Starting your own business can be extremely exciting, as well as daunting. It can give you the independence you crave, but there’s a lot of uncertainty involved and decisions to make. In this blog post, we’ll walk you through the steps of starting a business so you can feel confident and prepared in your business journey.
1. Come up with a business concept
The first step in starting a business is deciding what it will sell. Ideally, it should be something you’re passionate about. But what’s more important is that people will actually buy from you.
It’s crucial to do market research to see if there’s demand for your ideas of products or services. You also need to analyze your target audience and see what kind of competition you’re up against.
Once you’ve done your research, you can settle upon a business concept you’re comfortable with.
2. Create a business plan
You should know that 20% of small businesses fail within the first year, 30% fail within their second year, and 50% fail after five years, according to Fundera. With this in mind, you shouldn’t start a business without a plan; it can make the difference between success and failure. The U.S. Small Business Administration outlines how to create a business plan so you can have a clear idea of what to do and what milestones to aim for.
3. Choose a legal structure
The next stage is where Lawmato can come in handy – choosing the legal structure of your business. Before starting or forming a business, you want to choose the structure that is best for you.
You have the option of choosing a business entity type, which is a way of doing business that is recognized by the law as a separate (not natural) person, with its legal duties and obligations (e.g. paying taxes, complying with regulations, etc.).
Sole proprietorship and joint ventures are not business entity types, although they are valid ways of business.
To help you make your legal structure decision, talk with a lawyer and a good tax advisor. If you already know and understand the tax and liability consequences of the different business entity types, then you will need to file with the Secretary of State (hereinafter “SOS”) or equivalent agency in the state you have chosen to file the entity type.
What are the business entity types?
Some of the common business entity types include:
- Limited liability company (LLC)
- General partnership (GP)
- Limited partnership (LP)
- Limited liability partnership (LLP)
- Limited liability limited partnership (LLLP)
- Nonprofit corporation
There are some less common types, such as:
- Blockchain-based limited liability company (BBLLC)
- Low-profit limited liability company (L3C)
- Benefit corporation (B corp)
- Benefit LLC (B LLC)
What is a sole proprietorship?
A sole proprietorship is an unincorporated business with one owner. The owner pays personal income taxes on the profits they earn from their business. It is common, although not required for sole proprietors to run businesses under their personal names, as they aren’t legally required to come up with business names. To do business under a different name, you will need to file a voluntary assumed name (aka “doing business as” or “DBA”) with the county or state agency, depending which applies in your state.
This type of business is relatively easy to set up. Beware, however, that if you set up a sole proprietorship, all liabilities from your business will extend to you.
What is a partnership?
A general partnership is when at least two parties agree to operate a business and share in its profits. This is similar to a sole proprietorship, but instead of one owner, there are two. Some states allow a general partnership to file with the SOS.
What is a limited liability company (LLC)?
A limited liability company (LLC) is a business structure that protects its owner or owners from personal responsibility for the business’s liabilities with certain exceptions.
LLCs are typically taxed differently from corporations – the LLCs themselves are not taxed separately from the owner or owners but could choose different tax options under the Internal Revenue Code (“IRC”). Owners personally pay taxes on the profits they earn from the business.
What is a corporation?
A corporation is a separate, legal person from its owners (aka shareholders) and can have some of the same rights as people, such as being able to agree to contracts, pay taxes, sue or be sued, own assets, hire people, and loan or borrow money.
A corporation has limited liability. Its shareholders profit by buying stocks and receiving dividends from the company, but they are not personally liable for its debts.
Forbes has outlined a few important differences between limited liability companies and corporations. There are two ways a corporation can be taxed under the IRC.
What is a C corporation?
C corporations are the most common types of corporations and the default classification under the IRC. A C corporation is a business structure in which shareholders are taxed separately from the corporation. It creates a double tax situation – the corporation pays its income tax, and then shareholders pay taxes on personal income they gained from dividends.
What is an S corporation?
It’s a corporation that has chosen to be taxed differently from the default taxation under the Internal Revenue Code. Businesses with 100 or fewer shareholders can choose to be S corporations. Basically, an S corporation is a business structure that can pass its taxable income, losses, credits and deductions to its owners. Either a corporation or an LLC can choose to be taxed as an S corporation.
S corporation owners report income and losses on their personal tax returns.
4. Choose a business name
Choosing a business name can be as simple as using your first and last name, an option popular with sole proprietors and general partnerships. But you can be more creative than that. Have fun brainstorming a unique name that summarizes what your business will sell.
5. Register your business name (if applicable)
How you should register your business depends on its location and business structure. Most small businesses only need to register their business names with their local and state governments. If you conduct business as a sole proprietor using your legal name, you don’t have to register your business name. However, registering your business can give you tax benefits, legal benefits and liability protection.
