How to Start a Business: 12 Steps to Success

Are you ready you to take that leap of faith and start your own business? Use the following business start-up checklist to liberate yourself and become a self-sustaining entrepreneur.

1. Brainstorm Business Ideas

Brainstorm ideas

Every new business starts when the proverbial light bulb goes off. This is the first step in your entrepreneurial journey.

It could be something that you’re really knowledgeable and passionate about, or perhaps you just had an idea on a way to fill a gap in the marketplace while waiting to catch a flight. Wherever interests or inspires you there’s almost always a way to convert that idea into starting a real business.

The problem isn’t coming up with ideas. It’s narrowing down all of these possible businesses to just one or two. For example, do you want to start a t-shirt business or sell specialty cat gear?

Sound challenging? It’s not as difficult as you may think once you consider these decisions:

  • Decide what is most important to you right now.
  • Determine what you do best with the least amount of effort or funding.
  • Define your long-term objectives.
  • Consider what makes the most money the fastest.
  • Think about what you are good at.
  • Describe what you are are you passionate about.

If you’re intent on starting a home-based business, this will narrow the focus and scope of your ideation. Take these factors into consideration early, since it will help narrow down your list. If it’s a service-based business, do you think you can provide something that offers value immediately?

Get Realistic

Once you’ve narrowed down your list of ideas it’s time to balance it with a dose of reality by conducting research. You can start by learning what current brand leaders are doing, and determine how you can do it better or cheaper. You could also talk to a mentor, examine current trends, and your business idea through a validation process.

This simply means that in order for your business to be successful it must solve a problem, fulfill a need or offer something the market wants. You can identify this need by

  • Identifying your target market based on factors like age, gender, education level, income, and location. Once you do, you can conduct a market analysis to determine how large the market is and if it’s saturated. You can then conduct preliminary market research through polls, surveys, or focus groups to better understand their wants and needs.
  • Know what makes your product/service different by creating and focusing on a unique selling proposition (USP).
  • