How to Start a Business
All the important information you will ever need on starting your new business.
For some people, owning their own business is the ultimate goal. That’s why more than 550,000 people become an entrepreneur every month. It’s an integral part of the American Dream for many.
If the process of starting a business seems overwhelming – don’t worry. We’re going to break it down into manageable chunks and walk through every step; from coming up with an idea to opening the doors.
What is the business ideation process?
The first step in starting a business is coming up with a good idea.
It doesn’t necessarily have to be a new idea. It’s a popular misconception that you have to dream up something novel to have a shot at success, but that’s simply not the case.
- Pepsi was founded 6 years after Coca-Cola got the world hooked on Coke.
- Although Udemy (2009) is the go-to online course marketplace, Udacity (2010) and Coursera (2012) both hold a significant chunk of the market by differentiating their relationships with tutors and students.
- IBM had been entrenched for more than 50 years before Microsoft moved in and made a revolutionary operating system that propelled them to the world stage.
Innovation is a perfectly acceptable substitute for invention in business. Build off an existing model by improving processes, fixing problems, or adding new features.
Apple didn’t create the first MP3 player. They did make a better user interface, and that’s all it took. Don’t reinvent the wheel, just make a better one.
How do you validate a business?
Don’t dive in headfirst just yet. Before designing that logo, be certain that there is a demand for the product or service. This is known as business validation.
Remember that at this stage in the process, we’re not making money. We are trying to determine whether or not it’s even possible to make money. Don’t invest too much money in the validation phase or it’ll prevent you from being able to entertain other business ideas.
Here are a couple of proven methods for validating an idea:
1. Market Research
This classic method of validation has undergone a huge transformation in recent years.
It used to be that, if you wanted to open a new fast food restaurant, the first step was to hire an analyst to determine if there was any demand and if the local economy could support it. That still happens, but it’s not applicable to many businesses – particularly if you’re trying to start your own e-commerce business, for example.
After all, there are 1.3 million e-commerce businesses in North America alone. Business is rarely constricted to a geographical area: potential customers are the entire country, or even the world.
Market research these days can take many forms: Social media is exceptionally powerful.
- How many people are in Facebook groups related to your niche? Each is a potential customer. Ask them, through posts and polls, their opinions and thoughts.
- Search #hashtags relevant to your niche on Twitter and follow people that mention it frequently. Watch the conversation around the industry, and look at the profiles of people that discuss it, to learn about the market.
- Use a tool like KeyHole to track the volume of hashtag use on Facebook, Twitter, and Instagram. Is volume trending up? It might be a good time to hop on the bandwagon.
Take a look at potential competitors as well. There are a multitude of tools that allows you to (indirectly) get a view of what’s going on inside. Valuable metrics are:
- Traffic (in sessions)
- Sales, revenue per sale, cost per acquisition (CPA)
- Customer Demographics
- Keywords they rank for, and commercial value of those keywords
In most cases, it’s prudent to create an MVP to test the waters before jumping into the business.
An MVP, or Minimum Viable Product, is a bare-bones version of the product or service that you use to validate demand. It takes different forms for different businesses.
- If the goal was to start a maid company, the MVP would just be seeing if you can get clients and if they’re satisfied with your service. No fancy websites, no complex booking software. No employees, either! They come later.
- For developers, it would be launching the product the moment it fills its primary function… without all 42 features planned for the final version. Don’t worry about a sleek UI, it just needs to work.
Starting with an MVP is essential. It’s possible that you read the market wrong and nobody needs magnetic socks. An MVP also provides invaluable feedback; there’s still an opportunity to make a course correction before you’re too far down the road.
The last aspect of validation is that to be open to pivots. A pivot is a major shift in concept or strategy, such that the brand or business might not even be recognizable afterward.
It’s hard to let go of an idea you came up with but, ultimately, it’s best to cater to the market. Some examples of famous pivots:
- Nintendo, the Japanese video game powerhouse, used to manufacture playing cards. After seeing Disney’s success with animated cartoons, they changed to toy’s and gaming and released their first home video games in 1977.
- YouTube launched in 2005 as a “video dating site”. They never reached the critical mass of users necessary for growth until they dropped the “dating” bit and uploaded a few funny videos.
