Starting a new business can be an exciting experience, but it can also quickly become stressful as you step out into the unknown. Luckily, there are many great resources available to first-time small business owners to help start them on the road to success. Here are some helpful steps for starting a business.
Do your research
Sadly, a large number of businesses fail each year in the U.S. According to the Small Business Administration, approximately 20 percent of businesses fail within their first year. Only about half of small businesses manage to survive their five-year anniversary. However, if you complete your due diligence and go in armed with as much information as possible, your business will have a much better chance at success.
To start, research the market of interest to you. Is there truly a need for your business? Do you have the appropriate amount of capital available to you to be successful? Do you have the right team in place to help you succeed? If you need help answering these questions, the Small Business Administration offers data on a variety of different topics, including free business counseling.
Write your business plan
A business plan is a document that summarizes the objectives of a business. It contains detailed operational and financial plans that will show how you plan to reach your business goals. Consider it your roadmap to business success.
Your business plan should include the information you discovered when you conducted your initial research:
A market analysis will determine if your business will serve a niche audience or fulfill an unmet need in the market.
A competitive analysis will include the strengths and weaknesses of your competition and help you develop a strategy for carving out your space in your target market.
Your management plan outlines your business structure, management, and staffing requirements. This should also include any associated job descriptions, so you are ready to hire employees with the right skills.
Finally, and most importantly, your financial plan will help determine your initial investment needs as well as long-term funding requirements. It will help when approaching potential investors or meeting with banks for financing, if needed.
Consult with an accountant or attorney on your business structure
You will also need to set up your business structure, which means deciding on your type of business. Your business structure will directly affect how much you will pay in taxes, your ability to raise money, the paperwork you need to file, and your personal liability. At this point, you should take your business plan to an accountant or attorney to discuss the pros and cons of each different business type:
Sole Proprietorship: A sole proprietorship is easy to form and gives you complete control of your business. You’re automatically considered to be a sole proprietorship if you do business activities but don’t register as any other kind of business. Sole proprietorships do not produce a separate business entity, which means your business assets and liabilities are not separate from your personal assets and liabilities. This means if your business fails or you incur some type of financial difficulty, you can be held personally liable for the debts and obligations of the business.
Partnership: A partnership is the simplest structure for two or more people to own a business together. There are two common kinds of partnerships: limited partnerships (LP) and limited liability partnerships (LLP). Limited partnerships have only one general partner with unlimited liability, and all other partners have limited liability. Limited liability partnerships are similar to limited partnerships, but give limited liability to every owner. An LLP protects each partner from debts against the partnership, they won’t be responsible for the actions of other partners.
Limited Liability Company (LLC): An LLC offers the benefits of both the corporation and partnership business structures. LLCs protect you from personal liability in most instances. For example, your personal assets, such as your vehicle, house, and savings accounts, won’t be at risk in case your LLC faces bankruptcy or lawsuits. Business finances can be passed to your personal income without facing corporate taxes. However, members of an LLC are considered self-employed. Therefore, you must pay self-employment tax contributions towards Medicare and Social Security.
C Corp: A Corporation, often referred to as a “C Corp,” is a legal entity that is separate from its owners. Corporations can make a profit, be taxed, and can be held legally liable. C Corps offer the strongest protection to its owners from personal liability, but the cost to form a corporation is higher than other structures. C Corps also require more extensive record-keeping, operational processes, and reporting.
S Corp: A Subchapter Corporation, commonly referred to as an “S Corp,” is designed to avoid the taxation complexities of regular C corps. S corps allow profits, and some losses, to be passed through directly to a business owners’ personal income without ever being subject to corporate tax rates.
Get a tax ID number and register for state and local taxes
Once you have decided on the type of business structure you will use, it’s time to get a tax ID number. Also known as your employer identification number (EIN), this number helps the IRS keep track of your business for tax purposes. You are legally required to get an EIN if your business is established as a corporation or partnership. Sole proprietors are also required to have an EIN if you plan on hiring employees. You can obtain an employer identification number easily and for free by applying online at the IRS website.
