Starting a small business is a heady prospect, with business owners needing to prepare, plan, and make critical decisions about their company. These important decisions shape how your company is structured, your strategies and markets, customer engagement, financial relationships, and branding. By spending time on these factors to consider before starting a small business, you will be positioned well for success.
Here is a look at 10 factors to consider before starting your own business.
Conduct Market Research
Market research is an essential element to help you position your products and services. Market research gives you a deeper understanding of the competitive landscape and the demand for what you’re selling.
Market research begins with a deep understanding of your customers. You need to know their shared characteristics, habits, and needs. What problems do your customers have that your company can solve? Understand the demand for your products and services and how you can position your wares to add value.
Market research should be done to answer the following:
- The size of your market (number of potential customers)
- Whether there is a demand for your product or service
- What customers are likely to pay for your offerings
- The economic profile of your customers, such as income levels, disposable income, and employment rates
- Where your customers live
- What social media sites, publications, and media do your likely customers use
- What similar options are available to your potential customers
- Whether it is likely to grow or contract and by how much
- What market share you’re likely to obtain
- The buying habits of your customers
- The various segments of the market and which ones are most likely to respond to your products or services
- Margins you can expect within your chosen market
You can conduct market research in many ways, including using third-party research firms, surveys, focus groups, and public sources for data.
Write a Business Plan
Your business plan is a strategic roadmap that details the core elements of your company. It is often a required component of applications for loans or investors. Spending time creating your business plan helps you answer core questions about the business, its goals, and its leadership,
The market research mentioned above is one core component. Other elements include:
- Executive Summary. This section describes your business and how it is positioned for success. It includes subsections that detail the mission and vision for the company, key employees, location, structure, and growth trajectory
- Company Description. Here, you will detail what the company is, what it offers, its strengths, and its competitive advantages.
- Organization and Management. This section indicates key personnel, with biographies of your leadership team and how the leadership is structured. It will include an organizational chart and what business structure you’ve chosen
- Products and Services. Here is where you indicate what the problems of your customers, products, or services will solve. You will indicate the benefits of those items to customers and how the product life cycle will develop
- Sales and Marketing. Here is where the marketing strategy is spelled out, how you will reach customers and produce a return on investment
- Funding. If you are looking for funding, here is where you will detail the capital request and where it will be allocated (e.g., salaries, supplies, equipment or research)
- Financial Projections. You will provide a detailed financial analysis with a five-year outlook of capital and operational spending and how it ties into your capital request
Choose a Business Structure
Your business structure is the legal entity under which your company is formed. While there are many different types of business structures, small businesses typically choose either the sole proprietorship or limited liability company (LLC).
A sole proprietorship is the simplest business structure and requires no formal paperwork to establish. In a sole proprietorship, you are the single owner and pass along any profits or losses to your individual federal and state tax returns. There are few start-up costs and this structure is often used by home-based businesses that do not have a brick-and-mortar storefront.
From a liability perspective, a sole proprietorship carries risk as the owner is responsible for any court judgments or bankruptcy obligations. That means your personal property could be exposed.
An LLC is a very popular choice of business structure because it offers financial and organizational flexibility and liability protection. An LLC is a type of corporation that allows its owners, called members, to limit their risk and enjoy special tax advantages.
With an LLC, owners are protected from personal liability, unless there is wrongful conduct or negligence involved, thereby protecting assets like homes, cars, and savings. Any earnings or losses are passed on through the LLC to the member’s tax returns.
The LLC can choose the tax structure that works best for its finances. It can opt to be taxed either as a partnership or as a corporation. Each has its benefits, depending on the optimal financial situation.
You also have flexibility with how to organize the leadership of the LLC. Companies can be member-managed or manager-managed. In the former, the owner manages the company; in the latter, the members hire a manager to lead the company.
When opting for this business structure type, it’s important to understand which LLC type fits your needs.
Be Aware of Business Taxes and Fees
Your company’s tax obligations will depend highly on the type of business you have and where your business is based. There are multiple taxes you may have to pay including:
- Income Tax. Your business will need to pay taxes on any income the business receives. If organized as a sole proprietorship or LLC, these taxes will be passed on to your tax returns
- Estimated Tax. Businesses need to submit tax payments every quarter, usually due on the 15thof April, July, October, and January
- Employment Tax. If you are self-employed, you will need to pay self-employment tax to cover Medicare and Social Security expenses. Employers typically cover this cost but for those with their own business, they are responsible for their share
- Unemployment Tax. If you have employees, you will need to pay an unemployment tax
In addition, you may need to pay state or local taxes related to your business, although these vary by location.
Small businesses will also be subject to various fees at the state and local level. These fees may relate to your operations or cover permits and licenses. In addition, businesses may need to pay fees to belong to professional associations, chambers of commerce or other organizations that are beneficial to your company.