- Also in 2005, Odeo was a functional (but boring) podcast player. The Odeo team struggled to find their niche until they decided that status updates and micro-messaging were a better idea – and thus Twitter was born.
What are the steps in business planning?
For many founders, this is the most exciting part of starting a business. You draw up a map of what the future of the business will look like.
There are two primary business planning documents. The first is the traditional business plan. It’s an exhaustively-detailed document that describes the goals and how you’ll meet them. There are 7 key components of a business plan:
- Executive Summary
- Business Description
- Market Analysis
- Organization Management
- Sales Strategies
- Funding Requirements
- Financial Projections
These manuscripts can run dozens of pages. Yes, it’s a daunting task, but a vital one. If you intend to utilize any outside funding (grants, loans, etc.) a business plan is the first thing they’ll ask for.
Need help getting started on that business plan? Here’s a template from SCORE.
Even if that sounds like a tedious chore, don’t simply skip the planning step. Research shows that creating a business plan makes you 152% more likely to actually start, not to mention businesses with a plan grow faster.
So, if a behemoth document isn’t your cup of tea, try drafting a business model instead. These are geared towards lean companies and startups; the idea is to get all of your thoughts down without being bogged down by minutia.
Here’s an example business model canvas. It won’t win any awards for complexity, but it’ll help you to think your business idea all the way through to the end.
Here’s a blank canvas for you to build your business model.
What are some ways to fund a business?
A business plan should give you an idea of what kind of costs you’ll incur in starting up your business.
It could be next to nothing if you want to start a web design agency – a computer and a copy of Photoshop will get you pretty far. On the other hand, if the goal is to open up a hardware store, you’re gonna need a lot of initial capital.
The plan should cover what kind or kinds of funding you’ll pursue – otherwise you’ll end up as one of the many businesses that can’t obtain funding. Here are some of the principal methods of raising principal:
Bootstrapping – Pull yourself up by the bootstraps! You’re responsible for coming up with all the money by yourself. You can use your own savings or personal loans.
For online businesses, bootstrapping is a very common route. Many businesses can be started with a very small monetary investment and a lot of dedicated time.
Crowdfunding – An increasingly popular option is to have potential customers pledge to fund the development of a product or service. Crowdfunding requires social finesse and good marketing to pull off, but one could potentially start a business without incurring any costs.
An added bonus of crowdfunding is that it serves as an excellent gauge of demand, making it a useful tool for validation. It also provides you with the first set of customers ripe for retargeting!
Commercial/Small Business Loans – While in essence similar to personal loans, the practical side of securing a business loan is more complicated. The terms and conditions are quite different, so be sure to consult with the appropriate professionals before committing.
Such loans are one of the most common ways to start a brick and mortar business. You’ll want to have appropriate legal protection (i.e. be a corporation) before taking on a business loan.
Grants – Grants are much like the scholarships you applied for in college. Each grant has specific requirements to be eligible, so check for ones in your industry.
There are innumerable grants offered by federal, state, and municipal governments. Finding them is half the challenge, so here’s a resource to get you started: Grants.gov. Also look for grants offered by other businesses.
Angel Investors – Angel Investors are individuals who invest personal money, unlike venture capitalists that invest pooled money from a strategic fund. Oftentimes, angel investors are actually investing in the entrepreneur more than the actual business.
Angel investors allow you to get a huge influx of capital to help grow your business rapidly, and they generally have favorable terms (either equity or a deferred loan). The investor is usually a personal relation: friend, family, or mentor.
What is a business structure?
One of the most important decisions you’ll make is what sort of legal structure to give your new business. There are several options, and each will impact the future taxes you pay as well as legal liability.
Sole Proprietorship – By far the least complicated form of legal structure. In fact, you might already be a sole proprietorship and not realize it! The only requirement is that you are an individual and sell a product or service.
There is no registration required, other than necessary permits or licenses for your business. You are responsible for self-reporting and paying taxes on all income. The major disadvantage is that you are your business and have zero legal protection.
Partnership – For the most part, a General Partnership is the same as a sole proprietorship except that it has multiple proprietors and needs to be registered. A Limited Partnership is a more complicated version that includes Limited (liability) Partners that are usually investors.
Again, you are liable in the event that the company suffers losses or is sued. Additionally, you are responsible for the decisions and actions made by your partners. Only go into business with people you trust, and always have a partnership agreement in place before you begin.