You can trademark your business, brand name or product name by filing with the United States Patent and Trademark office.
To ensure the name you want is available with the SOS, you can run a search on the SOS website. You will also want to search the internet, federal and state trademark filing databases and maybe even a phone book (paper or online).
6. Get any necessary permits or licenses
Most small businesses need to acquire licenses and permits from state and federal agencies, according to the U.S. Small Business Administration. They provide this handy guide to determine which licenses and permits you need to apply for.
7 . Get an Employer Identification Number (EIN) from the IRS (if applicable)
Not all businesses need employer identification numbers (aka “EIN”). You need to apply for an EIN if you answer yes to one of the following questions listed by the IRS:
- Do you have employees?
- Do you operate your business as a corporation or a partnership?
- Do you file any of these tax returns: Employment, Excise, or Alcohol, Tobacco and Firearms?
- Do you withhold taxes on income, other than wages, paid to a non-resident alien?
- Do you have a Keogh plan?
- Are you involved with any of the following types of organizations?
- Trusts, except certain grantor-owned revocable trusts, IRAs, Exempt Organization Business Income Tax Returns
- Real estate mortgage investment conduits
- Non-profit organizations
- Farmers’ cooperatives
- Plan administrators
8. Create a budget
If your business plan involves making a lot of investments and other purchases, it is wise to create a budget to help you manage your money wisely. NerdWallet provides this handy guide to creating a business budget.
9. Set up a business bank account
No matter what type of business you’re running, setting up a business bank account is a great idea. Sole proprietors and freelancers don’t have to create business accounts, but doing so makes it easier to keep track of money and file taxes.
Any business run as a separate legal entity from its owner must have a business checking account.
The U.S. Small Business Administration provides a guide on how to open a business bank account.
10. Find funding (if applicable)
Not everyone has to complete this step; for example, if you want to be a freelance writer and already have a laptop with internet access, you’re good to go. But if you’re setting up a business that takes money to run, such as a restaurant, you’re going to need a source of funding.
Of course, you have to figure out how much money you need before you find a way to get it. After you’ve done that, here are a few ways to fund your new business:
It can be risky to use your own financial resources to fund your business, but it’s an option. Make sure you don’t spend more than you can afford. If you take this route, it would be wise to talk to a financial advisor first.
Some investors may be willing to give you venture capital, typically on the condition that they get to have an ownership share of your business and play an active role in your company.
Venture capital is different from traditional financing in a few ways. In the words of the Small Business Administration, venture capital:
- Focuses on high-growth companies
- Invests capital in return for equity, rather than debt (it’s not a loan)
- Takes higher risks in exchange for potential higher returns
- Has a longer investment horizon than traditional financing
Most venture capitalists will at least want to be on your board of directors, so you’ll have to give up some control of your company to receive their funding.
Investopedia defines “angel investor” as “a high-net-worth individual who provides financial backing for small startups or entrepreneurs, typically in exchange for ownership equity in the company.”
Angel investors give money to businesses they like, only expecting rewards if and when the businesses are successful.
Crowdfunding is a relatively low-risk way to secure funding. It involves raising funds from a large number of people; these people are not investors, as they don’t expect to receive more money back from you or share ownership of your business.
What crowdfunders want back from your company is some sort of gift or perk such as the product you’re going to sell. There are various platforms for crowdfunding.
Small business loans
With small business loans, you can get the funding you need without sacrificing control of your business. However, you have to convince an organization such as a bank or credit union to give you the loan. You’re more likely to succeed if you impress them with a business plan, a sheet of expenses and your financial projections for the next five years, says the U.S. Small Business Administration.
Small business grants
It’s possible to get free money for your startup with no strings attached, but it will take some effort. Small business grants are available from federal, state and regional governments as well as companies. You will have to do some research to find the right grantor and convince them to fund your business.
NerdWallet provides a fleshed out guide to small business grants.
11. Research laws and regulations
One of the biggest mistakes you can make in starting and running a business is to accidentally violate a law or regulation. You also need to know how laws work in your favor, such as protecting your intellectual property. It’s a good idea to find a lawyer who can help you navigate this step. You may need to consult with them regularly, depending on the complexity of your business.
Lawmato makes it easy to schedule and attend legal consultations from the comfort of your own home. Click here to join our platform and get started.
12. Set up operations
This step can be more or less difficult, depending on what kind of business you want to run. You might only need to set up a home office, or you might need to lease an office or building. You might need to buy equipment. At this stage, you can also decide how you’re going to run your business.
13. Buy business insurance
No matter what kind of business you run, it will carry some form of risk. You could get sued. An employee could crash a company vehicle. Your store could catch on fire. Who knows what will happen? It’s wise to get one or more forms of business insurance.
