How to Start a Small Business

Owning a small business is a common dream—one that an impressive 61% of Americans want. However, just 8% of those with a business idea have turned it into a reality, according to one Zapier-commissioned Harris Poll.

A significant barrier for many is access to knowledge and tools. If you're dreaming of entrepreneurship but don't know where to begin, we've outlined the steps to starting a small business—from planning and funding to everything in between.

What do you need to start a business?

There's a common misconception that entrepreneurs need a business background or master's degree to succeed. The fact is that every successful business starts with the same thing: a great idea. There are countless organizations and resources dedicated to helping aspiring entrepreneurs like you start a business, including writing a business plan and funding your startup.

This guide details the essential steps to starting a business, with tips and resources throughout.

Step 1: Write a business plan

Before filing paperwork, choosing a name, designing a logo or launching a website, you should create a business plan. Not only will it serve as your roadmap for how to structure, fund and grow your business, but it can also be essential if you're seeking external funding.

A solid business plan serves as a living document that grows and changes as your business evolves. In the initial stages of your business, the plan should include:

• A company description
• Solid market analysis
• Your plan for attracting and retaining customers
• Financial projections
• Proprietary trademarks and secured patents

Step 2: Choose your business structure

Another important step in starting a small business is choosing the right business structure. While you have several options as a for-profit business, what you ultimately choose may significantly impact everything from taxes to your liability exposure. Consult with a professional if you're not sure which option is best for your situation.

Sole proprietorship

Best for: A business wholly owned by one individual

Pros and cons: Sole proprietors—sometimes referred to as solopreneurs—must pay self-employment taxes for Medicare and Social Security, and profits are taxed as personal income. Likewise, your personal assets—things like your home and personal bank accounts—aren't considered separate from the business. This means your assets could be at risk if the business goes bankrupt or is sued.

Partnership

Best for: Two or more owners operating a business together

Pros and cons: Some types of partnerships protect the personal assets of owners in some way, such as by limiting liability to the amount each person invests in the business or to the extent of their involvement as managers of the business. As with a sole proprietorship, however, the partnership profits are always taxed through personal tax returns, and partners must pay self-employment taxes.

Limited liability company

Best for: A range of scenarios, from freelancers and sole proprietors to partners

Pros and cons: A limited liability company, or LLC, is a hybrid of a partnership and a corporation. Like with a partnership, profits are generally reported on owners' personal tax returns, and owners must pay their own self-employment taxes—although LLC owners may elect to report income as a C or S corporation. However, owners' personal assets are largely protected from liability, just like with a corporation.

Corporation

Best for: A company with a group of owners—or shareholders—that meets certain requirements

Pros and cons: Corporations are considered separate entities from individuals. While they're more expensive to set up and come with a host of strict requirements, they also offer the most protection for personal liability. Corporations generally pay income tax on profits—except for an S corporation, which allows profits to be taxed as personal income with a few exceptions.

Step 3: Register your business

Once you've created a business plan and chosen a legal structure, determine if you need to register your company. Requirements vary based on a few factors, including location and your business's structure. The US Small Business Administration, or SBA, has a helpful tool you can use to find your state's requirements.

You'll also need to apply for an Employer Identification Number, or EIN, even if you're a solopreneur. Also commonly referred to as your federal tax ID number, your EIN functions like a Social Security number for your business and is required to open a business bank account, as well as to apply for licenses and permits. You can apply for an EIN for free through the IRS's website.

Depending on where your business will operate, you may also need a state tax ID number, known as a state EIN. Most states allow you to apply for your state EIN online.

Many cities and states also require a business license—or more than one—and potentially permits as well. While requirements may vary, common licenses and permits include:

• State and local operating licenses
• Specialty licenses, such as a liquor license
• A Doing Business As, or DBA, license
• Federal licenses

Step 4: Establish a banking relationship

Having an established banking relationship may offer you many benefits as a small business owner. Before opening your first small business bank account, think carefully about your needs. For example, you may want a bank with branch access if you plan to make a lot of cash deposits. Similarly, if you anticipate receiving a large volume of payments across multiple channels, you may want a bank that offers a robust range of merchant services.

Before selecting a financial institution, make sure the bank is insured by the Federal Deposit Insurance Corporation, or FDIC. Other considerations include the bank's reputation, stability and history, as well as access to banker support.

Lastly, look for a bank that can grow with you. Be sure your institution offers a wide range of tools and banking resources for small businesses.

Step 5: Calculate startup costs

To determine how much capital you'll need to launch your business, make a list of your potential business expenses. Calculate how much savings you’ll need to start a business and compile a list of common startup business expenses, including:

• Rent
• Inventory
• Payroll
• Insurance
• Equipment and supplies
• Licenses and permits
• Taxes
• Marketing and advertising

Step 6: Fund your business

Now that you've laid the groundwork, created a plan and estimated startup costs, it's time to secure funding for your business. Here are some of the most common types of funding.

Bootstrapping

Bootstrapping refers to the use of personal funds to launch and grow your business. Beyond tapping into personal savings, some entrepreneurs also use retirement savings for small business funding, and many others resort to personal credit cards—although both options come with potential drawbacks.

Family and friends

Many entrepreneurs rely on support from family and friends to launch their business. This can come in the form of a loan, gift or formal investment. If you decide that the benefits of this approach outweigh the risks, be sure to treat a loan or investment professionally by writing up the terms of the deal and sticking to them.

Investor funds

Entrepreneurs with ambitious growth plans often turn to venture capitalists or angel investors for funding. This method can benefit entrepreneurs who need a substantial amount of startup capital. However, it's important to note that you may need to give up a portion of equity or ownership in your business if you choose this funding method.

SBA loans

SBA loans are issued by a bank and partially guaranteed by the federal government. Because the government will cover part of the loan if a business fails, SBA loans typically have less stringent requirements and more favorable terms—although eligibility isn't guaranteed. While the documentation requirements for these loans can be extensive, working with an SBA preferred lender may help streamline the process.

Business lines of credit

A small business line of credit is an approved amount of money you can draw from as needed, making it ideal for smaller expenses. However, you'll likely need a solid credit score and established business history to secure a line of credit from a bank.

Step 7: Set up accounting systems

Whether you hire a professional or do it all yourself, getting the right systems in place before starting a small business can help you keep a close eye on your financial picture. As you prepare for launch, keep these tactics in mind.

While using a personal account for business expenses may seem innocuous, separating your business and personal finances is essential—even if you're a solopreneur. Doing so may provide more protection for your personal assets and give you a better idea of how much money you have coming in and going out of your business.

Select a system to record your financial transactions, such as a spreadsheet or software. If you're managing the bookkeeping yourself, you might want to connect your business bank accounts directly to your software to cut down on manual steps.

To be able to take tax deductions, you'll also need a solid record of your expenses. Set up a system to record bills, receipts and credit card and bank statements in one place. To keep it organized, consider taking photos of receipts to store digitally or filing paper copies by expense type and date.

You may be tempted to do your own taxes, but business taxes can get complicated fast. While working with a tax professional may be an added expense, it's one that may also add to your peace of mind. A professional can help ensure that you're taking the right deductions and can guide you through other important considerations, like withholding enough money from your income to pay self-employment taxes.

Step 8: Use available resources

If you still have questions about how to start a small business, rely on the SBA and its SCORE partner program to help you navigate the process. Many traditional banks also have resources to help your small business thrive.

Whether you're exploring funding options, wondering about managing cash flow or simply wanting a better way to run your operation, your financial institution is here to help.