You will also need to register your business in your specific state, as most states will require you to pay income and employment taxes for your business. Some states have additional requirements, such as unemployment insurance. Again, your attorney or accountant can help you better understand your state’s specific requirements.
Set up your business finances
Once you have all your ID numbers and have discussed your plans with your accountant, you are ready to set up your financial documents and bank accounts. Based on your previous decisions, your financial documents can be as simple as a few spreadsheets or as in-depth as hiring an in-house accountant or bookkeeper. At the very minimum, you should keep:
A balance sheet as a quick snapshot of company assets, liabilities, and equity
An income statement, also known as a profit and loss statement, to summarize business revenues and expenses
A cash flow statement which reflects the company’s revenue and expenses related to business activities during a specific time period (usually monthly or quarterly)
Once you have your tax numbers and business finances set up, make sure to stay up-to-date with your tax obligations and changing tax laws. It’s a good idea to have standing appointments with your accountant or bookkeeper to make sure nothing is missed.
Get ready to accept credit and debit cards
No matter what type of business you own, you will almost certainly need to accept credit and debit card payments. According to a 2018 report, millennials who are currently between the ages of 26 and 34 have driven the recent growth in credit card use. Accepting credit cards will play a key role in the success of your business.
Your business will be able to accept credit cards by following a few simple steps:
Select a credit card machine or POS system: Whether using a countertop terminal, a virtual terminal, or a point-of-sale (POS) system, a business needs some type of hardware to accept credit cards. Today’s POS systems can do a lot more than process credit card payments. More advanced POS Systems, like the Clover Station, can track inventory, manage employee scheduling, and more.
Set up a merchant account: A merchant account allows businesses to accept credit and debit card payments. Merchant services accounts are an agreement between a merchant and a credit card processor to settle credit and debit card transactions. After transactions have been processed, the funds from customers’ credit and debit cards are deposited into this account. Monies are then transferred to a business banking account within 1-2 days.
Establish an online presence and a payment gateway account: According to a recent report, in 2017 e-commerce was responsible for approximately $2.3 trillion in sales and is expected to hit $4.5 trillion in 2021. In the US alone, eCommerce represents almost 10% of retail sales and that number is expected to grow by nearly 15% each year. That means online sales will be more and more critical to a business’ success over time. A payment gateway is a necessary part of conducting business online. It is an eCommerce application that authorizes online payment methods for e-businesses and online retailers. Payment gateways encrypt private data, such as credit card numbers, to ensure the information passes securely between the customer and the merchant.
Select your business location
Your location will also be an important factor in your business’ success or failure. Will foot traffic be important for business? Make sure to look for a storefront in a busy town center. Is there an area in town that offers tax incentives if you establish your business there, such as an enterprise zone? Consider enlisting the assistance of an experienced commercial real estate professional. They will be familiar with the areas you are considering and will know if locations will be coming to the market soon. You should also keep in touch with your tax professional, as there could be tax implications for the location you select.
Apply for any necessary licenses or permits
Different types of businesses may require special licenses or permits. For example, if you open a restaurant, you will require a business license, a liquor license if you plan to serve alcohol, a food service license from your local health department, and a food handler’s permit to guarantee your restaurant meets food sanitation, storage, and preparation regulations. Permits and licenses will vary based on your state and local area, so be sure to make sure you look into what you need. Consider joining your local Commerce Organization, which can be a great source of information.
Go start your own business
It is time to set up shop! You have everything you need to succeed. It may feel like a daunting list of “to dos,” but what is most important to remember is to stay organized and seek the assistance of other professionals as the need develops. Don’t be afraid to ask for help!
Interested in learning more?
If you’d like to learn more about getting started with credit card processing, schedule a free consultation with our merchant services team today.
Disclaimer: The information provided above is for educational purposes only and does not constitute business, legal, or financial advice.