Do you have a shiny new business idea you can’t wait to pursue? The prospect of starting a new business can be very exciting, but there are many hoops you’ll need to jump through first. From ensuring the idea is viable to covering the startup costs, here are eight key steps you need to take to start a small business.
Key Takeaways
Your business idea needs to serve a niche market with demand.
A compelling business plan serves as an essential guide for your company.
Register your business and ensure you have the necessary tax IDs, licenses, and/or permits.
You may be able to finance your startup with funds from government loan programs, grants, investors, or your own savings.
Advertising will often require a mix of online and offline tactics.
8 Steps To Starting a Small Business
You can start a small business in just eight steps.
Clarify how your business fits into a market niche
Write a compelling business plan
Form a legal business entity
Register your business
Explore financing options
Hire employees
Find suppliers, manufacturers, and vendors
Advertise your business
Clarify How Your Business Idea Fits Into a Market Niche
All successful businesses have one thing in common: They’re in demand. To be successful, people must want or need what you’re offering. It’s important to figure out whom your company will serve, which companies you’ll be competing against, and how you’ll stand out among them. You can find those answers by performing market research. The research process should involve looking into your potential market to assess its demand, market size, pricing, economic indicators, market saturation, and where your customers are located.1
Write a Compelling Business Plan
The next step is to write a business plan that will become the foundation for your company. But what should it include? Here are the main sections the U.S. Small Business Administration (SBA) recommends:
Executive summary: The executive summary gives an overview of your entire plan in a succinct introduction that is meant to pique the reader’s interest.
Company description: The company description gives an in-depth explanation of your company, including information about who started it, when it was founded, what type of entity it is, and why it exists.
Market analysis: The market analysis section gives a detailed look at the industry you plan to enter, your target market, the competition, and your positioning.
Organization and management: The management and organization section explains who’s on your management team and how each person contributes to achieving the business’s goals.
Service or product line: The products and services section explains what you’ll be offering to your target market and the value it provides them.
Marketing and sales: The marketing and sales section outlines how you plan to reach and sell to your target market.
Funding request: If you plan to seek funding for your business, the funding request section should include how much capital you need, how it will be used, and the details of your current financial situation.
Financial projections: The financial section lays out your income, cash flow projections, balance sheet, and shareholder equity allotments to show whether the idea is viable and profitable.2
Form a Legal Business Entity
Next, decide which legal business entity type is best for your situation. The entity you choose will impact your level of personal liability for the business, how you’re taxed, and more. Here’s a look at the main options for small business owners.
Sole Proprietorship
A sole proprietorship is the default entity type for a business. If you don’t set up any structure, you’ll be a sole proprietor. In short, it means that you and your business are legally one entity. You’ll file a Schedule C for your business along with your personal tax return (Form 1040), and your business income will be taxed along with any other income you earn. If your business is sued, your personal assets could be at risk because you and your business are one and the same.3
Note
Filing a Schedule C as a sole proprietor will typically trigger the self-employment tax, which is 15.3% and consists of 12.4% for Social Security and 2.9% for Medicare.4
Partnership
A general partnership is a pass-through entity for two or more people who are running a business together. You may want to use this entity type if you and one or more other people are both contributing to the business and sharing in the profits/losses of it. While you must file a return for the partnership each year, the company will not be taxed. All of the tax liability is passed down to the partners’ personal returns. Additionally, the owners have unlimited liability for the business. You’ll also be responsible for self-employment taxes.5
Limited Liability Company (LLC)
A limited liability company (LLC) is the chameleon of business entities. It’s created by state statute and can be treated as a sole proprietorship, general partnership, or corporation.6 If you’re an individual business owner, the default classification will be a sole proprietorship. If you’re in business with at least one other person, the default classification will be a partnership. However, you can fill out Form 8832 and elect to be treated as a corporation in either case.7 Corporations are treated as independent entities and will have tax liabilities while offering legal protections for the owner(s).
Corporations
Corporations (sometimes called C corps) are recognized as separate taxpaying entities that offer liability protection to the owners. They can be privately held with stock that is shared by the owners or publicly held with stock offered for sale to the public. The major downside of corporations is that they are double taxed—the corporation is taxed on the company’s profits and the owners are taxed on the dividends they receive from those profits. However, qualifying businesses can elect S corp status which removes the tax on the corporation.8
Register Your Business
Once you decide on your company structure, it’s time to register your business. There are a few things involved.
State Registration
First, choose the home state for your business. If you want to do business in other states, you can register in those as well by completing a foreign registration. While the registration process can vary, you’ll typically need to:
Choose your business location
Register your business name and entity type with the Secretary of State
Register with the required state entities (i.e. tax-filing commissions, departments of labor)
Apply for any required business licenses or permits9
Employer Identification Number (EIN)
An Employer Identification Number (EIN) is a number assigned by the federal government and used to identify your business. You can apply online and get one for free from the Internal Revenue Service (IRS). You may not need one if you are a sole proprietor and/or answer “no” to a series of questions on the IRS website.10
Open Bank Accounts
Open a bank account for your business to keep business and personal transactions separate. Consider getting a business credit card to build business credit and earn rewards on your business expenses.
Get Business Insurance
At this stage, it’s also a good idea to look into business insurance to protect yourself and your business against potential liabilities. A business owner’s policy, also known as a BOP, typically includes general liability insurance, business property insurance, and business interruption insurance.11
Explore Financing Options for Your Business
Now for the costs. If you don’t have funds to cover your startup costs out of pocket, you may be able to finance them. Many banks and online lenders offer business loans; however, they’ll often want to see some time in business and proof of revenue before they’ll approve you. As a new business, you’ll usually have a better chance with government loan programs, personal loans, or investors.
