Updated November 21, 2023

How to Start a Business

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Want to start a business but don't know how? No problem. Learn how to do it in 11 steps with this handy guide.

Around 20% of businesses fail after the first year.[1] That may be due to the ever-changing market conditions, accidents, natural disasters, etc.

But how do you avoid being part of that 20%? What does it take to start and succeed as a new business?

Here are the 11 steps you can take. Read on.

11 Steps to Start Your Business

Starting a business is undeniably daunting. But it's much more doable when you know what to do. And it starts with research.

Conduct market research

Market research involves collecting and analyzing data about your customers. It's also the first step you should take after coming up with a business idea.

It involves knowing your potential customers, their needs, pain points, and preferences. You can use this information to understand if your product or service can solve their problems.

In other words, you can see if there's a demand for what you're offering. With market research, you can avoid investing time, money, and energy in an idea that won't work.

One of the most common reasons startups fail is overestimating the demand for their products or services.[2]

Also, market research gives you valuable data about your competitors. You'll know who they are, their locations, and their overall performance in the market.

Use that info to develop more effective strategies. You can build on what they're already doing right instead of doing everything from scratch.

Then, after researching your customers and competitors, it's time to plan what to do with the data.

Write a business plan

A business plan contains your business goals, strategies, and operations. It also details your budget and financial goals.

It's not legally required to have one. But it's a critical element for your company's growth and success. There are 3 reasons why.

  • Investors and lenders typically require a business plan to consider funding applications[3]
  • A business plan can help you spot issues before they happen and plan for solutions
  • It also outlines your goals, giving your company direction

A business plan can help your company grow 30% faster.[4] That said, you can use it as a reference point when evaluating your company's performance. Avoid writing generic goals for the plan to be effective.

A traditional business plan typically includes:

  • Executive summary
    This is a short introduction about your business. Some investors only read this part, so it's very important to write this more carefully.

  • Company description
    This is a more detailed explanation of your business structure, history, and value offered.

  • Products and services
    This section talks in detail about your products/services, prices, and competitors.

  • Market analysis
    This part talks about your industry, target market, and the difficulty of grabbing market shares from top competitors.

  • Marketing strategy
    Your marketing strategy details how you plan to attract and retain customers.

  • Financial plans
    This section talks about your company's financial planning and projections, including its possible investors and funding.

  • Budget
    This is where you detail your business' existing budget and how to divide it to cover business expenses.

Startup Cost Calculator

Pro tip: You can also go for a lean startup business plan if you want something shorter. It usually just highlights the key elements of your business and doesn't go into too much detail. Keep in mind that it's less thorough than a traditional business plan, so lenders and investors typically end up asking more questions.

Now that you have your business goals in place, it's time to handle the legal requirements, starting with your business structure.

Choose a business structure

Your business structure determines your company's tax classification, compliance requirements, and funding sources.

You can choose from:

  • Sole Proprietorship
    This business structure is the simplest and easiest to start, especially for home-based businesses. As a sole proprietor, your business income taxes are filed and paid as part of your personal tax returns.

    It's the best option if you want to start a business with minimal fuss and requirements.

  • Partnership
    A partnership is suitable if you're starting a business with another person (like a friend or relative). It's a simple and flexible option, too.

    Like sole proprietors, partnerships don't need formal registration. There are fewer requirements, and you're considered disregarded entities by default.

    Unlike LLCs and corporations, sole proprietors and general partnerships don't have liability protection. You and your company are still considered the same entity. So if your business encounters legal problems, you risk losing your personal assets.

  • Corporation (C-Corporation)
    Corporations are formal business structures that must be registered with the state. They're considered separate legal entities, so you'll get liability protection with it.

    The owners are considered employees. You won't need to pay self-employment tax, unlike sole proprietors and partners.

    That said, there are stricter requirements, like having to pay income taxes twice (unless you're an S-corporation).[5]

  • Limited Liability Company (LLC)
    A limited liability company has the liability protection of a corporation and the flexibility and simplicity of a sole proprietorship or partnership.

    You can choose the tax classification, but you're considered disregarded entities by default.[6]

    Also, like corporations, you'll need to register your business with the state. But you'll generally have fewer and less stringent requirements.

Speaking of registering your business, that's really what you'll need to do next.

Register your business

You're required to register your business if you're an LLC or a corporation. And the requirements depend on your specific business structure and location.[7]

Each state will have its own set of rules. For example, California requires its LLCs to pay an annual franchise tax. Some states, like New York, also have a publication requirement.

