Starting a business in the United States involves a number of different steps, spanning legal considerations, market research, creating a business plan, securing funding, and developing a marketing strategy. It also entails decisions around a business’s location, structure, name, taxation, and registration.
This article covers the key steps involved in starting a business, as well as important aspects of the process for entrepreneurs to consider.
- Entrepreneurs seeking to develop their own business should start by conducting market research to understand their industry space and competition, and to target customers.
- The next step is to write a comprehensive business plan, outlining the company’s structure, vision, and strategy. Potential funders and partners may want to review the business plan in advance of signing any agreements.
- Securing funding is crucial in launching a business. Funding can come in the form of grants, loans, venture capital, or crowdfunded money; entrepreneurs may also opt to self-fund instead of or in combination with any of these avenues.
- Choosing a location and business structure can have many implications for legal aspects of business ownership, such as taxation, registration, and permitting, so it’s important to fully understand the regulations and requirements for the jurisdiction in which the business will operate.
- Another key aspect of launching a new business is having a strategic marketing plan that addresses the specifics of the business, industry, and target market.
Conducting Market Research
Before starting a business, entrepreneurs should conduct market research to determine their target audience, competition, and market trends.
The U.S. Small Business Administration (SBA) recommends researching demographic data around potential customers to understand a given consumer base and reduce business risk. It also breaks down common market considerations as follows:
- Demand: Do people want or need this product or service?
- Market size: How many people might be interested?
- Economic indicators: These include income, employment rate, and spending habits of potential customers.
- Location: Where are the target market and the business located?
- Market saturation: How competitive is the business space, and how many similar offerings exist?
- Pricing: What might a customer be willing to pay?
Market research should also include an analysis of the competition (including their strengths and weaknesses compared to those of the proposed business), market opportunities and barriers to entry, industry trends, and competitors’ market share.
There are various methods for conducting market research, and the usefulness of different sources and methodologies will depend on the nature of the industry and potential business. Data can come from a variety of sources: statistical agencies, economic and financial institutions, and industry sources, as well as direct consumer research through focus groups, interviews, surveys, or questionnaires.
Crafting a Business Plan
A comprehensive business plan is like a blueprint for a business. It will help lay the foundation for business development and can assist in decision making, day-to-day operations, and growth.
Potential investors or business partners may want to review and assess a business plan in advance of agreeing to work together. Financial institutions often request business plans as part of an application for a loan or other forms of capital.
Business plans will differ according to the needs and nature of the company and only need to include what makes sense for the business in question. As such, they can vary in length and structure depending on their intended purpose.
Business plans can generally be divided into two formats: traditional business plans and lean startup business plans. The latter is typically more useful for businesses that will need to adjust their planning quickly and frequently, as they are shorter and provide a higher-level overview of the company.
Reviewing Funding Options
The process of funding a business can be as unique as the business itself—that is, it will depend on the needs and vision of the business and the current financial situation of the business owner.
The first step in seeking funding is to calculate how much it will cost to start the business. Estimate startup costs by identifying a list of expenses and putting a number to each of them through research and requesting quotes. The SBA has a startup costs calculator for small businesses that includes common types of business expenses.
From there, an entrepreneur will need to determine how to secure the required funding. Common funding methods include:
Each method will hold advantages and disadvantages depending on the situation of the business. It’s important to consider the obligations associated with any avenue of funding. For example, investors generally provide funding in exchange for a degree of ownership or control in the company, whereas self-funding may allow business owners to maintain complete control (albeit while taking on all of the risk).
The availability of funding sources is another potential consideration. Unlike loans, grants do not have to be paid back—however, as a result, they are a highly competitive form of business funding. The federal government also does not provide grants for the purposes of starting or growing a business, although private organizations may. On the other hand, the SBA guarantees several categories of loans to support small business owners in accessing capital that may not be available through traditional lenders.
Whichever funding method (or methods) an entrepreneur decides to pursue, it’s essential to evaluate in detail how the funding will be used and lay out a future financial plan for the business, including sales projections and loan repayments, as applicable.
Understanding Legal Requirements
Legally, businesses operating in the U.S. are subject to regulations and requirements under many jurisdictions, across local, county, state, and federal levels. Legal business requirements are often tied to the location and structure of the business, which then determine obligations around taxation, business IDs, registration, and permits.
Choosing a Business Location
The location—that is, the neighborhood, city, and state—in which a business operates will have an impact on many different aspects of running the business, such as the applicable taxes, zoning laws (for brick-and-mortar, or physical locations), and regulations.
A business needs to be registered in a certain location; this location then determines the taxes, licenses, and permits required. Other factors to consider when choosing a location might include:
- Human factors: Such as the target audience for your business, and preferences of business owners and partners around convenience, knowledge of the area, and commuting distance
- Regulations and restrictions: Concerning applicable jurisdictions or government agencies, including zoning laws
- Regionally specific expenses: Such as average salaries (including required minimum wages), property or rental prices, insurance rates, utilities, and government fees and licensing
- The tax and financial environment: Including income tax, sales tax, corporate tax, and property tax, or the availability of tax credits, incentives, or loan programs
Picking a Business Structure
The structure of a business should reflect the desired number of owners, liability characteristics, and tax status. Because these have legal and tax compliance implications, it’s important to fully understand and choose a business structure carefully and, if necessary, consult a business counselor, lawyer, and/or accountant.