Government Business Loan Programs
The U.S. Small Business Administration’s (SBA) microloan program offers loans up to $50,000 through SBA funding intermediaries, which can be used for startup or expansion costs.12 Additionally, SBA 7(a) loans up to $5 million can also be used for startup costs.13
Personal Loans
Personal loans or credit cards can also be worth considering. Instead of basing approval on your business track record, they’ll look at your personal credit history. As a result, if you have good credit, you could access competitive rates and terms. However, this shouldn’t be a long-term strategy as it’s best to keep your business and personal finances separate for tax and liability purposes. Further, using personal credit for business will limit the credit you have available for personal needs such as housing costs, car expenses, or family stuff.
Investors
You may be able to find investors who believe in you and your company’s potential and are willing to buy stakes in it. These may be private lenders, angel investors, venture capitalists, or even friends or family members.
Hire Employees
Consider who you need to hire and whether employees or contractors are better fits.
Employees vs. Contractors
When your business requires hired help, you can opt to bring on employees or contractors. If you hire employees, you have to withhold and pay income taxes, Medicare taxes, and Social Security taxes. You also must pay unemployment tax on their wages. In return, you gain the right to control what workers do and the way they do it.
Contractors are self-employed. You hire them on a contract basis, so you don’t need to pay anything but their fees. However, they retain the right to control how they perform a job.
Note
It’s important to classify the people you hire properly. If the IRS determines an independent contractor is an employee, you could be held liable for back employment taxes.14
Setting Up Payroll
If you decide you want to bring on employees, you’ll need to set up a plan for payroll before you start recruiting. According to the SBA, that involves:
Getting the required tax IDs in place (federal, state, local)
Providing all new employees with a W-4 form
Scheduling pay periods to coordinate with IRS tax withholding
Choosing a payroll administration service
Knowing the rules for recordkeeping
Checking the payroll reporting requirements
Creating a compensation plan for mandatory leave
In addition to setting up payroll, consider additional non-mandatory benefits you want to offer employees, such as retirement plans and health insurance. Be sure to review the federal and state labor laws that apply to you.15
From there, you can begin the search for the right team members. You can hire a recruiter to help you, or perform the search yourself. Both online and offline avenues can be effective for finding talent. Online, you can look to platforms such as LinkedIn, Indeed, Monster, job boards, and other professional websites. Offline, you can take steps such as attending job fairs and posting ads in your local area.
Find Suppliers, Manufacturers, and Vendors
Most businesses need help from other businesses in one way or another, whether it’s sourcing materials and products or purchasing communication software and internet service. As a business owner, you’ll need to hunt for the best overall value when choosing your suppliers, manufacturers, and vendors.
A good first step is to identify everything you’ll need to outsource and make a list. Then, you can shop around and compare offerings to strike the right balance between price and quality. If you aren’t sure where to start, ask other small business owners for recommendations and read reviews online.
Advertise Your New Business
How do you get the word out about your new business? There are a variety of ways both online and offline.
Build a Website
A website gives your business a digital home base. While you’ll likely want to advertise across many online channels, they should all point back to your website—a web property you own. This will be your company’s main source of truth online and where you’ll want to drive traffic. Further, building a website that’s professional and user-friendly will help you build trust and credibility with your audience.
Social Media Marketing
Social media is a great place to build a presence and attract your target audience. According to the Pew Research Center, 72% of U.S. adults said they were using at least one social media site in 2021.16 Identify the platforms your target audience uses most, then create an optimized profile and begin crafting content that speaks to your audience and aligns with your brand. Consistency is key when using social media for your business. Over time, you can build a loyal following and continue to attract more customers.
Email Marketing
Email marketing can be used to connect the dots between new leads and loyal customers. Many businesses invite people to sign up for their email lists at the point of sale, on their website, or in exchange for a special offer. You can then use personalized sequences to communicate with your subscribers on a one-on-one basis over time. This allows you to nurture the relationship and provide relevant messaging in response to their brand interactions.
Search Engine Optimization (SEO)
According to a global retail study by Think With Google, 59% of shoppers said they use Google to research a purchase they plan to make online or in-store.17 If you want to show up at the top of the search engine results for your potential customers, you’ll need to invest in search engine optimization (SEO). SEO involves creating content such as articles and web pages that are designed to show up at the top of the search results for specific searches. You want to fill your website with content that answers a wide range of questions your audience is asking at each step of the buying cycle.
Local Listings
If you run a local business, get listed in various online directories such as Google My Business, Yelp, Bing Places, and Facebook. These are today’s versions of the Yellow Pages and will help people discover that your business exists. Plus, many have review features that can help you establish social proof.
Press Releases
Press releases can help you to notify the world about your business and any big announcements you’d like to make. Again, this can be especially helpful for local companies because you can notify your local news outlets and create some buzz.
Run Ads
While you can reach an audience without paying for ads, ads help you get the word out much faster to more people. You can opt for a variety of channels, from social media sites like LinkedIn, TikTok, and Instagram, to radio stations, billboards, and search engines. The payment structures vary depending on the ad network, but you’ll often pay for impressions, specific actions such as clicks, or the expected reach of the ad.
In-Person Events
While online advertising is highly effective and efficient, there’s power in meeting people face-to-face. You can do so by buying space at a tradeshow or a community event and setting up a branded booth. You can also join local business organizations and networking groups. This can help you meet people in your industry or community, build your network, and raise awareness of your brand.
The Bottom Line
Starting a new business is an exciting venture, yet one that is very involved. From clarifying a viable idea and ticking all the legal boxes to getting your target market to buy, it will require a large investment of time, effort, and capital. However, as a result, you can bring your dream to life and create your own revenue stream.