But these requirements overlap for all business structures:

  • Business name
    You need to come up with a unique name that reflects your business and follows state guidelines.

    Note that sole proprietors and partnerships have fewer options for business names. They'll need to include the owner's name, after all. But you can always apply for a DBA for more flexibility.

  • Formation documents
    Formation documents pertain to your Articles of Organization for LLCs, or Articles of Incorporation, for corporations.

  • Employer Identification Number (EIN)
    You need an EIN from the IRS after registering a business entity, especially if your business has multiple owners.

    This is useful for tax purposes. You'll also need it to open a business bank account, hire employees, and build your business credit.

    Only sole proprietors and single-member LLCs are exempted from this requirement, given they don't have employees. They can use their social security number (SSN) instead.

  • Business licenses and permits
    You may need to get specific licenses or permits to operate legally, depending on your location and industry.

    In most cases, a general business license is enough. Some states don't even require one. But check with your state laws and regulations to be sure.

Do I need to register an online business?
Online businesses are considered the same as physical, brick-and-mortar businesses. So you only need to do so if you're starting an LLC or a corporation.

Now that you're an official business, it's time to focus on your budget. Money gets your business moving, after all.

Organize your finances

There are a few things you need to do to manage your finances.

  • Calculate your business startup costs
    Listing and calculating your startup costs will give you a better grasp of how much you need to get started.

    That way, you can allocate enough room in your budget to cover everything, including emergency expenses.

    If calculating everything yourself seems daunting, consider using this handy business startup calculator to make things easier. Just remember that every business has different needs. And different industries have varying requirements. So there's no one-size-fits-all solution on how to budget.

  • Perform a break-even analysis
    You need to perform a break-even analysis to determine your BEP (break-even point). This break-even point is when the cost of doing business is equal to the money you make (no profits or losses).

    That said, with BEP analysis, you get to determine how long and how much it'll take to cover the cost and make a profit. You can then create better pricing strategies and set more realistic goals for your sales team.

    Also, investors and lenders will want to know when they can expect investment returns. Your BEP can answer that.

    How to calculate your BEP
    BEP = fixed costs / (average price per item - variable cost per item)

  • Calculate your profit margin
    Your profit margin is the percentage of the income you keep after deducting all business costs. It measures the company's performance in generating revenue.

    Like your BEP, investors and lenders consider profit margins when deciding to fund your startup. It lets them know if their investment can pay off.

    Should I have an exit strategy?
    Yes, you need an exit strategy, especially if you're aiming for external funding sources. It can highlight your company's value, which lenders will consider before funding your business. An exit strategy also highlights your company's key players and their roles in the decision-making.

  • Open a business bank account
    You'll need a business bank account to apply for funding, like business loans. Lenders will need your bank statements for approval. And once approved, your business bank account is where they'll deposit the funds.

    Also, a business bank account separates your personal and business finances. This is critical for LLCs and corporations since it reinforces liability protection.

Do I need a business credit card?
A business credit card can offer your business more financial flexibility, especially in emergencies. For example, you can use it to cover expenses when you don't have enough cash on hand. Business credit cards also have extra perks that regular cards don't.

Now that you have a business bank account, it's time to grow your funds. Here are ways to do just that.

What's stopping you from starting a business?

Fund your startup

When it comes to funding, there are a few options you can explore depending on your qualifications:

  • Self-funding
    Also known as "bootstrapping," self-funding is the most common financing option for startups. It involves using your own money to start a business.

    The money could come from your personal savings, while other business owners use their retirement accounts.

    That said, it offers more freedom and control since it's your own money. But it's also a risky option, given that you can go bankrupt. You wouldn't want to lose your retirement funds.

  • Small business loans
    Small business loans are a great alternative if you don't have enough cash to pay for everything out of pocket. It's also great if you don't want to dip too much into your savings.

    Just keep in mind that the application process can be tough due to the eligibility criteria. The payment terms are strict, too. So you risk losing your assets if you can't pay on time.

    There are many different types of small business loans you can check out. Just choose the one that best fits your company's needs.

  • Grants
    Grants are seed money organizations give to qualified businesses. It's often called "free money" since you don't need to pay it back, unlike business loans. But they're not entirely without conditions.

    Organizations will have their own qualification requirements. You typically need to support the institution giving the grant. You may also have aligned business activities with their objectives.

