Learning how to start a business and actually starting a business are easy. Over a recent five-year span, there were an average of 4.7 million businesses started each year in the U.S.
On the other hand, starting and growing a successful business is anything but easy. The Bureau of Labor Statistics (BLS) estimates that one in five businesses fail in their first year, nearly half within five years and close to two-thirds before they reach 10 years.
Succeeding as a business owner takes more than smarts, hard work and a great idea. A successful business focuses from day one on establishing and maintaining profitability. There are many ways to define a “successful business,” but making significantly more money than you’re spending on a consistent basis tops most people’s list. No matter how you get there, or how long it takes, your business’s financial success is the result of keeping a steady focus on the bottom line.
Unless you’re one of those rare unicorns whose ultimate goal is to sell their bright idea to a megacorp, your new business will need to generate more revenue than it spends relatively quickly and consistently. Achieving your ultimate business objective has six stages: planning, securing funding, registering, launching, establishing and creating value.
Select an Ownership Structure
After completing the first phase of your ongoing market research, you’re ready to decide on a business structure. The most common types are sole proprietorship, general partnership, limited liability company (LLC), limited liability partnership (LLP), C-corporation and S-corporation:
- Sole proprietorships are the simplest and least expensive, requiring no formal filing, but they make the owner liable for the business’s debts and other liabilities.
- General partnerships allow two or more people to share profits, losses and liabilities for the operation, with each partner responsible for filing their own taxes on the revenue they receive from the business. They typically involve a formal partnership agreement.
- LLCs must be registered with the state in which the business operates. They protect owners from some of the company’s debts and other liabilities. LLC annual filing requirements are less onerous than those for corporations.
- LLPs are often chosen by professional groups, such as lawyers, accountants and doctors, which want to reduce their personal liability without going through the process of incorporating.
- C-corporations, or C-corps, have a board of directors and sell shares of the business to investors. They are taxed separately, unlike sole proprietorships, partnerships and LLCs. C-corps may be subject to double taxation because both the business and its owners are taxed when profits are distributed.
- S-corporations, or S-corps, are similar to C-corps in having to register with the state, choose a board of directors and sell shares of the business. However, they can pass revenues directly to owners to avoid double taxation.
Write a Business Plan
Once you’ve determined what your business will sell and have devised a strategy for reaching your potential customers, it’s time to create your organization’s road map for success: your business plan. The plan’s three purposes are to describe the focus of the business, explain how it will be funded and designate who you’ll hire to manage and operate the entity.
The SBA provides three free business plan templates: two that take a traditional approach, and one that uses a “lean startup format.”
- The traditional business plan format starts with an executive summary and company description, followed by a market analysis, an outline of your organization and management structure, details of the products and services you’ll offer and how they will be sold and marketed. It may also include funding requirements if you’ll be seeking outside sources for financial support, as well as financial projections.
- The lean startup business plan is best suited to owners who want to start quickly, have relatively simple needs and intend to alter their operations and marketing efforts as the company grows. The plan covers key partnerships with suppliers, manufacturers, subcontractors and other entities, as well as the activities that will give the business an edge over the competition. It also describes important assets, such as key executives and staff members, intellectual property and sources of capital.
Get an Early Start on Marketing
Your marketing efforts begin well before your first day of operation. In addition to creating your website, you have to optimize it for search engines so that it appears in search results when people enter keywords and phrases related to your products. You’ll also want to add your business to online directories and establish a presence on social media.
Step Two: Secure Funding
With your business plan in hand, you can begin the search for funding by determining how much money you’ll need to start and run your business, which includes the amount you’re able to self-fund with your own money or that of close investors (family and friends). Being able to fund the business yourself gives you full control over its operation, while relying on outside investors usually requires ceding some ownership and operational responsibility.
How much does it cost to start a business? You can start a business for less than $500 if you sell digital products or dropship. A brick-and-mortar business, on the other hand, can cost tens of thousands of dollars.
Funding options include small business loans, crowdfunding and the SBA’s Lender Match program that works with more than 800 lenders located throughout the United States for both SBA-approved loans and conventional business loans. Our guide to the Best Startup Business Loans recommends considering five factors when comparing startup business loans:
- Make sure you can meet the bank’s requirements for minimum time in business and annual revenue targets.
- Determine whether you’ll receive the funds as a lump sum or as needed. Traditional term loans are best for the former, while lines of credit can be less expensive in the long run.
- The repayment schedule may be monthly, weekly or daily depending on the terms of the loan. Your business’s cash flow must meet the repayment requirements.
- Know what added fees you may incur such as origination charges, late payment penalties and other loan costs.
- Confirm that the lender’s customer support is adequate to address potential repayment issues quickly and completely.
Related: Low on capital? Read our guide to the best businesses to start with little money.
Step Three: Register Your Business
One of the first orders of business for your new company is to select a name that’s unique, descriptive and easy to remember. Make sure the internet domain that matches your chosen name is available, and confirm its uniqueness with your state’s business-name-search tool.
The SBA recommends four ways to protect your business’s name:
- An entity name safeguards your business at the state level.
- A trademark protects your business and its products at the national level.
- A doing business as (DBA) name doesn’t protect your business, but your state may require that you register the DBA name, as do certain business structures.
- A domain name establishes the web address associated with your business and prevents other entities from misusing your business’s brand.
Business types other than sole proprietorships and partnerships must register with the state’s official business liaison, which is usually the Secretary of State office. A registered agent service is necessary for LLCs and corporations in all states as the point of contact for official correspondences with state agencies.
Registered agents are required to have a physical address that’s accessible during business hours to accept tax and legal documents on behalf of the business. You can serve as your own registered agent if you’re available during standard office hours and take full responsibility for complying with all state requirements.
The business will also need an employer identification number (EIN) from the IRS, as well as various licenses and permits from local, state and federal entities. The specific ones your business will need depend on your industry and jurisdiction.
Be sure to complete these steps before opening your doors for business:
- Open a business bank account. This is frequently done as part of funding preparations.
- Hire a bookkeeper or buy small-business accounting software.
- Make sure you have all your startup costs covered.
- Purchase insurance for your business.
- Choose and install the hardware, software and other equipment your operation will require.
Most businesses will also need to recruit and hire the workers who will power the operation. Finding the right pace of hiring can be a challenge for a new business. Overhiring can be avoided by establishing and sticking to a hiring budget. This also ensures that you have sufficient time and resources for onboarding new hires and monitoring their workloads to prevent overburdening them.
Step Four: Launch Your Business
In your business’s first year of operation, it should record several milestones:
- The official launch of your products and services.
- Your first customer.
- The business’s total revenue meets its total costs (break-even point).
- Its revenues consistently exceed costs, allowing proceeds to be invested back in the business (positive cash flow).
- Reaching its first anniversary, which about 20% of U.S. startups don’t achieve, according to the BLS.
To realize these milestones, your business has to navigate around potential disruptions to your production and marketing plans such as errors in financial projections, problems with supply or ineffective marketing, to name just a few.
