We can agree that starting a business is scary and very exciting! Congratulations, you’re an entrepreneur. The thought of naming a business and designing a logo are apparent. The less known steps on how to start a business are vital to a new business’s success. Most successful business millionaires know 10 things about starting a business and so should you. An entrepreneur who puts in the time and effort to establish a business will need to know how to start a business.
These are the 10 things most business millionaires know about how to start a business:
Chapter 1: Market Research
Market research is key to knowing whether your business idea will succeed or not. It is an important step to starting a business, and one that many people skip. By doing market research, you can gauge the number of potential customers and the level of competition in that marketplace. You can also get an idea of pricing and therefore, profitability.
Market Research for Target Customers
Effective market research looks at economic trends and consumer behavior to see if your business idea is feasible. Understanding your consumer base from the outset is vital to running a strong business. It will reduce risks to your business from the outset.
To understand the scope of your consumer base and how to best market to them, gather demographic information such as age, family, interests, wealth, and other relevant information.
To see if there is room for your business, answer these questions:
- Demand – Is there a need for your product or service?
- Market size – How many people would be interested in your product or service?
- Market saturation – How many competitors do you have? What do they do differently?
- Location – How many customers can your business reach? Are you well located for your customer base?
- Economic indicators – What are the employment rate and income of your customers?
- Pricing – How much can you charge based on the pricing of similar products?
There are two options on how to conduct market research. You can use existing sources, or you can go straight to the source and ask consumers. Using existing sources will save you a lot of time and energy; however, the information will likely be general. It will be useful to get an idea of household incomes, demographics, and the overall industry.
Going directly to consumers will allow you to research specifics; however, it can often be time-consuming and expensive. This method is useful for business-specific questions such as impressions of your logo, or how to improve their buying experience. You can conduct direct research by:
- Focus groups
- In-depth interviews
Analyze Competitive Market Advantage
Competitive analysis is important to ensure that you secure a chunk of the market share. Learn from your competitors and find ways to offer a superior product or service to give yourself a competitive edge.
Assess the following features of your competitors:
- Their market share
- What they do well
- Where they can improve
- Any opportunities where you can offer something unique
- If they focus on your target market or not
- Any barriers to entering the market
- Other competitors who may affect on your success
The market you are targeting may be the focus of several industries, be aware of other industries that may affect your business. Consider the threat of new competitors, how customers and suppliers may affect price and the level of competition.
Chapter 2: Business Plan
A business plan is the foundation of your business. It lays out how you plan to structure, grow, and run your business. It is also vital for securing the support of investors or collaborators.
Writing a business plan gives an entrepreneur the foundation of how you plan to structure your business and will help you to decide later down the line. Most importantly, business plans are key for attracting funding and business partners in the infancy of your company. They will help investors to understand your plans for your business and see that they will get profit from their investment.
Do not obsess over the “right” business plan because there is not such thing as right or wrong. There are two basic types of business plans: the traditional business plan or lean startup.
Traditional business plans are common because it is easy to prepare. They have a standard structure and encourage detail in each section. Because traditional business plan are more detailed, it requires more efforts and are more pages. However, because traditional business plans are more comprehensive, investors and lenders tend to favor these types of business plans.
Lean startup business plans still use a standard structure, but they only contain the most important elements of the plan. They are typically one page long and can usually be completed in an hour. While these are acceptable, lenders and investors may require more information.
Traditional Business Plan Format
If you are detail orientated and want a comprehensive plan or are seeking financing from traditional sources, you might prefer a traditional business plan format. You need not stick to the exact outline, as some sections may not be relevant to your business. However, most business plans will require a combination of these nine headings:
Explain in short concise sentences what your company does and why it will succeed. You can include a mission statement, basic information about your product or service, location, employees, and leadership team. If you plan to use this business plan to ask for financing, include financial information and high-level growth plans.
Provide a detailed description of your company. This should include information about the organization, consumers, or businesses that you plan to serve and which problems your company solves. Explain your competitive advantages and strengths.
Summarize the information you found while doing your market research. Include facts about your target market and industry outlook. Explain how you can do things better than your competitors.
