How to Start a Business: A Step-by-Step Guide
Starting a new small business? Find out where to begin and how to achieve success.
- You want to make sure you prepare thoroughly before starting a business, but realize that things will almost certainly go awry. To run a successful business, you must adapt to changing situations.
- Conducting in-depth market research on your field and the demographics of your potential clientele is an important part of crafting a business plan. This involves running surveys, holding focus groups, and researching SEO and public data.
- Before you start selling your product or service, you need to build up your brand and get a following of people who are ready to jump when you open your doors for business.
- This article is for entrepreneurs who want to learn the basics steps of starting a new business.
Tasks like naming the business and creating a logo are obvious, but what about the less-heralded, equally important steps? Whether it’s determining your business structure or crafting a detailed marketing strategy, the workload can quickly pile up. Rather than spinning your wheels and guessing at where to start, follow this 10-step checklist to transform your business from a lightbulb above your head to a real entity.
1. Refine your idea.
If you’re thinking about starting a business, you likely already have an idea of what you want to sell online, or at least the market you want to enter. Do a quick search for existing companies in your chosen industry. Learn what current brand leaders are doing and figure out how you can do it better. If you think your business can deliver something other companies don’t (or deliver the same thing, only faster and cheaper), or you’ve got a solid idea and are ready to create a business plan.
Define your “why.”
“In the words of Simon Sinek, ‘always start with why,'” Glenn Gutek, CEO of Awake Consulting and Coaching, told Business News Daily. “It is good to know why you are launching your business. In this process, it may be wise to differentiate between [whether] the business serves a personal why or a marketplace why. When your why is focused on meeting a need in the marketplace, the scope of your business will always be larger than a business that is designed to serve a personal need.”
Another option is to open a franchise of an established company. The concept, brand following and business model are already in place; all you need is a good location and the means to fund your operation.
Brainstorm your business name.
Regardless of which option you choose, it’s vital to understand the reasoning behind your idea. Stephanie Desaulniers, owner of Business by Dezign and former director of operations and women’s business programs at Covation Center, cautions entrepreneurs against writing a business plan or brainstorming a business name before nailing down the idea’s value.
Clarify your target customers.
Desaulniers said too often people jump into launching their business without spending time to think about who their customers will be and why would want to buy from them or hire them.
“You need to clarify why you want to work with these customers – do you have a passion for making people’s lives easier?” Desaulniers said. “Or enjoy creating art to bring color to their world? Identifying these answers helps clarify your mission. Third, you want to define how you will provide this value to your customers and how to communicate that value in a way that they are willing to pay.”
During the ideation phase, you need to iron out the major details. If the idea isn’t something you’re passionate about or if there’s not a market for your creation, it might be time to brainstorm other ideas.
TIP: To refine your business idea, identify your “why,” your target customers and your business name.
2. Write a business plan.
Once you have your idea in place, you need to ask yourself a few important questions: What is the purpose of your business? Who are you selling to? What are your end goals? How will you finance your startup costs? These questions can be answered in a well-written business plan.
A lot of mistakes are made by new businesses rushing into things without pondering these aspects of the business. You need to find your target customer base. Who is going to buy your product or service? If you can’t find evidence that there’s a demand for your idea, then what would be the point?
Conduct market research.
Conducting thorough market research on your field and demographics of potential clientele is an important part of crafting a business plan. This involves conducting surveys, holding focus groups, and researching SEO and public data.
Market research helps you understand your target customer – their needs, preferences and behavior – as well as your industry and competitors. Many small business professionals recommend gathering demographic information and conducting a competitive analysis to better understand opportunities and limitations within your market.
The best small businesses have products or services that are differentiated from the competition. This has a significant impact on your competitive landscape and allows you to convey unique value to potential customers.
Consider an exit strategy.
It’s also a good idea to consider an exit strategy as you compile your business plan. Generating some idea of how you’ll eventually exit the business forces you to look to the future.
“Too often, new entrepreneurs are so excited about their business and so sure everyone everywhere will be a customer that they give very little, if any, time to show the plan on leaving the business,” said Josh Tolley, CEO of both Shyft Capital and Kavana.
“When you board an airplane, what is the first thing they show you? How to get off of it. When you go to a movie, what do they point out before the feature begins to play? Where the exits are. Your first week of kindergarten, they line up all the kids and teach them fire drills to exit the building. Too many times I have witnessed business leaders that don’t have three or four predetermined exit routes. This has led to lower company value and even destroyed family relationships.”
