Are you thinking about starting a small business? Well, you’re not alone. Believe it or not, small businesses account for 99.9% of all United States businesses. So, as a small business owner, you would be in very good company!
Admittedly, learning how to start a business can be both exhilarating and life-changing. However, budding young entrepreneurs (like you) may get more than a little bit overwhelmed and frustrated with the process of starting a business if you don’t have a systematic approach to follow.
Especially with all the “success stories” you see on social media. But don’t give up before you even start. You can do this. To get you jump-started, here are the key steps (at a glance) in starting a small business:
- Coordinate and streamline your activities.
- Ensure legal and tax compliance.
- Optimize cost-efficiency.
- Secure funding for your startup.
- Make informed decisions.
- Lay the foundation for future business growth.
Step 1: figure out what’s unique about your business (aka, your unique value proposition)
Your unique value proposition, or UVP, is a statement explaining the business basics, including:
- How your service or product works.
- Why your offer is valuable.
- Why your business stands out from your competitors.
Before you start a business, you need to determine what your product or service’s value will be to your target market. Your UVP will provide the foundation for lots of activities, such as funding applications, marketing, and team building.
To create your UVP, consider the following questions:
Who is your target market?
Successful businesses will do extensive business market research to formulate their target audience’s demographic profile. As a prospective small business owner, you should be specific about the following:
- Age range.
- Interests and hobbies.
- Daily schedule.
- Typical challenges or frustrations.
Ideally, you should create a buyer persona for your small business. A buyer persona is a fictional person who fits the typical customer description of your small business.
It’s a lot like creating the lead characters in the novel or screenplay you want to write. Create a backstory, interests, personality, quirks, secret dreams—even add a photo album.
What problems or needs does your small business solve?
Carefully consider the pain point you want your business to solve for your ideal customers. For example, does your service eliminate a daily hassle? Does it save time? Does it save costs? Make sure you fully vet this out in your business idea (and validate it through market research, per the point above).
Why should customers choose your business?
Research the products and services of what would be competing businesses. Read the mission statements crafted by the business owners of these companies, if you can find them. Check them out on social media, too. This will help you figure out just what they stand for.
Find out why customers are loyal to these companies and what makes them a successful business. Then: what do you feel will make your type of business idea distinct from your competitors? What will your small business model offer that the competitors don’t—and to what potential customers?
Starting a business is more than just an idea. To have a successful business, you need to ensure your business idea has been vetted, you’ve done enough market research, and you have a distinct UVP when compared to other similar businesses.
Step 2: draw up a business plan
After determining how your product or service can be superior to its competitors, now it’s time to write up a business plan (and ultimately, how the business will make money).
This document should outline the financial, operational, and marketing objectives of your business and include an actionable plan for achieving these goals.
Drawing up a business plan before actually starting a business allows you to:
- Calculate your startup costs.
- Determine your business’s potential profitability.
- Estimate your business’s revenue.
- Formulate an effective marketing strategy.
- Foresee potential issues.
- Obtain funding from lenders or investors.
- Outline the market research that validates all of the above.
A complete business plan should include the following ten components:
- An executive summary containing an overview of the business plan.
- Information about you and other founders or partial business owners.
- A complete product or service description.
- Market research analysis with data from surveys, banks, or university theses.
- Your price, distribution, offer, and marketing strategies (including social media).
- A description of the organization’s structural hierarchy.
- Your intentions with the company’s legal structure.
- An honest risk assessment.
- A comprehensive financial plan.
- Relevant documentation, such as patent registrations or your CV.
The financial plan is among the most critical components of your business plan. It should include your:
- Equity capital contribution.
- Distribution of external funds.
- Liquidity projection.
- An earnings forecast.
Step 3: fund your business
Writing a business plan will help you determine how much funding you’ll need to get your startup off the ground. But part of starting a business is having the money to do it. When it comes to funding your business, you have several options:
Bootstrapping (aka self-funding) is an option if you have 401(k) funds, savings, or an inheritance from a rich uncle you can use to fund your own business. Obviously, the advantage of bootstrapping is that you retain complete control over your business. However, with bootstrapping, you (and only you) also assume all the risk—and so you may have to wait longer before retiring.
However, even if you’re not a trust-fund kid, other options do exist.
A venture capital investment is when an angel investor offers you capital in exchange for a share of ownership in your company. In most cases, this investor also expects a role within the company, such as a consultant.
A venture capital investment is a good option for your business if:
- The potential for business growth is high.
- You’re willing to offer a share of equity in exchange for seed capital.
- Your business already has a foothold in the market.
