Starting a Small Business: A Step-by-Step Guide

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Starting a business comes with numerous questions that need to be addressed: What should you name your business? How do you register it? Will your product be appealing enough for customers to buy? And how will you finance the initial stages of your business while still paying your bills?

To successfully launch your small business, consult with experts and entrepreneurs using our guide, which provides solutions to various questions and more.

Research your market

Before pursuing your dream and ambition, ensure there's a demand for the product you plan to create.

Abby Mercado, a former venture capitalist and founder of Rescripted, emphasizes the significance of conducting market research before investing any money, in order to ensure success.

By conducting market research, you can uncover your ideal customer's specific requirements, the solutions they have attempted, your competitors, the price they are willing to pay, and other valuable insights.

How to use social media and real-life feedback for your market research

By monitoring social media platforms, you can gain insights into what your potential customers are discussing online. For instance, if you're planning to launch a dog food company, you can find valuable information about your customers' preferences by analyzing Reddit posts or comments on competitors' TikTok and Instagram accounts. This technique is commonly known as "social media listening."

Mercado didn't limit her research to just online and social media when conducting market research for Rescripted, a media company focused on women's reproductive health. Instead, she reached out to a fertility clinic she was familiar with and got feedback from a doctor there. The doctor loved her idea and introduced her to potential customers who gave her even more feedback.

Questions to ask for good feedback

Some useful questions to ask your target customer include:

• In the last three months, which brands have you purchased from in your target market?
• How satisfied are you with the products/solutions that already exist for this market?
• What was your reasoning for purchasing from a competitor?
• Which features are most useful to you?
• How do you prefer to shop for this product/service?
• At what price would you be unwilling to purchase this product?

Can you provide an example of your product?

To get the most accurate feedback on your offerings, it's important to survey your ideal customer, who is the person most likely to compare your business to competitors before making a purchase. If your mom is a vegan and you're opening a butcher shop, it may be best to seek feedback from someone else.

Formulate a business plan

A business plan outlines your company's objectives and the strategies you'll employ to accomplish them. Its usefulness transcends business size and experience, making it a valuable tool for both new and established enterprises.

A business plan can help keep you and your team organized and on the same page, especially when launching a business with a partner or hiring a senior leader.

A roadmap for marketing and revenue generation is included in a business plan, which can be used to identify milestones and assess the progress of the business.

Before granting funding, people may request a business plan.

The SBA recommends incorporating the following into your business plan:

• A brief overview of our company and team, including details about our product and mission.
• A detailed company description highlighting the target market and the unique benefits that set your business apart from competitors.
• Trends or themes you're seeing in your target market.
• What is the legal structure of your business and who will be on your team?
• Your product or service description, including any patents and copyrights, as well as your marketing plan.
• If you're seeking funding for your business, it's a good idea to include your financial projections with your funding request.

The different types of business models

Your business plan should include a breakdown of your revenue strategy.

Numerous business models exist, and many companies have achieved success using them. However, selecting the appropriate one depends on the type of business, as what works for a tech start-up may not be suitable for a food truck.

Service (Fee-for-service)

A fee-for-service business model entails performing a task or service in exchange for payment, which may be a fixed sum or an hourly rate. Examples of small businesses that use this model include consulting, coaching, and freelance work.

Subscription

A subscription model entails charging a regular fee for access to a product or service, which is frequently employed by online service providers and can also be utilized to sell physical goods, such as subscription boxes.

Freemium

The freemium business model offers a free basic version of the service to customers, with the hope that they will upgrade to a paid premium version with additional features. However, this model may not be suitable for product-based businesses because some customers may choose to stick with the free version. An example of a freemium business model is an app that provides basic features for free and unlocks premium features when users pay to upgrade their plan.

Product

This business model entails selling a tangible product in exchange for payment. The product can be sold in-person, such as in a bakery or ice cream shop, or online as an e-commerce brand. The objective is to produce the item at a low cost and sell it at a higher price.

Fund your business

To launch your business, you will require funding, which can range from the cost of a night out to the price of a midsize sedan, depending on your business. However, you have various options to obtain your seed money.

These are the most common ways to finance your small business idea.

Bootstrapping

Best for: Businesses with low startup costs; founders with enough personal savings

Perhaps the easiest way to finance your business is through bootstrapping, which entails using your own funds to launch the venture. This approach eliminates the need for loan applications and repayments.

