How to Start a Business
How to Start a Business
All the important information you will ever need on starting your new business.
Starting a new business is a fun and challenging experience. If you plan to start a business soon, it’s essential to understand how a company is established and the steps you’d take before you serve your first customer.
Whether you plan to start an online business, open a boutique clothing store, or want to offer mechanic services from your home, there are certain things you must do to make your entrepreneurial dreams a reality.
For help, you can follow our ultimate guide with step-by-step instructions to help you become self-employed.
Starting your business
Once you know the kind of business you’d like to start and have a basic plan in place, you’ll need to formalize that business with the state, usually through the Secretary of State website. Though the process is simple, it requires you to know some key facts about your business and make your first set of decisions as a successful business owner.
Decide what kind of business structure is best
Each business is formed as a specific legal structure, which dictates everything from your personal liability to how the company operates daily. The structure you choose is one of the first choices you will need to finalize, as each has a slightly different process for forming and maintaining.
There are four main structures you will likely choose from a sole proprietorship, partnership, limited liability company, or corporation.
Sole proprietorship
The simplest and most common business structure, a sole proprietorship, is one many people already operate without knowing. These entities represent businesses where one person is responsible for all profits and debts, essentially making them the same entity as the business from a legal perspective. Unfortunately, this also means there is no protection of personal assets for the owner.
While a sole proprietorship can be formalized, any freelancer or person operating a business, including an online store, under their name could be considered a sole proprietor. This also means that taxes are filed as a part of the owner’s personal income taxes, making setup and maintenance simple.
Partnership
When two or more individuals own a business together, it is known as a partnership. This can be structured as a general partnership, where all is equally shared between parties, or a limited partnership, where one partner has control of operations and the others are monetary partners only. Partnerships generally operate similarly to a sole proprietorship, with no legal distinction between the business and the owners, though there are also limited liability partnerships (LLPs).
Partnerships allow profits and losses to be shared between multiple people and for decision-making and administrative tasks to be spread out. All small business owners are liable, so you should be sure you trust anyone you are in a partnership with completely.
Taxation in a general partnership can be unique, and most must file special forms with both the state and the IRS. However, most partnerships do not pay income tax as a business, as partners report their shared income and losses on personal tax returns.
Limited liability company (LLC)
LLCs, or limited liability companies, are hybrid business structures that allow for some corporation benefits without the same tax burden. Owners and partners in an LLC can limit their personal liability, meaning that if the business owes a debt, personal assets cannot be seized or used to pay them. Most LLCs are not taxed as a business, with profits and losses instead reflected on the owner or owners’ personal tax returns each year.
An LLC can have single or multiple owners and may be structured in various ways. To maintain the asset protection of an LLC, you must adhere to certain rules, like keeping business and personal finances separate. All LLCs must also be formed and maintained through the state, including a structured formation process.
Corporation
Corporations are considered separate business entities with rights independent of their legal owners. A corporation can sue and be sued, own property, and sell ownership in the form of stocks, making it a unique structure. This entity type also carries a unique tax burden, as corporate tax rates are typically different from individual tax rates, and they will pay their own taxes each year.
There are a variety of types of corporations. C corporations are the most common, in which shareholders are the owners of the business; S corporations are more typical of small businesses, as they allow owners to have limited liability; B corporations are for-profit entities designed in service of corporate social responsibility; non-profit corporations are tax-exempt in exchange for performing a social good. Corporations can also be open and available for trade on the public market or closed with all ownership privately held.
Forming a corporation is a more involved process than other structures and typically requires many governing documents to be created in advance.
Create a business plan
Before embarking on any business venture, it is critical to have a business plan in place. This document is meant to outline your business’s financial goals and exactly how you will achieve them. A well-crafted business plan should serve as a roadmap for the next five years of your business.
In addition to being useful for your planning purposes, a business plan is often used to secure funding. Lenders and investors will want to see a business plan before they agree to put any money into your business, and other important partners may also request this document.
A traditional business plan is made up of seven sections but typically totals one or two pages when completed. These seven components are as follows.
1. Executive summary
You should be able to quickly summarize your business’s overall mission. Think of this like the “elevator pitch” for your business – a short paragraph about who, what, where, when, and why for your business. Keep your executive summary short and high-level, especially when you plan to share it with potential investors.
