Starting a new business takes a lot of time, energy, and hard work. There are products to develop, people to hire, leases to sign, and marketing to announce your new business to the world. Before you do any of these, you need to establish your business as a legal entity at the city, state and federal level. Otherwise, many of the actual operations of the business can’t take place. This blog will focus on the 10 steps involved in how to smart a small business from a legal standpoint.
Steps For Starting a Business
1. Conduct market research and competitive analysis.
This is the only step that comes before doing all the legal stuff, and it involves determining whether you have a viable business.
Marketing research helps you find what no business can live without–customers. Start by getting to know your customer base. Who are they? How old are they? What’s their average income? What is the best way to reach them? Gathering demographic and trend information can help you answer these and other critical questions.
Market research helps make your business unique. Analyze the competitive landscape to identify:
- Market size and competitor share
- Strengths and weaknesses of competitors
- Window of opportunity to enter the market
- Barriers (financial, competitive, technology, etc.) to entering the market
- Indirect or secondary competitors
The Small Business Administration (SBA) offers free small business data and trends
to help with your marketing research and analysis.
2. Create a written business plan.
Once you decide you have a viable business, the business plan defines how you will structure, run, and grow it. It also helps attract investors, partners or employees when first starting out. Traditional business plans tend to be lengthy and detailed, and usually cover:
- Company description
- Your competitive advantage(s)
- Market analysis
- Organizational and management structure
- Your product or service
- Marketing and sales
- Funding needs and financial projections
For those in a hurry to start a new business, “lean” startup plans can be as short as one page. They focus on key points such as your company’s value proposition, infrastructure, customers, and finances.
3. Fund your business.
Opening a business takes money. If you have enough financial resources, such as savings or credit cards, you can fund the business yourself. Family and friends can help if necessary. You retain control of the business, but also assume all the risk.
If you need to raise funding, common techniques include:
- Venture capital. Venture capital firms provide funding in exchange for part ownership of your business.
- Angel investors. These are individuals looking to invest in startup firms.
- Crowdfunding. A lot of people contribute money to your startup through a website. Instead of ownership, they expect to receive some type of gift, such as the product you plan to sell.
- Small business loan. These are obtained from banks or credit unions. You maintain full ownership of the business but will pay interest on the loan.
- Lender match. If you don’t qualify for a regular small business loan, other lenders may provide an SBA-guaranteed loan.
- Small business investment companies (SBICs). These are privately owned investment funds licensed and regulated by the SBA. SBICs make equity and debt investments in startup businesses that qualify.
4. Select your business location.
When considering how to open a business, location plays a major role because you must register the business, obtain all required licenses and permits, and pay taxes in the area you locate. When choosing the location, other factors to consider include:
- The location of your customer base and business partners
- Personal preferences
- The costs, benefits, and restrictions of local and state government agencies
- Minimum wages
- Local zoning ordinances
- Local and state taxes
- Local and state government incentives
5. Decide on your business structure.
Your business structure will influence day-to-day operations, taxes, and the level of risk to your personal assets. The four most common structures include:
- Sole proprietorship. One person owns the business. You get complete control, but your personal assets are at risk.
- Partnerships. Two or more people own the business A limited partnership (LP) has one general partner with unlimited liability and other partners with limited liability. A limited liability partnership (LLP) provides limited liability to every partner.
- C-Corporation. This makes the business a legal entity separate from its owners. It protects against personal liability, but costs more to operate and requires a lot of record-keeping and reporting.
- S-corporation. This structure avoids the double taxation of regular C-corps, but the business has to meet specific criteria. It also involves extensive record-keeping and reporting.
6. Give your business a name.
Starting a business requires a name, and the best business names are short and easy to remember. They should also reflect the brand you want your business to have. Registering the name can be done in four ways:
- Entity name. Protects your business at the state level.
- Trademark. Protects your business at the federal level.
- Doing business as (DBA). Doesn’t provide legal protection, but it could be legally required.
- Domain name. Gives you a unique website address.
Registering the name is important for protecting it. Don’t overlook this step.
7. Register your business.
Registering your business provides personal liability protection, as well as tax and legal benefits. At the federal level, most small businesses only need to apply for a federal tax ID. Filing at the state level usually costs less than $300, although fees can vary depending on your state and business structure. You will need to provide your business name and location, ownership or management structure, and registered agent information. If you’re a corporation, you will also need to provide the number and value of shares.
8. Get federal and state tax IDs.
A federal tax ID number is the same thing as an Employer Identification Number (EIN). It is essential for hiring employees, paying federal taxes, opening a business bank account and applying for business licenses and permits. The IRS provides an EIN assistance tool to walk you through the application process.
Not all states require a tax ID number. It depends on the state’s income and employment tax laws. Visit your state's website to determine whether you need a state tax ID number in order to pay state taxes.
9. Apply for licenses and permits.
When starting your own business, you want to be sure it complies with all relevant state and federal regulations. The licenses and permits you need will vary by industry, state, location, and other factors.
If any of your business activities are regulated by a federal agency, you will need to get a federal license or permit. This includes opening a business in industries like agriculture, aviation, firearms, mining and drilling, broadcasting and much more.
Required state, county or city licenses and permits will depend on your business activities and location. States tend to regulate a wider variety of businesses than the feds. For example, plumbing, restaurants, dry cleaning, and construction. Visit your state's website to find out which permits and licenses you need.
10. Open a business bank account.
Opening an business bank account should include a checking, savings, and a credit card account. You will also need a merchant account to accept credit and debit card payments from customers. A business bank account offers important benefits:
- Provides limited personal liability protection by separating business funds from your personal funds
- Allows customers to pay with credit cards and make checks out to your business instead of you
- Offers the option to open a business line of credit which can be used for capital or operating expenses
- Enables you to make large startup purchases with the credit card when cash flow is tight
- Helps build a credit history for your business
Franchising – The Easy Way to Start Your Own Business
If you would rather avoid all this legwork, you may want to consider buying a franchise. Here are some of the reasons why:
- No experience necessary. If you’re having a hard time coming up with a good idea, buying a franchise provides a ready-made model. You get extensive training and support before opening your store. You also get the benefit of knowledge and experience within the organization.
- Less risk. Franchises offer a more secure investment than new businesses. They have the support of a larger, established corporation. The business model has already proven to be successful. It’s also easier to get a franchise loan than a new business loan.
- Instant brand recognition. When you buy a franchise, you get a built-in customer base that knows your brand. This eliminates much of the effort required to market a new business.
- Extensive support. Franchisors provide everything from pre-opening assistance to design, construction financing, training and even grand-opening programs.
Best of all, you still get to be your own boss! As a franchisee, you have to abide by rules and regulations as established by the franchisor. But when it comes to running your store, you’re in charge. If you would like to be in business for yourself but not by yourself, consider franchising. Almost 750,000 Americans already have!