    You typically need to report your progress to these organizations. This helps them know that you're using the money for the intended purpose.

  • Angel investors
    Angel investors are groups or individuals who offer capital to small businesses (especially those with high potential for growth).

    Like grants, you don't have to pay back angel investors. Instead, the investor will receive ownership shares or equity. The percentage will depend on your agreement.

    That said, you might have less control over internal decisions (especially if they have a larger percentage of company shares).

    Angel investors are a great option because they're usually industry experts with a broad network. They can connect you with others in your field and speed up your company's growth.

  • Crowdfunding
    Crowdfunding involves asking for contributions from people to raise capital. You can also spread the cost among multiple sources to raise funds more easily.

    You may even raise more than your target amount if many people are interested. That said, if not a lot of people are interested, then you won't be able to meet your goal.

    Someone else might even swipe your business idea before you officially launch! So just be cautious.

    Some popular crowdfunding sites you can try are Patreon, Kickstarter, and GoFundMe.

Now that you know how to grow your funds, it's time to know how to protect them.

Protect your business with insurance

No matter how well you plan things in advance, unexpected things can (and often do) still happen. To avoid massive financial losses for your business, consider getting business insurance.

The most common types for small businesses and startups are:

  • General liability
    General liability insurance protects you if your company gets sued by customers who experienced injuries or property damages while at your store.

  • Commercial property
    Commercial property insurance covers any repair or replacement costs for your business property in case of theft, loss, or damages.

  • Business income
    Business income insurance covers any lost income due to natural disasters or property damage (e.g., flood, fires, theft, etc.) It's also known as "business interruption insurance."

  • Workers' compensation
    Also known as "workers' comp," this covers your employees' lost wages and medical expenses if they get injured while on the job. It usually goes hand-in-hand with disability insurance.

    In all states, workers' comp is mandatory for businesses with employees. The only exception is Texas.

  • Product liability
    Product liability insurance protects your assets and covers your legal fees and damages. It's for when someone sues you due to problems from using your products (i.e., products led to bodily injuries or property damages).

  • Professional liability
    Professional liability insurance covers legal fees and damages if you or an employee makes a mistake while providing professional services. This may include bad financial advice, errors in legal paperwork, or missed deadlines.

  • Cyber liability
    Also known as "data breach insurance," this covers any cost you incur because of compromised company data. For example, paying for damages to customers whose personal information was stolen.

Insurance companies sometimes combine different types in one policy. One popular example is the "business owner's policy." Its coverage usually includes general liability, business income, property damage, and workers' comp.

After securing your company's finances, you're all set to launch your new company. What tools can help you with that?

Invest in the right business tools

Running a business is hard work. So you'll need a system that can help you streamline your operations.

That's where business tools come in handy. They can automate some of your business operations, so you can better focus on the more important aspects of your company.

Here are some tools you can check out:

  • Accounting and Bookkeeping
    A well-organized financial record is essential for any business, especially when tax season rolls around. Accounting and bookkeeping tools like QuickBooks can make organizing your finances easier and more convenient.

  • HR Management
    HR management tools help you develop solid company policies to keep you and your employees happy. They can help your business comply with legal requirements, too.

    An in-house HR team can be too expensive, especially for startups and small businesses. Consider using HR outsourcing services to keep your costs low.

  • Customer Relationship Management (CRM)
    CRM tools optimize your workflow so you can provide better services and build strong relationships with your customers.

  • Payroll
    Payroll services help you pay your employees accurately and on time. These also automate every aspect of the process. This includes subtracting the necessary deductions before sending out checks to your employees.

    Don't have enough cash for paid services? Try free payroll solutions instead.

  • Cybersecurity
    Cybersecurity systems will prevent your company's sensitive data (e.g., customers' personal or financial info) from falling into the wrong hands. Common examples include encryption software, VPNs, and two-step authentication programs.

  • Communication
    Communication systems like virtual phone services ensure that customers can easily contact you when they need to. These also promote better collaboration since you and your team members can communicate more easily.

  • Payment Processing
    Payment processing tools give you a quick and efficient way to accept payments from customers (like credit card payments). Some examples of these tools are invoicing software and point-of-sale (POS) systems.

Business tools also include project management platforms, calendars and scheduling apps, marketing software, etc.

Contrary to popular belief, tools don't really replace people. So the next step would be to find the right ones for your company.

