March 8, 2022
Adam Hoeksema
If you’re planning to start a business, it’s an exciting time! You’re about to enter the world of entrepreneurship and reap the benefits that come with it. You’ll be in charge of your time and your future, and hopefully, you’ll build a lucrative company. There are several steps to start a business, though, that you need to know. Here we will cover five essential things that you need to do before you launch your new company.
Research the Market
The first thing you need to do is research the market for the product or service you plan to offer. Look at other businesses that offer something similar and examine their price points and the value they provide customers. You want to look for a way that you can make your offering unique. Are there features you can offer that competitors don’t? Can you make something of higher quality that could command a higher price? You want to find a market gap to fill. For example, if you’re starting a personal training business, maybe the market is missing a live online personal training business.
You also need to determine who your target market will be, and how you’ll reach them. Maybe your target market will be young women, so you might be able to find them on TikTok or Instagram. Just think about who your product will appeal to most, and then find out where they spend their time online.
You also need to determine how people will buy a product like yours. Do they buy it online or in person? Where do they shop for similar products?
Finally, determine what your products or services will be. If you have one particular product in mind, are there related products or services that you could offer as well? For example, if you’re opening a pet store, you could also offer pet training classes.
Calculate Your Startup Costs
Clearly, you need to know what you’re getting into financially. You should make a spreadsheet and list all of your possible startup costs. Costs might include:
- Business entity registration
- Licenses and permits
- Business insurance
- A website
- Marketing materials like business cards
- A marketing budget for things like Facebook ads
- The costs to make your product
- Software
Be sure to think through everything you will need to actually start selling your products, and then estimate your costs for each item. You’ll also need to determine where those funds will come from. Do you have the cash, or do you have friends and family who will invest? If not, you may be able to get a bank loan or an SBA loan. If you have an innovative idea, you might want to try a crowdfunding website. Crowdfunding sites like Fundable and WeFunder enable multiple investors to fund your business.
Create Financial Projections
So, you certainly want to know how much money you’re going to make, right? You’ll need to look realistically at how many sales you can do. If you’re selling online, you may think that you can do 10 sales per day. Take that number and multiply it by your price, and then you can determine your daily revenue. Then you can calculate how much you’ll bring in per month.
You also need to calculate what your expenses will be. How much does it cost to make or buy each product you offer? Then you can determine your gross profit before other expenses.
For example, if you can sell 10 items per day and your price is $50, and it costs you $20 to make each product, your monthly revenue will be $15,000, and your gross profit will be $9,000.
But then, you also need to calculate all your other monthly expenses for insurance, rent, overhead, labor, and any other recurring expenses. If your monthly expenses are $4,000, your net profit – meaning the money you keep – is $5,000 per month.
Your projections are important not only for your own information but because they are an essential part of your business plan. If you apply for a business loan, the lender will need to examine your financial projections as part of the loan underwriting process.
When you create your projections, you’re essentially playing a guessing game, but you need to try to be as realistic as possible. If, after you launch, you find that your projections were not accurate, you can create new projections based on real sales data. The process of creating financial projections can be made easier using a helpful financial projection template for your industry!
Choose Your Business Structure
Choosing a business structure is one of the most important pieces of the puzzle. Your decision will affect your taxes and your personal liability. Here are the most common options.
- Sole Proprietorship – In a sole proprietorship, the business and the single owner are one and the same. All income goes to the owner, who’s also liable for any debts, losses, or liabilities incurred by the business. The owner pays taxes on business income on his or her personal tax return on a Schedule C.
- General Partnership – A partnership is very similar to a sole proprietorship, but it has two or more owners. Again, owners keep the profits and are liable for losses. The partners pay taxes on their share of business income on their personal tax returns. They also have to file a partnership tax return, but it is for informational purposes only.
- Limited Liability Company (LLC) – An LLC offers personal liability protection for ownership and greater flexibility than a corporation, particularly in terms of taxes. The LLC itself does not pay taxes. As a “pass-through” entity, income passes through the business to the owner or owners, who report it on their personal tax returns.
- C Corporation - Under this structure, the business is a distinct legal entity and the owner or owners are not personally liable for its debts. Owners take profits through shareholder dividends, rather than directly. The corporation pays taxes, and owners pay taxes on their dividends, which is sometimes referred to as double taxation.
- S Corporation - An S-Corporation refers to the tax classification of the business but is not a business entity. An S-Corp can be either a corporation or an LLC, which just need to elect to be an S-Corp for tax purposes. In an S-Corp, income is passed through directly to shareholders, who pay taxes on their share of business income on their personal tax returns.
Apply for Business Licenses and Permits
You may be required to get various business licenses and permits at the federal, state, and local levels. It depends on your industry and location. Some common types of licenses and permits include:
- Business operating licenses may be required by the city and the state to allow you to operate.
- Industry-specific licenses may be required, depending on your type of business. Businesses involved in construction, childcare, plumbing, electrical, food and liquor, insurance, finance, landscaping, and architecture all require licensing, for example. In some highly regulated industries, you may require licensing from a federal agency, such as the FDA or the Department of Transportation.
- Zoning permits are issued by municipalities to ensure you’re operating in an area in which you’re allowed to operate.
- Building permits verify that the building you’re operating in is up to code. Home occupation permits, which some areas require, allow you to operate a business from your home.
- DBA permits allow you to do business under a name that is different from your legally registered business name.
- Sales tax permits allow you to sell products and collect sales tax.
- An employer identification number (EIN) is required if you plan to have employees, no matter what your business entity type.
- Health licenses and permits are required for certain businesses based on industry, and you will be required to maintain health and safety standards. Environmental permits are also required for certain industries in some locations.
- Fire permits certify that your business is up to fire safety codes. Depending on your location, this may be required for all businesses, while in other areas it’s required only if you work with flammable materials.
- Sign permits may be required for your location or other signage if there are rules about sign size and location.
In Closing
Starting a business is hard work! Be sure not to skip these critical steps before you launch your business. They can all have a huge impact on the future of your business and your success. When in doubt, contact your attorney or tax advisor who can help you make sure that all your bases are covered and that everything is done correctly. Much success to you!
Photo by PICHA Stock from Pexels