Organization and Management
Describe the company structure and who will run it and the legal structure of your business. Will you be an LLC, general or limited partnership, sole proprietor, or C or S corporation. Detail an organizational chart and the unique experience each person brings to the table. You can include resumes or CVs of key team members if you wish.
Service or Product Line
Describe in detail the product or service you sell. Give in-depth information about how it benefits customers and its life-cycle. Include information about intellectual property protection and explain the research and development you are doing for the service or product.
Marketing and Sales
Describe how you plan to attract and retain customers and the sales process. This section is important for financial projections and the cost of attracting each customer vs profit from each customer. Your marketing strategy will grow and evolve over time, but this is your initial marketing plan.
Outline your funding requirements if you plan on approaching an investor or lender. Explain how much funding you will need over five years and where the funding will be allocated.
Specify if you are requesting debt or equity, and the terms of either choice including the length of time. Include your future financial plans, whether that is selling your business or paying off debt.
Financial projections will show that your business will be financially stable and successful. If your business is already established, including balance sheets, income statements, and cash flow statements for the last five years. Also include information about collateral you could use for a loan.
Detail your financial outlook for the next five years, including your budgets and projected financial statements. Be extremely specific for the projections for next year. Explain how you calculated your projections.
You can use graphs and charts to illustrate your projections and past finances.
An appendix can include supporting documents or information requested by the lender or investor. You can include:
- Credit histories
- Product pictures
- Letters of reference
- Legal documents
Lean Startup Format
If your business is simple or you want to start your business quickly, then a lean startup format may be best for you.
Lean startup formats use only the most important elements to describe your business and how it will run. Here are the main components of a lean startup format:
- Key Partnerships. Explain the subcontractors, suppliers, manufacturers, and other businesses you plan to work with.
- Key Activities. List the ways your business has a competitive advantage, such as technology or selling direct.
- Key Resources. List the resources you will use to create value for your customers, such as capital, staff, or intellectual property. It can also include business resources such as those for minority businesses.
- Value Proposition. Show the unique value your company brings to the market.
- Customer Relationships. Describe what the customer experience will be like from start to finish and the methods that customers will use to interact with your business.
- Customer Segments. Be specific about the demographic of your target market and what their spending habits are.
- Channels. Use the mix of channels you will use to talk to your customers.
- Cost Structure. Will your company focus on maximizing value or reducing costs to ensure profit. Detail any significant costs you will face in ensuring profitability.
- Revenue Streams. Explain how your company will make money, such as membership fees, direct sales, and advertising space. List them all.
Chapter 3: Startup Money
The most important decision you will make as a business owner is how to fund your business. It could affect every other business decision for years.
Your business will have unique funding needs depending on your vision for the business and your personal financial situation. Calculate how much funding you require for the first five years until your business is more stable and self-sufficient.
This is where you use your own finances to fund your business. You could use your savings, tap into your 401k, or ask family or friends for money. This allows you to have complete control over your business but also means you take on all of the risks. If you choose to self-fund your business, it is important to be aware of your personal and business finances.
Money from Investors
Investors often offer venture capital to businesses in exchange for an ownership share and active role in the company. Venture capital often:
- Focuses on high-growth companies
- Takes higher risk in exchange for a potential of higher returns
- Has a longer investment horizon than other types of financing
- Invests capital in exchange for equity, it is not a loan
The majority of venture capitalists will want a seat on the board of directors and therefore influence in your business.
How to Get Investor Funding
There is no guarantee that you will be able to get venture capital, but here is the standard process of approaching an investor about it.
- Find an investor – You can look for venture capital firms or independent investors. Do your research to see if the investor has experience with startups and is reputable.
- Share your business plan – The investor will want to understand your business to see if it will be a profitable investment. Some investors may only focus on certain industries or stage of business development.
- Go through a due diligence review – The investors will look at your products and services, market, management team, financial statements, and corporate governance documents.
- Discuss the terms – If the investor decides they want to invest in your business, they will propose terms and conditions for you to negotiate.
- Investment – Once you have agreed to and signed the term sheet, you will get your money. Often there will be rounds of investments where you receive more money after hitting certain business milestones.
Crowd funders are not technically investors as they do not see a financial return on their money or own a share of the business. Instead, they receive a gift as thanks for the contribution. The gift may be one of your products or other perks like a credit.