2. Business history and objectives
This is where you can share more information about your business and yourself. Any relevant details about your experience and what led you to create the business, how you got to your current stage in the business, and where you plan to take it are helpful here.
You can also use this section to set up the rest of the business plan by touching on the objectives of your business. This should be a “big picture” version of the objectives that addresses what you want to do and why you are well-positioned to do it.
3. Products and services
In this section, you can get into detail about what exactly you offer. Think of this as a section about how you will generate revenue, which means getting specific. You can start by listing particular products and services and then talk about each one and why it is unique or even share testimonials from customers. Anyone reading your business plan should walk away with a clear understanding of what you sell and do.
4. Marketing plan
Now that you’ve established that your product or service is exceptional, you need to explain how you will get customers to understand that. The first element of this is understanding your target customer and anything you can about them – who are they? Where do they live? What do they buy? Fleshing this out will help you as you go into detail about more actionable marketing plans.
You can also use this section to talk about branding. Think about the values of your business and what it stands for, then think about how you will convey that to your target market.
Once you have these elements in place, it’s useful to talk about the channels you will use to market and sell your products and how you will promote your business. Don’t be afraid to get specific in this section, talking about individual campaigns and ideas you may have.
5. Competitive analysis
It is unlikely that your business is something that no one else has ever done before, so you will need to think about why someone may choose your business over others. To do this, you need to have a good understanding of who that competition is. Anything you can understand about your competition’s products and services, marketing, and the customer will help you.
With this knowledge, you can then think about gaps in the market or things competitors struggle with. That will be your opportunity to set yourself apart from them and gain customers. Identifying these differentiators up front will give you the ability to focus on them and become a market leader quickly.
6. Operational information
This is the “how” section of your business plan. Any logistics questions should be answered here, from your supply chain to manufacturing to reconciling finances. You can include information here about your business structure and employees, any vendors you will use to help with process management, and any weaknesses you may have that will need to be overcome. It is important to show here that your business is not just an idea but an organization that can function properly.
7. Financial analysis
The simple part of a financial analysis is to figure out the costs associated with your business. This will be everything from equipment and supplies to overhead costs like rent and salaries. Even if you don’t have these numbers for your business yet, you can typically do some research to get estimates on the costs you can expect.
It is a bit more difficult to estimate your revenue. You’ll start with listing different ways that you could make revenue, then determine how much you would charge for each. From there, you will need to estimate how much you will be able to sell in a time period, which may require some creativity. Similar businesses, historical trends, and other methods may be helpful in determining this.
Anyone reading a business plan will understand that these are estimates, not promises. The most important thing is to have solid research behind each number so that you can explain how you came up with the estimate. This will also help to ensure your plan is reasonable and achievable.
Pick a name
The name you choose for your business will be important both during the formation process and as you market your business to potential customers.
Every business must have a unique name that is distinguishable from other businesses in the state. In addition, you’ll need to choose a name that is not registered. You can usually run a business name search through the Secretary of State’s website to check on name availability.
There are also general naming guidelines that you must follow in each state and rules for different business structures. While rules vary, some regulations apply to the majority of states.
For example, an LLC or corporation name must include a designation that tells what kind of business structure it is, like “Corporation” or “LLC.” Most states prohibit certain words that can be misleading, words associated with government entities, inappropriate language, and words that imply any illegal activity.
Reserving a name
Until a business is formed using a certain name, that name is available for others to register. If you aren’t ready to form your business but are set on a name, you may want to reserve the name in advance.
Through the state’s website or business portal, you can usually fill out a name reservation form and pay a small filing fee to reserve the name for a few months.
Some businesses will be formed under the owner’s legal name, especially sole proprietorships. This can be useful for some businesses, but others may use a different name for public relations and marketing. Some states allow these businesses to register a trade name or a doing business as (DBA), to represent this additional name. Trade names must follow the same guidelines as other names and register with the state.
Research matching domain names
Outside of the state requirements for naming a business, marketing strategy considerations should be a part of choosing a business name. Remember that this name will be how the customer base finds you, so it should be easy to remember and spell.
Though each name must be unique, that does not mean businesses won’t share your name elsewhere. Before committing to a name, it can be helpful to see if the domain name you’d like to use is taken and, if so, whether the existing website may confuse your target audience.
