How to Start a Small Business
As appealing as working for yourself may seem, there’s a reason not everyone owns their own business: it’s hard. After all, the skills needed to create the product or service you’ll sell are often very different from the skills you’ll need to run a successful business. You can be really good at baking amazing cupcakes, for example, but making it a successful bakery is something else entirely.
In this guide, we’ll help you sort through the main steps to starting a business, including how to write a business plan, get financing, determine your business insurance and legal requirements, and more.
Overview of discount rates
- There are 33.2 million small businesses in the United States, or 99.9% of all American businesses. (US Small Business Administration)
- The average small business loan is $663,000. (US Federal Reserve)
- 77% of small business owners use personal savings to start their business and 41% use a business loan or line of credit. (gallup)
- Over five million small businesses were created in the year to August 2022. (US census)
- 82% of small businesses survive one year; 50% survive to the five-year mark; only 35% survive ten years. (Bureau of Labor Statistics)
- The median income of small business owners in 2018 was $51,816 for those with incorporated businesses and $26,084 for those with unincorporated businesses. (US Small Business Administration)
Find your inspiration and write a business plan
People are inspired to start a business in different ways.
Maybe you’re good at something, like homemade tamales, or doing something, like gardening. You can turn this hobby into a business if it doesn’t already exist in your area or if you can somehow differentiate it from potential competitors. Some small business ideas are new enough that you can sell your products nationwide.
Alternatively, some people start with the goal of opening a business in mind, and they just need to come up with the right idea.
Either way, it’s a good idea to write a business plan. Just like with resumes, there’s no one way to do this. You will want to include things like your plans for how to organize and market your business, the products or services you will offer, market analysis and financial plans.
According to a study by Babson College for Entrepreneurship Research, successful business owners are split on whether or not they have written a business plan. About a third didn’t start with a business plan at all, a third had an informal plan scribbled down somewhere, and another third started with a formal written business plan. According to an analysis by Harvard Business Review, people who write a formal business plan are 16% more likely to succeed – a good thing to keep in mind if you’re considering starting a business.
Evaluate your finances and obtain financing
Your business will live and die on your ability to control your finances. Namely, you will have to learn how to control the costs and prices of your business, in order to maximize your profits. You can start by doing a break-even analysis, where you will calculate the minimum price for your goods and services in order to break even. If you set prices below that, you will go bankrupt. If you price your items above that, you will make a profit.
Of course, before managing your finances, you will first need to secure financing. Starting a business with no money may be possible in a very limited number of cases, but most of us will need a down payment. Here are some of the most common ways to do this:
- Personal investment: money from your own savings
- Small business loans: money from a lender. Approval rates range from 14% with major banks to 26% with alternative lenders. Smaller banks, credit unions and institutional lenders fall in the middle.
- Small business credit card: money from a line of credit dedicated to the company. According to a study by Visa & AT Kearney, approximately 71% of small business owners have a business credit card.
Choose a business structure and register your business
Many people start their business as side gigs and then formalize things once they’ve gained traction. When you are ready to officially register your business with the government, you will first need to decide on a business structure:
- Individual business : a simple one-man business or side gig, where the owner is responsible for the debts and liabilities of the business
- Partnership: a business owned by more than one person, usually with all partners personally liable for the debts of the business
- Limited Liability Company (LLC): a common small business structure in which the owners are generally not responsible for the debts of the business
- society: a bigger company with even more rules and regulations
Once you have decided on a business structure and name, you can apply for an Employer Identification Number (EIN) from the IRS. It’s free and easy to create, and similar to your social security number but for your business. You will also need to create formal written business formation documents, such as articles of incorporation, which you can hire a lawyer to do or draft yourself. You can use both of these to create a separate bank account for your business.
Certain types of businesses, such as S-Corporations, may need to file a form with the IRS. Otherwise, most businesses usually just need to register with their state and/or local governments to make things official. You should also check with these governments if you need any licenses or permits, and if so, how to obtain them and stay compliant.
Take out business insurance
There’s a reason 66% of small business owners buy business insurance. Without it, you can face costly lawsuits that can derail your business. This is especially important today with increasingly unstable economic and environmental conditions. According to FEMA, about 25% of all businesses permanently close after being hit by a natural disaster like a hurricane or wildfire.
Most Common Small Business Complaints
- 20%: Burglary and theft
- 15%: Water damage and frost
- 15%: Wind and hail
- 10%: Fire
- 10%: Customer slip and fall
- Less than 5%: Other client injuries
- Less than 5%: product liability
- Less than 5%: struck by an object
- Less than 5%: recreational damage
- Less than 5%: Vehicle accident
Source: The Hartford Insurance Company
Build and grow your business
Once you’ve checked off the basics of building your business, it’s time to learn yet another new skill: growth.
Choose your team
According to the Small Business Administration, 81% of small businesses have no employees; it’s just the owner. But if growing your business is one of your goals, you’ll need to learn how to delegate your tasks to new team members. Among small businesses with employees, the average team size is 22 employees.
Keep in mind that you don’t necessarily need to hire employees to build your team. You can also hire freelancers and contractors, and even work with professionals that larger companies might have in-house, like accountants or virtual assistants. This can be a good way to dive into the world of expanding your business before hiring full-time employees.
Focus on marketing
Your product might be revolutionary, but it’s useless if nobody knows about it. Word of mouth is great, but even to get that recommendation, you need a way to let people know you’re open for business. You want it to be as easy as possible for your target audience to find you and understand what you offer.
The first step for many entrepreneurs is to create a website, which 71% of small businesses have, according to Top Design Firms. Social media is also a powerful option, with 25% of small business owners ranking it as their “most effective digital marketing tool,” according to a survey by Visual Objects, a portfolio website. Remember to also add your business to Google and other online directories. Other more tangible options include signs, apparel with your company logo, business cards and more.
Invest in business tools
Don’t be afraid to try using new tools, even if you have old favorites. You don’t want to be the last person stuck using only a fax machine when the whole world has switched to email, for example. Here are some of the broad categories of tools you’ll need to run your business:
The bottom line
Starting a small business is daunting. But if you’re a passionate entrepreneur and enjoy taking on new challenges as they arise, this might be one of the most rewarding things you’ve ever done. Give yourself grace when you make mistakes and remember that you can get there step by step. Everything does not need to be formalized before launching.