Crowdfunding is a popular option as it is low risk, you receive full control of your company, and you don’t have to repay crowd funders if your business fails. Read the fine print on the crowdfunding platforms to understand the legal and financial obligations.
Small Business Loan
A small business loan will allow you to receive a chunk of money while still retaining control of your business. The finances are given in the form of debt with a set repayment schedule.
Before applying for a loan, create your financial projections for the next 5 years, an expense sheet, and your business plan. These documents will increase your chances of securing a loan. Contact banks and credit unions and compare the terms of the loans.
If you are struggling to get a traditional loan, then an SBA-guaranteed loan might be a good option. The SBA guarantees your loan, so the bank has less risk in the deal. Lender Match has a list of lenders who offer SBA-guaranteed loans.
Small Business Administration Investment Programs
- SBIC. The Small Business Administration regulates privately owned and managed investment funds which assist small businesses and startups with loans. These SBICs use their own capital, but the SBA guarantees the money for less risk.
- SBIR Program. The program helps small business to do federal research and development with the potential for commercialization.
- STTR Program. Small businesses in this program will work with nonprofit research institutions in return for capital.
Chapter 4: Business Location
No matter if you are starting an online business or a physical store, the location of your business can affect your taxes, expenses, revenue, and legal requirements. When choosing your business location, it is important to be strategic in the state, city, and neighborhood you pick.
When you register your business, you must purchase licenses and permits and pay taxes in that location. Aside from these considerations, some of the other factors you should consider are:
- The location of your target market
- Costs and benefits
- Location of you and your business partners
- Government agency restrictions
- Personal preferences
Local Business Expenses
Research how different states and neighborhoods may increase your expenses. The following costs will vary considerably between locations:
- Legal minimum wage
- Rental prices
- Standard salaries
- Insurance rates
- Government licenses and fees
If you rent or buy a physical location for your business, it must be zoned for commercial use. Certain neighborhoods may be zoned as residential only or ban certain types of businesses from operating in the area.
If you run your business from home, zoning ordinances may still restrict your business operations. Check with your department of city planning to learn about the zoning laws in your area.
State and Local Taxes
Research the income tax, property tax, corporate tax, and sales tax when choosing a business location. Certain states are tax-friendly to different industries; for example, California is tax-friendly for tech startups.
State and Local Government Financial Incentives
Depending on your location, you may be eligible for state or local government tax credits, financial incentives, or loans. It is worth considering what financial incentives you may have for starting your business in a particular state or city.
Federal Government Financial Incentives
The federal government often offers incentives and benefits to small businesses operating in underutilized areas.
Chapter 5: Business Entity
The structure you choose for your business will affect your day to day operations, your personal assets, and your taxes. Choose a business structure that is right for your business.
You will need to choose your business structure before you register your business. You will also need to file for the appropriate licenses and permits and get a tax ID number.
Choose your business structure carefully. It is possible to change it at a later date, but it is very complex, and there may be tax consequences and other complications.
Business attorneys and tax accountants can help you choose the correct business structure.
A sole proprietorship is one of the easiest types of companies to form and allows you complete control of your business. Because this is not a separate business entity, your personal and business assets and liabilities are not separate. This means you can be held liable for the obligations and debts of the business.
As a sole proprietor, you can still use a trading name, but you cannot sell stock to raise money, and therefore banks are hesitant to lend money to a sole proprietorship.
This is a good option for those wanting to test a business idea before forming a formal business. It is also low-risk.
Partnerships are a simple structure where two or more people own a business. They can take different forms, such as limited partnerships and limited liability partnerships.
Limited partnerships are where one partner has all the liability, and the other partners have limited liability. The partners with limited liability have limited control over the company in most cases, and the partnership agreement will define the roles. Profits are passed through personal tax returns, but the partner with unlimited liability must also pay self-employment taxes.
Limited liability partnerships give limited liability to every party. Each partner is protected from business debts and will not be personally responsible for other partners’ actions.
A partnership is a good choice for a business with multiple owners like a professional group.
Limited Liability Company
A limited liability company gives the benefits of both the partnership and corporation business structure.
