17/04/2024

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How to start a business: A step-by-step guide

How to start a business: A step-by-step guide

Starting a business requires a basic understanding of business finances, sales, marketing and legal requirements. Depending on the business, the specifics within each step may differ, but below are the general steps you’ll need to take to start a business and the resources that can help you. 

1. Conduct market research

Conducting research helps you gather information on your potential customers and similar businesses in your local area. With this research, you can develop a marketing and business positioning plan that addresses unsolved customer problems in a way that will engage them.

“I strongly encourage every business owner to not only understand who their target customers are, but where they’re located and what motivates them,” says Peter Buzzard, SCORE Treasure Valley chapter co-chair and certified mentor.

Some market research strategies to consider include: 

Primary research

In primary research, you go directly to your potential customers to understand what problems you can solve for them. Surveys, interviews and focus groups are all tools used in this type of research. 

Secondary research

This type of research consists of accessing publicly available information about your company’s target market. Government statistics (such as those offered by the U.S. Census Bureau and the Bureau of Labor & Statistics) and market reports (such as those offered by Pew, Gartner and Forrester) are tools used in this type of research to better understand who your customers are.

Competitor analysis

This type of secondary research involves identifying gaps that may exist in the local market for your products or services, uncovering high-sale products among competitors and learning competitors’ marketing or sales weaknesses. A simple way to conduct competitive research is to ask your customers what other products or services they consider in your market and why. Social media channels can also shed light on customers’ sentiments around competitors’ offerings. 

2. Choose your business structure

Some common startup or small business structures include: 

  • Limited liability company (LLC): A limited liability company is a flexible business structure that allows you to choose your own management structure and membership with few restrictions. It is also a pass-through entity, meaning profits and losses pass through the business and to individual members who pay taxes on their personal income tax returns.
  • S corporation: An S corporation has 100 shareholders or fewer. However, it is also a pass-through entity, so profits are not taxed at both the corporate and shareholder level like in a C corporation. However, S corps can only issue one class of stock to raise funding.
  • C corporation: A C corporation is the most rigid type of business structure in that you must have a board of directors and hold shareholder and board meetings. In addition, it is taxed at both the corporate and shareholder level. However, C corporations can have an unlimited number of shareholders and issue multiple types of stock, making it a great structure for raising lots of capital quickly. 

Before choosing a business structure, it is important to consult with a business attorney or tax consultant to determine which business structure will best help you meet your short- and long-term business needs. Many business formation companies offer legal consultations for this purpose.

3. Determine funding options for your business

There are several ways to fund your business, including:

  • Self-funding: Bootstrapping may be a feasible option if you have enough funding or don’t need a lot of upfront capital. You can consider using your savings, asking friends and family for help or, though risky, tapping into your retirement accounts. The benefit is that you have absolute control over your business, but the pressure is all on you to make it work.
  • A business credit card: To obtain a business credit card as a startup, you must often provide information about your personal income and credit rating. However, without a business-revenue history to show, this may be easier than getting a business loan in the startup stage. Some even offer options specifically for small businesses.
  • Small business loans: A small business loan will require you to prepare documentation such as a business plan (see step four), financial projections and other proof showing that you will pay back your loan on time. There are several avenues to consider, such as a loan through the Small Business Administration (SBA). Some financial institutions offer loans specifically to startups
  • Venture capital investors: You can find companies or individuals who are willing to invest in your business in exchange for some ownership and sometimes a more active role in shaping the business. This is a more common approach for C corporations. 

4. Create a business plan

A business plan is one document or a series of documents that overview the various aspects of your business, including its financial position and projections, how it’ll be managed, how it’ll be positioned in the market and what products or services it’ll sell. It’s also a tool to help you determine whether you want to bring on a business partner, receive outside funding and if the company is a viable venture at all. Finally, it is often a tool used to attract investors to small business endeavors.

Most business plans include the following content: 

  • An executive summary: This section includes your company’s mission, vision, goals and value statement. It is often the first section read by investors, so it should target their interests.
  • A company description: This is a brief overview of your business, including its name, a description of its offerings and how the company aims to position within the market.
  • A competitive analysis: This section often includes a SWOT analysis that identifies your business’s strengths, weaknesses, opportunities and threats when lined up against competitors.
  • An organizational structure overview: This section should cover your business’s legal structure (whether it is an S corp, LLC or C corp, for example), its management structure and who will manage it. It often includes an organizational chart.
  • Products and services: This section describes your business offerings, such as the products or services it sells, how it serves customers, what products or services you plan to introduce soon and if you have copyright or patent filings in the works.
  • Marketing approach: This section overviews your strategies for attracting and retaining customers. 
  • Funding requirements: This section specifically delineates the funding you will require from investors to cover a five-year plan for your business. It includes a detailed look at how the funds will be used and the value the business will generate from them.
  • Financial projections: This section overviews the financial stability of your business to assure investors and other stakeholders. It often includes recent income statements, balance sheets, cash flow statements and collateral that could serve to obtain a loan if needed.
  • Appendix: This section offers supporting resources and documentation, such as the business’s credit history, licenses, permits, contracts, patents and resumes.

While you may not have all of these sections’ resources at this startup phase, include as much information as you can. Doing so helps you plan around company weaknesses and highlight company strengths so you can attract and take advantage of business opportunities as they arise. 

5. Register your business

Launching your business as an LLC or other legal structure requires you to file documentation with your secretary of state. There are several preparatory steps involved, including choosing a unique business name, choosing a business structure, choosing a registered agent and filing an articles of organization or articles of incorporation form (depending on your business structure).

Read our guides on how to start an LLC and how to start an S corp for more information. 

