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10 Steps for Starting a Small Business

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Rebecca Lake

Rebecca Lake

Updated April 23, 2021
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10 Steps for Starting a Small Business; If you're interested in exploring your entrepreneurial side and breaking free of the traditional 9-to-5, you might consider opening a small business.
If you're interested in exploring your entrepreneurial side and breaking free of the traditional 9-to-5, you might consider opening a small business. But it's not something to venture into without mapping out a strategy for success first. There's some groundwork that needs to be laid when you’re working toward owning a business. That includes refining your concept, taking care of the legal aspects of starting a new company, and getting your finances in order.If you’re looking for a checklist of steps to follow when you're starting your new business, this guide can help. 

1. Research Your Idea

At the core of every successful business is a great idea. Depending on the type of business you're interested in starting, you may have what you believe is a winning concept for a product or service you'd like to offer. Before you get too far along in the process of starting your new business, however, it's important to do some market research. Specifically, you should be thinking about these questions.
  • How original or unique is this concept?
  • Are there other businesses with a similar product or service?
  • How successful are those businesses and who are the biggest competitors?
  • What's the long-term outlook for this product or service like?
  • How much demand is there overall for what I plan to offer?
At this stage, the goal is to determine whether owning your own business is viable, based on what you envision for your products or services. If you're entering into an established industry, you should have an idea of what share of the market you may be able to claim. And if you're having a hard time finding any competing businesses in your niche, then it's important to understand why. That could be a sign that your idea or niche focus is too narrow. 

2. Identify Your Target Customers

Part of conducting market research when starting a small business involves finding your target customers. These are the people who are most likely to buy your product or service. Creating an avatar that embodies your ideal customer can help. As you create your avatar, try to paint as clear a picture as possible and consider things like:
  • Basic demographics such as age or gender
  • Income and employment
  • Education level
  • Geographic location
  • Hobbies or interests
It's also important to consider what problems your ideal customers are facing that your business can help to solve. Being able to solve problems and offer solutions is one of the keys to owning a business that has staying power. 

3. Draft a Business Plan

A business plan is an important document to have when starting a new business. This is essentially a roadmap or playbook of how you plan to start, run, and grow the business over time. There are different formats business plans can take, depending on the scale of the company you're trying to start. A traditional business plan includes an executive summary and description of the company. But it also covers things like:
  • Market research and analysis
  • Organization and management structure
  • Details about the products or services you plan to offer
  • Marketing and how you plan to promote the business
  • Estimated startup and operational costs
  • Key financial ratios, such as estimated profit and loss
Broadly speaking, your business plan should identify what your goals for the business are and how you plan to go about achieving them. Writing a business plan can help you get organized in the early stages of starting a small business and give you a reference that you can check your progress against. 

4. Plan Your New Business Budget

One of the most important steps in how to set up a business involves estimating your costs. The cost to start a business has two dimensions: estimating how much money you'll need to get the business up and running and how much you'll have to spend on an ongoing basis to maintain it. When calculating startup costs, consider everything you may need to spend to get off the ground. That may include things like:
  • Leasing a space if you're starting a brick-and-mortar business
  • Utility, cellphone, and internet service deposits
  • Purchasing or leasing equipment
  • Hiring and training staff if you plan to have employees
  • Purchasing necessary business licenses and/or paying registration fees
  • Marketing and promotion costs
  • Production costs to create your products
  • Website hosting and/or ecommerce setup
Those are the bigger expenses you may need to plan for when starting a new business. Once the business is open, your small business accounting will include ongoing costs such as:
  • Rent or lease payments
  • Utilities
  • Payroll if you have employees
  • Supplies and equipment
  • Marketing and advertising costs
  • Basic living expenses
If you plan to stick with your current job while owning your own business in the early stages, then you may have steady income that can cover your living expenses. But those may not be enough to cover your business expenses until your venture begins turning a profit. For that reason, it's important to consider the next step in the process.