Common business structures include:
Getting a Tax ID Number
A tax ID number is like a Social Security number for a business. Whether or not a state and/or federal tax ID number is required for any given business will depend on the nature of the business, as well as the location in which the business is registered.
If a business is required to pay state taxes (such as income taxes and employment taxes), then a state tax ID will be necessary. The process and requirements around state tax IDs vary by state and can be found on individual states’ official websites. In some situations, state tax IDs can also be used for other purposes, such as protecting sole proprietors against identity theft.
A federal tax ID, also known as an employer identification number (EIN), is required if a business:
- Operates as a corporation or partnership
- Pays federal taxes
- Pays staff
- Wants to open a business bank account
- Applies for federal business licenses and permits
- Files employment, excise, alcohol, tobacco, or firearms tax returns
There are further situations in which a business might need a federal tax ID number, specific to income taxation, certain types of pension plans, and working with certain types of organizations. Business owners can check with the Internal Revenue Service (IRS) about whether they need an EIN.
Registering a Business
Registration of a business will depend on its location and business structure, and can look quite different depending on the nature and size of the business.
For example, small businesses may not require any steps beyond registering their business name with local and state governments, and business owners whose business name is their own legal name might not need to register at all. However, registration can include personal liability protection as well as legal and tax benefits, so it can be beneficial even if it’s not strictly required.
Most LLCs, corporations, partnerships, and nonprofits are required to register at the state level and will require a registered agent to file on their behalf. Determining which state to register with can depend on factors such as:
- Whether the business has a physical presence in the state
- If the business often conducts in-person client meetings in the state
- If a large portion of business revenue comes from the state
- Whether the business has employees working in the state
If a business operates in more than one state, it may need to file for foreign qualification in other states in which it conducts business. In this case, the business would register in the state in which it was formed (this would be considered the domestic state), and file for foreign qualification in any additional states.
Some businesses may decide to register with the federal government if they are seeking tax-exempt status or trademark protection, but federal registration is not required for many businesses.
Overall registration requirements, costs, and documentation will vary depending on the governing jurisdictions and business structure.
Filing for the applicable government licenses and permits will depend on the industry and nature of the business, and might include submitting an application to a federal agency, state, county, and/or city. The SBA lists federally regulated business activities alongside the corresponding license-issuing agency, while state, county, and city regulations can be found on the official government websites for each region.
Implementing Marketing Strategies
Every business should have a marketing plan that outlines an overall strategy and the day-to-day tactics used to execute it. A successful marketing plan will lay out tactics for how to connect with customers and convince them to buy what the company is selling.
Marketing plans will vary according to the specifics of the industry, target market, and business, but they should aim to include descriptions of and strategies around the following:
- A target customer: Including market size, demographics, traits, and relevant trends
- Unique value propositions or business differentiators: Essentially, an overview of the company’s competitive advantage with regard to employees, certifications, or offerings
- A sales and marketing plan: Including methods, channels, and a customer’s journey through interacting with the business
- Goals: Should cover different aspects of the marketing and sales strategy, such as social media follower growth, public relations opportunities, or sales targets
- An execution plan: Should detail tactics and break down higher-level goals into specific actions
- A budget: Detailing how much different marketing projects and activities will cost
How Much Does It Cost to Start a Business?
The startup costs for any given business will vary greatly depending on the industry, business activity, and product or service offering. Home-based online businesses will usually cost less than those that require an office setting to meet with customers. The estimated cost can be calculated by first identifying a list of expenses and then researching and requesting quotes for each one. Use the SBA’s startup costs calculator for common types of expenses associated with starting a small business.
What Should I Do Before Starting a Business?
Entrepreneurs seeking to start their own business should fully research and understand all the legal and funding considerations involved, conduct market research, and create marketing and business plans. They will also need to secure any necessary permits, licenses, funding, and business bank accounts.
What Types of Funding Are Available to Start a Business?
Startup capital can come in the form of loans, grants, crowdfunding, venture capital, or self-funding. Note that the federal government does not provide grant funding for the purposes of starting a business, although private sources do.
Do You Need to Write a Business Plan?
Business plans are comprehensive documents that lay out the most important information about a business. They are important references for the growth, development, and decision-making processes of a business, and financial institutions as well as potential investors and partners generally request to review them in advance of agreeing to provide funding or work together.
The Bottom Line
Starting a business is no easy feat, but research and preparation can help smooth the way. Having a firm understanding of the target market, competition, industry, business goals, business structure, funding requirements, tax and operating regulations, and marketing strategy, and conducting research and consulting experts where necessary, are all things that entrepreneurs can do to set themselves up for success.