Be sure to do extensive research on potential investors and how much money you think you’ll realistically need. Make sure they can add the value your business needs to grow. You’ll need to negotiate the terms of the investment agreement to protect you in terms of the ownership share you give up.
We’ve all heard about businesses and products launching with the financial capital that online donors contributed through sites like GoFundMe, IndieGoGo, or Kickstarter. With crowdfunding, a large number of individuals contribute to your seed capital. How does this work?
- Equity crowdfunding.
- Reward-based crowdfunding.
- Peer-to-peer lending.
With equity crowdfunding, investors receive unlisted shares or a convertible note in exchange for their contributions. When you offer a convertible note, the contribution is a loan, but the investor can convert the debt into an ownership share. This option is ideal if a startup’s value is unclear.
Reward-based crowdfunding differs from equity crowdfunding in that individuals receive rewards, such as a free product, service, or discount in exchange for their contributions. Investors don’t receive an ownership share with reward-based crowdfunding.
A different type of crowdfunding is peer-to-peer lending—a method for crowdsourcing loans to fund your new business. Lending platforms offer this service online, and the rates are generally competitive. Here is a list of some of the best P2P lending sites so you can learn more.
Small business loans
Lenders rely heavily on financial projections, so make sure that you have a well-founded financial plan for starting a business. Also, compare small business loan offers from different lenders to get the best terms and lowest possible interest rates.
Riskier option – credit cards
An option, albeit a slightly riskier one, is to use a credit card to fund your business. I want to make it clear that this option shouldn’t be taken lightly though. You can get yourself into a lot of trouble if you don’t know what you’re doing and you forget to make payments. Or, you simply take on too much debt.
Step 4: select a location
When you want to start a business that’s either online or mobile-focused, you can set it up anywhere you want. However, if your operation involves direct contact with customers, location is critical. Be sure to look into these issues when selecting your new business location:
- Zoning laws. Ignoring zoning laws can result in a hefty fine when you start a business—and you don’t want to spend valuable resources setting up shop, only to have to start over somewhere else a few months later.
- Demographics. Use your buyer persona to determine the optimal location for your business. Where would she or he be most likely to find you? Where would they feel like you fit into their stomping grounds?
- Easy access. Make sure that your business office or store is close to your customer base, with enough parking and easy access for disabled individuals.
- Foot traffic. If you rely on walk-in customers, your business location should be on the main drag in a high-traffic area where people don’t have to go out of their way to access your products or services.
- Office or store space conditions. Your location should have enough space for everything your business needs. The building should also be in a presentable condition. That doesn’t mean it needs to be brand new—but keep in mind any remodeling you might need to do to adapt it to suit your business.
When leasing office space, pay careful attention to the following terms:
- The lease term’s length.
- Needed alterations or improvements.
- The assignment and subletting clause of the lease.
- Rent and annual escalations.
If possible, find a professional tenant broker for your business. Also, try to remove any one-sided provisions favoring the landlord from the lease.
Step 5: take care of the legal stuff
Compliance when it comes to a business involves following relevant laws and regulations to ensure:
- Responsible business and staff management.
- Fair consumer treatment.
- Tax compliance,
- General public safety.
Following this step is when developing your business is necessary to avoid criminal charges and penalties, but it will also help you build a positive reputation and optimize your productivity.
Select a suitable small business structure
The legal structure you choose for your new business will affect various issues, including:
- Pass-through taxation.
- The safety of your personal assets.
- Business continuation upon ownership change.
- Access to capital.
Here are some different business structure models:
A sole proprietorship is the simplest and doesn’t constitute a separate legal entity for your business. In other words, you will have no legal separation between (a) the business’s assets and liabilities and (b) your personal assets and liabilities. You will be personally liable for the obligations, debts, and legal claims against your business.
A partnership is a business that consists of two or more individuals. If you choose this business structure, you and your partner(s) will be jointly responsible for the business’s obligations and debts. A partnership is not a taxable entity, so each partners’ income will be taxable in proportion to the profit share each owns in the business.
Limited Liability Company (LLC)
An LLC is a separate legal entity that combines the benefits of a partnership and a corporation. As an LLC member, your personal assets would have protection in the event of bankruptcy or a lawsuit. LLCs are also pass-through entities, which means you would pay all the income tax for your business on your personal return while claiming business deductions and losses.
In some cases, the IRS allows LLCs to choose their taxation structure. If you have significant personal assets that need protection, or if you want to benefit from the pass-through taxation structure, an LLC may be a viable business structure option for you.