5. Weigh Financing Options

When deciding how to start your own business, finances are a focal point. You need to know what you're set to spend--and how you plan to pay for it. Bootstrapping could be a possibility if you have a sizable amount of cash tucked away in savings that you could tap into. But that may not be a reality, in which case you'll need to explore other options for raising the money you need. There are two broad categories of business financing: equity and debt. 

Equity Financing Explained

With equity financing, you exchange an ownership stake in the business for funds from investors. This is typically how angel investing or venture capital investing works. The upside of this type of business financing is that there's nothing to pay back. This can be a real advantage as you’re attempting to achieve a positive cash flow while you get your startup off the ground. And whether the business succeeds or fails, with equity you're not obligated to make investors whole financially. So the investor shoulders much of the risk in this financing equation. The trade-off, however, is that each equity investor owns part of your business and as such, can have a say in how it's run. That may not be ideal if you'd prefer to have complete control over business decision-making.  Equity financing is a popular startup funding option if you're hoping to eventually go public with your company. Once a startup goes public, angel investors or venture capitalists can sell their shares and get back what they put into the business. But if you're interested in owning a business on a smaller scale, debt financing may be the better choice.  

Debt Financing Explained

Debt financing is just what it sounds like: debt you take on to fund your business. For example, that can mean:You borrow a set amount of money and agree to pay it back to a lender, typically with interest. Small business loans can be found at traditional banks and credit unions or through online lendersStarting a small business with debt may not be a perfect solution but you don't have to give up any of your ownership. And you can compare loans for small businesses or personal loan options to find one that fits your budget and offers the best repayment terms, based on your credit profile. 

Small Business Grants

There's also a third potential funding option you may consider in lieu of debt or equity financing. Small business grants can provide funding to start a new business with no repayment required. Getting small business grants can be time-consuming and competitive, however, so if you need money to start a new business quickly you may want to explore loans instead. 

6. Choose a Business Name

By this point, you've covered most of the biggest hurdles associated with how to set up a business. From here, you can tackle some of the smaller, yet still important tasks associated with starting a small business beginning with choosing a name. When selecting a name for your small business, consider what kind of brand reputation you want to build and what you want to be known for. You may choose your own name or something that embodies what your business is all about. Before finalizing your choice of name, do your homework. Specifically, make sure the name isn't trademarked or otherwise being used by any other business entity, as this could create legal headaches later. If you plan to launch a website or social media accounts for your business, you'll also want to check to see if your business domain name and social media handles are available.

7. Determine Your Business Structure

Choosing a legal structure is next on the list of steps to starting a business and you can't skip this part. A legal structure means how your business will operate. The most common business structures are:
  • Sole proprietorship
  • Partnership
  • S-corporation
  • C-corporation
  • Limited liability company (LLC)
Your choice of business structure matters for a few reasons. First, it determines what kind of liability you have in situations where your business is sued. With a sole proprietorship, for example, you and the business are treated as one and the same. So if you're sued by a customer or supplier, then your personal assets could be attached if a judgment is entered against you in civil court. An LLC, on the other hand, shields your personal assets. Your choice of business structure can also affect taxation and how you pay taxes. Again, with a sole proprietorship you and the business are treated as one and the same for tax purposes. Corporations, however, are taxed differently so depending on how much profit you anticipate the business generating, one structure may be better than another. A third consideration has to do with getting business funding. If you plan to take out one or more business loans, then your business structure may influence what type of financing you're able to qualify for and how much you can borrow. Banks typically can be reluctant to loan money to sole proprietorships, for instance, and they can’t sell stock. 

8. Make Your Business Legal

If you have a business name and structure, the next step is making your business legal. This may include:
  • Registering your business with state and local agencies
  • Obtaining an Employer Identification Number (EIN) from the IRS and a state tax ID if needed
  • Securing any licenses or certifications required to operate
  • Filing trademark or patent applications for business names or products, if applicable
What, if any of these steps, are required for starting a small business will depend largely on where you plan to do business. Some states may require a separate tax ID to go along with your federal tax ID while others don't, for instance. Depending on what type of business you plan to operate, you may need a special license before you can open your doors. If you're unsure what you need to do to register, contacting your local chamber of commerce or your state's business development agency can be good places to start. Keep in mind that you may need to pay certain fees to register or obtain necessary licenses when starting a small business. 