As a limited liability company, you and your assets are protected. If your business faces lawsuits or bankruptcy, you will not be liable.
Profits and losses can also go through your personal accounts without being subject to corporate taxes. As a member of an LLC, you will be considered self-employed for tax purposes.
LLC may be subject to restrictions in some states and be dissolved when a member leaves or joins and be reformed. LLC can be a good choice for owners with a lot of personal assets and those who want to pay a lower tax rate.
A C corp is a legal entity that is separate from its owners. The corporation acts like a person in terms of they can be held legally liable, make a profit, and be taxed.
Corporations are the business entity that offers the strongest protection from personal liability. They require more extensive reporting, operational processes, record keeping, and the cost is higher than other structures.
Corporations will pay income tax on their profits, unlike other business types. Sometimes the shareholders will be taxed on their personal tax returns too.
Corporations are independent of business owners or shareholders. If someone leaves the company or sells their shares, a C corporation can continue business as normal. They can also raise funds through selling stock.
An S corporation is designed specially to avoid the double taxation that C corporations sometimes suffer. Profits and losses are able to be passed directly to the owner’s personal income without corporate taxation. In some states, this is not the case, and S corporations’ shareholders are taxed. Check the S corporation taxes for your state.
The process for registering as an S corporation is different, it must be registered with the IRS because of the tax benefits. There are also limits on the number of shareholders, and all shareholders must be US citizens. Like a C corporation there are also strict operational and filing processes.
The B corporation, or benefit corporation are taxed similar to a C corporation. The B corporation is driven by a mission to do public good as well as profit. In some states, the B corp must submit annual reports of the public good they have done. The shareholders will also hold the owner responsible for producing social good.
Similar to a B corporation, the Close corporation has an nontraditional corporate structure. A board of directors is unnecessary, and the shares are usually prohibited from publicly trading. Rules vary from state to state about the requirements for a close corporation.
Nonprofit corporations serve the purpose of religious, literary, education, scientific, or charity work. They receive tax-exempt status because profits are not paid to members but held for future projects. They must file with the IRS to get their tax-exempt status.
This type of organization is owned and operated by those using its services. The earnings and profits are distributed amongst the members who hold shares. The amount of shares members have do not correlate with the weight of their vote. A cooperative will normally have a board of directors and officers who are elected by the members. The members will also have voting rights on important decisions.
Chapter 6: Register Business Name and Brand
You want to pick the perfect name for your business, one that reflects your brand and captures your spirit. It is also important to pick a name that hasn’t been used by someone else.
Creative market research will help when picking a name; you can run focus groups on the names you like best to see which one your target market connects with.
Once you have picked your business name, protect it by registering it. Once your business name is registered, no one can steal it. There are four different ways to register your business, depending on your location and business structure.
- If you register an entity name, you are protected at a state level
- If you register a trademark, it protects you at a federal level
- If you register as a DBA, there is no legal protection, but it can be a legal requirement in some states
- If you register a domain name, your website address is protected
These types of registrations are legally independent, and you may need to register multiple of these.
Register Entity Name
If you choose to register your business as an entity name, it can protect your business name at a state level. Sometimes, your state may require you to register a legal entity name.
Each state has different rules about the use of company suffixes and what your entity name can be. If a name has been registered by someone else, most states won’t let you use it, and some states even require your name to indicate the type of business you run.
In most cases, however, registering an entity name prevents anyone else in the state from operating under the same name.
Trademarking your business name or the name of your products will protect you at a national level. It will prevent others in similar industries from using your trademarked names. It is important to check prospective names against the official trademark database to determine whether it has already been used before you pick a business name or name a product. Otherwise, you may be subject to costly trademark infringement lawsuits.
Register “Doing Business As” (aka: DBA)
This allows you to do business under a different name from your business entity or personal name. In some states, businesses are required to do so; in other states, it is optional. It provides no legal protection, so multiple businesses can use the same DBA within a state. Trademark infringement laws will still apply.
Website Domain Name
A domain name is your URL or website address. Once you register your domain name, it is taken off the market, and no one else will use it for as long as you own it. This allows you to protect your brand’s online presence. A domain name does not necessarily need to be the same as a business name, but it can be helpful for brand identity.
