ll need to register your business name with various governmental entities. If you have decided on a sole proprietorship, you may want to register a fictitious name—known as a “doing business as” (DBA) name. You can do this directly with your state or through a website like LegalZoom that will handle the process for you. This allows you to open a bank account under the business’s name. If you’ve formed a business entity other than a sole proprietorship, the name you chose will be automatically registered with your state so no other business can be formed with the same name.
Get federal and state tax IDs
You’ll need federal and state tax IDs in order to file your business tax or informational returns. You can apply on the IRS website for an Employer Identification Number (EIN). If you’re opening a business bank account, you’ll need an EIN. Depending on the state you are in, you may need a state tax ID as well.
Apply for licenses and permits
Depending on your location and business activities, you may need city, county, state, or federal licenses and permits. The U.S. Small Business Administration lists federal licenses and permits you may be required to obtain. Be sure to check with your local municipality to see which local licenses and permits are required for your business.
Open a business bank account
Having a separate business bank account is useful for bookkeeping and tax purposes, even if you’re operating as a sole proprietorship. If you have chosen another business structure, you should be able to open a business bank account as soon as you have an EIN.
Purchase business insurance
There are several types of business insurance. Depending on the industry, certain types of insurance may apply more than others. If you provide a service, for example, consider liability insurance. There are general liability insurance policies that cover property damage, bodily injury, or personal injury to yourself, your employees, or your customers.
Market your business
You’ll want to get your name out there before you open. Create a logo to brand your business. Use social media to start networking and making contacts in the industry. Market to your friends and family, and ask them to share with their contacts. A well-designed website is a great tool for potential customers to see your product or service, so it may be worth it to hire a website designer. Make sure your business is showing up in Google searches.
Open your business
Plan an opening day. Schedule a grand opening event within a month of your soft opening. This gives you time to work out the kinks before inviting the public into your space.
TIME Stamp: A solid plan lays a great foundation
Taking the time up front to do market analysis, design a solid business plan, and chart the course for your business will pay off when you do eventually open your business. Following the process above will make sure you don’t miss important steps along the way. Be sure to contact an accountant or lawyer if you have any professional questions specific to your industry, locality, or business.
Frequently asked questions (FAQs)
What are the best states to start a business?
The best states to start a business are the ones with favorable taxes for small business owners, high consumer spending in the state, and strong business survival rates. According to Management Library, here are some of the best states to start a business:
- Texas: Best overall.
- Utah: Best for business financing.
- Montana: Best for business=friendly policies.
- Georgia: Best for cost of labor.
- Florida: Best state for starting a business for tax purposes.
- California: Best for innovation.
- Oklahoma: Best for cost of doing business.
- Idaho: Best for real estate.
- North Carolina: Best for starting an LLC.
- Delaware: Best for privacy protection.
How do I start a small business with no money?
Starting a business with no money is easiest if you have a marketable service to sell. You can start small, out of your home. Consider starting your business as a side gig while you keep your full time job. This limits your risk if the business does not take off.
If you have your heart set on a business that requires capital up front, you’ll need to look for alternative funding sources. Have your business plan solidified before you seek funding from third-party sources. Consider the following funding options:
- Friends and family.
- Small business grants.
- Small business loans.
- Venture capitalists.
- Angel investors.
How do I start a business online?
Online businesses offer the advantage of being relatively cheap compared to their brick-and-mortar counterparts. You will want to follow the same steps outlined above from defining your business concept to marketing your business. A key component to a successful online business is having a strong online presence and well-designed website.
Do I need a business credit card?
If you want to establish a business credit score, you should eventually plan to get a business credit card. Prior to opening your business, it’ll be harder to get a business credit card because you have no business credit history—or history in business at all, if this is your first venture. Some business credit cards will allow you to use your personal credit score to qualify. Others may require six months or a year in business before you qualify.
Revenued offers a combination line of credit and a prepaid card. You may be able to get approved with little to no business history or credit. Once your application is approved, you may have access to your funds within 24 hours.
Once you have one year in business under your belt, you can apply for a PayPal business credit card. You can apply online, and your virtual card will be linked to your PayPal business account immediately.
What are the best business checking accounts?
There are a wide variety of business checking accounts to choose from. For example, U.S. Bank’s business checking accounts are a good choice if you use its merchant services. Your funds can be deposited into your business checking account even faster—within hours of batch closure, including weekends.
If you’re looking for a convenient app to keep track of your banking, bookkeeping, and tax information in one place, consider the Foundsmall business banking app. If you have multiple owners who would like joint business account access, Lili provides multi-user access and a debit card for each business owner, with exclusive benefits including a Metal Visa® Business Debit Card and priority support.
How much does it cost to create a business?
The cost to start a business varies considerably based on location and industry. According to Small Business Trends, the average small business startup and first-year costs fall between $30,000 to $40,000.
How do I get a loan for a new business?
You can get a loan for your new business from a private lender or the U.S. Small Business Administration (SBA). Startup business loans can help you cover startup expenses such as:
- Purchasing or leasing a space.
- Paying utility bills during the startup phase.
- Purchasing equipment and inventory.
To be approved for a startup business loan, you’ll first need a solid business plan. With no business history, lenders will rely heavily on your extensive research and financial projections in the business plan. Despite being called a startup loan, many private lender startup loans have a minimum-of-six-months-in-business requirement to qualify for the loan. Requirements vary by lender. You may be able to qualify for a business loan with a strong personal credit score or significant collateral—something of value put up as security for the loan in case you default on payments.
The SBA 7(a) loan program offers small businesses a loan guarantee, up to $5 million, if certain qualifications are met. It is not provided directly by the SBA, but it is instead offered through approved third-party lenders. To qualify, your business must:
- Be actively operating.
- Operate for profit.
- Be located within the United States.
- Meet size requirements for a small business according to the SBA.
- Not be an ineligible business.
- Not be able to obtain reasonable terms through any other private loan source.
- Be creditworthy.
- Be able to repay the loan.
If you are unable to secure a business loan, a personal loan is another option. You may also be able to take a 401(k) loan out of your employer-sponsored retirement plan. Unless a lower limit applies to your plan, the maximum you can take from your 401(k) is $50,000 or 50% of your vested account balance, whichever is less.
What are some of the best business ideas in 2023?
This TIME article covers 12 great business ideas in 2023. There are:
- Flower arrangements.
- Meal delivery service.
- Event planning.
- Pet sitting.
- Cleaning service.
- Professional organizing.
- Music performer.
- Home delivery.
- Online teaching.
- Online bookkeeping.
- Host a group program.
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