Starting a Business
No matter what type of product or service they sell, many small business owners have to go through a similar process to turn an idea into a real company. From creating a business plan to registering your business with the proper government organizations, the process can include a mix of practical and legal steps.
Steps to starting a business
1. Have an idea
Most companies start with a spark of inspiration. Perhaps you've come up with a new product on your own, or you might have discussed how you're going to launch a new business with a potential partner.
You don't need to invent an entirely new product to be successful. In fact, building a business based on something you know customers need may be an easier path.
For example, a new shoe company isn't inventing the shoe. But it can still distinguish itself by using specific materials, offering lower prices, creating exceptionally high-quality shoes or having outstanding customer service.
- Who does my product or service help?
- What problem am I solving?
- How much will others pay for this product or service?
- Have other businesses tried this idea before? Were they successful? What can I learn from their mistakes?
- How will I distinguish myself from the competition?
2. Assess the market
A great idea won't always turn into a successful business. Even if you develop an amazing product, your business could still fail if you can't figure out how to sell it at a price that works for your ideal customer. Similarly, if your product doesn't help solve a customer's wants or needs, then you could have trouble selling it regardless of how little it costs.
You need customers who want and can afford your product or service. And you'll need to convince them that they should buy your products or services over a competitor's product line.
Market research can help you understand why a customer will buy what you are selling. It could help you determine whether you're offering the right product for your ideal customer and if your business idea is likely to succeed. Doing this work now can save you time and money later.
You could start by interviewing potential customers to see if they might like your product or service and how much they're willing to pay for it. Start with friends and family, but branch out to strangers you meet in person or online. In most cases, you are sure to get both positive and negative feedback. If you get the latter, think of ways to modify or change your product that would resolve your potential customer's concern.
Online reviews are another potential source of information. Read reviews of similar businesses or products and see what customers like and dislike. If you can improve on the areas that they dislike, then you may be able to offer a better product or service.
Government organizations also collect and organize demographic and behavioral data about consumers, information you can review for free while doing market research. If you're planning on opening a retail location, see if your local city or county government has any additional resources. Some local governments might have statistics about similar businesses and different neighborhoods.
3. Create a business plan
A business plan is like a roadmap for your company. It has an overview of your company, the products or services you offer and your plan for the business in the coming years.
You'll use this research as you describe your business's goals, how you will launch and run your company and how much money you expect to make. The business plan will also tell the story of why your company started, how you plan to make a difference with your product and exactly what your product is and includes. Remember that mapping out these details now can help guide every decision you make.
Creating a business plan is an important step that can help you flesh out your idea. Having a clear business plan can also be a requirement when you apply for a small business loan or line of credit.
4. Raise money
Many businesses will require an initial investment, or startup funding, to buy equipment, purchase supplies, hire employees, rent a space, pay for licenses and cover any other business expenses that pop up.
Small business owners might be able to choose from different sources of funding, including:
- Self-funding. Using your savings or income from another job, or taking out a personal loan to pay for business expenses.
- Friends and family. Asking friends or family members to invest in your business. They might offer you a loan and you will need to make an agreement to pay it back.
- Loans. Taking out a small business loan from a financial institution. You many need to have good credit, a solid business plan and some form of business or personal income to qualify for a loan. If you are unable to qualify for a loan on your own, consider finding a co-signer who agrees to be jointly responsible for the debt with you and who will help repay the debt if you are unable to do so.
- Investors. Raising money from angel investors or venture capitalist funds. Venture capital firms make direct investments in young companies in exchange for equity, or partial ownership, in the business. Angel investors will also invest in new businesses — often in exchange for equity.
- Seller financing. If you're buying an established business, the seller may offer to finance the purchase and lend you the money. The original owner of the business loans money to the individual who is buying their company. This helps the new owner finance their ownership in a new company over a longer period of time. Then the buyer repays the loan according to agreed-upon terms.
- Crowdfunding. Raising money from a large number of people who will donate their contribution and receive a reward, like a pre-order for your product or a visit to the business headquarters for a day.
You'll have to weigh the pros and cons of each option, such as whether you want to retain full ownership of the company while repaying a loan, or give up some control in exchange for an investment in your idea.
5. Register the business
Once you've determined that your idea can be successful and you've raised money to start your business, you'll need to go through the process of legally creating and registering your business.
In some cases, this step might come before raising money. Or, you might raise a little money, legally form your business, and then look for additional funding.
- Decide on a business structure. You may be able to run your business as a sole proprietorship, which doesn't create a legal separation between the business owner and the business. Or, you could create a partnership, limited liability company (LLC) or corporation. Forming a business entity can offer business owners tax advantages, legal protections against creditors, and may be a requirement for obtaining some types of business financing.
- Choose a business name. Make sure your business name reflects your business activity and isn't owned by someone else. You may also want to check whether a website address (for example, www.practicalbusinessskills.com) and social media account names are available for the business name.
- Register your business. You may need to register your business with the federal and state governments. You may also need to register with your local government office.
- Get tax identification numbers. State and federal tax identification numbers allow you to open a business bank account and pay business taxes. Visit your state and federal government websites to access the forms needed to request your taxpayer identification numbers; these will be important to have when you file your tax returns.
- Obtain licenses and permits. Depending on your type of business and where you set up shop, you may need to get local, state and federal licenses or permits. A Small Business Development Center might be able to offer you free guidance.
Once you legally form your business and get all the required licenses and permits, you can open shop and start selling your products and services. You've done it. You're officially a business owner.
Next, you'll need to figure out how to run a successful business and attract customers.