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You’re not alone if you’ve thought about starting and running your own business. Being your boss, having flexibility with your schedule, and keeping more of the financial rewards that come with business ownership are all good reasons to own your own company.
But as you might expect, it’s not all vacations and fat bank accounts. According to the SBA, 2/3 of businesses survive at least two years, and approximately 50% survive five years.[1] So why is the failure rate so high? At least for the businesses that fail early on, lack of or poor planning can be a significant factor.
So how to start a company?
Starting a business from scratch doesn’t have to be complex or complicated, but it does take planning and work. Here are the first and most important nine steps to take when starting a company from scratch.
1. Do an Honest Evaluation of Yourself
Do you work better in a structured or unstructured environment? Does a daily routine reduce your anxiety? What kinds of things are you good at? Does public speaking or making presentations make you nervous? Are you good at accounting and numbers? Can you handle the rejections you’re bound to get when selling or cold calling?
These are all critical questions to ask yourself. It’s a good idea to get other people’s opinions about their perception of you in each situation.
Whatever the answers you come up with for your evaluation, remember that’s all it is, an evaluation of where you are now. Think of it as a way to identify both your areas of strength and weaknesses.
You may be good at public speaking, which can help raise money, but bad at accounting, which means you’ll need to find some help with that business area.
2. Evaluate Your Idea
It needs to be evaluated if your business idea involves a new product or service (or even an enhancement to an existing product or service). This is technically called market research.
Some firms specialize in market research for new products, but if you are on a tight budget, you can do this yourself.
First, if you can build a prototype for people to use, touch, and look at, that’s the best option. If a prototype is not possible or it’s a service business, then offer a highly descriptive presentation of the business plan, complete with its unique benefits and how it’s different from the competition.
Then listen! Remember that this is not about others liking your product; this is not your baby that they are talking about. You want honest market research that gives you the best chance for a successful business. Take notes; when someone tells you they didn’t like a feature or some aspect of your idea, tell them ‘Thank you”.
After several rounds of market research with different groups of people, you should see patterns emerging about things they both liked and didn’t like. Use this information to tweak your product or service and do another round of market research.
Remember that you’ll never come up with a universally loved product; your job is to produce a product or service that appeals to the broadest range of your target market.
3. Make a Business Plan
I know this isn’t the “fun” part of starting your own business, but it is an essential step in creating a successful business!
You can think of a business plan as an outline or blueprint of your business. A good business plan should have the following elements:
- Executive Summary – This should outline the business’s product or service and the problem it solves for the consumer.
- Market Evaluation – This should talk about the market you are serving. Is it an expanding market, and how does your product better fulfill the consumers in that market?
- Market Strategies – How will you penetrate the market and sell your product?
- Operational Plan – How will the company run from day to day? Who are the key employees, and what are their specific roles? Do your key players have specific goals set for them in advance?
A final word on making a business plan: while lying is never acceptable, especially when you are using the business plan to raise money, it is sufficient to “put your best foot forward.”
A business plan almost expects to play up the positives while minimizing the negatives.
Besides, banks and professional investors will do a more in-depth analysis before investing any money into your idea.
4. Decide on a Business Structure
You have many options here, and discussing them with your accountant or financial adviser is the only way to know what’s right for you. But to give you a quick rundown of the types of business entities and their pros and cons, we will briefly go through them:
Sole Proprietorship
This is a common way for small businesses to get started.
The pros are:
Relatively low costs to set up (usually a business license and sales tax license). Owners typically do not have to set up a particular bank account and are allowed to use their one. Any income earned can be offset by other losses (check with your state!). As the sole proprietor, you have complete control over all decision-making.
Finally, sole proprietorships are relatively easy to dissolve.
The cons of using a sole proprietorship include:
As the sole proprietor, you can be held personally responsible for the debts and liabilities of the company. Some benefits, such as health insurance premiums, are not directly deductible from business income.
If you need to raise money, you are not allowed to sell an equity stake in the company. In that same vein, you were hiring key people may be more complex because you cannot offer them an equity stake in the company.
Partnership
A partnership is formed when two or more people decide to start a business. Although there is no legal requirement for any documentation to form a partnership, it is my advice that you never enter into a partnership without having a partnership agreement. (Remember, spending $1500 can save you $150,000 in legal fees later!).
The pros of a partnership include:
You are being relatively easy and inexpensive to start. Hiring key employees can be more accessible as you can give equity ownership to as many partners as possible.
For tax purposes, partnerships are relative simple as any income is treated as “pass through,” meaning that each partner pays tax on their portion of the partnership’s income (As of this writing, always check with your tax adviser).
As far as the cons go:
It can be difficult for some general partnerships to raise capital. Because it is a partnership, the actions of one of the partners can obligate the entire organization. All profits must be shared according to the partnership agreement regardless of the amount of work done by any single partner.