There are many types to choose from, including but not limited to:
- General Liability Insurance – For lawsuits from people outside of your company
- Professional liability insurance – For lawsuits based on claims of mistakes, negligence, or malpractice
- Commercial property insurance – For damage to your business property
- Workers’ compensation insurance – For on-the-job injuries
- Business income insurance – For loss of income when you can’t operate your business for covered reasons
- Commercial auto Insurance – For vehicles used for business purposes
- Cybersecurity insurance – For cyberattacks such as hacking and data breaches
- Employment practices liability insurance – For lawsuits about unfair employment or hiring practices
- Product liability insurance – For bodily harm caused by defective products
- Commercial umbrella insurance – For costs that exceed your other liability coverage limits.
To choose business insurance, you need to know what your risks are, understand what is covered by the insurance you’re considering, and compare different insurance quotes.
14. Create a team (if applicable)
If you’re not going to run your business alone, you’ll need a team. Before you hire anyone, you’ll need to examine your business to identify where you need help.
When you’ve identified the necessary roles for your business, you’ll need to determine whether you want to hire employees or independent contractors. Indeed outlines the difference between them and the pros and cons of choosing either option.
To recruit workers, you’ll need to write effective job descriptions. An Indeed survey found that 52% of people seeking jobs say the quality of a job description is “very or extremely influential” towards their decision to apply for the job. They explain how to write a good job description here.
Of course, you’ll have to choose where to put your job descriptions. Money provides this useful guide to the top recruitment sites for employers in 2023.
Finally, you’ll need to interview job seekers who have applied for your positions. Indeed explains how to do this in seven steps.
15. Market your business
You can’t sell anything if people don’t know you exist. You have to either market it yourself or hire someone to do your marketing.
Step 1 – Branding
The first step to marketing your business is developing your brand. Branding agency Ignyte provides this insightful definition of the word:
A brand is the sum of how a product or business is perceived by those who experience it—including customers, investors, employees, the media, and more. Branding is the process of shaping these perceptions.
A brand, then, is more than just a company’s name, logo, product, or price tag. It’s more than the marketing and advertising around these things. A brand is the consistent and recognizable feeling that all of these things evoke.
A relatively simple first step to developing your brand is to pay someone to design your logo. A harder step is giving your brand a personality. How do you want your business to come across? Casual? Formal? Friendly? Authoritative? You can communicate your brand’s personality in all sorts of ways such as in advertising copy, video ads, your brand’s official colors, choosing a mascot, etc. You can get really creative with this.
Step 2 – Establish your online presence
Depending on what kind of business you run, an online presence may not be absolutely necessary. In 2021, 28% of small businesses in the U.S. still didn’t have websites, according to data from Top Design Firms. Still, even if your business is a brick and mortar store, you could benefit from having a website and social media pages.
Having an online presence allows more potential customers to learn about your business. If you actually do business online in addition to your physical store, you can make more money. And interacting with your audience on social media can cause more people to like your brand.
Creating a website doesn’t have to be expensive. Click here to see Wix’s pricing for business website plans.
Step 3 – Advertise your business
People might find you on their own, but you’ll reach more potential customers if you advertise your business. You can buy ads online for mediums such as social media or search engines results pages, or you can buy ads offline for mediums such as newspapers, radio stations and television channels. If you feel intimidated by this step, you can hire someone to help.
Step 4 – Employ other marketing tactics
There are other methods you can use to promote your business, such as search engine optimization (SEO), content marketing, email marketing, and more. Again, if you’re not confident you can market your business on your own, consider hiring a professional or company.
You’re all set!
Lawmato wishes you success with your new business. If you need to talk to a lawyer about starting or running your business, download our apps or visit our website to find the right lawyer for your business needs.
Frequently Asked Questions:
Which state is best for anonymous ownership?
There is no true anonymous ownership. Even if the record owner on the document transfers funds to someone else (a beneficial owner), many states require annual filing of directors, officers, and beneficial owners; each entity is responsible for designating someone for when the government wants to know who the beneficial owners are. The closest state is Wyoming, which does allow a shareholder of a corporation to be identified by a blockchain key or private network key. (However, the SEC is requiring disclosure of private network keys on the OFAC Sanctions List.) Beginning in 2024, the Corporate Transparency Act will require certain non-exempt businesses to make annual filings.
When do securities laws apply to companies?
Securities laws apply when a business is preparing or offering to sell ownership interests in its business to investors.
What is the difference between a limited liability company (LLC) and a limited liability partnership?
LLCs are for any type of business purpose, while LLPs are limited to certain professional services. They are also different entity types, with LLCs having more limited exposure.