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Almost everyone has considered starting a business at some point.
Very few people, however, actually follow through.
Those who do manage to get started often don’t plan ahead and end up abandoning their idea when times get hard.
- Step #1: Do Market Research To Come Up With Ideas
- Step #2: Validate Demand For Your Specific Business Idea
- Step #3: Create a Business Plan
- Step #4: Find Funding (If Required)
- Step #5: Decide on a Business Structure
- Step #6: Pick a Business Name and Location
- Step #7: Register Your Business
- Step #8: Get Federal and State Tax IDs
- Step #9: Obtain Additional Licences and Permits As Required
- Step #10: Open a Bank Account
- Step #11: Execute Your Plan
You can avoid their fate using this in-depth guide to starting a business from scratch. In this article, I break down the process into simple steps that anyone can understand.
However, just because the steps are simple, doesn’t mean that starting a business is easy.
If you’re on the edge about starting a business, read through this guide so you can determine if you’re willing to put in the work required for a chance of success.
This guide was specifically written for those looking to open a business in the United States (most of the resources are in the US), but most of the other steps apply to anyone.
Step #1: Do Market Research To Come Up With Ideas
If you already have a business idea you’d like to pursue, skip to step #2.
But if you just have an urge to start a business, you’ll have to start right here: market research.
The idea behind market research is to study different markets where you might be interested in starting a business. This research will give you insight into which types of businesses are actually viable.
There are three main steps to most market research processes.
First: Identify Potential Markets You Would Excel In
Much of the enjoyment of owning your own business is doing something you love and having complete control over the process.
Pick the right market to work in, and motivation will rarely be an issue. Pick a business market you hate, and every day will be a chore, even if you do control your schedule.
Essentially, you’re looking for markets that fall into the overlap between your passions and areas where people spend money.
Start by making a list of your passions (or things that you enjoy at least a bit), and then move on to the next step.
Second: See If People Are Spending Money In Those Markets
The true test of a business market is the amount of money being spent in them.
Some markets are large, but have virtually zero commercial value. For example, image hosts often get popular, but then struggle financially because people won’t pay for image hosting and advertising revenue is insufficient.
The fastest and most accurate way to gauge the commercial value of a market is to look for thriving businesses in it.
At first, competition may seem scary, but it shows that people will spend money in that area. Don’t worry about you’ll be the competition yet, we’ll get there soon.
For now, open up the Yellow Pages or start Googling the following 2 phrases for every passion (market) on your list from step #1:
- “[Market] + stores”
- “[Market] + businesses”
The first one will reveal whether businesses are product-based, while the second will usually tell you if businesses are service-based.
It will also tell you if there are no, a few, or many businesses in this market. In general, you want to see at least a few.
Third: Research Problems and Brainstorm Business Ideas
You should still have a few businesses left on your list after looking at passions and corresponding markets.
Now, where will your business idea come from?
All ideas are born out of problems. The more painful the problem is, the more willing someone is to pay money to solve it. Think about the last things you bought, and connect each product or service to the problem it solved for you.
What you need to do now is compile as many problems in your market as possible. Don’t worry about transforming them into business ideas yet.
To find problems:
- Brainstorm them yourself: A good approach if you are truly interested in your market.
- Talk to others: For example, if you want to make a tennis-related product, ask tennis players or instructors about their challenges.
- Look online: Find a relevant forum or subreddit for your market, then write down every problem (usually in the form of a question) that you see.
Many of these will turn out to be duds, so create as large of a list as possible.
Once you’ve done that, go through each problem and ask yourself if it’s a big enough problem that people will spend money trying to fix.
Second, think of one or more ways to solve it. These are your business ideas. This will take time, don’t skip over a problem just because it’s hard to think of a solution, as that could make it a great opportunity.
Finally: How Will Your Business Be Better?
Most of the ideas on your list will already exist.
For example, you may have window washing as a potential business idea, but you will quickly notice there are many other window washing services.
So how does your business stand out?
You start looking for unsatisfied customers. Yelp! reviews, Google reviews, and forum comments are all useful.
You might notice that many complain that jobs take too long. You could be the first to offer “window washing in [X] time”.
Or you might see questions about the eco-friendliness of cleaning supplies. You could be the first or one of few businesses in your area to offer green cleaning.
The problems will vary, but the process is always the same.
Do this for all your business ideas and, in the end, you will have a list of the most viable options left.
Step #2: Validate Demand For Your Specific Business Idea
In theory, your business idea should be a winner.
In reality, it might not be quite what the market wants. You may be misunderstanding or overestimation how much a market wants a particular product or service.
This is common because we tend to view the world only from our own perspective. Plus, it is easy to get excited when thinking about starting your own business.
