Things to Know Before Starting a Business
Success of a startup hinges on preparation before launch. While it's nice to think you could just jump in, based on the unique value of your great new idea, success generally occurs when you act on all the things to know when starting a business.
What you need to know
Here are some things to know when starting a business:
Being a business owner means having lots of responsibilities. Being a business owner means wearing many hats and juggling many tasks. These business responsibilities include:
- Customer service, including responding to problem situations and reaching out to new customers
- Finances, including banking and merchant services (for credit/debit card processing)
- Human resources and payroll if you have employees
- Legal matters, including licensing, contracts, and agreements
- Marketing, including social media and advertising
- Planning, including business plans and long-term strategic planning
- Risk management, including insurance coverage, disaster recovery plans, and actions to minimize or avoid lawsuits
- Taxes on the federal, state, and local levels, including income taxes, payroll taxes, sales taxes, business taxes, and more
Determine your choice of entity. How you set up your business has many implications from a legal standpoint. For example, unless you incorporate or form a limited liability company (LLC), you remain personally liable for business debts; your home, family car, and other assets can be reached by business creditors. Choice of entity also impacts your taxes — when and how you file, whether payments to you are subject to payroll taxes or self-employment tax, and tax-advantaged fringe benefits you can use for yourself.
Basic choices for a business entity are:
- Sole proprietor
- Partnership (if you have at least one co-owner)
- S corporation
- C corporation
It's a good idea to discuss with your attorney and business advisors which entity is the right choice for you. Then take the necessary steps to form the entity before you open your doors and conduct business.
Insurance coverage is needed. While state and federal laws may not require you to have liability protection and other coverage, it's a mistake to operate your new business without it. Most small businesses use a Business Owners Policy to provide liability coverage for third-party claims and property coverage, in case your equipment or other business property is stolen, damaged, or destroyed. If you operate from home, don't assume your homeowners' policy will protect you; check with your agent. If you use your personal vehicle for business driving, check with your insurance company to see whether any changes in the policy are needed.
Separating your business life from your personal life is essential. As you get started and rely to some extent on personal resources to underwrite your business activity, don't be casual when it comes to money. Be sure to separate your personal finances from your business activity. Get a separate bank account and separate credit card for your business, even if you operate as a sole proprietor under your own name. There are important reasons for separating your finances:
- Having separate business accounts enables you to see your expenses, the cash on hand to pay your bills, and whether you're making a profit.
- You need to report your business income and can write-off various expenses as long as you can clearly identity them as being for business; separate business accounts help you do this.
If you operate your business from home, find a spot you can devote exclusively to business. This will allow you to claim a home office deduction (assuming you meet certain tax law tests).
Keeping track of your activities is mandatory. While you can be informal about your personal income and expenses, the tax law requires a business to keep records. You don't have to be an accountant or numbers whiz to do it. Software or cloud solutions enable you to easily keep your books and records in order. You can do it yourself or use someone, such as a bookkeeper, to handle this chore.
Factors to consider before starting a business: making plans
Finding ways to take advantage of gaps in the market and differentiate your new business from competitors is the main thrust of strategic planning. When creating a strategic business plan, account for individual company strengths and be prepared to invest in the facets of the company poised for future success.
The first stage of strategic planning focuses on a market analysis. Study available data like customer satisfaction surveys. Listen to what customers are asking for and develop goals to meet their needs. For example, convenience is one important way companies can stand out in today's hectic world. Being available to customers during extended business hours may draw in additional market share. This may mean shifting staffing to more nights and weekends.
Benchmarking comparisons against top competitors are also useful when working on a strategic business plan. Plan to invest in funding for projects that will further the company's strengths. Be willing to take small, calculated risks, but always analyze the results on the back end before developing the next year's strategic plan.
Successful companies must fill a gap or niche in the market to set themselves apart. The strategic planning process helps organizations analyze the current market and devise ways to best utilize the company's unique strengths. Once identified, these strategic opportunities should be the foundation of your strategic plan and the company's long-term success.
What to include in your new startup list
Deborah Sweeney, CEO of MyCorporation, which provides leading online legal filing services for entrepreneurs and businesses, identifies key elements every would-be business owner should address:
- Establish bylaws or an operating agreement. Create terms for your business, including how money is invested or the role of owners. Put everything in writing. When partners and investors know their roles and the revenue opportunities of profits and losses, it is much clearer when questions arise.
- Protect your business's intellectual property. Trademarks, copyrights, and patents can be a critical business asset. These assets often involve a huge investment from the business owners, and should be adequately protected.
- Assess the need for a business license. Depending on the business type, different business licenses requirements may vary. Even if a business does not incorporate, most states and counties require a "DBA" or business license to designate the business is operating. Find out about relevant licenses in your area and make sure they're filed in time to avoid penalties.
"As the entrepreneur decides to move forward, it's important to remember that a small business is a living and breathing entity," Sweeney notes. "Things change. Businesses grow. You need to remain flexible as the business grows, but you don't need to have all of the answers at the outset."
Funding your new business
Funding is one of the key items to consider when starting a business. But small business funding is evolving. Traditional methods of going to your bank with homemade financial documents and projections just won't cut it anymore. Financing your vision can happen through other alternative methods of obtaining funds, such as:
- U.S. Small Business Administration (SBA). Although the SBA doesn't provide direct loans to small-business owners, they set guidelines for their lending partners and offer numerous programs to assist in small-business funding. These include facilitating loans through a third-party provider, securing a bond, or helping to locate venture capital.
- Credit unions. Generally speaking, credit unions are smaller and often more community-oriented than big banks, so they may be more willing to lend to up-and-coming entrepreneurs.
- Crowdfunding. Have a great idea for a new business? Check out various crowdfunding websites that offer the chance to reach out to untapped audiences for donations and investments from people who "get" what you want to offer.
How much will you need to start your new business? It's virtually impossible to estimate every last penny of your future operating costs. But assembling a realistic estimate helps you to create a working budget and better understand where funds should be allocated and in what order.
Outsourcing your HR and payroll needs
It's hard enough to get a new business off the ground, without getting mired in administrative duties that can take time and energy away from your bigger goals. That's where a skilled outsourcing partner can make a huge difference in where you focus your best efforts for business success.
Outsourcing many HR functions is an excellent strategy to stay on top of your emerging human resources needs. The right outsourcing company can help mitigate the risk of noncompliance with state and federal reporting and filing requirements, as well as processing payroll, assisting with the development of worksite safety programs, and insurance benefits.
More small businesses are also investigating the merits of entering into an arrangement with a professional employer organization (PEO), which enables business owners to outsource management of employee benefits and rein in insurance costs, as well as:
- Create an employee handbook
- Build job descriptions
- Assist with regulatory and legal compliance issues
- Maintain Affordable Care Act documentation
- Provide comprehensive online HR resources
- Offer onsite employee training
- Help with risk assessment
The process of paying your employees (on time and without errors) is another time-consuming and potential hazardous area for employers to handle on their own. Increasingly complex regulations and tax laws (local, state and federal) make it easy to commit errors that lead to tax audits or otherwise fall prey to liabilities you might otherwise be able to ignore.
A reputable payroll outsourcing company can take care of the appropriate deductions for Social Security, unemployment, and withholdings — and stay on top of changing legislation. Look for a reputable payroll provider that clearly stipulates the monthly costs up front, so you can plan for payroll expenses each month. These providers can also offer various add-on packages, so you only need to pay for the services relevant to your organization.
Starting a new business can be both exciting and challenging. Fortunately, there's an abundance of resources available to help you throughout the journey.