How to Start a Business

Step #1: Think about the who, what, and why

According to Nathan Furr, author of the book Nail It Then Scale It, 70% of startups fail because their founders invest in growth too soon. They spend too much money on costly marketing campaigns, top-notch salespeople, and product development without identifying how their product fits the market.

Define your target audience

You need to know who will buy what you’re selling before you invest large amounts of money in starting a business. Trying to be everything to everyone is a classic mistake among new entrepreneurs. No small business owner can market their brand to the whole world, but it’s absolutely possible to meet the needs of a select group.

That select group is your target audience, and you need to figure out who they are. One way to do this is to create a buyer persona. To complete this character sketch of a fictional target customer, consider descriptors like:

• Age range
• Gender
• Family status
• Income level
• Education level
• Location
• Values and personality traits

Next, think about why that person would want your product or service.

Refine your selling proposition

Every successful business has one thing in common: It delivers a particular benefit or solves a problem better than the competition.

You might hear this described as your “unique selling proposition” or “value proposition.” It communicates two important things to your potential customers and investors:

• What makes your business stand out
• Why people should buy from you instead of a competitor

As you develop your unique selling proposition, identify the ultimate benefit to the buyer. This will usually be something personal and emotional—such as being on-trend or eating healthy for less.

Research the market

Now that you know you have a place in the market, your next step is to determine the financial viability of your idea. That means conducting 2 types of market research.

• Primary research: Talk directly to customers via focus groups, surveys, etc.
• Secondary research: Review statistics and reports that describe the current trends in your target market.

Your secondary research will provide you with 3 essential criteria:

• The potential revenues for your product or service category, both at the regional and national level
• The names of your top competitors, both locally and nationally
• Whether the market is growing (more room for new players) or stagnating (squeezing out who’s already there)

Step #3: Assess your financial needs

After you’ve established a business plan, you can start calculating your expected expenses to find out how much money you’ll need to launch your new business.

Fixed costs and variable costs

Fixed costs are what you’ll pay to run your business, regardless of its size. The 5 most common fixed costs for any business are:

• Insurance: The coverage you have to protect yourself from legal or financial threats such as property damage, on-site injury, slander, or lawsuits
• Rent: The monthly cost of your office and/or other facilities necessary to run your business
• Utilities: Electricity, water, gas, etc
• Asset depreciation: The decline in value for owned assets like equipment or machinery (including vehicles)
• Amortization: The cost of large purchases spread over a specific period

Variable costs depend on your sales volume. They increase when you sell more and decrease when you sell less. Examples include:

• Raw materials
• Production supplies
• Shipping and delivery costs
• Sales commissions and bonuses

To determine the costs for a business that hasn’t started up just yet, you’ll need to do a fair amount of research. Investigate the cost of insurance policies, rent in your area, the materials you’ll need, and so forth. Take notes, track your findings in a spreadsheet, and consider speaking with an accountant who works with small businesses.

Profitability and the break-even analysis

Once you know your costs, you can determine how much money your business needs to break even—and ultimately turn a profit.

Start by calculating a sample sales volume. For example, if you plan to open a hair salon, how many haircuts or updos would you need to give per year? Determine your variable costs per unit, and use those costs to identify a selling price. If every haircut costs you $10, you might decide to charge $20 for that service.

From there, subtract your variable costs per unit from your selling price. Divide your fixed cost by that difference, and you’ve calculated the number of product units you’ll need to sell to cover your expenses.

So, if your salon’s overhead (fixed costs) is $20,000 per year, your break-even point will be:

$20,000 / ($20 - $10) = 2,000 haircuts

In this example, you need to give 2,000 haircuts a year to avoid losing money, and every haircut beyond that 2,000 number would be profit.

If you’re unhappy with your break-even point, you’re in luck. As a new business, you can decrease your break-even point by increasing your selling price—say, charging $25 or $30 for a haircut—or reducing costs by, for example, finding a less expensive storefront.

Funding options

You’ll need cash to cover your fixed and variable costs, even if you haven’t sold anything yet. That’s where startup capital comes in. Some entrepreneurs are able to fund their startups with their own money, but there are a few other options available, too.

