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8.5: Steps on Starting a Business

  • Page ID
    3641
  • What you’ll learn to do: describe the steps to starting a business

    In this section, we move from introspection and the nature of entrepreneurship to the specific steps involved in starting a business. Reducing the process to a list of steps is deceptive; it can take from a month to a year to get started and the work involved will test both your grit and your rigor. As Walt Disney said: “The way to get started is to quit talking and begin doing.”

    learning objectives

    • List the steps to starting a business
    • Briefly describe the steps to starting a business

    Ten Steps to Starting a Business

    Photo of two women putting Post-its on a whiteboard.The SBA’s 10 Step Guide to Starting a Small Business includes the following action items, with links to the associated detail page.

    1. Conduct market research
    2. Write your business plan
    3. Fund your business
    4. Pick your business location
    5. Choose a business structure
    6. Choose your business name
    7. Register your business
    8. Obtain federal and state tax IDs
    9. Apply for state licenses and permits
    10. Open a business bank account

    The IRS site is the source of federal action items, including requesting employer IDs and accessing tax forms and publications. Direct link to the IRS Small Business and Self-Employed portal: https://www.irs.gov/businesses/small-businesses-self-employed. For state-specific guidelines, you can use the IRS’ State Government Websites page as a jumping off point or use a search phrase such as “starting a business in [state].” Your city or county may have additional requirements; refer to the relevant site for any permit or licensing requirements.

    The nonprofit small business education and mentoring organization SCORE is another source of start-up information including a Simple Steps for Starting Your Business workbook, online course and additional resources and webinars. Finally, your city or county may have an economic development program that provides business planning expertise, relevant economic data and access to funding.

    practice question \(\PageIndex{1}\)

    According to the SBA, the following are steps needed to start a business EXCEPT:

    1. Fund your business
    2. Choose your business name
    3. Register with the Chamber of Commerce
    4. Open a business bank account
    Answer

    c. This is not one of the 10 steps although it is probably something a new business owner would want to do at some point.

    Understanding the Steps for Starting a Business

    In this section, we’ll discuss each of the 10 start-up steps briefly, so you understand the flow and see the connections between the individual action items.

    Step 1: Conduct Market Research

    As Peri Pakroo notes in The Women’s Small Business Start-Up Kit (an excellent resource regardless of your gender), “Before you launch any business—even before you write a business plan—you’ll need to gather information and do research to demonstrate that your idea will be successful.” The key insight is that doing research first allows you to test drive and fine tune—or reject, if necessary—your business concept, reducing the risk of your new venture.

    SBA’s Conduct Market Research page recommends two areas of research: market and competitive. You’ll use market research to understand consumer behavior and market and economic factors. Competitive research will inform your business offering and positioning relative to the existing product or service providers in your market.

    Step 2: Write Your Business Plan

    We’ll drill down into business plans in the next section. Interim perspective: Your business plan distills your research and analysis into an actionable plan, including your unique value proposition, competitive strategy and what it will take—in specific operating and financial statement terms—to succeed.

    Step 3: Fund Your Business

    There’s a range of options for funding your business: self-financing, microloans, crowdfunding (see Fundly’s top 40 ranking), regional development or government grants and loans, business competition awards and venture capital. What’s important to note is that a businesses start-up costs (developed in the business plan) and choice of funding have implications for the business structure and business ownership/management.

    Step 4: Pick Your Business Location

    Selecting a business location depends on a range of factors including your type of business, proximity to your target market, business partners, economic development support, suppliers and your personal preferences. In addition, you will need to factor in taxes, zoning laws and other fees and regulations relevant to your business operation.

    Step 5: Choose A Business Structure

    As the SBA site notes: “The business structure you choose influences everything from day-to-day operations, to taxes, to how much of your personal assets are at risk. You should choose a business structure that gives you the right balance of legal protections and benefits.” The table below summarizes the options and liability and tax implications.