Some employee benefits may not be able to be deducted on income tax returns.
Limited Liability Company (LLC)
This is a prevalent business entity for small to medium-sized businesses. The reason for this is the cost of setup is not prohibitive, and there is a separation between the owners and the company.
The pros of an LLC include:
Limited liability for the partners, unlike sole proprietorships and partnerships where the owners are held responsible for all of the companies debts and liabilities, an LLC provides some protection against certain obligations and liabilities solely to the companies.
In simple taxation, just like sole proprietorship and partnerships, income is considered “pass-through” and is only taxed once on an individual level.
There is no limit on the number of shareholders in an LLC. An LLC requires fewer fillings and administrative requirements than a corporation.
Corporation
A corporation is much more complex and expensive to set up. And a corporation is legally considered an independent entity separate from its owners.
The pros of a corporation include:
Complete separation between the owners and the company. Because the corporation is considered its legal entity, owners can not be held personally responsible for any debts or liabilities of the company.
A corporation can raise capital much easier just by selling more shares in the company.
Cons of corporations include:
Much higher administrative costs than any other business entity. Corporations generally have a higher tax rate. Dividends are not tax deductible for corporations. The dividend income is taxed twice, once by the corporation and again by the shareholder.
Again, this is just a summary of the pros and cons; always check with your tax adviser about what will work best in your situation.
5. Address Finances
Again, not one of the “Sexier” parts of starting your business from scratch, but very important nonetheless.
So, you’ve done your business plan, and an estimate of your start-up funding should be included. It should include the budget you’ll need to get you through your first full year of operations.
Now, how do you get that money?
Self Funding
If possible, self-funding is the easiest. You won’t have to go to banks and investors with a hat in hand or give up ownership or control of your company. But as we know, this is not a reality for most people. But don’t worry, there are still plenty of options available.
Friends and Family
They can be a good source of funding for your business if they can see and understand your vision.
Remember that business plan? Pass them out to everyone you know. Then follow up, be prepared to tell them the total amount of money you expect to raise, the minimum investment you are looking for, and what you will give in return for the investment.
For example, you give a friend your business plan and follow up with them a few days later. You can explain that you have secured funding for $80,000 of the $100,000 you need. You are selling a 2% share in the company for every $2,000 investment. How many claims would he like?
And when they tell you no, thank them and ask if they can think of anyone who might be interested off the top of his head. Tell them you appreciate their time, and if they do come across someone who might be interested in letting you know.
Banks
These guys are happy to lend you money when you don’t need it, but all of a sudden, they get stingy when you need a loan! This is where preparation comes in.
It’s a good idea to go over your business plan with an expert and maybe even have it rewritten by an expert before you approach either a bank or professional investor. Both will want to review your business plan with a fine tooth comb, verifying all the numbers and data you provide.
It would help if you also brushed up on everything in the plan so that you can answer any questions they have with authority.
Crowdfunding
Finally, there is crowdfunding through sites like Kickstarter or GoFundMe. Crowdfunding helps to build interest, community spirit, and a customer base. It’s also an efficient way to raise funds. You can take a look at these tips to find out more:
6. Register with the Government
As stated earlier, different business entities have extra filing and administrative requirements. At the very least, you’ll probably need a business license and a state sales tax license.
Unless you are forming a corporation, many good resources on the web will do everything for you at a minimal cost.
7. Assemble Your Team
Remember when we evaluated your strengths and weaknesses? Here is where we fill in the gaps!
Do you hate sales and cold calling? Great! Some people love selling and wouldn’t want to do anything else.
Are you bored to death with accounting? There are many small accounting firms out there that will take care of that for you.
What about marketing? You can hire someone in-house or outsource that too.
Your job is to keep on top of all the different aspects of the business to ensure they are all running smoothly and getting the desired results. If not, it’s your job to figure out the problem and implement a solution.
8. Buy Insinsurance matter what kind of business you start, you need insurance; I know no one likes to buy insinsuranceut it can be the difference between having a minor inconvenience and declaring bankruptcy.
We live in a very litigious time; even a minor slip and fall at your place of business could bankrupt you. Without insurance, you need help finding a good agent; check with your local trade organizations or fellow business owners.
9. Start Branding Yourself
Has anyone ever asked you for a Kleenex or a QTip? We all know they are because of branding; Kleenex is just a brand of tissue, and QTip is just a brand of a cotton swab. It doesn’t have to be as widely known as Kleenex or QTip, but you can make your brand a familiar name within your niche.
I once owned a manufacturing company that developed a product that was so popular that my competitors started co-opting my brand name for their products.
The Bottom Line
Starting a business from scratch can be one of the most rewarding experiences a person can have.
But do you know what’s even more rewarding? A business that succeeds is profitable and provides a good source of income for you, your employees, and their families.