• Institutional loans: Borrowing money from a financial institution is a traditional way to obtain business funding. You’ll need to submit your business plan and financial projections to a bank, credit union, or some other type of lender.
• SBA-guaranteed loans: In the U.S., the Small Business Administration works with select lenders to make funding more accessible to qualified borrowers.
• Business grants: Government agencies, private institutions, and nonprofit organizations sometimes offer grants to qualifying startups. In most cases, you’ll need to be in a particular industry, have a specific objective in mind, or fall into a certain category (woman, veteran, person of color, etc.). Typically, you don’t have to pay back a grant, but you may have to provide reports to the funder.
• Investor capital: Investors provide startup business funding, also known as venture capital, in exchange for a share in the business. To acquire venture capital, you’ll need to share your business plan and make a case for your company’s viability.
• Crowdfunding: An alternative to securing a large investment from one or two generous individuals is to raise small amounts of money from multiple supporters. Some crowdfunding companies offer incentives to investors, which can range from shares in the company to discounts on future projects. Others offer microloans, in which case you’ll need to repay each investor. Still others treat investors like donors, where crowdfunding works more like a grant.

Step #5: Register with the government and IRS

The business structure you choose will determine where and how you need to register your business.

Getting a federal and state tax ID number

Your business will need a federal tax ID number, also known as an employer identification number (EIN), if any of the following apply:

• Your business has or will have employees
• You’ve established the business as a corporation or partnership
• You have an LLC that’s multimember or has chosen to be taxed as a corporation
• Your business is involved with certain specified entities or files specific tax returns
• You intend to set up a Keogh retirement plan as a self-employed person

If none of these federal requirements apply, you may still choose to get an EIN. There are 2 main benefits to having one when it’s not required:

• You can offer it instead of your Social Security number to clients or anyone else who has to pay you.
• You may need it to open a bank account for your business or apply for certain permits.

If your business pays state taxes, you may need a state tax ID in addition to your EIN. The process and requirements vary by state, so check with your state government about your particular situation.

Registering your business name

If you operate a business under a name that’s not the one on your personal legal documents, you’ll need to do the following.

Protect your entity name

An “entity name” works at the state level. It keeps other businesses from operating under the same name and allows the state to identify your business accurately. States have different rules as to which businesses need an entity name and what that name can be. For example, in some states, your entity name has to reflect your business type.

Trademark your brand, business, or product

A trademark works at the federal level. It protects the name of your business and any other products or services that you choose to register as your own. You file a trademark application through the U.S. Patent and Trademark Office (USPTO).

A trademark is legally protected, so it’s important to check to ensure the name you want to use is available. The USPTO has a federal database that is regularly updated.

Register a “doing business as” name

A “doing business as” name, more commonly known as a DBA, is a name—other than your own—that you use to do business. Most states require you to register a DBA, and you may also need to register at the county or city level.

A DBA doesn’t protect your business name from use by others, but it does allow you to legally conduct business under that name, even if you don’t have a separate business entity. Your DBA, along with an EIN, will also allow you to open a business bank account under your company name. This is beneficial for sole proprietors who want to use a memorable name for their company.

Registering at the state level

Unless your business is a sole proprietorship, you’ll usually need to register in a state where you do any of the following:

• Maintain a physical presence or have in-person client meetings
• Have employees that work there
• Generate a significant portion of your income

In any state where your business is registered, you’ll also need to have a registered agent to receive legal papers and documents on your company’s behalf. Most business owners choose to use a registered agent service, but you can take on this role yourself. When you register, you’ll need to provide the following:

• Your business’s name and home location
• Registered agent information
• Information about shares if you have a corporation
• Documentation for your business structure (LLC, partnership, etc.)

Each business type has different documentation requirements, so make sure you have the correct documents before you attempt to register.

Securing local permits

Depending on your industry and business activity, you may need to file for certain licenses and permits in your city or county. This usually only applies to LLCs, corporations, and partnerships, but sole proprietorships with DBAs may also need to secure similar paperwork.

Check your local government’s websites to determine which rules apply to you. Be sure to check at the state, city, and county levels.

For corporations: Creating articles of incorporation

If you create a corporation, you’ll have additional rules and regulations to adhere to, beginning with your articles of incorporation. Filed with your state, these articles legally establish your company as a valid business entity and detail your corporation’s:

• Name and principal place of business
• Names of individual incorporators
• Director, if named
• Registered agent
• Intended business activities
• Stock information, including the number and value of shares available

You may choose to draft the articles of incorporation yourself or hire a business attorney to assist. If you decide to do it yourself, it’s a good idea to visit your state’s secretary of state website; most states provide useful templates of the relevant articles of incorporation.

When you’re ready to file the articles of incorporation, you’ll submit them—along with a filing fee—to your secretary of state’s office.

Ready, set, launch

Now that you’ve got an outline for how to start a business, you can begin the preliminary research. Your first step will be to make sure you have a good product-market fit, given that this will have the most impact on your success in the years to come.

Remember to stay flexible; none of your decisions are written in stone. If you decide that a different business model or structure would work better for you, don’t be afraid to make adjustments. There’s no substitute for a strong foundation, and this is the time to build it.