There are several domain registrar services with different price points and customer service records. You will need to renew your domain name on a regular basis.
Chapter 7: Register Business with Federal, State, and Local Government
Now that you’ve picked your business name and put it on hold, you need to register your business with the state and the federal government. Depending on your business type, you may need to use different methods to register your business.
In some cases, businesses need not register with the federal agencies and file for a federal tax ID is sufficient. However, tax-exempt status or trademark protection requires filing with government agencies.
If your business is formed as an LLC, partnership, corporation, or nonprofit, then you will need to register with your state. You need to register in the state where you will do busienss. This is defined by:
- You have face to face meetings with clients in the state
- Your business has a physical presence in the state
- A large amount of your company’s revenue comes from the state
- Some of your employees work in the state
Depending on the state you are registering with, you will need to either file electronically or through the mail.
Registered Agent for Service Process
For corporations, LLC, nonprofits, and partnerships, you will need a registered agent in your state. The registered agent will receive official papers and legal documents on behalf of your company and must be located in the state where you register. While it isn’t a requirement for other types of businesses, some business owners use a registered agent, so they need not do this work themselves.
Out of State Filings
If you conduct business in multiple states, then you may need to file for a foreign qualification in the other states. It is necessary to pay the State annual report fees and taxes in your state of formation and the foreign qualified states.
File a Certificate of Authority with the state you wish to foreign qualify for; this will charge a filing fee.
State Documents and Fees
The fees to register your business will vary in each state, but generally, it will be less than $300. You will need the following information to register your business:
- Business name
- Business location
- Management structure, owners, and directors
- Registered agent details
- Number and value of shares
Depending on your business type, you may need the following documents:
- Articles of Organization – This document is for LLCs and explains the basics of your business. It includes information like company address, name, registered agent, and the member names.
- LLC Operating Agreement – This document describes the business structure for your LLC, including the functional and financial decisions. It explains how key business decisions will be made and the powers, responsibilities, and duties of each member. Even if this isn’t required, it is best to have one for your company records as they will be legally enforceable.
- Certificate of Limited Partnership – This document is simple but contains the basic information of your partnership and notifies the state that the partnership exists.
- Certificate of Limited Liability Partnership – Similar to the above, it contains the basic details of your limited liability partnership.
- Limited Liability Partnership Agreement – It is an internal document that defines the powers, duties, and responsibilities of each partner and how business decisions will be made. Even if the state does not require it, it is important to have one as it is legally enforceable.
- Articles of Incorporation – This is a comprehensive document that gives the basic outline of your business. Every state will require one.
- Bylaws or Resolutions – These are corporate governance documents that lay out the powers, responsibilities, and duties of shareholders and officers. It also defines how business decisions will be made and is legally enforceable.
Register with Local Agencies
In most cases, you will not need to register with city or county governments to form your business. You may need to file for permits and licenses from the city or county though. In some places, you might need to register your DBA if you use one.
Stay Up To Date With Registration Requirements
Depending on your business structure, some states require you to provide reports and additional documentation. Check with your local tax office and state government to see what applies to your business.
Chapter 8: State and Federal Tax Identification
Your federal and state tax ID numbers are also known as Employer Identification Numbers or EINs. These are important to important business steps, like paying taxes and opening a bank account. In some states, you might need to get a tax ID as well as your EIN.
Federal Tax ID Number
Your Employer Identification Number (“EIN”) is your federal tax ID, and you will use to it hire employees, open a bank account, apply for business permits and licenses, and pay federal taxes.
Applying for an EIN is free a the IRS website, and you should do it right after registering your business so you can finalize the rest of the business set up.
If you do any of the following, you will need an EIN:
- Pay employees
- File employment, firearms, alcohol, tobacco, or excise tax returns
- Operate as a corporation of partnership
- Use a Keogh tax-deferred pension plan
- Work with certain types of organization
- Withhold tax on non-wage income paid to a non-resident alien
Change or Replace Your EIN
If you have an EIN already, if you change certain things in your business you might have to change it.