A business plan helps you figure out where your company is going, how it will overcome any potential difficulties and what you need to sustain it. When you’re ready to put pen to paper, these free templates can help.
3. Assess your finances.
Starting any business has a price, so you need to determine how you’re going to cover those costs. Do you have the means to fund your startup, or will you need to borrow money? If you’re planning to leave your current job to focus on your business, do you have money put away to support yourself until you make a profit? It’s best to find out how much your startup costs will be.
Many startups fail because they run out of money before turning a profit. It’s never a bad idea to overestimate the amount of startup capital you need, as it can be a while before the business begins to bring in sustainable revenue.
Perform a break-even analysis.
One way you can determine how much money you need is to perform a break-even analysis. This is an essential element of financial planning that helps business owners determine when their company, product or service will be profitable.
The formula is simple:
- Fixed Costs ÷ (Average Price – Variable Costs) = Break-Even Point
Every entrepreneur should use this formula as a tool because it informs you about the minimum performance your business must achieve to avoid losing money. Furthermore, it helps you understand exactly where your profits come from, so you can set production goals accordingly.
Here are the three most common reasons to conduct a break-even analysis:
- Determine profitability. This is generally every business owner’s highest interest.
Ask yourself: How much revenue do I need to generate to cover all my expenses? Which products or services turn a profit, and which ones are sold at a loss?
- Price a product or service. When most people think about pricing, they consider how much their product costs to create and how competitors are pricing their products.
Ask yourself: What are the fixed rates, what are the variable costs, and what is the total cost? What is the cost of any physical goods? What is the cost of labor?
- Analyze the data. What volumes of goods or services do you have to sell to be profitable?
Ask yourself: How can I reduce my overall fixed costs? How can I reduce the variable costs per unit? How can I improve sales?
Watch your expenses.
Don’t overspend when starting a business. Understand the types of purchases that make sense for your business and avoid overspending on fancy new equipment that won’t help you reach your business goals. Monitor your business expenses to ensure you are staying on track.
“A lot of startups tend to spend money on unnecessary things,” said Jean Paldan, founder and CEO of Rare Form New Media. “We worked with a startup that had two employees but spent a huge amount on office space that would fit 20 people. They also leased a professional high-end printer that was more suited for a team of 100; it had key cards to track who was printing what and when. Spend as little as possible when you start, and only on the things that are essential for the business to grow and be a success. Luxuries can come when you’re established.”
Consider your funding options.
Startup capital for your business can come from various means. The best way to acquire funding for your business depends on several factors, including creditworthiness, the amount needed and available options.
- Business loans. If you need financial assistance, a commercial loan through a bank is a good starting point, although these are often difficult to secure. If you are unable to take out a bank loan, you can apply for a small business loan through the U.S. Small Business Administration (SBA) or an alternative lender.
- Business grants. Business grants are similar to loans; however, they do not need to be paid back. Business grants are typically very competitive, and come with stipulations that the business must meet to be considered. When trying to secure a small business grant, look for ones that are uniquely specific to your situation. Options include minority-owned business grants, grants for women-owned businesses and government grants.
- Investors. Startups requiring significant funding upfront may want to bring on an investor. Investors can provide several million dollars or more to a fledgling company, with the expectation that the backers will have a hands-on role in running your business.
- Crowdfunding. Alternatively, you could launch an equity crowdfunding campaign to raise smaller amounts of money from multiple backers. Crowdfunding has helped numerous companies in recent years, and there are dozens of reliable crowdfunding platforms designed for different types of businesses.
You can learn more about each of these capital sources and more in our guide to startup finance options.
Editor’s note: Looking for a small business loan? Fill out the questionnaire below to have our vendor partners contact you about your needs.
Choose the right business bank.
When you’re choosing a business bank, size matters. Marcus Anwar, co-founder of OhMy Canada, recommends smaller community banks because they are in tune with the local market conditions and will work with you based on your overall business profile and character.
“They’re unlike big banks that look at your credit score and will be more selective to loan money to small businesses,” Anwar said. “Not only that, but small banks want to build a personal relationship with you and ultimately help you if you run into problems and miss a payment. Another good thing about smaller banks is that decisions are made at the branch level, which can be much quicker than big banks, where decisions are made at a higher level.”