To find out if it’s actually a winner, you need to validate the demand for your idea.
In short, you need to see what actual potential customers think of your idea. If possible, create a prototype to get more accurate feedback.
There are a few different ways to do this:
- Reach out to complainers: If you got your business idea from a negative forum post or customer review, get in touch with them and ask them if they’d be willing to have a short conversation with you.
- Survey: Tools like Typeform or SurveyMonkey make survey creation and distribution easy. You can ask whether they’d buy your product or service, and how excited they are about it. Here’s an example of such a survey.
- Track down people on social media: If your business idea is targeted towards a profession (lawyer, athlete, etc.), it’s easy to find your potential customers on LinkedIn. Try to connect with them and ask for a call.
- Friends and family: While they don’t always provide the most unbiased advice, and the may not be in your target audience, friends and family can be a good starting point.
What happens if people don’t like your idea, or only parts of it?
That’s the whole reason validation is important. Instead of spending months building a business around a product no one wants, you can tweak your idea or find a different idea to pursue.
Make adjustments to your pitch and prototype, and then begin the validation process until you have a product that your target audience gets genuinely excited about.
This can take a lot of time, but lays the groundwork for your success, and saves you from wasting much more time in the future.
Step #3: Create a Business Plan
Once you’ve committed to a business idea, it’s time to plan.
A business plan will help you:
- Find funding
- Focus on the essentials
- Stay accountable
- Predict and plan for obstacles
Among other benefits.
At this stage, a simple one-page business plan may be enough.
But if you’re planning on raising funding, or having employees, you should take the extra time and effort to create a full business plan. Although the length can vary, expect a full business plan to be around 40 pages long.
A business plan, no matter how long, should at the minimum contain the following:
- Mission Statement: The purpose of your business. Who it serves, and what problem(s) it solves.
- Company Information: Founders, employees, business structure, and basic business information (ID, etc.). You may not have all this information yet.
- Products and Services: A detailed look at your product or service, as well as your market.
- Financial Data: How the business is funded initially (more on that later), and any investment information.
- Future Projections: How you expect your business to grow over time, and what milestones will you achieve along the way that will require action.
When you’re ready to create your plan, refer to this full guide to writing a business plan.
Step #4: Find Funding (If Required)
Before your business makes any money you will need to pay for many of the items below:
- Build prototypes
- Buy materials and tools
- Hire employees
- Pay for marketing expenses
- Hire a logo designer and web developer
(This is just a starter list, some businesses will require much more.)
Even once you’ve launched, there’s often a lag period behind selling and getting paid. If you don’t have further funding to cover operational costs for a few months, your chances of survival are slim.
There are a few different ways of pursuing funding, depending on how much you believe you need:
- Self-funding (bootstrapping): In other words, how to start a business with no money, or a small amount that you provide yourself.
- Friends and family: For small amounts of funding, it may be possible to get funding from friends and family.
- Crowdfunding: Typically, crowdfunding involves raising money by pre-selling your product to your potential audience. Here’s a detailed guide to crowdfunding.
- Grants: Grants are essentially “free money” for businesses that does not need to be paid back, usually given to innovative businesses. However, they take a lot of work to apply for, and the competition is stiff, so it’s not like grants are handouts. Here’s a guide to finding and winning grants.
- Loans: If you run out of options, getting a small loan is a viable option if you really believe in your idea. The Small Business Administration (SBA) is the best place to start looking for small business loans. There is often special consideration given to certain people like veterans.
- Angel investors: Investments from non-professional investors. Typically for smaller amounts although there are exceptions.
- Venture capital: Where you pitch venture capital (VC) funds to fund your business. For sizeable funding, this is your only realistic option. In return, you give up some equity or percentage of revenue.
Each method of funding has its own advantages and disadvantages, and the best for you will depend on your specific business and funding needs.
Step #5: Decide on a Business Structure
Your business structure will decide your personal liability, as well as the taxes you pay. It will also affect your business registration process.
While you can switch business structures later on, it can be expensive and a headache. Ideally, pick the right business structure from the start.
There are three main types of business structures in the United States. I’ll sum them up here, but refer to this guide for more detail.
Sole Proprietorships or Partnerships
The simplest type of business structure, because you don’t need to complete any formal business registration.
A sole proprietorship means that you alone will take on all the liability of the business. In a partnership, two or more people own the business.
However, you will have to fill out an extra tax form.
You are also allowed to register a business name, as long as it’s not taken. Use the trademark database to find out.
Finally, if you do hire any employees, you’ll need to get an Employer Identification Number (EID).
A corporation is used to remove your liability from any business debts. It also allows you to issue shares in your business.
