Motivations for starting a business are widespread. Some of the most popular reasons entrepreneurs buckle down and start a business are to gain financial freedom, to be their own boss, and simply because the culture of business ownership seems far superior to “working for the man”. Whatever your reasons for starting a business, there are steps to follow before you can open the doors to a booming business.
Step One: The Business Plan
A business plan is the first step to starting a business. This document should be extensive. It cannot be thrown together in an afternoon. Most people think of a business plan as something to show potential investors or lenders. However, a good business plan can be used like a map during a business’s first years of operation. The writing process offers an excellent time for you to determine the feasibility of your business idea, the strengths and weaknesses of your business, areas of opportunity, and much more. The keys to a good business plan include:
- Solidifying a mission and vision for your business
- Developing a realistic financial outlook, keeping in mind most businesses do not profit for many years
- Completing significant market research to better understand customer, clients, and competitors
Required sections of a business plan include:
- Executive Summary
- Business Description
- Research, Design, Development
- Organization (legal and management specifics)
- Projected Milestone Schedule
Step Two: Money, Money, Money
After you have written a business plan, you will have a good idea of how much money you need to get your business up and running. Startup costs vary greatly between industries. Some technology companies can start with just a few hundred dollars, while a business such as a small bakery or coffee shop will cost at least $100,000-$200,000. There are a few different ways to fund a new business:
- Savings: Personal savings are often used to start a business. The benefits to using savings include that you will not be burdened by debt or pressured by outside investors. On the other hand, your savings may be depleted, or you may not have enough money to get started. Some people even tap into their 401k for startup funds, but this is hotly debated choice.
- Loans: Friends, family, banks, and some local organizations might loan you money to start a business. The main thing to remember about a loan is that you will have to pay back the total amount plus interest. No matter who loans you money, even if it is your parents, it is critical to write up a loan document for tax and legal purposes. A good business plan will help you secure a loan by instilling trust in your lender.
- Investors: If you are starting a technology company, you may be able to receive venture capital or money from an angel investor. Venture capitalistsonly invest in companies with the potential to make millions. Angel investors will occasionally work with smaller companies, but you will need to have big ideas for how your company will expand during the first years of operation in order to secure funding.
Step Three: Get Structured
- Sole proprietor: The easiest to set up, a sole proprietorship is run by one person and profits are taxed only once as income. However, the owner is responsible for all debts, and lenders have the right to come after the owner’s home and other possessions if necessary.
- Partnership: A partnership is similar to sole proprietorship, except the profits and liability are split between two people.
- LLC: An LLC can be owned by one or more people who are not personally liable for the business’s debts. Owners can choose if they want to be taxed as a partnership or corporation.
- Corporation: Ideal for entrepreneurs who will use investors to raise funds, a corporation offer owners limited liability but the paperwork can be arduous. Additionally, a corporation is taxed as its own entity and then owners are taxed on their income from the business.
Other business structures include S corporations, nonprofit corporations, and more. Each has their own unique advantages and disad
vantages, specifically when it comes to paying taxes, liability, and investment options. Once the most appropriate structure has been selected, you may need to apply for a tax identification number for your business.
Step Four: Be Legal
Although many people starting a small business are strapped for cash, spending a little money on a business lawyer can save big bucks in the long run. Setting up a business structure, renting retail space, hiring employees, purchasing business equipment, and more are all decisions with serious legal implications. Most small businesses will not require a lawyer on retainer at all times, but hiring a lawyer to help with startup legal issues is a good idea to get off on the right foot.
Step Five: Paperwork
The legal documents, licenses, and permits will vary depending on what type of business you open, but every startup will require some kind of paperwork. Common business licenses and permits which startups require include:
- Business license
- Tax registrations
- Employer Identification Number
- Health permits
- Occupational licenses (state)
- Liquor licenses
- Reseller’s licenses
- Zoning and land-use permits
- Health department permits
Most of these application forms are state and county specific, depending on where your business will be operating.
Nolo – Nolo offers a comprehensive collection of resources, articles, and books on business law.
Entrepreneur Startup – News, practical guides, business planning resources, and much more from the trusted magazine and website Entrepreneur.
Small Business Administration – SBA is the ultimate resource for advice on starting a business. They cover topics from law, to loans, and beyond.
Business Plans – Excellent examples of business plans for startups in a wide range of industries.
Business IRS – The best place for documents and requirements for paying business taxes.