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Starting a small business

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The SmallBusiness.com WIKI Guide to Starting a small business is a collaborative project created by users of the SmallBusiness.com WIKI. It provides an overview of basics related to this topic. Find more guides at The SmallBusiness.com WIKI Guides Hub.

Contents

[edit] Overview

So you want to start your own business? Congratulations on wanting to become your own boss. In addition to giving you the ability to make your own decisions, business ownership also offers financial independence, creative freedom, the chance to fully use your skills and knowledge, and more free time to spend with your family and friends. Of course, with those perks of business ownership also comes a host of pitfalls, including risk, liability, and mounds and mounds of paperwork. Luckily, you’ve come to the right place to help you navigate the first phase of business ownership—startup.

In the startup phase, you’ll figure out whether you have what it takes to run a business, determine what kind of business you’d like to open, write a business plan, conduct initial market research, secure funding, decide on a business structure, meet with accountants, advisers and lawyers, and the list goes on.

Starting a business isn’t easy. It takes a lot of motivation, discipline, talent, research, planning and good old-fashioned hard work—before you can even hang your “open for business” sign. But ask any successful business owner, and they'll verify that working hard in the beginning will pay off in the end.

[edit] Getting started: The self assessment

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. And that starts by looking at yourself. Take some time to answer the following questions about yourself before starting a business:

Spend a good amount of time on this exercise. This might be best done with a friend, colleague or business mentor. When you’re finished, take a look at the list and note any gaps. Your lacking some of the traits of a successful small business owner, for example, doesn’t mean your business will fail, but it will give you a good idea of your strengths and weaknesses—and any partners, employees or advisers you may need to help you fill the gaps.

[edit] Alternatives to starting a business from scratch

Instead of starting a business, you may consider one of these options:

[edit] Buy a franchise

Becoming a franchisee of a successful franchising company can increase the odds a business will succeed, but there are many factors which a potential business owner should consider. There are plenty of reasons, outlined in the SmallBusiness.com Guide to Buying a Franchise, for potential franchisees to beware.

[edit] Buy an existing business

Purchasing a business that is already operating can help a potential business owner succeed. But like acquiring the rights to a franchise, the buyer must beware.

[edit] Developing a business plan

Have successful business started without a business plan? Probably. But is it risky? Definitely. No small business expert would recommend starting a business without a business plan. There's too much at stake—-your money, other people's money, the livelihood of your family and potential employees. That's why a business plan is essential to starting a business and—as you'll learn once you take the plunge into business ownership–running a business.

[edit] Parts of a business plan

Every successful business plan should include something about each of the following areas, since these are what make up the essentials of a good business plan:[1]

  • Executive Summary
  • Market Analysis
  • Company Description
  • Organization & Management
  • Marketing & Sales Management
  • Service or Product Line
  • Funding Request
  • Financials
  • Appendix

Once you have completed your business plan, review it with a friend or business associate or a small business counselor from the Service Corps of Retired Executives (SCORE) or a Small Business Development Center (SBDC). The business plan is a flexible document that could and should change as you develop your business idea and then as your new business grows.

[edit] Using the business plan

In the startup phase, you'll use your business plan to guide you through the various phases of your new business, but you'll also use it to attract investment capital, secure loans and attract strategic business partners. For these external eyes, a business plan shows whether or not a business has the potential to make a profit. It requires a realistic look at almost every phase of business and allows you to show that you have worked out all the problems and decided on potential alternatives before actually launching your business.

[edit] Choosing a business structure

Many factors must be considered when choosing the best form of business ownership or structure. The choice you make can have an impact on multiple aspects of your business, including taxes, liability and ownership succession.

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 pros and cons of each structure.

[edit] Sole proprietorship

This is considered 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. The owner operates the business, is personally liable for all business debts, can freely transfer all or part of the business, and can report profit or loss on personal income tax returns.

[edit] Partnership

There are several types of partnerships. The two most common types are general partnerships 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. Profit, loss and managerial duties are shared among the partners, and each partner is personally liable for partnership debts. Partnerships do not pay taxes, but must file an informational return; individual partners report their share of profits and losses on their personal return.

[edit] Limited liability company

A limited liability company (LLC) is a structure that gives its owners 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. An LLC is a statutory creation. That is, unlike general partnerships which are developed under common law, an LLC is created by filing a document (usually called Articles of Organization) with an officer designated by state law.

[edit] Corporation

A business may incorporate without an attorney, but legal advice is highly recommended. A corporation is usually the most complex and most expensive way to organize a business. Control depends on stock ownership and 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.

[edit] Naming your business

While it seems simple, coming up with a name will probably be one of the most difficult steps of starting your business. There's a lot riding on that name. For starters, you'll have to like it and enjoy the way it sounds (you'll be saying it a lot). At the same time, the name also needs to be unique so you can stand out among the competition, but not so unique that potential customers won't know what you're selling. If that's not enough pressure, you'll also want to check to see if the URL is available. Actually, checking URL availability might help you in the business name brainstorming process.

However you go about it, spend some time with a thesaurus and an empty sheet of paper and play around with name ideas. Once you have a few you're happy with, test them out with family and friends. Before ordering letterhead, though, there are a few steps you'll need to take to ensure that you legally can use the name you selected.

[edit] Legal requirements and implications

Before choosing a name, you'll need to decide which business structure you will use. Naming your business (unless you're a sole proprietorship or a partnership using your own name) is a formal process, which varies depending on the business structure you choose.[2] For example, many states require a sole proprietor to use their own name for the business name unless they formally file another name as a trade name, or fictitious name.

Similarly, you will need to determine whether your trade name will be the same as the full legal name of your business. Of equal importance is finding out whether your name or a similar name is being used by another business, and if so, what rights they may or may not have to use the name in the area where you do business. Keep in mind that some businesses only file trademarks within their locality, so it's possible that the same name can be used elsewhere.

[edit] Search and registration

Trade names can be registered through state Secretary of State offices, and for wider marketplace protection, through the U.S. Patent and Trademark Office (USPTO Trademark Search)[3]. Businesses should first use the USPTO's online system to search all state and federal trademark registers to see if their proposed name is being used.

[edit] Domain Names

For many businesses that operate on the Web, trade names are synonymous with domain names, such as Amazon.com and Monster.com. Domain names are not registered through state or local government; rather they can be obtained through numerous online businesses, most of which will allow you to conduct a name search prior to purchase to make sure your chosen name isn't taken.

[edit] Funding your business

An integral component of starting a successful business is raising sufficient funds, also called capital. whether from your personal savings, a bank loan, an investor, a credit card or a combination of all four. There are many challenges associated with funding a new business, but like with any important decision, careful planning can help you anticipate any obstacles.

[edit] Estimating startup costs

To determine your startup costs, you must identify all the expenses that your business will incur during its startup phase. Some of these expenses will be one-time costs, such as the fee for incorporating your business or price of a sign for your building. Some will be ongoing, such as the cost of utilities, inventory, insurance, etc.

When identifying these costs, decide whether they are essential or optional. A realistic startup budget should include only those things that are necessary to start that business. These essential expenses can then be divided into two separate categories: fixed and variable. Fixed expenses include rent, utilities, administrative costs and insurance costs. These expenses must be paid regardless of sales, and are often referred to as overhead costs. Variable expenses include inventory, shipping and packaging costs, sales commissions, and other costs associated with the direct sale of a product or service. Variable costs fluctuate directly with sales volume.

The most effective way to calculate your startup costs is to use a worksheet that lists all the various categories of costs (both one-time and ongoing) that you will need to estimate prior to starting your business. The U.S. Small Business Administration recommends using an online expense calculator.[4]

[edit] Performing a breakeven analysis

The breakeven point occurs when revenue equals all business costs. Estimating this will help when you determine how much startup funding you'll need—and for how long. Performing a breakeven analysis will also help you determine if you have a viable business idea.[5]

[edit] Weighing your financing options

Raising capital is the most basic of all business activities. You need to spend money to make money, right? But securing the capital necessary to start a business can be a daunting challenge. The good news is, there is funding available for new small business owners from traditional and non-traditional sources.

[edit] Self-financing

The primary source of capital for most new businesses comes from savings and other personal resources. While credit cards are often used to finance business needs, there are usually better, less risky options available, even for very small loans .

[edit] Traditional business financing

Traditional business financing options include loans or lines of credit from a traditional lending institution, such as a bank or credit union. In order to secure traditional business financing, you generally need to prove or provide the following:

  • Ability and willing to repay the loan: Lenders will check your credit report to see that past payments were made as agreed and on time. Traditional lenders also like to see at least three potential sources of collateral (including projected cash flow).
  • A sound business idea: Just because you pass the first test doesn't mean a traditional lender will approve your application. You also have to prove that you have created a sound business idea and that you and your startup team hold the expertise necessary to carry out the idea as outlined in your business plan. Before approaching a lender, ask yourself: Do you have sufficient experience and training to operate a successful business? Any traditional lender will want a solid answer to that question.

[edit] Alternative sources of financing

If you cannot secure financing from traditional lenders, there are other sources of financing:

[edit] Protecting your ideas

Intellectual property is important to your small business. It’s your ideas–and their implementation—that have gotten you to the point where you're starting a business. Whether it's the business name, the logo for your business cards, a slogan to make you stand out from the competition, or a product or service, you’ll want to protect those ideas. In some instances, businesses may want to apply for trademarks, patents or copyrights to protect a trade secret or to register a name or distinctive logo.

Here are the most common types of intellectual property marks you should be familiar with:

[edit] Trademark

A trademark (TM) refers to names or symbols used in any commerce that is subject to regulation by state government or the U.S. Congress. Trademarks and service marks may be registered in a state for a term of ten years. Placing a trademark after your product or service name indicates the company’s intent to protect the mark used by the company related to its products or services.

Similar to the TM mark, the service mark (SM) differs from a trademark in that the mark is used in regards to a service rather than specific products or the packaging or delivery of the service.

[edit] Patent

A patent is a set of exclusive rights issued by a government agency declaring someone the inventor of a new product and having the privilege of stopping others from making, using or selling the claimed invention.

To obtain a patent, an application must be made through the U.S. Patent and Trademark Office. Once application is made but before it's approved, businesses can use "patent pending" language.

[edit] Copyright

A copyright is protection for the works of authors, composers, programmers, artists and others who create intellectual property. A copyright prevents illegal copying of written matter, works of art or computer programs.

To obtain a copyright, there is no form to complete or fee to pay. A work must simply have three elements: The © symbol (the word "Copyright" or the abbreviation "Copr." will substitute), the year of first publication and the name of the author or owner. Copyrights last for the author’s life, plus 70 years.

[edit] Complying with government regulations

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 list 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.

[edit] 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. Certain types of trades and services, ranging from being a barber to brain surgeon, also require state and local licensing. Refer to state and local agencies to review such requirements.

[edit] 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".

[edit] 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".

[edit] 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

[edit] 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.

[edit] 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

[edit] 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.

[edit] Understanding taxes

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.

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 the SSA Employers' Information web site.

[edit] Employer identification number

To pay federal taxes, withhold Social Security contributions for employees and for other reasons, a business needs an Employer Identification number.

[edit] 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, or 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.

[edit] Sales tax and 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.

[edit] 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. Go to your state home page to check the figures for your state. Unemployment insurance must be reported and returns made to the state.

[edit] Getting 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.

[edit] Choosing a location

Choosing the right location for your business can be a major factor in its success or failure. A good location may allow a struggling business to survive, but a weak location could mean trouble for even a very well-run business. Or maybe you don't need a location just yet—maybe a home office would suffice for now.

Whatever location you choose, make sure you know all of the legal restrictions on your place of business, including:

  • Home-based business regulations
  • Commercial leasing
  • Zoning requirements

[edit] Reference

[edit] See also

[edit] External links