If you plan to seek business funding from angel investors or go public in the future, a corporation may be the most suitable business structure. This type of entity is legally separate from its owners and can enter agreements, pay taxes, assume liability, and own property. The different types of corporations include:
- C corporation. This type of corporation pays taxes as a separate entity. The corporation owners also pay taxes personally on the profits they earn.
- S corporation. S corps are pass-through entities and are not subject to double taxation like C corps. The shareholder limit for S corps is 100.
- Nonprofit. This type of corporation includes charities, homeowners’ associations, and labor unions. Nonprofits are tax-exempt.
Meet the legal requirements for operating your business
Before you can legally start your business operations, you’ll need to meet several local, federal, and state requirements.
Limited Liability Companies need to create an operating agreement that includes the following:
- Each member’s ownership share.
- Voting rights and responsibilities of each member.
- Members’ responsibilities and duties.
- Procedures for holding meetings.
- Members’ capital contributions.
- Procedures for profit and loss distributions among members.
- Procedures for transferring members’ interest in the event of a buyout or death.
- The company’s dissolution provisions.
Check your state’s requirements for operating agreements to make sure that you include the correct information.
Articles of incorporation
Corporations need to create and file articles of incorporation through the Secretary of State before starting their business operations. Articles of incorporation include the following information:
- The business name.
- The name and contact details of the corporation’s registered agent.
- The type of corporate structure.
- The board members’ names and addresses.
- The type and number of authorized shares the company has available.
- The incorporator’s name, signature, and address.
Doing Business As (DBA)
You are “doing business as” if the name under which you operate differs from your registered business name. In some states, filing for a DBA certificate is a requirement.
However, even if you don’t have to register a DBA for your business, it can be beneficial to do so anyway, as it allows you to do business under a brand name that differs from your personal name or legal entity name. If you have a federal tax ID number and DBA, you’ll also meet the requirements for opening a business bank account.
Apply for federal and state tax ID numbers
After registering your business with the government, the next step is to apply for an Employer Identification Number (EIN), which also doubles as your business’s federal tax ID. You will need this number whenever you:
- File your federal tax return.
- Open a new business bank account.
- Apply for permits and licenses.
- Hire new employees.
You can apply for an Employer Identification Number (EIN) using the IRS assistance tool. If you want to create an S corporation, you’ll need to file form 2553 with the IRS.
Depending on your state’s tax law, you may also need a state tax ID. You’ll need a state tax ID to:
- File employment and income tax.
- Hire employees.
- Sell certain goods or services.
- Obtain identity theft protection.
Apply for permits and licenses
Federal and state agencies have regulations in place to:
- Monitor the performance and compliance of businesses.
- Ensure the transparency of information.
- Keep organizations accountable for their actions.
- Maintain quality standards within and across industries.
- Ensure the public’s wellbeing and safety.
Depending on your business activities, you may need to apply for licenses and permits with regulatory authorities such as the:
- U.S. Department of Transportation.
- U.S. Department of Agriculture.
- Alcohol and Tobacco Tax and Trade Bureau.
- Federal Maritime Commission.
- Bureau of Safety and Environmental Enforcement.
- Federal Communications Commission.
On a state or local level, you’ll encounter regulations for business activities, such as:
- Construction and plumbing.
- Dry cleaning.
- Food services.
Be sure to research your state, city, and county regulations to determine which permits and licenses you need.
Step 6: get a business checking account
Another important step when starting a business is to get a business checking account. This will be the account that you use to deposit your payroll checks and pay all of the bills for your new company.
Here are the “traditional steps” to opening a business checking account:
- Find a bank that’s near your business location and apply for an account.
- Bring identification to the bank (driver’s license, passport, etc.), as well as proof of ownership if you’re opening the account in your own name instead of on behalf of a company or organization.
- Provide copies of any banking documents from other accounts so that they can verify how much money is available to open this new checking account.
- Negotiate with the banker about what types of transactions are free at their institution and then choose one with no monthly service fees based on how often you plan on using it; some banks even offer “free” services such as checks or credit cards which may offset costs elsewhere.
If you don’t want to go through all the hassle of that, I suggest opening an online business checking account. A great option right now is Lili – which provides free checking for freelancers and solopreneurs. You’ll get a debit card, mobile app, tax tools, automatic savings, and more.
Another option I recommend is Bank Novo. They’re a digital-only bank with no fees (unless you withdraw money from other institutions). They also have low ATM withdrawal limits ($300 per month) which is perfect for freelancers.
Step 7: protect your business’s intellectual property (IP)
Your business’s intellectual property forms an integral part of your unique value proposition, and you need to protect it at all costs. Intellectual property includes the following:
- Inventions and designs.
- Original ideas.
- Creative work.