Limited-Liability Company (LLC) – One of the most popular forms of business structure for small to medium, or high risk, businesses. It is a hybrid of Partnership and Corporation that gives you limited liability while paying minimal taxes.
Limited liability means that your personal assets and your business assets are separate. If your business goes under or is sued, all of your personal possessions are safe. At the same time, the LLC does not pay taxes on company revenue – profit is passed on to the members and each member pays taxes as self-employed.
Corporation – Corporations come in several flavors, but only two are really pertinent: S-Corps and B-Corps.
A C-Corp is your classic corporation. It has maximum protection from personal liability. It has (or plans to eventually have) stocks and shareholders. In most cases, it is taxed twice. The corporation is taxed on profits and shareholders are taxed when dividends are paid out. It requires extensive supporting infrastructure for all of the necessary reporting, record-keeping, and operational processes.
If you’re eligible, you’ll probably want to choose an S-Corp instead. They avoid the double-tax of C-corps; shareholders directly receive profits, losses, and pay appropriate taxes. Note that, in order to be an S-Corp, you have to apply to the IRS directly. Also be aware that some states tax S-Corps differently.
It’s difficult to choose the correct structure if you’re not intimately familiar with the intricacies of business law, or if you don’t know what the future of your business will look like. You should consult a professional. The SBA (U.S. Small Business Administration) and SCORE (Service Corps Of Retired Executives) both have free, or nearly free, resources to help budding business-owners.
What are the basics of business law?
Many would-be entrepreneurs are intimidated by the prospect of getting entangled in all of the bureaucracy of starting a business. You’re probably imagining mountains of paperwork or having to navigate unintelligible legalese.
Fortunately, the process is actually quite straightforward! You can easily apply for all the necessary documents online within a couple of hours and be totally legitimate within a week or two.
It does differ by state, though, so it’s worth double checking with your state website.
If you’re a sole proprietorship – congratulations, you’re already finished. There’s no paperwork to complete unless you want a DBA (Do Business As). You are currently conducting business as yourself under your own name, but if you want to be recognized as something else (such as Sally’s Cupcakes) you need to register a DBA with your state.
How do I register my business with the State/Federal Government?
Most businesses don’t have to register with any federal agencies beyond getting an EIN from the IRS. (The only notable exception is S-Corps, which need to file a Form 2553 with the IRS.)
- The first step, is to register with your state. Navigate to the state’s .gov website and find the page for business and commerce. Since governments aren’t exactly known for their efficiency and transparency, it might be easier to use the SBA State Lookup tool to go directly there.
- You’ll be directed to the correct application for the documents your business structure requires (Articles of Organization for an LLC, Articles of Incorporation for a corporation, etc.). They will also provide information on whether or not a state tax ID will be necessary.
- Costs for registration vary widely, anywhere from $0 to $1000. It depends both on the state and the business structure you are registering. Be sure to include these costs in your planning!
EIN (Employer Identification Number)
Your EIN is your federal tax ID. It’s equivalent to your person Social Security number. You’ll need one for hiring employees, opening a business bank account, and paying taxes.
It’s fairly easy to apply for one and totally free. Simply go to the IRS website and fill out the form (during their hours of operation). It should be available immediately afterward.
Licensing and Permitting
Depending on the kind of business you’re starting, you may require additional licenses or permits. These should have already been identified during the business planning phase. Note that, while most of these are handled by the federal government, some states have additional requirements.
If and when your business begins interstate commerce, you’ll also be subject to the laws and licenses of other states. If you’re unsure what you might need to be fully compliant, consult with a business attorney from your state.
What to after a business launches?
Once you’ve finished all that paperwork, your business is official.
One of the first things you’ll want to do is obtain appropriate business insurance. This will help protect your business (or your person) from unforeseen accidents. Additionally, in many industries (construction, cleaning, etc.) insurance and/or bonding is a prerequisite for conducting businesses.
It’ll save you a lot of future headaches if you set up your accounting software before your first transaction. Businesses are under intense scrutiny when tax season rolls around, so you’ll want to be fully equipped with in-depth and accurate records.
Once insurance and accounting are taken care of, you can begin the hiring process. For more information about hiring best practices, go here.