The most common type in the US is a “C” corporation (c-corp), but you can also register as an “S” corporation (s-corp).
The biggest difference between the two corporation types is taxes. You’ll want to consult with a lawyer and accountant before choosing a corporation.
Limited Liability Companies (LLCs)
The LLC is a relatively new structure in the US, and is a form of a private limited company.
It’s not quite a corporation, but not a partnership either – more like a middleground.
Corporations have to deal with old laws and rules, which has led to a lot of bureaucracy and time wasting. LLCs cut out a lot of that, and also removes most of your liability from the business. It’s quicker to setup than a corporation.
The most important feature of LLCs is the tax flexibility they offer. You can choose to structure your taxes like sole proprietorships, partnerships, or corporations (C or S), depending on the number of business members (including you).
Step #6: Pick a Business Name and Location
It’s easy to try and pick the perfect business name, but in most cases, your name isn’t as important as you might think.
You shouldn’t pick the first name that comes to mind, but you also shouldn’t agonize for days over it.
For now, pick a name that you think is reasonable and move on. The perfect name won’t make you your first sales.
As mentioned above, make sure you search the trademark database and Google before picking a name to make sure you’re not using one already in use. Use a tool like Namechk to see if your business name’s domain and social media accounts are available.
You can also take advantage of “doing business as,” which lets you operate under a different business name later on. It only takes a few minutes to do.
Picking a location may be easy, if you’re only going to have an online presence.
But if you’re opening up a brick and mortar location, you’ll need to get in touch with a real estate agent. The sooner you do this, the sooner you’ll find a good spot.
Step #7: Register Your Business
Businesses need licenses to make it easier for the government to track your revenue, and assess your taxes accordingly.
But not all businesses need a license. If you have a sole proprietorship, and are operating under your own name, you do not need a license.
Otherwise, you may need to register with State or Federal agencies:
- Federally regulated industries: Certain industries are federally regulated, like alcohol and agriculture. Here’s a full list. These need extra licenses or permits.
- State regulated industries: Most businesses will need to register with their state. The process varies widely between states, but usually does not take long, and costs only a few hundred dollars.
Step #8: Get Federal and State Tax IDs
Other than sole proprietorships, businesses need tax IDs for paying taxes and other financial tasks like opening bank accounts.
You’ll need both a federal and state tax ID.
The federal ID is also known as an Employer Identification Number (EIN), and also the more important of the two. It’s used for filing business taxes and opening bank accounts.
The state ID is only used for state tax reporting. It’s not used nearly as much, and only needed when filing payroll returns for employees.
Getting your EIN only takes a few minutes online, and is free.
Step #9: Obtain Additional Licences and Permits As Required
Aside from the licenses we’ve already gone over, certain businesses will need additional licenses or permits.
The simplest way to find out if you need any of these is to visit your local SBA office and ask for help. Each locality is different, so searching online isn’t much use when it comes to permits.
Step #10: Open a Bank Account
If you registered a business, you’ll need to open a bank account.
It’s important not to mix personal and business funds, or you may run into trouble later on with the IRS.
In order to do so, you’ll need your:
- Ownership agreement (if applicable)
- Business license
- Business formation documents.
Type of Account and Where to Open Your Account
Don’t automatically go with your personal bank.
See what types of business bank accounts that all local banks and credit unions offer.
Mainly, you’ll be looking for:
- A good introductory offer.
- Low interest rates for savings, checkings, and credit.
- Low transaction fees.
- Low or non-existent minimum account balance fees.
Again, your local SBA office can provide you with direction to any particular accounts you should take a look at.
Keeping Track of Expenses
Once your business is operating, you can either choose to record all revenue and expenses in a simple spreadsheet, or use an accounting tool.
If your business has a low volume of revenue and expenses, a spreadsheet is usually fine to start off with. Over time, however, a tool will keep your records more organized and useful when it comes to filing taxes.
Step #11: Execute Your Plan
Once you’re here, you’ve done all the groundwork.
It can take weeks or months to get to this point, which is why starting a business is so difficult. Essentially, you only have a stack of papers at this point.
Your next step is to revisit your business plan and revise it if necessary. Otherwise, you need to start executing it.
Depending on the type of business you want to start, your next step may be to:
You put in a lot of work just to read through this guide, but that’s just a small part of the effort required to start your own business.
Once you do get started, even more effort is needed on a regular basis to grow your business into a successful one.
The entrepreneurial path can be rewarding, but it is a challenge. Be prepared to invest a large part of your time and life if you want a good chance at succeeding. The result, however, is more than worth the hard work.
If you do take the plunge, I wish you the best of luck in starting your own business. Hopefully, this guide served as a useful starting off point.