The SmallBusiness.com Guide to Starting a business is a collaborative project created by users of SmallBusiness.com. You can find more SmallBusiness.com Guides here.
Overview
Starting and managing a business takes motivation, desire and talent. It also takes research and planning. Like a chess game, success in small business starts with decisive and correct opening moves. And, although initial mistakes are not fatal, it takes skill, discipline and hard work to regain the advantage.
To increase your chance for success, take the time up front to explore and evaluate your business and personal goals. Then use this information to build a comprehensive and well-thought-out business plan that will help you reach these goals. The process of developing a business plan will help you think through some important issues that you may not have considered yet. Your plan will become a valuable tool as you set out to raise money for your business. It should also provide milestones to gauge your success.
Getting started
Before starting or acquiring a small business, it is important to take the time to review a wide array of factors and considerations about yourself and the business you plan to enter.
Be honest with yourself. Know what you're getting into.
In business, there are no guarantees. There is simply no way to eliminate all the risks associated with starting a small business - but you can improve your chances of success with good planning, preparation, and insight. Also keep in mind that the business you start may not be the exact business you started. Start by evaluating your strengths and weaknesses as a potential owner and manager of a small business. Carefully consider each of the following questions:
- Are you a self-starter? It will be entirely up to you to develop projects, organize your time, and follow through on details.
- How well do you get along with different personalities? Business owners need to develop working relationships with a variety of people including customers, vendors, staff, bankers, and professionals such as lawyers, accountants or consultants. Can you deal with a demanding client, an unreliable vendor, or a cranky receptionist if your business interests demand it?
- How good are you at making decisions? Small business owners are required to make decisions constantly - often quickly, independently, and under pressure.
- Do you have the physical and emotional stamina to run a business? Business ownership can be exciting, but it's also a lot of work. Can you face six or seven 12-hour work days every week?
- How well do you plan and organize? Research indicates that poor planning is responsible for most business failures. Good organization of financials, inventory, schedules, and production can help you avoid many pitfalls.
- Is your drive strong enough? Running a business can wear you down emotionally. Some business owners burn out quickly from having to carry all the responsibility for the success of their business on their own shoulders. Strong motivation will help you survive slowdowns and periods of burnout.
- How will the business affect your family? The first few years of business start up can be hard on family life. It's important for family members to know what to expect and for you to be able to trust that they will support you during this time. There also may be financial difficulties until the business becomes profitable, which could take months or years. You may have to adjust to a lower standard of living or put family assets at risk in the short-term.
Good attributes for entrepreneurs
- Self confidence. You have a belief in yourself that you can do it.
- Does not consider failure as an option. You recognize that failure is a necessary step to finding what does work.
- Able to move from ambiguity to clarity. You recognize that confusion, chaos and lack of clarity are all pieces of the “playing full out” puzzle. You have a process that allows you to move through this phase into a state of power and momentum.
- Has perseverance and discipline. You know that every day you must focus on what MUST be done, not what you feel like doing. You engage in consistent, supportive habits.
- Has a plan yet is “flexible.” The key to massive results is setting your mind on a desired outcome while being willing to “go with the flow” so the idea can expand and grow with the changing environment.
- Sets and attains realistic goals. In my work, the only difference between goal talkers and goal getters are how realistic you are about your time management and abilities.
- Takes calculated risks. Risks are necessary – but they must be tempered against what is good for you and your business. Learn what your high payoff opportunities are (a great resource for this process can be found in the Unstoppable Goals Method system).
- Equally skilled in sales, marketing and “craft.” It’s not enough to love what you do; you must become masterful at bringing in the business opportunities. Otherwise you will be the best kept secret in the world.
- Has financial backing/funding sources. To truly achieve success, you must have access to financial leverage. As the saying goes, “It takes money to make money.”
- Enormous passion and drive for the work. When the going gets tough (and it will) the one thing that will keep you going is your passion. You have to get up every day believing that what you do is so vital, so important and so necessary that you are willing to overcome any obstacles in your way.
- Willingness to learn. You recognize that the minute you know it all, you are done. Bigger successes come from continuing to learn, grow and evolve your mind and your goals.
- Surrounded by other successful entrepreneurs. You invest your time, money and energy in people who are playing a big game. Choosing an environment to tap into collaborative opportunities, brainstorming and big thinking is your way to leaping forward. (Like our Platinum Inner Circle Program does).
- Has good health and unbounded energy. The one thing that is precious that can’t be bought once it is gone is your energy. You make a commitment to maintaining a good health regime as a priority, not a last resort.
Keys to success
According to the U.S. Small Business Administration, the following traits are found among successful entreprneurs:
- persistence
- desire for immediate feedback
- inquisitiveness
- strong drive to achieve
- high energy level
- goal oriented behavior
- independent
- demanding
- self-confident
- calculated risk taker
- creative
- innovative
- vision
- commitment
- problem solving skills
- tolerance for ambiguity
- strong integrity
- highly reliable
- personal initiative
- ability to consolidate resources
- strong management and organizational skills
- competitive
- change agent
- tolerance for failure
- desire to work hard
- luck
Source: SBA
Start with questions about yourself and the business you want to persue.
Your answers will help you create focused, well-researched business plan that should serve as a blueprint. It should detail how the business will be operated, managed and capitalized.
Before starting out, list your reasons for wanting to go into business. Some of the most common reasons for starting a business are:
- You want to be your own boss.
- You want financial independence.
- You want creative freedom.
- You want to fully use your skills and knowledge.
Next you need to determine what business is "right for you." Ask yourself these questions:
- What do I like to do with my time?
- What technical skills have I learned or developed?
- What do others say I am good at?
- How much time do I have to run a successful business?
- Do I have any hobbies or interests that are marketable?
Then you should identify the niche your business will fill. Conduct the necessary research to answer these questions
- Is my idea practical and will it fill a need?
- What is my competition?
- What is my business advantage over existing firms?
- Can I deliver a better quality service?
- Can I create a demand for my business?
The final step before developing your plan is the pre-business checklist. You should answer these questions:
- What business am I interested in starting?
- What services or products will I sell? Where will I be located?
- What skills and experience do I bring to the business?
- What will be my legal structure? (see overview below)
- What will I name my business?
- What equipment or supplies will I need?
- What insurance coverage will be needed?
- What financing will I need?
- What are my resources?
- How will I compensate myself?
Determine how to organize your new business
There are four primary ways to legally organize a business: a sole proprietorship, a partnership, a limited liability company and a corporation. When organizing a new business, it is important to take time to review the advantages and disadvantages of which one of these structures you will choose. Factors influencing your decision about your business organization include:
- Legal restrictions
- Liabilities assumed
- Type of business operation
- Earnings distribution
- Capital needs
- Number of employees
- Tax advantages or disadvantages
- Length of business operation
Sole Proprietorship
This is the easiest and least costly way of starting a business. A sole proprietorship can be formed by finding a location and opening the door for business. There are likely to be fees to obtain business name registration, a fictitious name certificate and other necessary licenses. Attorney's fees for starting the business will be less than the other business forms because less preparation of documents is required and the owner has absolute authority over all business decisions. (See also: Sole_proprietorship.)
Partnership
There are several types of partnerships. The two most common types are general and limited partnerships. A general partnership can be formed simply by an oral agreement between two or more persons, but a legal partnership agreement drawn up by an attorney is highly recommended. Legal fees for drawing up a partnership agreement are higher than those for a sole proprietorship, but may be lower than incorporating. A partnership agreement could be helpful in solving any disputes. However, partners are responsible for the other partner's business actions, as well as their own. (See also: Partnership.)
A Partnership Agreement should include the following:
- Type of business
- Amount of equity invested by each partner
- Division of profit or loss
- Partners compensation
- Distribution of assets on dissolution
- Duration of partnership
- Provisions for changes or dissolving the partnership
- Dispute settlement clause
- Restrictions of authority and expenditures
- Settlement in case of death or incapacitation
Limited Liability Company
A limited liability company (LLC) is a relatively new business entity, at least in the United States. Its basic features are that its owners have limited liability for the entity's debts and obligations, similar to the status of shareholders in a corporation, and its income and losses are normally passed through to the owners as if it were a partnership. It is probably most like a limited partnership, without the requirement that there be at least one general partner liable for the debts and obligations of the partnership. An LLC is a statutory creation. That is, unlike general partnerships which developed under common law, an LLC, like a corporation, is created by filing a document (usually called Articles of Organization) with an officer designated by state law.
Corporation
A business may incorporate without an attorney, but legal advice is highly recommended. The corporate structure is usually the most complex and more costly to organize than the other two business formations. Control depends on stock ownership. Persons with the largest stock ownership, not the total number of shareholders, control the corporation. With control of stock shares or 51 percent of stock, a person or group is able to make policy decisions. Control is exercised through regular board of directors' meetings and annual stockholders' meetings. Records must be kept to document decisions made by the board of directors. Small, closely held corporations can operate more informally, but record-keeping cannot be eliminated entirely. Officers of a corporation can be liable to stockholders for improper actions. Liability is generally limited to stock ownership, except where fraud is involved. You may want to incorporate as a "C" corporation or "S" corporation. (See also: Corporation.)
Develop a business plan
You will need to develop a business plan before starting or acquiring your business. A more detailed description and discussion of business plans can be found in the Business plan entry of Smallbusiness.com The following outline of a typical business plan can serve as a guide. You can adapt it to your specific business. Breaking down the plan into several components helps make drafting it a more manageable task.
Introduction
- Give a detailed description of the business and its goals.
- Discuss the ownership of the business and the legal structure.
- List the skills and experience you bring to the business.
- Discuss the advantages you and your business have over your competitors.
In-depth help on developing a sound business plan can be found on the SBA Web site in the Starting Area.
Marketing
- Discuss the products/services offered.
- Identify the customer demand for your product/service.
- Identify your market, its size and locations.
- Explain how your product/service will be advertised and marketed.
- Explain the pricing strategy.
Financial Management
- Explain your source and the amount of initial equity capital.
- Develop a monthly operating budget for the first year.
- Develop an expected return on investment and monthly cash flow for the first year.
- Provide projected income statements and balance sheets for a two-year period.
- Discuss your break-even point.
- Explain your personal balance sheet and method of compensation.
- Discuss who will maintain your accounting records and how they will be kept.
- Provide "what if" statements that address alternative approaches to any problem that may develop.
Operations
- Explain how the business will be managed on a day-to-day basis.
- Discuss hiring and personnel procedures.
- Discuss insurance, lease or rent agreements, and issues pertinent to your business.
- Account for the equipment necessary to produce your products or services.
- Account for production and delivery of products and services.
Concluding Statement
- Summarize your business goals and objectives and express your commitment to the success of your business.
- Once you have completed your business plan, review it with a friend or business associate or a Service Corps of Retired Executives (SCORE) or Small Business Development Center (SBDC) counselor. (See SCORE and SBDC listings in this guide).
- When you feel comfortable with the content and structure make an appointment to review and discuss it with your lender. The business plan is flexible document that should change as your business grows.
Funding your business
There are numerous ways that businesses are financed. Funding sources are the sources from which someone obtains the funds necessary to startup or operate a business. There are several sources available for such funds, also called capital. For more information on this topic, see the "Funding Sources" entry on Smallbusiness.com.
Regulations: Government regulations and your business
It may be inconceivable to you that your home-based consulting service or handknit sweater business would have to comply with any of the numerous local, state and federal regulations, but in all likelihood it will. Avoid the temptation to ignore regulatory details. Doing so may avert some red tape in the short term, but could be an obstacle as your business grows. Taking the time to research the applicable regulations is as important as knowing your market.
Below is a checklist of the most common requirements that affect small businesses, but it is by no means exhaustive. Bear in mind that regulations vary by industry. If you're in the food service business, for example, you will have to deal with the health department. If you use chemical solvents, you will have environmental compliance to meet. Carefully investigate the regulations that affect your industry. Being out of compliance could leave you unprotected legally, lead to expensive penalties, and jeopardize your business.
Business Licenses
There are many types of licenses. You need one to operate legally almost everywhere. If the business is located within an incorporated city limits, a license must be obtained from the city; if outside the city limits, then from the county. For more information contact the county or city office in your area or try these state web sites that offer business license information You should also go to the website of your home state and hometown and search for "business license" or "county information" to review local regulations.
Certificate of Occupancy
If you are planning on occupying a new or used building for a new business, you may have to apply for a Certificate of Occupancy from a city or county zoning department. For more information contact the county or city office in your area. You should also go to the website of your home state and hometown and search for "certificate of occupancy" or "county information".
Business Organization
There are many forms of legal structure you may choose for your business. The most common structures are Sole Proprietorships, General and Limited Partnerships, C and S Corporations and Limited Liability Companies. Each legal structure offers organizational options which are appropriate for different personal situations and which affect tax and liability issues. You should research each legal structure thoroughly and consult a tax accountant and/or attorney prior to making your decision.
Fictitious Business Name
Businesses that use a name other than the owner's must register the fictitious name with the county as required by the Trade Name Registration Act. This does not apply to corporations doing business under their corporate name or to those practicing any profession under a partnership name. For more information contact your state or local government. You should also go to the website of your home state and hometown and search for "trade name registration" or "county information".
Protecting Your Idea
If applicable to your business, you may want to apply for trademarks, patents and your copyright.
- Trademarks: Trademarks are names or symbols used in any commerce that is subject to regulation by state government or the U.S. Congress.
- State Registration of a Trademark: Trademarks and service marks may be registered in a state for a term of ten years. For more information about Applications for Registration of Trademark or Service Mark in your state, contact your state government.
- To register a trademark contact:
U.S. Department of Commerce
Trademark Office
2021 Jefferson Davis Highway
Arlington, Virginia 22202
(703) 305-8341 or (800) 786-9199
- To register a patent, contact:
Asst. Commissioner for Trademarks, Patent Applications
Washington, D.C. 20231
(800) 786-9199
Also, visit their web site at http://www.uspto.gov
Caution: Federally registered trademarks may conflict with and supersede state registered business and product names. Businesses are encouraged to check for conflicts with federal trademarks.
Contact:
Superintendent of Documents
P.O. Box 371954
Pittsburgh, Pennsylvania 15250-7954
(412) 512-1800
New and useful inventions can be protected by a U.S. patent. Professional assistance from a patent attorney is strongly urged because patent procedures are detailed and technical. A patent search is performed to see if a patent currently exists on the same or nearly the same device and, if not, to make proper application with the Patent Office.
Note: Only attorneys and agents registered with the U.S. Patent Office may represent inventors in related matters. The office has geographical and alphabetical listings of the more than 11,000 registered agents. Only these agents may perform patent searches in the patent office. Inventors or their attorneys can make arrangements with one of those agents. U.S. patents are issued by the Assistant Commissioner of Patents, Washington, D.C.
Additional information is provided in the publication, General Information Concerning Patents and other publications distributed through the U.S. Patent and Trademark Office.
Contact:
U.S. Library of Congress
James Madison Memorial Building
Washington, D.C. 20559
(202) 707-9100 (Order Line)
(202) 707-3000 (Information Line)
Copyrights protect the thoughts and ideas of authors, composers and artists. A copyright prevents illegal copying of written matter, works of art or computer programs. In order to ensure copyright protection, the copyright owner should always include notices on all copies of the work.
Tax Information
Business owners are required by law to withhold the following from the wages paid to employees: federal income taxes, state income taxes and FICA (Social Security) Insurance.
Income taxes will also be levied by the federal and state governments on earnings of any business. Therefore, each business must file an income tax return with both agencies. Businesses may be required to file estimated tax returns and pay estimated taxes on a quarterly basis.
For federal tax information, contact:
U.S. Internal Revenue Service (IRS)
You can go to IRS's website area for business taxes or call your local IRS office to receive a number of publications that are available upon request to small businesses. One of the most helpful is Your Business Tax Kit, which includes data and forms for a Federal Employer Identification Number and a tax guide for small businesses that can be ordered by calling Forms and Publications at (800) 829-3676 or through a visit to your local IRS office.
You may want to contact your local Social Security Administration Office for (FICA) Insurance information or visit one of these helpful SSA web sites:
For State tax information, try these state web sites for tax information, call your state government or visit your official state Web site.
Federal Self-Employment Tax
Everyone must pay Social Security Tax. If you are self-employed, your Social Security contribution is made through the self-employment tax. You will need to calculate how best to report earnings and pay your business taxes. Contact the IRS at (800) 829-1040, visit your local IRS office, go to the Official IRS Web site for more information. The IRS may seem like a complicated maze, but there are publications, counselors and workshops available to help you sort it out.
Business Insurance
Like home insurance, business insurance protects the contents of your business against fire, theft and other losses. Contact your insurance agent or broker. It is prudent for any business to purchase a number of basic types of insurance. Some types of coverage are required by law, other simply make good business sense. The types of insurance listed below are among the most commonly used and are merely a starting point for evaluating the needs of your business.
- Liability Insurance -- Businesses may incur various forms of liability in conducting their normal activities. One of the most common types is product liability, which may be incurred when a customer suffers harm from using the business product. There are many other types of liability, which are frequently related to specific industries. Liability law is constantly changing. An analysis of your liability insurance needs by a competent professional is vital in determining an adequate and appropriate level of protection for your business.