    Business structure Ownership Liability Taxes
    Sole proprietorship One person Unlimited personal liability Personal tax only
    Partnerships Two or more people Unlimited personal liability unless structured as a limited partnership Self-employment tax (except for limited partners)

    Personal tax

    Limited liability company (LLC) One or more people Owners are not personally liable Self-employment tax

    Personal tax or corporate tax

    Corporation – C corp One or more people Owners are not personally liable Corporate tax
    Corporation – S corp One or more people, but no more than 100, and all must be U.S. citizens Owners are not personally liable Personal tax
    Corporation – B corp One or more people Owners are not personally liable Corporate tax
    Corporation – Nonprofit One or more people Owners are not personally liable Tax-exempt, but corporate profits can’t be distributed

    Note as well that the business structures entail different levels of administrative paperwork and cost of incorporation. For example, the cost of a sole proprietorship is generally just the cost of registering a “DBA” or Doing Business As (also referred to as a trade name, fictitious name if you’re not conducting business in your own name; incorporating requires extensive record-keeping, operational processes and reporting as well as higher registration or filing fees. If you’re particularly focused on social impact and/or sustainability, you may want to explore structuring as a Benefit Corporation, Certified B Corp or “L3C,” low-profit limited liability company structures.

    Step 6: Choose Your Business Name

    Choosing a business name is an opportunity to communicate not only what you do but who you are: the personality and your unique value proposition. You may want to create multiple options and test drive your short list with people who represent your target audience. Also consider how your name will look in print and using the type of signage and advertising you plan to use. Prior to committing to a name, check domain name and DNA registrations to make sure the name is available and use a trademark search tool such as the U.S. Patent and Trademark Office’s trademark search tool to avoid infringement.

    Depending on your business, your social media presence may be your website, so be sure to claim and manager your business identity on relevant rating sites such as Yelp, TripAdvisor. One way to monitor your business reviews is to set up a Google Alert on your business name.

    Step 7: Register Your Business

    Business registration requirements are based on business structure and location. As the SBA site notes:

    • Entity name protects you at state level
    • Trademark protects you at a federal level
    • Doing Business As (DBA) doesn’t give legal protection, but might be legally required
    • Domain name protects your business website address

    To the DBA point: A duplicate name will generally not be approved. Prior to filing, conduct a DBA search to verify that the name you want to use is not already in use. At a local If you’re conducting business using your legal name (versus a DBA), there is generally no registration required.

    Step 8: Obtain Federal and State Tax IDs

    The downstream effect of income is taxes. Enter federal and state tax IDs. At a minimum, you will need an Employer Identification Number (EIN) or federal tax ID number, with the potential exception of sole proprietors. For elaboration on that point, refer to the When does a sole proprietor need a EIN? Discussion on the NOLO site. In addition to paying federal taxes, you will need an EIN to hire employees, open a business bank account and apply for business licenses and permits. To determine whether you need a state tax ID, use the state lookup function on the SBA site and research from there.

    Step 10: Open A Business Bank Account

    The SBA advises new business owners to open a business bank account as soon as they start accepting or spending money as a business. Doing so avoids one of the risk factor the commingling of personal and business assets cited as a failure risk factor in the prior section. Business author and coach Peri Pakroo also cautions against running your business out of your personal account, citing two specific reasons:

    1. If you created an LLC or a corporation to protect your personal assets, commingling business and transactions undermines that protection.
    2. If combining business and personal transactions will make it much more difficult to do essential financial management tasks.

    You may want to read a few Best Banks for Small Business articles to evaluate the options. SmartAsset’s Best Banks for Small Business (2018) analysis is one of a number of analyses.

    practice question \(\PageIndex{2}\)

    Besides gathering information for your new business, the most significant benefit of conducting market research is:

    1. understanding how many employees will be needed to staff your business.
    2. test driving and fine-tuning your business concept to demonstrate that it will be a success.
    3. choosing the best location for your new business.
    4. outlining your marketing strategy given your target customer.
    Answer

    b. Doing the research first allows you to validate your business idea and reduce the risk of failure