Start Your Own Business
Starting your own business can be an exciting and daunting task. Whether you are at the beginning of a future Fortune 500 company or ready to start your own local “mom and pop” shop, there are important steps to take to help ensure your best chance for success. In this module, we will outline a series of steps you can take to help you down the path of self-employment.
Decide What You Want
As you begin down the road toward owning your own business, the first step is to decide what you want to do. What idea you want to pursue? You have to decide what type of person you are and what resources you want to commit to starting your own business.
Let’s take a look at each of these decisions you will need to make individually.
Generating a New Business Idea
There are essentially three ways to generate a new business idea:
You see a need that is not being met by any producer or service provider.
You have skill in an area, or a desire to provide a product or service in a particular area.
You can brainstorm for ideas that would suit you.
Regardless of the method you choose to find your business idea, step one will always be hatching an idea that you think could work.
After you have found an idea you want to pursue you should conduct a self-assessment. In this assessment, you need to be completely honest with yourself because ultimately the characteristics you have will manifest themselves in the effort you put into your new business.
Are you entrepreneurial by nature?
Are you self-motivated?
Can you operate efficiently and set your own deadlines?
Are you willing to commit to the business regardless of the hurdles you face?
These are all questions that will have an impact on the ultimate outcome of your new business, and the answers to these questions will tell you if starting your own business is the right decision for you.
The last step in your decision is to make a determination what resources you will commit to get your new business off the ground and running. You will have to make a commitment of your time and your money to get started, and oftentimes new businesses take up to two years to begin showing a profit.
So, as you begin planning your new business, you will have to look at the time you will have to put into your new business. Whether it will be a full-time or part-time venture will be important as you move forward in starting your business. Additionally, you have to plan financially to start a business. Not only will starting a business cost money to develop, but you must also consider the possible income reduction from other work you do as you shift time to your new business venture.
Now that you have decided what you want to do and what resources you are prepared to commit to your business it is time to press forward.
Get Assistance and Training
Opening your own business will come with many unexpected twists and turns. One way to help ease the pain of the unexpected pitfalls of business ownership is to find ways to get assistance and training before you start. Here are a few ideas of ways you can get experience in an industry before you start your business:
Work in the Industry – Regardless of your capacity, working within an industry or area you intend to start a business in will provide excellent experience.
Education – College, university or trade school can be a great place to gain experience you can use in your business.
Find a Mentor – Mentors can be a great resource for questions and guidance before and during the operation of your business.
As a new business owner you want to “perfect the mousetrap” and not “reinvent the wheel.” Obtaining assistance from others in your industry and gaining experience through training will help you as you work toward building a successful business.
Determine Business Model
Once you have an idea for a business you want to pursue, you will need to decide what the most appropriate business model is for that business. A business model is the format of how a business operates from a physical standpoint. For example, you would not want to engage in a costly storefront lease to start a lemonade stand as the income generated from the business would not likely offset the cost of the storefront lease.
Let’s review the different business model structures so you can decide which would be the best fit for your business idea.
Types of Business Models
While there are many different business models (and variation of business models) the basic business models are:
Brick & Mortar
We will now review the pros and cons of each of these options to help you better understand which business model will work best for you.
Home-Based Business Model
A home-based business is exactly that, a business that you operate from home. In the Internet and computer world we now live in, this option is more feasible than ever before, regardless of the type of business you want to operate.
The following are the “pros” of operating a home-based business:
Low overhead and start-up costs
Can work on or operate business at any time
Cost and time savings by eliminating a commute
The following are the “cons” of operating a home-based business:
Possible zoning, ordinance or HOA restrictions
Possible family life interruptions
Little customer appeal
Operating a home-based business can be a great fit if you are operating the type of business that does not require a lot of foot traffic and sign exposure.
Brick and Mortar Business Model
A brick and mortar business is a business that operates from some type of storefront location. Whether it is within a complex of business buildings, part of a shopping center or a stand-alone building these are the types of business locations you see around town every day. This type of business model will either require you to purchase and build out a building or space to suit your business needs, or lease an existing space, which may or may not require a build out.
The following are the “pros” of operating a brick and mortar business:
Opportunity to attract walk-in customers
Dedicated work space to be at each day
Physical investment creates trust with customers
The following are the “cons” of operating a brick and mortar business:
Generally high start-up and overhead costs
Availability for customer needs often requires long work hours
High overhead may translate into higher pricing for goods and services
A brick and mortar business, while requiring more capital investment, can be a great business model when you want to develop a face-to-face relationship with your customers.
e-Commerce or e-Bay Business Model
An e-Commerce or e-Bay based business is a one that you operate completely online. In the Internet and computer world we now live in, this option is more feasible than ever before, regardless of the type of business you want to operate.