Anwar believes that you should ask yourself these questions when choosing a bank for your business:
- What is important to me?
- Do I want to build a close relationship with a bank that’s willing to help me in any way possible?
- Do I want to be just another bank account, like big banks will view me as?
Ultimately, the right bank for your business comes down to your needs. Writing down your banking needs can help narrow your focus to what you should be looking for. Schedule meetings with various banks and ask questions about how they work with small businesses to find the best bank for your business.
Key takeaway: Financially, you will want to perform a break-even analysis, consider your expenses and funding options, and choose the right bank for your business.
4. Determine your legal business structure.
Before you can register your company, you need to decide what kind of entity it is. Your business structure legally affects everything from how you file your taxes to your personal liability if something goes wrong.
- Sole proprietorship. If you own the business entirely by yourself and plan to be responsible for all debts and obligations, you can register for a sole proprietorship. Be warned that this route can directly affect your personal credit.
- Partnership. Alternatively, a business partnership, as its name implies, means that two or more people are held personally liable as business owners. You don’t have to go it alone if you can find a business partner with complementary skills to your own. It’s usually a good idea to add someone into the mix to help your business flourish.
- Corporation. If you want to separate your personal liability from your company’s liability, you may want to consider forming one of several types of corporations (e.g., S corporation, C corporation or B corporation). Although each type of corporation is subject to different guidelines, this legal structure generally makes a business a separate entity from its owners, and, therefore, corporations can own property, assume liability, pay taxes, enter contracts, sue and be sued like any other individual. “Corporations, especially C corporations, are especially suitable for new businesses that plan on ‘going public’ or seeking funding from venture capitalists in the near future,” said Deryck Jordan, managing attorney at Jordan Counsel.
- Limited liability company. One of the most common structures for small businesses is the limited liability company (LLC). This hybrid structure has the legal protections of a corporation while allowing for the tax benefits of a partnership.
Ultimately, it is up to you to determine which type of entity is best for your current needs and future business goals. It’s important to learn about the various legal business structures available. If you’re struggling to make up your mind, it’s not a bad idea to discuss the decision with a business or legal advisor.
Did You Know: You need to choose a legal structure for your business, such as a sole proprietorship, partnership, corporation or LLC.
5. Register with the government and IRS.
You will need to acquire a variety of business licenses before you can legally operate your business. For example, you need to register your business with federal, state and local governments. There are several documents you must prepare before registering.
Articles of incorporation and operating agreements
To become an officially recognized business entity, you must register with the government. Corporations need an “articles of incorporation” document, which includes your business name, business purpose, corporate structure, stock details and other information about your company. Similarly, some LLCs will need to create an operating agreement.
Doing business as (DBA)
If you don’t have articles of incorporation or an operating agreement, you will need to register your business name, which can be your legal name, a fictitious DBA name (if you are the sole proprietor), or the name you’ve come up with for your company. You may also want to take steps to trademark your business name for extra legal protection.
Most states require you to get a DBA. If you’re in a general partnership or a proprietorship operating under a fictitious name, you may need to apply for a DBA certificate. It’s best to contact or visit your local county clerk’s office and ask about specific requirements and fees. Generally, there is a registration fee involved.
Employer identification number (EIN)
After you register your business, you may need to get an employer identification number from the IRS. While this is not required for sole proprietorships with no employees, you may want to apply for one anyway to keep your personal and business taxes separate, or simply to save yourself the trouble later if you decide to hire someone. The IRS has provided a checklist to determine whether you will require an EIN to run your business. If you do need an EIN, you can register online for free.
Income tax forms
You also need to file certain forms to fulfill your federal and state income tax obligations. The forms you need are determined by your business structure. You will need to check your state’s website for information on state-specific and local tax obligations.
“You might be tempted to wing it with a PayPal account and social media platform, but if you start with a proper foundation, your business will have fewer hiccups to worry about in the long run,” said Natalie Pierre-Louis, licensed attorney and owner of NPL Consulting.
Federal, state, and local licenses and permits
Some businesses may also require federal, state or local licenses and permits to operate. The best place to obtain a business license is at your local city hall. You can then use the SBA’s database to search for licensing requirements by state and business type.