Name Your Business
Choosing a business name is important. There are two types of names to consider. One is your formal legal name, which will be used in any formal documents or filings, such as if you elect to organize as an LLC.
The formal legal name is not necessarily the one your business will use commercially. That name is your doing-business-as (DBA) name, which can be used on storefronts, signs, business cards, and marketing materials.
You want to select a DBA name that’s unique, compelling, and reflects what your business does. It needs to be clear, appealing, and memorable for customers, too.
Most states have online directories that allow business owners to track what names have already been taken and are registered. Once you pick a name that works and is available, you can register it to prevent others from taking it.
Each state has different rules related to creating the business name, whether the legal or DBA name. Among the most common restrictions are:
- Using words like incorporated or LLC with the name if the business is not registered as such
- Using words that imply the business is part of a government unit, such as federal, city or United States
- Including words that imply professional licensing, such as CPA or attorney, when the business does not have such a license
- Using bank, trust, or insurance unless legally allowed to operate as such
Open a Business Bank Account
Having a business bank account is smart for several reasons. For one, it gives you legitimacy and a professional way to conduct business. Using a business bank account provides payors with an impression of your company and its stature.
A business bank account is a good way to establish a relationship with a financial institution. It also allows you to separate your personal and business finances, making the preparation of financial reports clearer and cleaner.
In addition, having a business bank account can lower your risk. In some situations, if your personal and business finances are co-mingled, courts could go after your assets.
When opening a business bank account, be sure to look at the benefits, costs, and fees. Comparing potential bank partners ensures that you’ll get the best possible deal and help reduce your operating expenses.
Obtain Permits, Licenses, and Employer Information
To launch a small business, you may be required to secure permits and licenses related to your work or occupancy of a brick-and-mortar location.
Permits may relate to local health codes or to ensure that your workplace meets local building and zoning codes. Various inspectors may need to visit your location and verify that the location and business are up to code before permits are issued … and there are likely fees involved to secure these permits.
Licenses are required for some business types. Business licenses are a common requirement, issued usually by the state after you’ve registered your company. Professional licenses are needed if you are a contractor, attorney, or medical provider, among many others.
In addition to these documents, your business will need to create different identifiers with the government. You should obtain a federal and state tax ID number. This information is a unique identifier similar to an individual’s Social Security number and is used when filing tax forms and other documents.
Purchase Business Insurance
Protecting your valuable business assets is an important step to take to safeguard your hard work. The types of insurance you will need vary, but may include:
- General Liability. This coverage protects the company against claims of property damage or bodily injury, along with libel or slander
- Professional Liability. Often known as errors and omissions insurance, this coverage protects you if customers sue you for negligence due to poor advice or counsel
- Business Income. This protects your business income when a fire, flood, wind damage or theft forces you to temporarily shut down operations
- Property. This insurance protects your equipment, inventory, furnishings, tools and the physical location where your business resides. It can help protect from damages due to fire, flooding, or theft
- Workers’ Compensation. This coverage provides benefits to your employees who are affected by work-related injury or illness. It covers costs related to medical care, lost wages, and other expenses
- Auto. If you have vehicles used as part of your commercial enterprise, auto insurance covers the costs of accidents
Name a Registered Agent
Having a registered agent is a smart choice, especially if you choose to organize as an LLC. A registered agent is a person or company that is the point of contact with a state for official correspondence.
The registered agent will accept and organize legal documents and other materials delivered to a company. The agent will then pass these materials on to the company.
Every LLC must have a registered agent within its formation state. Other structures, such as limited partnerships or limited liability partnerships, are also usually required to have a registered agent.
Having a registered agent is an important component of running your business. The registered agent ensures that documents are received (to be a registered agent, you must be a state resident and available to receive documents every business day during business hours).
Having a registered agent also avoids any embarrassment that may arise by receiving a legal summons or other sensitive materials in front of employees or clients.
No business can succeed without having advice and guidance from others. For a small business, there are three core advisors to bring on:
- Attorney. Having a lawyer can help you with the complex issues around forming your business and navigating various bureaucratic tasks. An attorney can help advise about deals, draw up legal contracts, and provide counsel about employment issues, conflicts, and disputes that may arise with customers, vendors, or partners
- Accountant. An accountant can help in the preparation of your financial documents and interpret the results for you. A good accountant will provide insights about your cash flow, financial statements, and budgets. An accountant can also prepare and file tax returns on your behalf
- Financial Planner. Preparing for your future is important. Having a financial planner can help guide decisions about your personal and business finances, retirement, and succession issues
Starting a small business is an exciting time for any founder. It’s time to take your big vision and turn it into reality.
To be positioned for the best possible outcomes, business owners should spend some time planning, developing marketing strategies, forming a business structure, and obtaining the necessary licenses and permits.
With plans well in place, you’ll be ready to launch with the infrastructure that lets you focus on core business tasks.