The following are the “pros” of an e-Commerce or e-Bay business:
Low overhead and start-up costs
Can work on or operate business at any time (and can be based out of home)
Potential customer base very large
The following are the “cons” of operating an e-Commerce or e-Bay business:
Shipping and inventory management can be difficult to manage
Challenging to route traffic to your website
Potential technical issues could halt business unexpectedly
This business model can be used for both a full-time or part-time business idea, and it is flexible enough to be used for a small business or a large company.
Franchise Business Model
A franchise-based business is typically a brick and mortar type business, which is associated with an established company. In the Internet and computer world we now live in, this option is more feasible than ever before, regardless of the type of business you want to operate.
The following are the “pros” of operating a franchise-based business:
Established and proven business model
Built-in support structure through parent company
Franchise recognition helps attract customers
The following are the “cons” of operating a franchise-based business:
High buy-in or start-up fee
Freedom and creativity can be limited
Franchise typically requires royalty payments from profit
This business model is effective for those with less business experience because a mentoring system is generally built in to the business model. However, if you are seeking the true entrepreneurial experience, this model will limit your freedom.
Product Licensing Business Model
A product licensing-based business is a business where you license another manufacturer or retailer to create or sell your product or service.
The following are the pros of operating a product licensing business:
Less time commitment
Risk and financial commitment shifted to license
The following are the “cons” of operating a product licensing-based business:
Financial reward can be limited
Placing trust in another entity where you know little or have no real control
This business model is an effective choice when you have a product or service to provide to consumers, but do not have the time or resources to develop it yourself.
Multi-level Marketing Business Model
A multi-level marketing business is a one you operate completely online. In the Internet and computer world we now live in, this option is more feasible than ever before, regardless of the type of business you want to operate.
The following are the “pros” of operating a multi-level marketing business:
Products are “ready to go” (similar to a franchise)
Limited start-up costs
Can be done while you maintain other employment
The following are the “cons” of a multi-level marketing business:
Negative stigma attached to this industry
High failure rate
Takes a lot of dedication and discipline to make it work
A multi-level marketing business is a great option for a person who wants to start his/her own business but does not have the time or financial stability to commit to a full-time venture. However, in order to succeed in this type of business venture, you have to be patient and put in a significant amount of effort.
Now that you have selected a business model to pursue it is time to consider where to locate your business. This is a primary consideration if you are starting a brick and mortar or franchise type business, and not a consideration if you choose any of the other models.
When choosing a location for your business, you should keep potential customers in mind as well as your budget. If you are running a retail business, you need to be in a high visibility location. On the other hand, if your business will be manufacture in nature, signage and walk-in traffic are not a factor so the location should be based on cost and logistics.
Ultimately if location is a key element to the success of your business, you want to be sure you find a location which gives your business the best chance for success.
Determining Business Structure
As you continue to work toward starting your own business, another important consideration is what legal entity your business will be. There are a variety of options to choose from, and each has a different effect on flexibility, control, taxation, and owner liability.
Legal (e.g., attorney) and taxation (e.g., accountant, CPA, etc.) experts can help you understand the different business structures available to you, and how each business structure would coincide with your business goals. While you will ultimately be the one to make a choice of business structure, consulting a professional legal and tax advisor can help to eliminate any gray area before you get down to business.
Now we will review the different business structures available, and how each would fit with your business model.
Different Business Structures
There are five different business structures you can use to legally organize your business:
Limited Liability Company
Let’s review each structure with a little more detail to help you determine which option is best for your new business venture.
A sole proprietorship is a business structure owned and run by one person. It is the default business structure, and takes no formal paperwork or government filing to organize. Once you begin your business, if you have not taken any steps to formalize your business structure, you are operating as a sole proprietorship.
In order to operate your sole proprietorship under a particular name, and more specifically to ensure no other entity uses your name, you will need to file a request through your Secretary of State or State Corporations Commission.
Now let’s review the advantages and disadvantages of a sole proprietorship.
Advantages and Disadvantages of a Sole Proprietorship
There are many advantages and disadvantages of a sole proprietorship. The following are some things to consider as you try to decide whether a sole proprietorship is right for you:
A partnership is a business structure where two or more people share an ownership stake in a business which is operated for profit. In order to start a partnership you will have to create a partnership agreement, which can be a fairly simple document but can grow quite complex depending on a variety of factors. Such factors include (but are not limited to): the number of partners involved, whether limited partners will be involved
Let’s take a look at the advantages and disadvantages of a partnership.
