Is this the year you start your own small business?
Whether you're starting up a side-hustle to earn money outside of your regular working hours or ready to take the plunge and step into your new role as an entrepreneur, starting your own business can feel a bit overwhelming.
It's estimated that 17 million new small businesses will be started this year, so don't let fear stop you from moving forward with your small-biz dreams. This guide to starting a small business will help you check off all the boxes so you can start strong, confident, and protected.
5 Steps to Start a Small Business
1. Figure out what you should do
This may sound like a no-brainer, but getting very clear on what your business will be is essential.
What can you do to earn a profit as a business owner? You can:
- Make things: build houses, create custom t-shirts, develop your own nutritional supplements, bake stunning wedding cakes
- Sell things: create an online store, open a brick and mortar retail store, manufacture wholesale goods to sell to retailers, sell goods on Amazon
- Provide a professional service: help people do their taxes, manage their social media accounts, workout more efficiently at the gym, photograph weddings
- Create a personal brand: become a coach or social media influencer
- Share your existing skills and knowledge: take what you've learned from your work experience and start a business utilizing your existing skills
- Buy into a pre-existing business model: buy an existing business or franchise
2. Create a business plan
A business plan allows you to clearly identify your business and what it aspires to be. It's a written document that outlines your vision, mission, and path to profitability.
Your business plan can be a lean, single-page document or a more in-depth, professional document that can be shared with banks or lending institutions.
At its most basic, a business plan should address the following questions:
- What type of business will you operate?
- Who is your ideal customer?
- How will you market to this customer?
- What will you charge for your goods or services?
- What is your definition of success?
- Who are your competitors and how are you different from them?
- How much capital do you need to get started and how will you get it?
3. Decide on a business structure
Are you going to be a sole proprietor, run a partnership, or have a limited liability company (LLC) or corporation (Inc)?
Your business structure can have an impact on your taxes, liability, and the cost of getting up and running.
If you are a sole proprietor, it means you are the sole person operating your business. You don't need to file any paperwork to indicate you are operating a business as a sole proprietor, and when you pay taxes, your business income will be reported as earnings under your personal social security number. That means any income your business earned will be reported as personal taxable income, whether you pulled profit from your business or not. Sole proprietors are personally responsible for all debts and liabilities arising from their businesses.
As a sole proprietor, you can move directly to registering your business locally with no additional paperwork involved.
Structuring your business as a limited liability company (LLC) gives you some protections and advantages that a sole proprietor doesn't get. An LLC can limit your personal liabilities for the debts and actions of your business and is a preferred structure for when you have multiple owners/ business partners involved.
Like a sole proprietorship, LLCs can be considered "pass-through" entities. The profits from your small business will pass through to the LLC members to be filed on individual tax returns.
The biggest advantage in forming a limited liability business is the protection of personal assets from business debts. LLCs are designed to protect owners (members) from incurring any liability greater than the amount they've invested in the business.
Learn more about business structures at SBA.gov
4. Register your business
Once you've decided on a business structure and taken the necessary steps to create one, if necessary, it's time to register your business with the relevant federal, state, and local agencies.
In most cases, you will register your business name with state and local entities.
You'll also want to get a federal and state Employer Identification Number (EIN), which is like a social security number for your business. You will need an EIN to open a bank account, file taxes, hire employees, and more.
If your industry or local government requires certain licenses or permits to operate, you'll also want to take steps to do so. That may mean having a contractor license in place if you want to remodel homes, for example, or a child care license if you plan on providing in-home daycare services.
5. Get insurance and bonds
Every business can benefit from commercial insurance policies, and in many cases, you will be required to carry certain policies if youâ€™re running a small business.
General liability insurance is the most common form of business insurance and it protects you against claims for third-party injuries or property damage. This coverage is essential for every business, whether you're private labeling products to sell on Amazon, providing copywriting services, remodeling homes, or 3D printing acrylic accessories out of your garage.
Workers' compensation insurance is required in nearly every state in the U.S. if you hire employees, be they full-time or part-time. Even if you only have one part-time employee, you're likely required by state law to carry workers' comp. This insurance policy protects your employees in the event they become sick or injured during the course of performing their work duties.
Commercial auto insurance is important if you will be using a vehicle for business purposes, too. Whether that's driving inventory to the local shipping drop-off center or letting employees use your vehicle to pick up coffee and donuts before a weekly meeting, commercial auto policies provide the coverage that a personal auto policy won't. If you get into an accident while using your personal vehicle for business purposes, you could have your auto claim denied and may even have your policy dropped by your insurance carrier.
Talk to your insurance agent to find out what additional insurance policies can best protect your small business based on what services you provide or the goods you sell.
These 5 steps are the first steps in your entrepreneurial journey. Now you're ready for the fun part: finding clients, getting the word out about your business, and stepping into your new role as a business owner.