Setting Up A Business

First Do Your Research

If you are going to start a business, you want to be reasonably sure that you will be successful with it before you put a lot of money into it. One way to do that is to research the type of business you would like to start. Whatever the particular industry is, whether a service-type industry or a product you'd like to manufacture and sell, you will want to take a look at industry trends. Is this industry growing or declining, both nationally and locally?

You will also want to take a look at every aspect of how this business will operate--how will a product be produced, focusing on all the exact steps. What is the process for providing a particular service? This will give you an idea of the amount of time needed to produce a product or perform a service, and how quickly you can do both of those things while still maintaining quality will determine how much business you can handle and how much money you can make. It will also tell you if this is a business you can do on your own or one for which you will need to hire employees.

Now is a great time to take a closer look at the market for your business. Who would want to buy your product or service? What product or service is it that those customers want to buy but currently cannot find available? Is there anyone else who sells such a product or service?

Where can you find the answers to these questions? There are many sources available, and many are low-cost or free. The Internet can be a great jumping-off point for information, as can any trade associations for the type of business you might want to start. Another free online resource is Score, standing for Service Corps of Retired Executives www.scn.org/civic/score-online. They have online volunteers with experience in the business you would like to start, and you may e-mail them questions about your small business at no charge (Score, 1998). If you are fortunate enough to find someone who has experience with the business you want to start, see if that person would mentor you, perhaps in exchange for a product or service you could provide that person. Your local library is another great free source of information about business and business statistics (Washington State University-Small Business Development Center, 2005).

When you have some answers to the above questions and are starting to get a clearer idea of your new business, you will next want to consider what it will cost to start this new business. Now is the time to think about both what it will cost to start and then operate the business. What about advertising costs--how will new customers hear about your business? Business taxes are also part of the cost, and you can get information from the Internal Revenue Service, your state Department of Revenue, or a certified public accountant. Will you need a license or permit to conduct your business? You can check with your state, county and city Departments of Licensing. You might need to include insurance and worker's compensation as part of your business cost, and your state Department of Labor and Industry can assist you with this (Washington State University-Small Business Development Center, 2005).

Types of Businesses

You will also want to put some thought into the new business in terms of what type it should be: a sole proprietorship, a for-profit corporation, or a non-profit corporation.

A sole proprietorship is when one person operates and owns a business and it is not incorporated. This form of business is how many enterprises get their start. One person goes out and offers his or her services, or this one person makes some kind of product which is sold to the public. This is the simplest type of business in terms of the paperwork involved in getting started, and simple in terms of having only yourself to deal with rather than a host of employees or a board of directors.

There are several forms that a for-profit corporation can take. Sometimes a small business will choose to become a LLC, or limited liability company. This type of incorporation can protect your personal assets in the event of bankruptcy, and it provides a somewhat easier and less expensive form of incorporation than some of the others available. LLC owners are called members, which can consist of one person or many.

A C Corporation is legally a separate entity from its owners. Shareholders own it because they have exchanged money and/or property for the C Corporation's stock. You can tax or sue it, and you can create a contract with it. You have to file articles of incorporation with the government and pay a fee. A board of directors will make the decisions for the business and the policies it will abide by, called bylaws www.corporate.com. You can sell a corporation to new shareholders, if you choose, and it will continue to exist as an entity. This type of corporation will also protect your personal assets in a bankruptcy, and corporations can also take special tax deductions. In addition, you can sell stock in a corporation.

An S Corporation offers the advantage of being exempt from federal income tax in certain situations. This means that each of the owners, or shareholders, which in this case have to be natural human beings and not other corporations, report the income, deduction, loss and credit on their own personal tax return in proportion to their interest in the business. It offers the advantage of protection of personal assets if the business falls into bankruptcy.

Depending on the purpose of the new business you are planning to start, you might find that it would be to your benefit to form a non-profit corporation. By forming a non-profit corporation, one type of which is a 501(c)(3), the advantages are that you may become exempt from some taxes, and your personal property would not be at risk in the event of bankruptcy of the business. Individuals cannot become a non-profit corporation, only groups. The Internal Revenue Service can tell you if the business you want to form will qualify as a non-profit, at http://irs.gov/charities/index.html The other great news is that non-profits are eligible for many more grants than are for-profit corporations, so if you are looking to procure grant money, you will want to consider the non-profit business form and see if your business will fit into that format.

Write a Business Plan

After you have done some research on your new business idea, you will have a better idea of the specifics of the business. Next it is worthwhile to try to articulate all those great ideas on paper, in the form of a business plan.

At this stage it is not a bad idea to carry around a small pad of paper and something to write with everywhere you go, or your favorite high-tech gadget that can record your thoughts. Your ideas will be percolating in your brain even when you are working on other things, and you never know when you will get a good idea, so be ready for it.

A business plan can help you get funding for your business, will explain how you will market your new service or product, and much more. Even before that, however, it can show the new business idea for what it is, in all its glory and warts. Then you can decide if you still want to proceed with it, make some changes to it so that success is more likely, or perhaps try again with another business idea. This paper step can save you a lot of time and frustration when you actually have to go out and provide the new service or begin to manufacture the new product for the first time.

The United States Small Business Administration has a branch called the Office of Small Business Development Centers. These centers can be found in each state, and they offer free or low-cost help with all aspects of starting a new small business, including help with writing a business plan http://www.sba.gov/sbdc/sbdcnear.html.

A business plan needs to show your methods for running the business. For example, who will be involved in running and working in the business and what expertise they bring to the endeavor. It will show how you plan to sell your product or service, what the product is exactly and what all the steps are that are necessary to manufacture it. Or, in some cases, what specific service will you offer in full detail, and money particulars focusing on what it will cost to bring the product or service to the buying public. Basically, what it will bring in terms of revenue.

Banks and charitable organizations will want to look at your business plan and see if it is a sound investment. A business plan will also offer the entrepreneur peace of mind, because you will have gone through every aspect of the business, and you know how it will work, how much you can make from it, and how much it will cost to start and continue operating. After the business plan is written, you will have a pretty clear idea if your business has a good chance of succeeding or if it won't work.

Determine Startup Costs

So let's say that, after analyzing the market, you come to the conclusion that your idea will sell like hotcakes. But perhaps one factor that is standing in your way is high start-up costs. Start-up costs include things like paying for a place to work out of, buying all the initial equipment, furniture, and tools necessary for the business to operate, possibly legal fees and consultation fees, licensing fees, communication fees for telephone and Internet services, taxes, buying raw materials if you plan to manufacture a product, and marketing your new business venture. When you start adding it all up, it can become a little daunting. At this point you might need to ask yourself if there is some way that you can maintain the quality of your potential service or product, yet cut some of the initial costs to start. This is when creativity will come into play. Anyone who is rich can throw money at a problem, but if you have a lack of funds, this will be the impetus you will need to get creative and find other solutions. (Not to mention that people pay big money for creative ideas that lead to solutions to problems--that can be a business in and of itself, if you have a talent for it!) All viable businesses provide a solution to a client or customer's problems. So, by thinking along these lines from the start, you will be helping yourself greatly in the process.

One way to cut costs is to start small. Can you work out of a room in your home, or a garage? You can avoid renting an office or workspace for a while until you start making money, which can help lower initial costs. You might not ever need a brick and mortar office if you start an online business or store. Get creative and consider as many possibilities and options as you can so your business idea will work.

Another method you can try is to figure out a way to do the work by yourself in the beginning. This is not a bad way to start, because you will want to know every aspect of how your business runs, so you will want to work every job yourself to see where all the strengths are, and where you can improve on any weak areas. This can give you vital information you will need to potentially lower costs, improve productivity and increase the amount of money you can make. Then, when you start making money you can hire some employees to help you. It will also make it easier when you have to train employees, because you will understand all the requirements of every job your business must perform to stay in business and how they interact with each other, because you will have worked them all yourself.

Be certain to keep an open mind during the business planning and start-up cost phase. Keep talking to other small business people or a mentor who might have suggestions for starting small and less expensively. Also remember that the start-up costs will be offset by the revenue that your business will generate, so over time you will break even and then begin to make money from the business.

Get Licensed

You might need a license or a permit to conduct business in your state. Each state has a Department of Licensing that will explain all the parameters of what you will need and the fees involved for all types of businesses. If you go to the state's Department of Licensing website, you can often select the type of business you will conduct and where it will be located. In return, you will receive a list of all the licenses you will need and exactly who you will need to contact. Your local city and county may also require licensing and permits as well. Look under your city or county's Finance Department for more information.

Get Set Up For Taxes

When you are starting a business for the first time, it is a good idea to consult with a certified public accountant. Let this person help you get your bookkeeping system set up, and let him or her help you get set up to pay your taxes. Depending on your business parameters you might be paying taxes quarterly or yearly, and your CPA can help you with this. When it is set up to work properly, then you can take it over and keep it running smoothly to begin your business. Eventually you may want to hire a bookkeeper to take care of all the paperwork aspects of your business, freeing you to focus on the product or service you are trying to sell.

There are also several software programs available that will help you keep business records on your computer. You want something that is easy to use and flexible, so you can set it up to meet your business's unique needs. Although they come with several extra bells and whistles, the bottom line is that you need to keep track of revenue and expenses, clients and invoices, and information that will be needed at tax time. You will need a simple filing system to store receipts, contracts and other important hard copies that will be needed when you are computing your taxes and for auditing purposes.

It can potentially save you money at tax time if, throughout the year, you are keeping track of deductible tax items. These are usually some type of business-related expense. For example, if you have a business that provides a house-cleaning service, then the automobile expenses that are incurred while providing the service, your mileage, as well as cleaning supplies and equipment used on the job can be tax deductible. You might also be able to deduct up to $5,000 of your new business start-up costs. Depreciation on equipment, such as computers and printers used for business purposes, the business automobile, or a carpet steam cleaner in this example, might also qualify as a deduction. According to the IRS, you can depreciate machinery, equipment, buildings, vehicles and furniture used to conduct business if it can wear out and will ordinarily have a useful life longer than one year http://www.irs.gov/faqs/faq11-1.html. The IRS Publication 535 covers all sorts of business expenses, so you can find more information specific to your new business there.

Find Funding

Once you have a great idea for a business, and after putting it down in writing in a business plan, you see that it can make money. The next step is to find funding to get the business started. If you have personal savings you can use, then you are all set to go. However, most people look for funding from two main sources: loans and grants.

Loans

Loans are funds that will need to be paid back to the lender. There are also loan guarantees available for new businesses, where if you default on the loan the government agency agrees to pay the loan back. You can find loans and loan guarantees for businesses at the Small Business Administration. The SBA doesn't offer grants for small business start-up purposes, but it does offer to guarantee their loan programs that you can access through a private or other institution www.sba.gov. One excellent program that they offer is a loan pre-qualification program. Before you head off to a bank asking them for money, the SBA will use an "intermediary" to go over your loan application and help you make it stronger. Then it is submitted to the SBA, and if they like it they will write you a letter of pre-qualification, essentially saying that they will guarantee your loan. Then the intermediary will help you find a lender and get the best rates on the loan. Then off you go to the lender with your spiffy loan application and letter of pre-qualification, thereby improving your chances of getting the loan.

So let's say that you have begun your new business and it is really taking off. It is time to expand the business, and that also takes money. The SBA could be a resource for you, depending on who you are and what your business entails, because they also guarantee loans to grow your business. If you are a woman or a military veteran-business owner, or your business is located in an area that the government is trying to revitalize, for just a couple of many examples, then you might qualify for this type of loan. For more information go to www.sba.gov and look under "SBA Loans."

Loans may not have been the first source on your list of financing options for your new business because they must be repaid, but sometimes they offer the best solution to your money needs to get the business up and running. There tends to be more loans rather than grants available for business start-up costs, so this bears keeping in mind also, depending on what your financial purpose for the funding is.

Grants

Grants are funds that are given to you outright, and you do not have to pay them back. Generally speaking, you will likely find more grants with awards available for starting or growing a small business on the state and local level rather than the federal level. One informative place to start looking for state and local grants is your state's Economic Development Council. They usually will have a search engine, so type in "grants" and you will likely be surprised at how many offerings come up. You will also notice that some grants are for businesses, while others are for funding city projects, for example. Every grant is different, and has different eligibilities and requirements, so this is a stage where you will need to spend a bit of time reading to see what all is available. Some grants are made available to non-profit corporations. As you read about different grants, you will discover that if your business is a non-profit, or if you as an individual are affiliated with a non-profit organization, there will be several grants for which you will be eligible, more so than if your business is a for-profit corporation. You might even want to look into forming a non-profit corporation yourself.

There are many grants available, and the first step to success with obtaining a grant is knowing where to look for it. The next chapter will go into more detail about grants at the federal, state and local levels, so you will know where to begin your search to access essentially free money, and what it can and cannot be used for.