Find your dream team

Even if you can handle everything as a one-man team, that doesn't mean you have to. It'll only get harder as your company grows, after all.

Doing it all yourself might even compromise important aspects of your business. So it may be best to delegate the work to other people (who may also do some things better than you).

You can also delegate less urgent or repetitive tasks. This frees up your time and energy for the jobs you can't delegate or outsource.

Resources to find your dream team members:

  • Referrals (from friends, family, colleagues, etc.)
  • Job posting and recruitment sites (e.g., LinkedIn, Indeed, and ZipRecruiter)
  • Freelancer platforms (e.g., Upwork, Fiverr, Freelancer)
  • Social media sites (if you have a strong online presence)
  • Job or career fairs
  • Careers page on your company website

If you're in a service-based industry, consider connecting with other businesses in the same field. For example, if you're a wedding planner, you can partner with local photographers, bakeries, and florists in the area. This will help expand your professional network and potentially gain more clients.

After building your team, it's time to attract some customers.

Promote your business

Even if you have everything you need, you can't really succeed if customers don't know who you are. That's why spreading the word about your new company is important.

Here's what you need to do to get the word out:

  • Build a business website
    An official website makes it easier for customers to find you. It shows them you're a legitimate company. And it helps them learn more about your business and what it offers.

    Your company website must be personalized to accurately reflect your brand. But that doesn't mean you have to do everything from scratch. You can use website builders to make creating your business website easier.

  • Be active on social media
    Since almost everyone is on social media these days, your business needs to keep up. Using social media is a great way to build rapport with your customers. You can easily address their concerns and receive feedback, too.

    Plus, customers may be more likely to recommend your business if you have active social media accounts.[8] Your online pages make your business easily accessible to them.

  • Create relevant and engaging content
    Relevant and engaging content makes your business more valuable. It shows customers that your company has more to offer than what you're selling. This, in turn, builds trust.

  • Use SEO to rank higher in search engines
    Great content won't be as useful if people can't find it. That's why businesses use search engine optimization (SEO) to help them rank higher on search engine results pages (SERPs). That way, your site will reach your target audience.

  • List your business in online directories
    Platforms like Yelp and Google Business Profile can help local customers find your company more easily.

Say customers have been coming and going, and business is thriving. What do you do next?

Grow your business

After all that, the only thing left is to grow your business. Growth is important for any business, regardless of size or industry.

Not only does it boosts your profitability, but it also helps your company maximize its potential.

Although each company's pace is different, here are a few tips you can try:

  • Keep detailed and well-organized records
    Your records give you deeper insights into the company's performance. Use this to improve your business operations and ensure your business' growth.

  • Build your professional network
    Like your records, establishing relationships with other entrepreneurs can give you valuable insights into your industry. You can use these insights to build better strategies and maximize your business' potential.

  • Value out-of-the-box thinking
    Good ideas can come from anywhere. So don't limit yourself to conventional methods.

    Valuing creativity can give your business a competitive edge by establishing itself as an innovator. It can also help you develop more effective solutions to your company's most common problems.

Which step do you think you need the most help with?

What the Experts Say

CreditDonkey asked a panel of industry experts to answer readers' most pressing questions. Here's what they said:

Bottom Line

Starting your own business can give you the freedom and flexibility to pursue your passion. All while generating an income.

But preparation is important if you want to succeed as an entrepreneur. After all, even with a solid business idea, you're more likely to encounter issues if you don't plan ahead.

You don't really need to know everything when starting a business. That said, these 11 steps can get you on the right path.

References

  1. ^ US Bureau of Labor Statistics. Table 7. Survival of private sector establishments by opening year, Retrieved 07/05/2023
  2. ^ CB Insights. The Top 12 Reasons Startups Fail, Retrieved 8/11/2023
  3. ^ Academia. Entrepreneur passion and preparedness in business plan presentations, Retrieved 07/05/2023
  4. ^ Journal of Management Studies. The Multiple Effects of Business Planning on New Venture Performance, Retrieved 07/05/2023
  5. ^ Internal Revenue Service. Forming a Corporation, Retrieved 8/11/2023
  6. ^ Internal Revenue Service. Single Member Limited Liability Companies, Retrieved 8/11/2023
  7. ^ U.S. Small Business Administration. Register your business, Retrieved 8/11/2023
  8. ^ Ambassador. Social Customer Service (Infographic), Retrieved 07/05/2023

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