How to start a small business

As appealing as working for yourself sounds, there’s a reason why not everyone owns their own business: It’s hard. After all, the skills it takes to create the product or service that you’ll be selling are often very different from the skills you’ll need to run a successful business. You may be really good at baking amazing cupcakes, for example, but turning that into a successful bakery is a different thing entirely.

In this guide, we’ll help you sort out the main steps to starting a business, including how to write a business plan, get funding, figure out your business insurance and legal requirements, and more.

Find your inspiration and write a business plan

People get inspired to start a business in different ways.

Maybe you’re good at making something, like homemade tamales, or doing something, like gardening. You can turn that hobby into a business if it doesn’t already exist in your area or if you can differentiate it in some way from potential competitors. Some small business ideas are novel enough that you may be able to sell your products nationwide.

Alternatively, some people start with the goal of opening a business in mind, and they just need to find the right idea.

Either way, it’s a good idea to write up a business plan. Just like with résumés, there isn’t any one way to do it. You’ll want to include certain things like your plans for how to organize and market your business, what products or services you’ll offer, market analyses and financial projects.

Successful business owners are split in terms of whether they wrote a business plan or not, a study from Babson College for Entrepreneurship Research found. About a third didn’t begin with any business plan at all, a third had an informal plan scribbled down somewhere and another third started with a formal written business plan. People who write a formal business plan are 16 percent more likely to succeed, according to an analysis by Harvard Business Review — a good thing to keep in mind if you’re thinking about starting a company.

Assess your finances and acquire funding

Your business will live and die by your ability to get a firm handle on your finances. Namely, you’ll need to learn how to control your business costs and pricing, so you can maximize your profit. You can get started on this by doing a break-even analysis, where you’ll calculate the minimum price for your goods and services in order to break even. If you price things below that, you’ll go out of business. If you price your items above that, you’ll earn a profit.

Of course, before you manage your finances, you’ll need first to get funding. Starting a business with no money may be possible in a very limited number of cases, but most of us will require some cash outlay. Here are some of the most common ways people do it:

Choose a business structure and register your business

Many people start their businesses as side gigs and then make things more official once they’ve gained some traction. When you’re ready to formally register your business with the government, you’ll first need to decide on a business structure:

Once you’ve decided on a business structure and a name, you can apply for an Employer Identification Number (EIN) from the IRS. It’s free and easy to create, and similar to your Social Security number but for your business. You’ll also need to create formal written business formation documents, such as Articles of Organization, which you can hire an attorney to do or write yourself. You can use these two inputs to set up a separate bank account for your business.

Certain types of businesses, such as S-Corporations, may need to file a form with the IRS. Otherwise, most businesses generally only need to register with their state and/or local governments to make things official. You should also check with your state and local governments to see if you need any licenses or permits and if so, how to get them and stay in compliance.

Purchase business insurance

There’s a reason why 66 percent of small-business owners carry business insurance. Without it, you can face costly lawsuits that can derail your business. This is especially important these days with increasingly unsteady economic and environmental conditions. According to FEMA, about 25 percent of all businesses close their doors permanently after being hit by a natural disaster like a hurricane or a wildfire.

Most common small business property and liability claims

• 20%: Burglary and theft
• 15%: Water and freezing damage
• 15%: Wind and hail damage
• 10%: Fire
• 10%: Customer slip and fall
• Less than 5%: Other customer injury
• Less than 5%: Product liability
• Less than 5%: Struck by object
• Less than 5%: Recreational harm
• Less than 5%: Vehicle accident

Source: The Hartford insurance company

Most common small business insurance claims

An analysis by The Hartford insurance company found that more than 40 percent of small businesses will experience a property or liability claim in the next 10 years. The most common claim is burglary and theft, affecting 20% of small businesses.

Source: The Hartford, March 2015

Build and grow your company

Once you’ve checked off the basics of establishing your business, it’s time to learn yet another new skillset: growth.

Choose your team

According to the Chamber of Commerce, 70 percent of small businesses are owned and operated individually. But if scaling your business up is a goal of yours, you’ll need to learn how to delegate your tasks to new team members.

Keep in mind that you don’t necessarily need to hire employees to build your team. You can also hire freelancers and contractors, and even work with professionals that bigger firms might have in-house, such as accountants or virtual assistants. This can be a good way to dip your toes into the world of expanding your business before you hire full-time employees.

Focus on marketing

Your product could be groundbreaking, but it’s pointless if no one knows about it. Word of mouth is great, but even to get that referral business, you need a way to let people know you’re open for business. You want to make it as easy as possible for your target audience to find you and understand what you offer.

The first step for many entrepreneurs is creating a website, which 71 percent of small businesses do have, according to Top Design Firms. Social media is a powerful option as well, with 25 percent of small business owners ranking it as their “most successful digital marketing tool,” in 2021 according to a survey by Visual Objects, a portfolio website. Don’t forget to add your business to Google and other online directories as well. Other more tangible options include getting your business logo on objects (such as clothing and trinkets) and using business cards.

Invest in business tools

Don’t be afraid to try using new tools, even if you have old favorites. You don’t want to be the last person stuck using only a fax machine when the whole world has moved to email and document scanning, for example. Here are some of the broad categories of tools you’ll need to consider for running your business:

• CRM software
• Safety equipment
• Accounting software
• Communication systems
• Online and in-person security systems
• POS systems and credit card processors

The bottom line

Starting a small business is daunting. But if you’re a self-starter with a passion and you enjoy tackling new challenges as they come up, it may be one of the most rewarding things you ever do. Give yourself grace when you make mistakes, and remember that you can take it step by step. Not everything needs to be formalized before you get started.