6. Apply for an EIN

An employer identification number (EIN) is a nine-digit number issued for free by the IRS to identify your business just as a Social Security number identifies a person. It is used to complete many key business tasks, such as hiring employees, paying federal business taxes, obtaining business funding, opening a bank account and applying for required business licenses.

You can apply for an EIN on the IRS website between Monday and Friday, 7 a.m. to 10 p.m. EST. Once you submit your application, you will receive an EIN instantly.

7. Apply for relevant business licenses

Some states require businesses to obtain a state business license to operate. Others only require business licenses on the local or county level. And, still, others require professional and activity-based business licenses or permits. To help you navigate this step, we’ve prepared a business licensing guide that walks you through how to discover required business licenses and apply for them.

What to consider before starting a business

Aside from doing ample market research to understand the viability of your business, understanding resources to gauge, grow and protect your cash flow can mean the difference between business success and bankruptcy.

Estimating your cash flow

“One of the most common mistakes I see when mentoring is business owners failing to understand the cash flow requirements to launch and operate their business during the first year,” says Buzzard.

Cash flow estimates may not be completely accurate as you’re still learning how your business will work. Still, estimating what you need — such as employee salaries, funding for products — and when you can expect revenue to hit your business account is important. Doing this analysis helps you to take a proactive approach to ensure your business has every opportunity to succeed. A good financial advisor can help you nail down your cash flow management and budgeting strategies.

Protecting your cash flow

You’ll also want to consider working with advisors, professionals and tools that can help guide you through the many aspects of starting a business, including ways you can protect your cash flow by, for example, reducing legal or tax penalties or debts. Some of these resources include:

  • A tax consultant: These consultants help businesses reduce their tax liabilities by, for example, helping them choose the best business structure (or when to convert to another business structure), identify tax deductions and strike a balance between wages and dividend distribution in a corporation. 
  • A business attorney: Many business formation companies offer legal services with lawyers who are well-versed in startup and small-business law. These include LegalZoom, Rocket Lawyer and other top business formation companies. These lawyers can help businesses avoid compliance penalties.
  • Registered agent service providers: A registered agent receives legal and tax correspondence on a business’s behalf. However, they also often offer other services that can help to keep your business financially healthy, such as ongoing guidance on staying ahead of business filings and compliance issues to avoid hefty penalties. 
  • Payroll software providers: The right payroll software can help you stay ahead of your tax responsibilities and avoid employee overpayments. For example, they can ensure all employment taxes are paid on the state and federal levels, that your accounting ledger is always up to date and that your taxes are filed on time and accurately. Some even offer accuracy guarantees to reimburse for penalties should withholdings or taxes be performed inaccurately. Many also offer concise time tracking tools to ensure you only pay employees for hours worked.
  • A certified public accountant (CPA): A CPA is certified through the Board of Accountancy for your state. Most must hold a bachelor’s degree in business administration, finance, accounting or a similar field and have years of accounting experience. They can advise in business financial planning to help you keep your cash flow healthy and plan for unforeseen cash flow obstructions.

Best places to start a business in the U.S. 

Often, the best place to start a business is within the business owners’ own state. This is because starting a business in a foreign state often comes with added costs, such as hiring a registered agent and filing foreign entity formation paperwork (which is often more expensive than domestic entity formation paperwork filings). You may also have to hire a lawyer who is versed in the foreign state’s law and file annual reports in that state in addition to your own. 

Tips for starting a business with no money

Depending on the structure you choose for your business, it may or may not be possible to start a business with no money. For example, many sole proprietors begin a side hustle to sell their services using their personal computers, then purchase more equipment, certifications and upgrade their business structures as they are able.

However, most business structures require at least a small initial investment. Still, there are some decisions you can make to ensure startup costs are as low as possible, including: 

  • Appointing a free registered agent: In most states, you can serve as your business’s registered agent and pay no money for this service. However, if fulfilling this role in-house is too burdensome, some registered agent service providers offer one year of registered agent services for free if you also form your company through their business formation services, including Incfile and Inc Authority
  • Hire a free business formation service: If you need assistance starting your business, many business formation services offer free formation packages so you know your registration is done correctly, even if you have no money for a lawyer. Read our best LLC services list to find a formation company with plans to fit your budget.
  • Use what you have: If you are starting a service business, instead of purchasing new computers, printers and tablets, use the equipment you already have to get started. 
  • Use free tools: Many software and hardware providers offer free products to startups. Square, for example, offers a free credit card reader to its small business customers. And, Payroll4Free will give you the basics to run payroll for your small company for free.
  • Keep your day job: “Starting a business is stressful enough without having to worry about how to feed and house your family,” says Buzzard. “In most cases, it is best if business owners can hold onto a job until the business is generating sufficient and consistent cash flow.” 
  • Prioritize business purchases: “The process of selling and delivering to even your first customer will be an incredibly valuable learning experience,” says Buzzard. “Then, let your customer interactions guide the refinement of your business plan and prioritize the investments you make when scaling,” advises Buzzard.

Frequently asked questions (FAQs)

The easiest business to start and make money is a service-based online business. For example, a sole owner and operator might become a freelance writer or graphic designer and use the equipment they have on hand to launch the business.

The cheapest business to start is a sole proprietorship that provides an online service. For example, to become a freelance writer, you only need a laptop computer and a home internet service connection, both of which most households already have.

There is no best business structure. Choosing the best one for your new business depends on the nature of your business, its needs and your goals. To learn the best business structure for your needs, consult with a business formation service provider.

To get a business credit card, first compare the best business credit cards to narrow down your list to one. Then, head to the credit card issuer’s website and fill out an application form. Information you will need to provide generally includes your business name and address, the owner’s contact and income details, your annual business revenue, the number of employees in your business, your business category, your monthly business spend and your EIN or Social Security number.