Advantages and Disadvantages of a Partnership
Here are some things to consider as you try to decide whether a partnership is right for you:
A corporation is a business structure organized thorough State governmental authority that acts as an artificial person in order to carry out business. They can be formed in a variety of different ways in order to best utilize different tax advantages. A corporation takes more work and money to set up than the less formal business structures, and will require regular upkeep in order to maintain the corporate structure.
Many people think a corporation is only for a large business entity or a large group starting a business; this is not always the case. A corporation may be the most appropriate business structure for your new business.
Let’s review the advantages and disadvantages of corporation.
Advantages and Disadvantages of Corporations
Here are some things to consider as you try to decide whether a corporation is right for you:
Limited Liability Company (LLC)
A limited liability company (LLC) is a hybrid business structure, which includes components of both a corporation and a partnership. The LLC combines the liability protection of a corporation with the pass through taxation of a partnership, making it one of the most popular business structures available today. The multi-faceted benefits of the LLC make it an intriguing business structure for almost any type of new business.
Let’s review the advantages and disadvantages of an LLC.
Advantages and Disadvantages of an LLC
Here are some things to consider as you try to decide whether a LLC is right for you:
Your Business Structure
As you can see there are not only a multitude of choices for the business structure of your new business, but also a number of factors you need to consider before you will be ready to choose one that will suit you best. Now that you have chosen a business structure you are ready to move on to the next step in the development of your new business.
Writing a Business Plan
At this point in the process, you need to take the time to develop a comprehensive business plan to guide the actions and direction of your business. An effective business plan will be crucial not only for the initial success of your business, but also for its long-term success.
The business plan should be developed to be a guide for the direction you want to take your business and to track the progress of your business. One of the best ways to ensure your business is heading in the right direction is to track the goals you set in your business plan. The goals you set in your business plan should act as a type of “life coach” for your business. Each step of the way you strive to meet goals you set in the business plan, and those goals lead you down the path you have drawn toward a successful business.
The business plan should be a living, breathing, ever-changing document. Many business owners struggle to understand why their business failed even though they “followed the plan.” As you begin to operate your business, it is important for you to track your business progress by monitoring the goals you set.
As you operate your business, you may begin to realize some of your projections were incorrect, or you may have underestimated some of your costs or operating expenses. Additionally, you may have underestimated initial demand for your product. Regardless of the circumstance, it is vital to constantly monitor the goals within your business plan and continuously adjust your business plan goals as you gain experience.
To learn more about the specific steps to writing a business plan, go to THE BUSINESS PLANNING COURSE.
After you have completed your business plan, you are entering the final stages before you begin to actually operate your business. Depending on the type and scope of your business, you may need to generate capital before you are able to launch your business.
As we discussed earlier, the need for additional capital will be a consideration in the structure of your business. If you are developing a sole proprietorship, partnership or LLC, you may well get your initial start without any outside financing. However, if you are starting a corporation, or intend to begin your business on a larger scale, you will likely need to secure outside capital before you begin operation.
Let’s review some of the important concepts when considering the financing options for your business.
Investor Revenue or Business Credit
The best way to generate investor revenue or business credit is by using your business plan to pitch your idea, and the feasibility of that idea, to potential investors, suppliers and lenders. If you have a business plan that outlines a need within a particular consumer base, and a unique method you have to satisfy that need, you give yourself a chance to get the money and credit you need to start your business.
The needs of your business will guide who you should approach about financing. If you simply need capital, a financial institution should be your first choice. If you need supplies, but do not have enough money to purchase all of the supplies you need to get started, you will want to approach potential suppliers and request an extension of credit to your business.
When seeking a business capital loan, keep these important tips in mind:
Use a professional looking business plan to pitch your idea and your needs.
Look professional and act professional when meeting with potential lenders/investors.
Ask for more than the minimum amount you need.
Seek capital from the following sources: financial institutions, private investors, or friends/family.
Registering a Business Name
Depending on the business structure you chose, you may have to take additional steps to ensure the business name you choose is protected and cannot be used by another individual or business.
If you started your business by creating a corporation or LLC, you will not need to take any additional steps to protect the name of your business. When you file the required documents within your State to organize either of these business structures, you also secure the use of the name of your business.