Think about what domain name you might use, as well as social media handles that could be available to you.
Select a registered agent
Most states consider the business a separate entity from the owner for business structures like an LLC or corporation. This means that there may be a scenario where the state needs to get in contact with the business to send things like tax documentation or service of process in the case of a lawsuit. To ensure this is possible, you must provide a registered agent during their business formation.
A registered agent is an individual or business entity that accepts official documents on behalf of the business. Any individual over 18 years old with a physical address in the state can be named a registered agent, including the business owner, employees, or any individual not affiliated with the business. The only additional requirement is that the person is available during all normal business hours at the provided address.
Some businesses will choose to use a registered agent service rather than an individual to ensure the proper availability of a registered agent. These services must have a location within the state to receive documents on behalf of a business.
Register your company with the state
The majority of businesses need to file with the state in order to formally establish a business. However, this is not true of all business structures, so the exact steps you take will vary.
Sole proprietorships, for example, do not require any organizational documents to be filed to be considered a business. The same is true of general partnerships. However, a limited liability partnership will require a registration to be filed with the state agency to establish liability protection.
An LLC, or limited liability company, requires another form called the Articles of Organization or Certificate of Formation to be completed. This form includes basic information about the business, its nature, owners, registered agent, and management style. The filing fee may be paid online or by mail.
Corporations require the most paperwork. Once directors have been appointed, the Articles of Incorporation can be filed with the Secretary of State. This paperwork includes all relevant information about the business and must be submitted alongside a filing fee, online or by mail. Corporations must also complete recurring requirements like holding board meetings and maintaining bylaws.
Create an operating agreement
While the state does not mandate an operating agreement, it is recommended that all businesses have one in place. The contents of this agreement can vary based on your business structure, industry, and other decisions, but it is wise to have them in place early on.
In general, an operating agreement is meant to lay out the ownership and operations of a business. The operating agreement can be referenced to solve any future conflict. Without these documents in place, the state may default to its own business rules or even find that a business is not operating properly to maintain asset protection for its owners.
Common provisions in an operating agreement can include the following:
- Member ownership. If a business has multiple owners, specify what percentage they each own, including how stocks will be divided.
- Voting rights and responsibilities. An agreement should outline how decisions will be made and by whom. This can include how votes are held, split and when someone may make a universal decision.
- Manager and member roles. In addition to whether managers or members operate a business, the authority and expectations of each person involved in the business should be made clear.
- Distributions. For businesses where profits and losses are treated as personal income tax, it needs to be laid out who can claim what amount of these profits and losses.
- New and leaving members. Specify how a new member or director could join the business and what happens if someone leaves. This includes buyouts, member death, and other scenarios.
- Meeting rules. Any meetings, like board meetings, should be outlined in the agreement, as well as who is responsible for things like minutes and setting the agenda.
Operating agreements do not need to be turned in as a part of forming a business, nor do corporate bylaws. Instead, these should be kept as internal documents that can be referenced as needed. It is also possible to amend these agreements over time as the nature of the business changes.
To-do list to run your business
The official formation of your business is an important step, but other requirements must be met before you can be operational. It is important to ensure all of these tasks are completed early and properly so you can move toward running your business and maintaining it for years to come.
Get an EIN
Federal taxes apply to all business entities, which is why an EIN may be necessary. An Employer Identification Number, or EIN, is a nine-digit number given by the Internal Revenue Service to businesses. You can think of an EIN like a Social Security Number that is attached to your business.
Not every business is required to have an EIN, though any business can apply for one and be issued an EIN for no charge. For example, a business that doesn’t hire employees and has no excise tax responsibilities will not need an EIN – all other businesses will be required to have one to file their federal taxes.
However, an EIN can be beneficial to businesses that do not require one. Many banks and lenders will require an EIN to open an account or a credit line, and others will see the ID as a sign of a legitimate business. It is also safer to provide an EIN than your personal Social Security Number when a tax ID is requested.
You can obtain an EIN by applying on the IRS website. There is no filing fee for the EIN, and it will last the life of your business with no renewal required.
Look into business licenses
Business licenses can be issued at the federal, state, and local level, and it is important to ensure your business has all the licenses and permits required to operate.
Federal licenses
Certain industries are regulated by the federal government and require licensing through the appropriate federal agency. These include commercial fishing, nuclear energy, natural gas, transportation, and others. A full list of federally regulated business activities can be found here, along with links to the relevant agencies.