- Symbols, names, and images.
To protect your IP, you’ll need to register:
- All your business’s patents, trademarks, and copyrights with the U.S. Patent and Trademark Office (USPTO).
- Your business name and products in the state where you operate and the USPTO.
- Your domain name through your registrar service.
You’ll also need to set up:
- Password protection for all your computer networks.
- A virtual private network (VPN) access.
Signing confidentiality agreements with employees and partners is integral to IP protection. These agreements prevent stakeholders from sharing sensitive information, such as trade secrets. The most common confidentiality agreements include:
- A secrecy agreement (SA).
- A non-disclosure agreement (NDA).
- A proprietary information agreement (PIA).
- A confidential disclosure agreement (CDA).
Where possible, avoid joint IP ownership agreements, as they grant control of IP to other parties.
Step 8: hire a team of employees, contractors, and vendors
Once you have the measures in place to protect your intellectual property, you can start putting together your team to carry out the business operations.
An employee is someone who works full-time in the service of the business under a contract of hire. On the other hand, an independent contractor carries out specific business duties but not under your supervision.
Pros of hiring employees
- Full-time access to labor.
- Complete control over the employee’s input.
- Ample opportunity for business-specific training.
Cons of hiring employees
- Federal and state regulations of salaries and overtime.
- Various payroll tax requirements, including FICA tax payments.
- Worker’s compensation insurance payments.
- Unemployment insurance payments.
- 401(k) contributions.
Pros of hiring independent contractors
- Contractors supply their own resources.
- You’ll have limited tax responsibilities.
- You’ll have fewer payroll responsibilities.
Cons of hiring independent contractors
- Contractors don’t work under supervision.
- You’ll have little control over work hours.
- Specialist contractors tend to charge a premium for their services.
In most cases, startups onboard both employees and contractors. Generally speaking, employees are best for doing long-term work that is integral to your business. Consider hiring a contractor for peripheral duties, such as waste disposal or computer system management.
Vendors are business-to-business (B2B) entities in the supply chain that provide the goods or services your business needs so you can provide your customers with your end product. Vendors include manufacturers, wholesalers, and secondary service providers. For example, if your business organizes events, the caterer, florist, and DJ are your vendors.
When selecting vendors, due diligence is necessary to ensure that you have a reliable and cost-effective supply of goods and services.
Step 9: start marketing your business
Finally! Now that you have a team of employees, contractors, and suppliers, you can start marketing your services and generate an income. Congratulations for making it this far—you’re almost there!
Marketing a business is a comprehensive, multi-dimensional, and ongoing business operation. Ideally, you should hire or appoint a qualified individual or team to carry out your business’s marketing activities.
The list of marketing strategies you might implement is endless, but all of them aim to:
- Draw your target audience’s attention.
- Build brand authority and loyalty.
- Incentivize an action, such as scheduling a service or buying a product.
Conventional marketing strategies include advertising, strategic product placement, and promotional, public relations activities, such as competitions, events, and sponsorships.
First, any successful business will need a well-designed and optimized web page and logo that will be appealing to your target buyer demographic. Of course, you can build your own site using readily available online sites like WordPress, Wix, or Squarespace.
Still, you’ll achieve the best marketing success if you hire a digital marketing professional and graphic designer to design it and incorporate the following strategies while doing so.
Digital marketing strategies you should implement include:
- Search engine optimization (SEO) to generate organic traffic to your website.
- Pay-per-click (PPC) advertising to target people who enter transactional searches.
- Content marketing to build authority within your niche and optimize your online assets for search engines.
- Email marketing to keep potential customers aware of your offers.
- Social media marketing to increase brand awareness and build your business’s reputation.
If your business doesn’t have a unique value proposition, your marketing strategies will be hit-and-miss. However, if you have a clearly defined customer persona with carefully formulated and unique buying and selling propositions, you’ll have the foundation for a highly successful marketing campaign.
Step 10: manage your business and grow
If you follow all the steps above, you should be starting a business that’s legally compliant. You’ll also have a well-defined market you can target to whom you can provide with a superior, unique product or service.
Now, your job will be to coordinate and organize the various business activities in a manner that adds value to your customer base, ensuring sustainable growth. Business management include:
- Communicating with customers, employees, and other stakeholders.
- Gathering information about the business’s performance, market share, and financial situation.
- Making decisions and communicating them to your teams.
- Innovative thinking to reduce costs, increase output, and provide customers with more value.
When managing your business, your objectives should include:
- Maximizing output with minimal input.
- Increasing the efficiency of your business’s production factors.
- Establishing a productive and comfortable environment for your employees.