If these changes occur, you might need to change your EIN depending on your state:
- Name change
- Change in ownership
- Change in tax status
- Address change
- Change in management
State Tax ID number
If your business pays state taxes, then you will need a state tax ID number. If not, then you aren’t required to get one. Check on your state website to see if you need a state tax ID number.
Chapter 9: Business Licenses and Permits
Staying legally compliant will ensure your business runs smoothly and has limited disruptions to service. Most small businesses will need permits and licenses from the state or federal level. Check which agencies regulate your business. Each agency will have its own requirements and fees.
Here are some of the agencies you might need to register with:
- Alcohol and Tobacco Tax and Trade Bureau. If you manufacture, import, sell, or wholesale alcoholic beverages.
- Alcohol Beverage Control Board (State and City). If you manufacture, import, sell, or wholesale alcoholic beverages.
- Federal Aviation Administration. If your business transports people or goods through air, operates aircraft or involves aircraft maintenance.
- Bureau of Safety and Environmental Enforcement. If your business is involved in drilling for oil, natural gas, or other minerals on federal lands.
- Nuclear Regulatory Commission. If your business produces commercial nuclear energy, is involved in the distribution and disposal of nuclear materials or is a fuel cycle facility.
- Bureau of Alcohol, Tobacco, Firearms, and Explosives. If your business deals, imports, or manufactures any of those products.
- Fish and Wildlife Service. If your business is involved in any activity with wildlife, including the export and import of wildlife and related products.
- National Oceanic and Atmospheric Administration Fisheries Service. Businesses involved in any kind of commercial fishing.
- Federal Maritime Commission. If you provide transport over the ocean or facilitate cargo shipping.
- Federal Communications Commission. If your business broadcasts information via cable, wire, radio, satellite, or television.
- Department of Transportation. If your business operates overweight or oversize vehicles.
- US Department of Agriculture. For any companies transporting biotechnology, plants, animals, or animal products across state lines.
State Licenses and Permits
Depending on your business location and activities, the permits and licenses you need and their fees will vary. The states will regulate a broader range of activities than the states do, so it is important to check which permits you will need for both.
Licenses will expire after a set period of time, so be sure to keep track of when it is up for renewal.
Chapter 10: Business Bank Account for Business
A small business account makes it easy to separate your personal and business expenses and makes it easier to do your taxes. It will help protect your assets and ensure your business is legally compliant.
Common business accounts include:
- Checking account
- Credit card account
- Savings account
- Merchant services account
Once you have your federal EIN you can open a business bank account.
There are some perks that come with opening a business bank account vs a personal bank account.
- Protection – Business banking offers some liability protection because your personal and business funds are separate. When you have a merchant services account, your customers’ private information is secure.
- Professionalism – Customers will be able to make checks out to your business instead of directly to you. This means that employees can handle banking tasks without access to your personal accounts.
- Preparedness – When you have a business bank account, you can have a line of credit for the company in case of emergency or new purchases.
- Purchasing power – You can build a credit history and make large startup purchases with a business credit card account.
Fees and Good Benefits
Instead of just opening a business account at the same bank you use for personal banking, shop around to find the best benefits and lowest fees available.
Consider the following when opening a checking or savings account:
- Interest rates for savings and checking
- Introductory offers
- Early termination fees
- Transaction fees
- Interest rates for lines of credit
- Minimum account balance fees
When opening a merchant services account, consider the following:
- Transaction fees: How much charged for credit card transaction s
- Discount rate: The charge for each transaction processed (often as a percentage)
- Monthly minimum fee: The fee if your business does not meet the minimum required transactions
- ACH daily batch fees: The fee when you settle credit card transactions for the day
- AVS fees – The fee for verifying customers addresses for transactions
A popular alternative to traditional merchant services accounts is payment processing companies. They can offer additional functions such as allowing you to use your phone to accept credit card payments. Look at the same fees as those for merchant services accounts. A payment processor will still need to be connected to a business checking account.
Necessary Documents to Open a Business Bank Account
Once you have picked your bank, opening a business bank account is easy. Go online or to a local bank to fill out the paperwork. Banks will often ask for the following information and documents:
- EIN number
- SSN if you are a sole proprietorship
- Ownership agreements
- Business license
- Business formation documents
Some banks may require additional information, so check with them before you go into the branch.