Businesses and independent contractors in certain trades are required to carry professional licenses. One example of a professional business license is a commercial driver’s license (CDL). Individuals with a CDL are allowed to operate certain types of vehicles, such as buses, tank trucks and tractor-trailers. A CDL is divided into three classes: Class A, Class B and Class C.
You should also check with your city and state to find out if you need a seller’s permit that authorizes your business to collect sales tax from your customers. A seller’s permit goes by numerous names, including resale permit, resell permit, permit license, reseller permit, resale ID, state tax ID number, reseller number, reseller license permit or certificate of authority.
It’s important to note that these requirements and names vary from state to state. You can register for a seller’s permit through the state government website of the state(s) you’re doing business in.
Jordan says that not all businesses need to collect sales tax (or obtain a seller’s permit).
“For example, New York sales tax generally is not required for the sale of most services (such as professional services, education, and capital improvements to real estate), medicine or food for home consumption,” Jordan said. “So, for example, if your business only sells medicine, you do not need a New York seller’s permit. But New York sales tax must be collected in conjunction with the sale of new tangible personal goods, utilities, telephone service, hotel stays, and food and beverages (in restaurants).”
Key takeaway: Register key documents like articles of incorporation or an operating agreement, a DBA, an EIN, income tax forms, and other applicable licenses and permits.
6. Purchase an insurance policy.
It might slip your mind as something you’ll “get around to” eventually, but purchasing the right insurance for your business is an important step to take before you officially launch. Dealing with incidents such as property damage, theft or even a customer lawsuit can be costly, and you need to be sure that you’re properly protected.
Although you should consider several types of business insurance, there are a few basic insurance plans that most small businesses can benefit from. For example, if your business will have employees, you will at least need to purchase workers’ compensation and unemployment insurance.
You may also need other types of coverage, depending on your location and industry, but most small businesses are advised to purchase general liability (GL) insurance, or a business owner’s policy. GL covers property damage, bodily injury, and personal injury to yourself or a third party.
If your business provides a service, you may also want to consider professional liability insurance. It covers you if you do something wrong or neglect to do something you should have done while operating your business.
7. Build your team.
Unless you’re planning to be your only employee, you’re going to need to recruit and hire a great team to get your company off the ground. Joe Zawadzki, CEO and founder of MediaMath, said entrepreneurs need to give the “people” element of their businesses the same attention they give their products.
“Your product is built by people,” Zawadzki said. “Identifying your founding team, understanding what gaps exist, and [determining] how and when you will address them should be top priority. Figuring out how the team will work together … is equally important. Defining roles and responsibility, division of labor, how to give feedback, or how to work together when not everyone is in the same room will save you a lot of headaches down the line.”
8. Choose your vendors.
Running a business can be overwhelming, and you and your team probably aren’t going to be able to do it all on your own. That’s where third-party vendors come in. Companies in every industry from HR to business phone systems exist to partner with you and help you run your business better.
When you’re searching for B2B partners, you’ll have to choose carefully. These companies will have access to vital and potentially sensitive business data, so it’s critical to find someone you can trust. In our guide to choosing business partners, our expert sources recommend asking potential vendors about their experience in your industry, their track record with existing clients and what kind of growth they’ve helped other clients achieve.
Not every business will need the same type of vendors, but there are common products and services that almost every business will need. Consider the following functions that are a neccessity for any type of business.
Taking payments from customers: Offering multiple payment options will ensure you can make a sale in whatever format is easiest for target customer. You’ll need to compare options are find the right credit card processing provider to ensure you’re getting the best rate for your type of business.
Managing finances: Many business owners can manager their own accounting functions when starting their business, but as your business grows you can save time by hiring an accountant, or comparing accounting software providers.
9. Brand yourself and advertise.
Before you start selling your product or service, you need to build up your brand and get a following of people ready to jump when you open your literal or figurative doors for business.
- Company website. Take your reputation online and build a company website. Many customers turn to the internet to learn about a business, and a website is digital proof that your small business exists. It is also a great way to interact with current and potential customers.
- Social media. Use social media to spread the word about your new business, perhaps as a promotional tool to offer coupons and discounts to followers once you launch. The best social media platforms to utilize will depend on your target audience.
- CRM. The best CRM software solutions allow you to store customer data to to improve how you market to them. A well-thought-out email marketing campaign can do wonders for reaching customers and communicating with your audience. To be successful, you will want to strategically build your email marketing contact list.