9. Open a Business Bank Account

Once you've registered your business and made it legal, you can open a business bank account. Having a separate bank account can make sense when owning your own business for a few reasons. First, this is a good way to keep business and personal expenses separate. When you're paying your household bills and business expenses out of the same account, it can get confusing as to which funds are going where. It's easier to keep track of business cash flow and personal cash flow when they're in separate accounts. Next, having a business bank account can make filing taxes easier. If you plan to deduct certain business expenses, then having all of those expenses linked to a single account can minimize headaches when filing taxes. Separate business and personal bank accounts may also be necessary if you want to avoid mingling funds because you've chosen something other than a sole proprietorship as a business structure. When comparing business bank accounts, pay attention to fees you may pay, as well as minimum deposit or minimum balance requirements. Also consider whether the account offers access to merchant services if you need help with things like payroll or accounting. 

10. Hire Staff and Plan Workload, If Necessary

Not all startups will require employees, especially in the beginning. But if yours does, it’s a good idea to figure out what areas you’ll need help in and for how many hours you want employees to work. If you’re running a coffee shop, for example, you will likely need at least one other barista to spell you. At this point, you may be able to start figuring out what tasks will need to be done each day and each week, how long they’ll take, and who can do them. In your coffee shop, someone will have to get there early to prepare the tables, make the coffee, and set up. And at the end of the day, someone will have to stay late to clean up and close down the shop. Depending on how much project management is involved in your particular startup, you may want to use task management software to track what needs to be done and who will do it.  You should already have budgeted for payroll, but it’s also important to figure out when and how often each employee will be coming in and what exactly each will be working on. 

Get the Right Insurance

One final thing to know about how to start your own business is the value of insuring it. There are different types of business insurance you can have in place but they all have a similar goal: protecting your investment of time and money in the business. When considering insurance coverage for your business, assess your needs carefully. Some of the types of coverage you may want to have include:
  • Liability insurance
  • Property insurance
  • Business interruption insurance
  • Cyber liability insurance
  • Equipment breakdown insurance
  • Auto insurance for business vehicles
  • Workers compensation insurance if you have employees or plan to
SoFi Attune can help when you need to get business insurance. You can get a quote online, apply in minutes, and get an insurance policy or package that's tailored to fit your new business needs. 

The Takeaway

After reading through this list of steps to starting a business, it can seem like a lot. But breaking down each step into smaller, actionable tasks can make the process less daunting. If you're interested in exploring small business financing options, SoFi can help. With Lantern, you can compare small business loans, credit cards and personal loans to find the right financing solution for your needs.
The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice. This Lantern website is owned by SoFi Lending Corp., a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license number 6054612. SoFi Lending's NMLS number is 1121636. NMLS Consumer Access. SoFi Lending Corp. operates this Lantern website in cooperation with Even Financial Corp. ("Even"). If you submit a loan inquiry, SoFi will deliver your information to Even, and Even will deliver to its network of lenders/partners to review to determine if you are eligible for pre-qualified or pre-approved offers. The lenders/partners receiving your information will also obtain your credit information from a credit reporting agency. If you meet one or more lenders' and/or partners' conditions for eligibility, pre-qualified and pre-approved offers from one or more lenders/partners will be presented to you here on the Lantern website. More information about Even, the process, and its lenders/partners is described on the loan inquiry form you will reach by visiting our Personal Loans page.SOLC21019

About the Author

Rebecca Lake

Rebecca Lake

Rebecca Lake is a freelance writer specializing in personal finance, investing and small business. Her work has appeared online at U.S. News and World Report, Forbes Advisor, CreditCards.com and Investopedia. Rebecca writes about a variety of topics for SoFi, including budgeting, saving money and student loans.
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