10 Steps for Starting a Small Business

Rebecca LakeUpdated April 21, 2023

Share this article:

Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.

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. Recommended: Mistake Proof Your Business Idea

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. Recommended: 30 Low-Cost New Business Ideas

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. Recommended: Small Business Loans for Women

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. Recommended: How to Grow an Ecommerce Business

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. Recommended: Venture Capital vs Hedge Funds

Debt Financing Explained

Debt financing is just what it sounds like: debt you take on to fund your business. For example, that can mean:

Small business loans
Small business lines of credit
Small business credit cards
Personal business loan or lines of credit

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 lenders. Starting 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. Comparing rates for loans will help.Recommended: The Essentials on Small Business Financing and Building Credit

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. Recommended: Hard Money Loans: What You Need to Know

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. Recommended: Guide to Silent Partner Agreements

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

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. Recommended: Being Your Own Boss: Benefits, Drawbacks and Tips

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, Lantern by SoFi can help. Users are matched with a single provider that can supply fast funding for a business.

LCSB0423035U

About the Author

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.

Share this article: