Let’s be honest.
Starting a business isn’t very easy.
So I can understand where the hesitation comes from
I mean a lot of people think, and a lot might say, “Whoa, I don’t want to get into debt especially with 8 out of 10 new businesses failing. It’s risky.”
Well, here’s the thing, how to start a business in 2020, is easier than it’s ever been before.
You see back in the day, you would have to get a loan to get retail or office space just to set up your foundation. So you needed thousands and thousands of dollars to get started, then pray that someone would actually buy your product or services.
Today, you can start hundreds of businesses without as much capital.
As a co-founder of two companies and someone who has helped others get started. I’m excited to share with you what I’ve learned about how to start a business in 2020.
Now there are so many things to think about when you’re starting a business.
So today, we’re going to make it easier for you and break down what you need to do step-by-step.
Also, you don’t have to follow this exact order, but if you do then it will make it easier for you to connect all the dots.
Alright, let’s go ahead and get into it with step number one.
10 Steps on How to Start a Business
Step 1: Build your business plan
Now this step is so obvious, so plain, so apparent, so… I mean a business plan is like an idea, right?
Well as someone who has personally rushed through this step, I can tell you that it is a mistake to not fully think through this part.
Now sure, you won’t have it all figured out on day 1, but you should definitely ask yourself these questions:
- What problem does your business solve?
- Who are the people who have this problem?
- Define your audience. How big is it? What are their goals & challenges?
- What other solutions/competitors out there that also solve this problem?
- What makes you different?
- How can you sustain that difference? (if you need to replace yourself for example)
- Will you need a team or partners?
- What will be your initial costs?
These are some of the key questions you have to answer before you even decide to start a business.
Think of it like this.
You might decide that you want to start a boutique burger restaurant.
You may get so excited that you find a location, put together a digital menu, hire staff and get ready for business, only to find out later that there are 8 other burger restaurants with bigger menus, more quality and lower costs.
And because you skipped your business plan, you were on a fast track to business failure before you even got started.
So plan, plan, plan and when you’re done planning then plan so more!
Step 2: Choose your business entity
There are 5 types of entities you want to look at when you’re ready to make it official.
We’re going to look at some pros and cons of each one starting with a sole proprietorship.
A. Sole proprietorship
Now a sole proprietorship is someone who owns an unincorporated business by themselves, which basically means you can begin working for yourself at any time.
- The pros here is that you can get started without filing forms which require annual fees.
- Another pro is that you are in complete control. You keep all profits (and losses) for yourself.
- The con of sole proprietorship is that your financial and legal situations are tied together.
This means that you are personally liable for your company’s actions. So if someone has a bad experience with your company and sues you then they can come after your personal assets which could affect you and your family.
So I would only recommend a sole proprietorship if…. okay, i wouldn’t recommend it.
B. General Partnership
Let’s move on to the next entity which is a general partnership.
If you want to go into business with someone else and you want the same ease of maintenance and freedom of fees that a sole proprietorship gives you then you may want to consider a general partnership.
The pros and cons of a partnership are similar to the sole proprietorship except you have to share control, taxes, lawsuits, profits and losses with your partners.
So needless to say, I’m not a big fan of the general partnership either because it does not have any liability protections.
The 3rd entity to choose from is the C-Corporation, which sounds so prestigious right?
Well let’s look at the pros and cons.
- The major pro is that C Corporations are legal entities that shield stakeholders from personal liability and company debt. So if someone sues you then they can only go after the Corporation’s assets.
- Another pro is that C-Corporations can take special deductions such as fringe benefits.
- The con of C-Corporations is that there are strict guidelines on operations. Oftentimes you have to hold board meetings, record minutes and meet trading requirements. So for most small businesses, you will spend more time managing the corporation than actually growing your business.
- Plus another con, is that you will experience double taxation. This basically means the corporation will be taxed and the shareholders will be taxed on any income the company generates.
Now this is an oversimplification of how C-Corps work. But in short, it’s a more complex entity that can come at a huge opportunity cost.
The 4th entity to choose from is the S-Corp.
At first glance, the S-Corp and C-Corp are very similar. However, S-Corps are restricted to 100 US shareholders.
- However the major pro of the S-Corp is that you avoid double taxation. Because the tax liability is passed down to the shareholders instead of the corporation.
- And you still get the liability protection that the C-Corp offers.
- The con of a S-Corp is that you must have articles of incorporations and record corporate minutes.
Like C-Corps, the entity can be pretty complex and generally requires the help of an accountant. For example, S-Corps require that all shareholders within the company take a “reasonable” salary even if their company is not making a profit.
Now let’s cover the 5th and last entity which is the LLC. LLC stands for limited liability.
For me, it’s like a combination of sole proprietorship, partnerships, c-corps and s-corps all- bulked into one flexible option.
- The major pro of an LLC is that it offers more control and flexibility while also providing liability protection.
- Also, you can choose your tax structure from any of the entities we covered.
- The major con of an LLC is that you have to pay annual fees and this structure makes it really hard for investors to contribute capital whereas the C and S corps makes it much easier.
In my opinion, the clear winner for companies just starting is an LLC.
But hey maybe you have a different opinion, comment below which structure you think is best.
Step 3: Register your business
Registering your business may differ between states. Oftentimes, you will want to file with your secretary of state office. If you have partners, then it’s important to create an operation agreement between you and the other stakeholders.
This agreement will be used to decide voting rights (or control), ownership percentage, successorship and more.
Many states will ask you for your operations agreement when you’re registering your business.
Once you’re registered then you can move on to the next step.
Step 4: Get your EIN
EIN stands for Employer Identification Number.
This is a simple step in the process where you will need to fill out a brief application form so you can get a unique number for your business.
Your EIN works like a social security number, but for your business. You will often need it when you are applying for licenses or permits, filing your taxes and paying employees.
You will also need it for the next step.
Step 5: Setup your business bank account
The cardinal sin when operating your business is to mix your business finances with your personal finances. Because it can easily blur the lines between your business profit & losses and tax situation.
Okay, let’s see 23 sales, product costs, shipping costs, Mcdees, tesla… the next thing you know, the IRS will come knocking at your doorstep.
Ok, so maybe the IRS won’t show up at your door, but you should still make sure that you are relying on accurate information so you can make strong business decisions.
Step 6: Setup your accounting
Once you have a business bank account, you want to start tracking your transactions with something like QuickBooks. Then hire an accountant to help assist you with all the bookkeeping, taxes and watch your finances closely.
This way, you can concentrate on your business growth instead of more reporting.
Step 7: Get business insurance
I know, I know… insurance is boring and sometimes can feel like a waste of money.
Earlier we talked about entities and protecting your personal assets. But if you’re serious about the success of your business then you want to make sure your business assets are protected as well.
Step 8: Protect your intellectual property
If you have something that is extremely unique and you spent a lot of time creating, then you should protect it. That means opting in for trademarks, patents and copyright protections. But it really needs to be extremely unique and important.
Listen, whether you have these protections in place or not, people may try to copy you.
So remember, there’s an opportunity cost to everything. You want to make sure you’re focused on growth rather than protecting your trademark against nobody.
Especially because legal costs are very expense and time consuming. And unfortunately, sometimes these copy catters will win their legal arguments with small and simple modifications.
Step 9: Start marketing and advertising
Now, when you’ve got all your business stuff setup. And your products/services ready to go. Then you can start marketing and advertising!
If you’re just starting out then you can check out this post on how to calculate your marketing budget
But the key takeaway is to make sure you are putting away at least a year’s worth of expenses.
Step 10: Be patient and prudent
Remember what I said at the beginning? Starting a business isn’t easy.
But in 2020, it’s easier than it’s ever been before… and in 2021, it will even probably get easier.
You can do a lot of the things we talked about by simple whipping out your laptop and hanging out on the couch.
The key to your future success is to be patient and prudent. If you’ve followed the steps above, there’s no reason to give up after a few months.
And if you’re being prudent about your expenses and financials then you will be able to build a long lasting company.
So in conclusion, follow these 10 steps
- Create a business plan
- Choose your business entity (reach out to us if you want help)
- Register your business
- Get your EIN
- Setup your business bank account
- Setup your accounting
- Get your business insurance
- Protect your intellectual property (optional)
- Start marketing and advertising
- Be patient and prudent
Well, that’s it for this post! I hope the steps above on how to start a business can help you jumpstart your dream in owning one. And if you need sound financial advice before you even start a business, our team of expert financial advisors are always happy to guide you. From helping you start a business to all your other financial management needs, LYFE Accounting got you covered, We’re just a click away!