The most effective bootstrapping approach is when you have minimal initial expenses (or a substantial personal fortune). However, the greatest danger with bootstrapping is over-investing in the business and subsequently facing financial difficulties in your personal life when you require funds for an emergency or to meet basic necessities.

If you're not confident in starting a business without any resources, there are other alternatives to explore.

Crowdfunding

Best for: Raising small amounts

To achieve a larger funding goal for a business idea, crowdfunding entails requesting small contributions from numerous individuals. For instance, if you require $5,000, you may have 200 people contribute to help you attain that amount.

Crowdfunding typically does not require repayment from donors, although some platforms may require a refund if the funding goal is not met within a specific timeframe.

Dr. Jenny Woo launched Mind Brain Emotion, a deck of skill-building cards, through a combination of bootstrapping with a small amount of money and crowdfunding through Kickstarter.

"Kickstarter was the lowest risk option for me because the worst-case scenario is not getting funded. It's also less time-consuming than pitching to investors or seeking a loan."

Using crowdfunding can be a viable option for bridging small funding shortfalls that you can't cover with your own savings. However, be aware that many campaigns have a limited lifespan of 30 to 60 days on the platform, so it's crucial to set realistic fundraising goals within that time frame.

Platform fees on some crowdfunding platforms can be as high as 12%, which reduces the amount of money you can keep after raising funds.

Grants

Businesses that don't require immediate funding and can adhere to any usage guidelines.

A grant is a sum of money given to a business or organization without the need for repayment. Such grants are frequently offered by government agencies, nonprofits, and corporations.

To be eligible for a grant, you must submit an application. However, some grant processes may have long approval and disbursement timelines, so even if you qualify, it may take time to receive the funds. As a result, grants may not be suitable for those who require funds urgently for product development.

If you don't need to use your savings or take on debt for your business, it can be worth the wait to receive grant money.

Some grants have specific rules on how the funding can be utilized, such as only allowing it to be used for research and development or purchasing equipment.

Small business loans

Founders who require a substantial initial investment and can manage to make small, recurring payments.

Unlike a grant, a small business loan is a sum of money borrowed from a lender that must be repaid within a specified time frame. The terms of your small business loan can vary based on your credit score, the nature of your business, and the amount of funding you require.

Before taking out a small business loan, ensure you can cover both the principal and interest payments without defaulting on your balance.

OnDeck and Kiva are among the top small business loan lenders, with OnDeck known for its same-day funding service, and Kiva for its 0% interest crowdfunded microloans.

Small business credit card

Small expenses over time can be financed through a line of credit for founders.

Financing your business costs with a small business credit card means incurring debt, but unlike a loan, it offers revolving credit that can be used repeatedly as long as payments are made on time. This flexibility makes it more convenient than a loan, which requires a lump sum upfront and demands precise knowledge of future funding needs.

The Blue Business® Plus Credit Card from American Express is a great choice for business credit due to its 12-month 0% intro APR on purchases from the account opening date (18.49% - 26.49% variable APR after that; APR will not exceed 29.99%). (See rates and fees)

The Ink Business Unlimited® Credit Card is a strong option as it does not have an annual fee and offers 1.5% cash back on business purchases.

Which funding method is right for you?

To minimize your financial risk, you should explore crowdfunding and grant opportunities before deciding on a funding route. With these options, you won't have to repay the money, and in an ideal situation, you can cover all your start-up costs without using your savings.

To cover the expenses not covered by crowdfunding or grants, consider a high-yield savings account. An FDIC-insured account is a safe place to put your cash and earn interest while keeping your funds easily accessible. The Marcus by Goldman Sachs High Yield Online Savings account and LendingClub High-Yield Savings are both FDIC-insured and have no monthly fees, overdraft fees, or excessive transaction fees.

Carefully consider all other options before resorting to taking on debt to start your business. Ensure that you are confident in your ability to repay any loans in full.

Pick a business name

A business's name is a crucial element that represents its identity and capabilities, hence it is essential to choose a name that effectively communicates these aspects.

When choosing a business name, it is important to consider legal implications such as avoiding names that are too similar to competitors and using the Trademark Search tool to ensure the name has not already been trademarked.

Some states may require you to add certain "identifiers" to the end of your business name if you're a registered legal entity. Identifiers could include words like "Inc," or "Corp."

LegalZoom can assist you in establishing your business legally and ensure that your chosen business name is available for use.

Create a website for your business

To effectively reach potential customers, your business requires a website that showcases your online presence and contact information. The complexity of your website will depend on the nature of your business. For coaching or consulting businesses, a straightforward website that highlights your services and expertise is sufficient.

Building a basic website is easy with platforms like Squarespace or Wix, which offer pre-designed templates and require no coding knowledge.

If you're running an online store, you'll need additional features such as payment processing, contact information collection, and user-friendly product display. While you can use services to create a more complex e-commerce website, it may be beneficial to hire an expert if you lack the necessary skills, time, or patience.

Some indications that you might need to engage a website designer rather than creating the website yourself include:

• You need advanced features to help you sell products online.
• To help your site grow alongside your business, you need a long-term relationship with a designer.
• You are too busy to do it yourself and prefer to spend money to have someone else do it.

Legally form your business

Your business's legal structure is a crucial decision that will significantly impact taxes and other aspects. Among the three most common legal structures for small businesses are a sole proprietorship, an LLC, and an S Corporation (S-Corp).

Each structure offers its own set of distinctions and safeguards for running your business.

Sole proprietorship

A sole proprietorship is the simplest business structure to comprehend and utilize. It is owned by one individual, the sole proprietor. Unlike other business structures, you do not need to file any paperwork to incorporate your business as a sole proprietorship. If you start operating a business without filing any paperwork, you will be classified as a sole proprietorship by the Small Business Administration (SBA).

As a sole proprietorship, you are personally responsible for your business's debts.

"Shaliz Sadig Romano, Co-Managing Partner at Romano Law, advises against recommending a sole proprietorship as it is the default structure and does not take full advantage of the legal rights available with other business structures. He emphasizes that in case of any legal issues, it is crucial to ensure that the assets of the company are at risk, not personal assets such as one's house or car."

Limited liability corporation (LLC)

An LLC limits your liability and makes your business a separate entity with its own bank account and taxpayer ID.

As a business owner, you can safeguard your personal assets from legal issues, financial liabilities, lawsuits, or bankruptcies caused by your business.

An LLC can facilitate business growth by attracting investors and allowing for employee hiring, as stated by Romano.

According to Romano, an LLC is often preferred by lawyers due to its benefits for small businesses and some larger enterprises looking to expand.

S Corporation

An S Corp offers limited liability protection to its owners, similar to an LLC. Both S Corps and LLCs are considered pass-through entities, meaning the business does not pay taxes, but the tax liability is passed on to the owner's personal taxes. Both structures provide asset protection for the owner.

While an LLC can have an unlimited number of owners, an S Corp can have no more than 100 shareholders.

Which one is right for you?

Before starting a business, it's crucial to have a clear vision of where you want to be in the next two to five years. This can help determine the right structure for your business. Romano advises clients to consider whether they want to be a small solopreneur or something much larger.

If you plan to run an online e-commerce business on a platform like Etsy on your own on weekends, you may feel secure enough to run it as a sole proprietorship. However, if you want to open a storefront and envision seeking assistance from investors in the future, an LLC or S Corp may be a better fit for you.

It is important to consider the legal recognition of an LLC in other countries when planning to do business overseas. Romano suggests researching the rules and practices of each country to determine the best legal structure for your business.

To become an S Corp, you must be a U.S. citizen or resident, operate domestically, have no more than 100 shareholders who own stock and have voting rights.

Filing an LLC does not require being a U.S. citizen or legal resident.

Determining which legal structure is best for your business can be challenging, but understanding the requirements and do's and don'ts of each structure can help. LegalZoom provides tools to assist you in making this decision.

These companies help you legally form your business

LegalZoom is a renowned service that assists users in starting their businesses through three easy steps: selecting a business name and structure, obtaining compliance information and filing the necessary paperwork. Additionally, LegalZoom offers other features such as obtaining business licenses and creating operating agreements to help manage your business. The cost of these services varies based on the type of business, formation state, and any additional business management requirements.

Tailor Brands is a top choice for a streamlined LLC application process. At the basic level, you can submit your state's filing fee and have your application processed within 14 days. Additional tiers provide additional services, but come at a higher cost.

The Elite package from Tailor Brands includes LLC formation, expedited filing, legal compliance, a domain name and website, and a $50 Amazon gift card for $249 per year, plus your state's fee. Additionally, you'll have access to a range of business tools, such as digital business cards, eight free logos, and more.

Bizee offers a lot of value for your money, even at its most affordable pricing plan ($0 plus your state's filing fee). At this price point, you can still enjoy a range of benefits.

• unlimited business name searches
• paperwork filing
• A Registered Agent can assist with state compliance for a year.
• compliance alerts
• banking offers
• business tax consulting
• unlimited phone and email support.

You can choose from several add-ons for an additional fee.

Apply for a business license (if you need one)

An official permit issued by a state or local government is what a business license is. While not all businesses need one, certain industries mandate having a license to operate.

If you're opening a business in the beauty, food, or construction industry, you'll need to obtain the appropriate license to operate legally.

If your business lacks a license and causes harm, there could be severe consequences.

Before starting your business, ensure you comply with your state or jurisdiction's business license requirements.

Apply for an Employer Identification Number (EIN)

An EIN is assigned by the IRS to identify and track a business's tax activities.

Certain entities, such as corporations, partnerships, and organizations with employees, are required to have an EIN. However, an EIN is not necessary for every type of business.

For more details on who requires an EIN, business owners can check the IRS website.

To obtain an EIN, you must submit IRS Form SS-4. If you apply online, your EIN will be issued instantly, according to the IRS website. If you apply by mail, it will take approximately four weeks to process your application.

You can also apply for an EIN by fax and receive it within four business days.

Consider business insurance

Business insurance safeguards your business and its assets, as well as offers protection against lawsuits, damage, and theft.

If your bakery's storefront is destroyed by a natural disaster or your delivery vehicles are stolen, you can submit an insurance claim to recover your losses.

An insurance policy can assist in covering expenses if your business is involved in a lawsuit. Additionally, if an employee is sick or injured while working, a worker's compensation insurance policy can provide the necessary medical care.

The type and amount of insurance coverage required for your business will depend on its nature and the level of risk involved.

Since The Hartford Business Insurance serves many industries at affordable prices, CNBC Select ranked it as one of the best providers for small business insurance. Additionally, Nationwide stands out for its wide range of plans for business owners.

Open a business bank account

It is beneficial to keep your business and personal finances separate to maintain organization and accurately track transactions during tax season. Additionally, many lenders and grant funders require a business bank account for receiving funds.

Opening a business bank account is straightforward and similar to opening a personal bank account.

The Bluevine Business Checking Account is one of the top choices for small businesses due to its lack of monthly maintenance fees, no minimum deposit required to open, and no minimum balance requirements. Additionally, account holders receive interest on their balances and have access to a user-friendly mobile app.

The Axos Bank Business Premium Savings account is a top savings option with no monthly maintenance fee, no minimum deposit, and no overdraft fees. It also offers a high APY for account balances and allows you to deposit checks through the mobile app.

Set up your accounting system

To achieve long-term success for your business, it is crucial to manage your cash flow and prepare for tax events. A professional can assist you in comprehending the financial data that supports your business and help you make informed decisions.

"According to Sheneya Wilson, Founder and CEO of Fola Financial, staying organized is crucial. It's important to work with a professional who can assist you throughout the year, not just at the end of it, to ensure you're always prepared."

If you want to manage your business's accounting on your own, you can opt for software like Quickbooks or Xero. These programs can help you keep track of expenses, pay bills, and accept payments. Additionally, they can integrate with payroll services to simplify employee payment. While good professionals can be expensive, these software options can be a cost-effective solution for managing your business's accounting needs.

Launch your business

After completing all other tasks on your to-do list, the final step is to launch your business and start operating.

Setting up social media profiles before launching your business can help you spread the word and potentially gain early clients and customers through friends and family.

To increase sales, refer back to the business plan for marketing strategies.

Running a business requires continuous learning and adaptation. While there will always be highs and lows, being able to quickly pivot and learn from what's successful and what's not can help you recover quickly and establish a sustainable business.

Meet our experts

We interviewed experts with specialized knowledge and authority for this CNBC Select story.

• Sheneya Wilson, the Founder and CEO of Fola Financial
• Shaliz Sadig Romano, the Co-Managing Partner at Romano Law
• Dr. Jenny Woo, the Founder and CEO of Mind Brain Emotion
• As a former Venture Capital Investor at the Altira Group and the Co-Founder and CEO of Rescripted, Abby Mercado is a prominent figure in the tech industry.

Why trust CNBC Select?

Our mission at CNBC Select is to deliver top-notch service journalism and in-depth consumer advice to our readers, enabling them to make well-informed decisions with their money. Each article is crafted by our team of expert writers and editors, who possess extensive knowledge of small business products. In order to identify the best insurance companies, we conducted extensive research, collecting over 100 data points on more than a dozen insurance providers. At CNBC Select, we maintain the highest journalistic standards and ethics, and our content is created without any input from our commercial team or external third parties. For more information on our methodology, please refer to our website.

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