State licenses
Each state has its licensing requirements. Licenses might include:
- General business license
- State sales tax license
- Seller’s permit or other tax registration
In addition, particular professions may require a state license. To learn more, you’ll need to research business license requirements in your state.
Local business licenses
Each city and county within the state has jurisdiction to require its own licensing and permits for businesses. These rules vary by location, industry, and other factors. For example, in Manchester, NH, certain types of businesses, like food service and tattoo establishments, must obtain a license from the Business Licensing and Enforcement Division of the Office of the City Clerk.
It’s important to check in with your local government agency to make sure your business is properly licensed.
Hire employees
At the beginning of your business, you may be the only person that is part of the organization, which is common. In fact, the Small Business Association finds that 81% of small businesses have no employees at all. But if you are planning to add employees at this stage, it will be important to find the right candidates and onboard them in compliance with the law.
The most important steps to take will be surrounding taxes. Any business with an employee is required to have an EIN in place, as there are federal tax responsibilities for employers. Your payroll will need to immediately include withholdings, which means you will have to pay those taxes to the government. You will likely also need to do the same thing at a state level, so registering as an employer with your state can be a separate process.
Depending on your state, there may be other requirements for employers. For example, most states require businesses with employees (or a certain number of them) to obtain workers’ compensation insurance.
Finding the best employees
Of course, it is also important that any employees you bring on are the best fit for your business, especially in these early stages. It can be difficult to know what you are looking for without being too picky, but consider these tips:
- Have a thorough job description before you begin hiring so you understand the qualifications and responsibilities.
- Make use of job websites like ZipRecruiter that have wide candidate databases and can match you to potential employees.
- Consider including things like salary and benefits in your job posting.
- Focus on a passion for your business, especially in the early stages.
- Ask for referrals from people you know and trust.
Consider using business IDs
Something that is often overlooked is the benefit of using business IDs and badges from the early stage. Not only can they give your employees a sense of identity and pride, but they are also a key security element for your business. Identifying someone clearly as a part of your business helps to signal when someone does not belong quickly. The professionalism and branding that business IDs bring can be invaluable in the early days of your business.
Manage finances
In the early days of your business, finances may be simple, but managing them can quickly become an overwhelming task. However, there are steps every entrepreneur can take to ensure that bookkeeping is simple and, most importantly, accurate. Keeping up with finances can not only make daily life as a business owner easier but help protect your personal assets and avoid large payments in the future.
Open business bank accounts
In many business structures, personal and business finances are considered the same for tax purposes. It can seem more convenient to use a single bank account for both sets of finances, but this can cause issues in the future. Having at least one bank account can be helpful and may be required for some businesses.
Even for a sole proprietorship, combining personal and business bank accounts can cause confusion and make it difficult to properly itemize expenses. While all profits and losses are reported on the owner’s personal tax returns, certain transactions may count as deductions when used for business purposes. The time it takes to go through each line item can be a drain or, if an accountant is hired, a large expense. Maintaining separate checking accounts streamlines this process and saves time in the future.
A bank account is a legal requirement for other business structures, like an LLC. Since these businesses allow personal asset protection for their owners, there is an assumption that business and personal finances are not mixed. Suppose it is found that you don’t keep these finances separate. In that case, it can cause something known as “piercing the corporate veil,” and these protections can be eroded, leaving owners responsible for business-related funds.
Having a bank account is also generally good business. It can simplify transactions with customers and vendors and help you appear more professional overall. A checking account usually suffices for most small businesses.
If you’d like, you can open a savings account in your company’s name or a credit card. The latter can help you establish credit in the name of your business – it can even be given a credit score similar to your personal credit score, which can help secure funding in the future.
Accounting software like FreshBooks or Quickbooks may be helpful if you don’t have accounting know-how.
Have a tax plan
Every business is subject to both federal taxes and state taxes. How taxes are paid depends on the type of business structure selected, which is why selecting the right one is important.
Sole props, for example, simply pay taxes on their earnings via their personal tax returns. LLCs are considered pass-through entities, where profits are passed to the owner’s tax returns.
Corporations have the most complex tax filing. The business must file taxes, and the owners must file taxes too. Corporations are subject to double taxation. The company pays taxes, and the owners pay taxes on their income; hence the term double taxation.