However, in some cases, a corporation or LLC will want to engage in business using a name other than the name filed with their State governmental agency. In this case, that business can file a trade name or doing business as (DBA) within their State; this will enable a corporation or LLC to transact business within that State under a name other than the name on its business structure documents on file with the State. These trade name or DBA filings are typically made through either the Secretary of State or the State Corporation Commission.
When a sole proprietorship is created, the name of the business is the name of the sole proprietor. For example, if John Doe started a cleaning business, the default name for that business would be “John Doe.” Similarly with a partnership, the name of the partnership will be the name outlined within the partnership agreement. In order for either of these entities to operate under any other name, or to officially reserve their business names, they would have to file a request to register a trade name or DBA with the appropriate State agency.
For example, if John Doe wanted to call his sole proprietorship “Doe, Rae, Mi Clean,” he would first run a check, through the appropriate State agency, to ensure the name was available and not already in use by another business. Then, he would file the required paperwork with that State agency to secure the use of the desired name. After receiving notification from the State agency that his name request has been approved, John can then use “Doe, Rae, Mi Clean” as his business name.
Tax Identification Number
Once you have officially organized your business, you are about to start serving your customers. Now it is important to be officially recognized by the Internal Revenue Service (IRS) as an official business entity. Some business entities will be identified by the IRS through the social security number of the business owner. Other types of business entities will be required to obtain an identification number through the IRS; this identification number is called an Employee Identification Number (EIN).
The question of whether your business will need an EIN is best answered either directly by the IRS or through the assistance of a legal or tax professional. The IRS web site www.irs.gov has a question and answer section regarding this issue. The website outlines what businesses are required to have an EIN and what businesses are not required to have an EIN.
This is a critical step in the life of your business. As you begin to generate revenue through your business, you will be required to pay taxes to the Federal government. Failure to properly address this step could lead to financial or even criminal penalties.
State and Local Taxation
In addition to Federal taxes, your business will be required to pay a series of State and local taxes. It is important to consult with your State Department of Revenue as well as your local municipal government to determine what is required in order to ensure your business is in compliance with all tax laws and regulations. These tax steps are important to the sustainability of your business, and carry potentially serious consequences if handled improperly. Therefore, it is advisable for you to contact a legal and/or tax professional for advice before moving forward with your business.
Business License and Permits
Now that your business is organized, and you have all of your taxation information in order, it is time for a few final steps before you are on your way to being a full-fledged business owner! Another regulatory item that you will want to consider is whether the State, county or municipal government in your area will require you to obtain a business license and/or any permits.
Business licensing is a way for a government to regulate where a business operates. Local governments try to ensure that businesses operated in areas where they are most appropriate. Permits are a way for a government to regulate how a business operates. Safety of customers, employees and the public are typically the focus of business permit programs.
Let’s review some important information about licenses and permits.
A business license is a legal document that authorizes you to operate your business within the city that issued the license. Generally, a business license will be obtained through a municipal government. However, there are some business types which may require a license from a higher level governmental authority; these licenses normally require a fee and are renewed annually.
A good resource for determining what agency you need to contact for business licensing information is your local, State or federal Small Business Administration Office. They will be able to guide you to the appropriate regulatory agency for your type of business.
A permit is a document given by a government official or agency, which allows the holder to engage in certain activities. Permits are typically obtained through State, county or municipal government, and the need for a permit(s), and the cost associated, will depend on the nature of your business and the permit(s) required. The renewal period on a permit can vary, but will typically be one year.
Government agencies use business licenses and permits to track your business for income tax and sales tax purposes, for unemployment tax purposes and potentially for safety regulation, depending on the nature of your business. As with taxation matters, it is important to ensure that you have the necessary license and permits in place before you begin to operate your business as you may encounter legal consequences if you fail to comply with government regulations in this area.
Understanding Employer Responsibilities
You now have your idea, crystallized your map to success through an excellent business plan, secured all the necessary organizational details for your business, and you are now ready to start making money. At this point, if you are operating your business without any employees, you are ready to begin the operation of your business.
However, if you intend to add employees to help operate your business, you have one final requirement before you are ready to go. Understanding and complying with Federal and State employment laws is a complex task. There are a number of taxation requirements you must comply with for each employee. Additionally, there are a number of wage and labor laws that must be understood before adding employees to your business.
This area, as with taxation a licensing and permits, is filled with potential legal pitfalls. Before adding employees to your business, it would be prudent to consult with a professional tax and/or legal advisor. These professionals can guide you through the employee process and help you avoid potentially costly mistakes.
Now that you have reviewed this course, you should be more keenly aware of the planning and preparation that will go into starting your own business. For more information about small business matters, move on to some of the other modules in the Small Business category.