- Property -- There are many different types of property insurance and levels of coverage available. It is important to determine the property you need to insure for the continuation of your business and the level of insurance you need to replace or rebuild. You must also understand the terms of the insurance, including any limitations or waivers of coverage.
- Business Interruption -- While property insurance may pay enough to replace damaged or destroyed equipment or buildings, how will you pay costs such as taxes, utilities and other continuing expenses during the period between when the damage occurs and when the property is replaced? Business Interruption (or "business income") insurance can provide sufficient funds to pay your fixed expenses during a period of time when your business is not operational.
- "Key Man" -- If you (and/or any other individual) are so critical to the operation of your business that it cannot continue in the event of your illness or death, you should consider "key man" insurance. This type of policy is frequently required by banks or government loan programs. It also can be used to provide continuity in operations during a period of ownership transition caused by the death or incapacitation of an owner or other "key" employee.
- Automobile -- It is obvious that a vehicle owned by your business should be insured for both liability and replacement purposes. What is less obvious is that you may need special insurance (called "non-owned automobile coverage") if you use your personal vehicle on company business. This policy covers the business' liability for any damage which may result for such usage.
- Office and Director -- Under some circumstances, officers and directors of a corporation may become personally liable for their actions on behalf of the company. This type of policy covers this liability.
- Home Office -- If you are establishing an office in your home, it is a good idea to contact your homeowners' insurance company to update your policy to include coverage for office equipment. This coverage is not automatically included in a standard homeowner's policy.
Sales Tax Number
In your state there is a percent sales and use tax which applies to the retail purchase, retail site, rental, storage, use or consumption of tangible personal property and certain services. In other words, sales tax must be collected on just about every tangible item sold.
A sales tax number is required for each business before opening. The number, plus instructions for collection, reporting and remitting the money to the state on a monthly basis, can be obtained from your state government.
Other Considerations
All businesses with employees are required to comply with state and federal regulations regarding the protection of employees. For information on state labor laws, work force availability, prevailing wages, unemployment insurance, unionization, benefits packages and employment services contact your state government (See: Smallbusiness.com Directory: State online resources). Federal information can be found in a number of places, including a site maintained by the U.S. Department of Labor (See: Smallbusiness.com Directory: Federal online resources).
- Unemployment Insurance Tax -- Businesses are required by the state to pay unemployment insurance tax if the company has one or more employees for 20 weeks in a calendar year, or it has paid gross wages of $1,500 or more in a calendar year. The taxes are payable at a rate of 2.7 percent on the first $8,500 in annual wages of an employee. Go to your state home page to check the figures for your state. Unemployment insurance must be reported and returns made to the state.
- Immigration Act -- The Federal Immigration Reform and Control Act of 1986 requires all employers to verify the employment eligibility of new employees. The law obligates an employer to process Employment Eligibility Verification Form I-9. The Immigration and Naturalization Service Office of Business Liaison offers a selection of information bulletins and live assistance for this process through the Employer Hotline. In addition, INS forms and the Employer Handbook can be obtained by calling the Forms Hotline. For Forms: (800) 870-3676, Employer Hotline: (800) 357-2099
- Health and Safety -- The Federal Occupational Safety and Health Administration (OSHA) outlines specific health and safety standards employers must provide for the protection of employees. Many states have similar standards.
- Workers' Compensation -- If a business employs three or more people, workers' compensation insurance must be carried to provide protection to those injured in on�the�job accidents. The State Board of Workers' Compensation aids people who need claim assistance. For more information contact your state government.
- Minimum Wage -- Virtually all business entities are subject to the federal minimum wage, overtime and child labor laws. Information on these laws and other federal laws, may be obtained from: U.S. Department of Labor, Wage and Hour Division
- Bar Coding -- The Uniform Code Council, Inc., (not a government agency) assigns a manufacturer's ID code for the purposes of bar coding. Many stores require bar coding on the packaged products they sell. For additional information contact: Uniform Code Council Inc., P.O. Box 1244, Dayton, Ohio 45401, (513) 435-3870.
Sources
Much of the information in this Guide to Starting a Small Business comes from the "Small Business Startup Guide" developed by the U.S. Small Business Administration. You can find the SBA Small Business Guide at the following URL: www.sba.gov/starting_business/startup/guide.html
See also
External Links