No matter the size or structure, all businesses can benefit from working with a tax professional and accountant to ensure their taxes are filed and paid accurately. This can help avoid costly mistakes and accidental omissions that may even be illegal.
Research funding options
As a part of creating a business plan, it is important to know where your initial funds will come from. Understanding your startup costs can help you plan how you will finance the early days of your business. There is no one “right” way to fund your business, and you may use a combination of resources to get started.
Some common funding methods include:
- Bootstrapping: This method is for those who can provide the capital for their business upfront using personal savings, current income, and other available assets. Profit can later be re-invested into the business to help it grow over time or to pay yourself back.
- Borrowing from loved ones: If you have friends or family who can lend capital to your business, this can be a good way to get started. Mixing business and family or friends can be tricky, so you may want a written agreement in place before moving forward with this option.
- Small business loans: Most banks and lending institutions have an option for small business-specific loans, which can give you the money needed to get started. You will have to repay this money, usually with interest, but it can be a good option for those with a solid business plan.
- Small business grants: Many organizations offer grants for small businesses, which can be obtained through an application process and do not usually need to be paid back. These may be specific to a type of business, business owner, or location. Usually, state grants are listed on the Secretary of State’s website or the state’s business portal.
- Crowdfunding. There are several sites online where you can ask the public to help fund your startup, be it an e-commerce venture, a dropshipping endeavor, or a new hair salon.
However you fund your business, having a plan in place will allow you to plan for not only startup costs but any unexpected costs that may arise in the early days of your business. Utilizing tools to create online polls can help you gather valuable customer insights so that you make data-driven decisions.
Launch a business website
In modern times, the internet is how most clients will find your business. The first thing they look for will be a website that discusses your services, values, and contact information and answers any other questions they may have. It is important to have a website completed early on in your business’s life, during the official formation of your business, so that you can begin gaining this traction right away.
Your website should have a domain name that is similar to your business name and messaging that is accurate and easy to understand. While you don’t need the sleekest website, there is, having a page that conveys professionalism and trustworthiness is important.
Some things to consider including on your website may be:
- A short, clear description of your business.
- Your logo and branding.
- Contact information for your business.
- A list of your services, menu, or other relevant details.
Many tools exist to help you create a simple, effective website for your business. You can use tools like Wix or Squarespace to build a website with very little technical knowledge. Or, if you prefer, you can use a service that builds websites for you. Whatever you choose, remember that you can grow a website with your business as long as you start out with a place where customers can find you.
FAQs
The best business idea will fit your skill set, resources, and abilities. Popular industries include professional services, construction, real estate (buying rentals or self-storage facilities), and retail trade. Any of these could be a good option for a sole proprietorship or other business structure to begin working in the state.
A business plan is a good way to focus your planning process for your business and ensure you have everything necessary to succeed. In addition to being helpful for entrepreneurs, business plans can show legitimacy to outside sources like grantors and lenders, who may be more likely to fund a business with a well-thought-out plan.
In most states, a corporation is legally required to have corporate bylaws adopted at the first organizational meeting. Other business structures do not require any documents, but it is recommended that all businesses have an operating agreement or similar document in place to resolve any conflict.
Yes. Business owners file Articles of Organization to establish their business, and most states require an annual report to be filed to keep that document up to date. In most states, it’s an annual requirement, with a small filing fee attached. In some states, it’s a biannual requirement.
Employer identification numbers, or EINs, are issued by the federal government for the purposes of tracking business taxes. Most businesses will need an EIN to file taxes. In addition, many states require businesses to get a state-specific EIN for tax purposes. The number is usually issued by the taxation agency.
Some companies can help you set up your business. Northwest Registered Agent and ZenBusiness, for example, can help you file your formation documents with the state. They also offer other services. They can serve as your registered agent, annual file reports, and even help with SEO or create a website that caters to your target market.
Costs for starting a business will depend on the type of business and its structure. Sole proprietorships, for example, do not include a registration fee, while corporations and LLC costs come with a $100-$500 filing fee. Depending on the business’s location, local business licenses and other fees may also apply. The Small Business Administration (SBA) has a tool to calculate additional costs.
Yes, businesses are subject to state taxes. However, eight states do not have a personal income tax: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming.