- Logo. Create a logo that can help people easily identify your brand, and be consistent in using it across all of your platforms.
Also, keep these digital assets up to date with relevant, interesting content about your business and industry. According to Ruthann Bowen, chief marketing officer at EastCamp Creative, too many startups have the wrong mindset about their websites.
“The issue is they see their website as a cost, not an investment,” Bowen said. “In today’s digital age, that’s a huge mistake. The small business owners who understand how critical it is to have a great online presence will have a leg up on starting out strong.”
Creating a marketing plan that goes beyond your launch is essential to building a clientele by continually getting the word out about your business. This process, especially in the beginning, is just as important as providing a quality product or service.
Ask customers to opt into your marketing communications.
As you build your brand, ask your customers and potential customers for permission to communicate with them. The easiest way to do this is by using opt-in forms. These are “forms of consent” given by web users, authorizing you to contact them with further information about your business, according to Dan Edmonson, founder, and CEO of Dronegenuity.
“These types of forms usually pertain to email communication and are often used in e-commerce to request permission to send newsletters, marketing material, product sales, etc. to customers,” Edmonson said. “Folks get so many throwaway emails and other messages these days that, by getting them to opt in to your services in a transparent way, you begin to build trust with your customers.”
Opt-in forms are a great starting point for building trust and respect with potential customers. Even more importantly, these forms are required by law. The CAN-SPAM Act of 2003 sets requirements for commercial email by the Federal Trade Commission. This law doesn’t just apply to bulk email; it covers all commercial messages, which the law defines as “any electronic mail message the primary purpose of which is the commercial advertisement or promotion of a commercial product or service.” Each email in violation of this law is subject to fines of more than $40,000.
TIP: Create a strategic marketing campaign that combines various marketing channels, like a company website, social media, email newsletters and opt-in forms.
10. Grow your business.
Your launch and first sales are only the beginning of your task as an entrepreneur. To make a profit and stay afloat, you always need to be growing your business. It’s going to take time and effort, but you’ll get out of your business what you put into it.
Collaborating with more established brands in your industry is a great way to achieve growth. Reach out to other companies and ask for some promotion in exchange for a free product sample or service. Partner with a charity organization, and volunteer some of your time or products to get your name out there.
While these tips will help launch your business and get you set to grow, there’s never a perfect plan. You want to make sure you prepare thoroughly for starting a business, but things will almost certainly go awry. To run a successful business, you must adapt to changing situations.
“Be prepared to adjust,” said Stephanie Murray, founder of Fiddlestix Party + Supply. “There’s a saying in the military that ‘no plan survives the first contact,’ meaning that you can have the best plan in the world, but as soon as it’s inaction, things change, and you have to be ready and willing to adapt and problem-solve quickly. As an entrepreneur, your value lies in solving problems, whether that is your product or service solving problems for other people or you solving problems within your organization.”
FAQs about starting a business
How can I start my own business with no money?
You can launch a successful business without any startup funds. Work on a business idea that builds on your skill set to offer something new and innovative to the market. While developing a new business, keep working in your current position (or “day job”) to reduce the financial risk.
Once you’ve developed your business idea and you’re ready to start on a business plan, you’ll need to get creative with funding. You can raise money through investments by pitching your idea to financial backers. You could also gather funding through crowdsourcing platforms like Kickstarter, or set aside a certain amount of money from your weekly earnings to put toward a new business. Finally, you can seek out loan options from banks and other financial institutions as a way to get your company up and running.
What is the easiest business to start?
The easiest business to start is one that requires little to no financial investment upfront, nor should it require extensive training to learn the business. One of the easiest types of new business to launch is a dropshipping company. Dropshipping requires no inventory management, saving you the hassle of buying, storing and tracking stock. Instead, another company will fulfill your customer orders at your behest. This company will manage the inventory, package goods, and ship out your business orders. To get started, you can create an online store by selecting curated products from the catalog available through partners.
When is the best time to start a business?
Each person’s ideal timeline for starting a new business will be different. First and foremost, you should start a business when you have enough time to devote your attention to the launch.
If you have a seasonal product or service, then you want to start your business a quarter before your predicted busy time of the year.
For nonseasonal companies, spring and fall are popular times of years to launch.
Winter is the least popular launch season, because many new owners prefer to have their LLC or corporation approved for a new fiscal year.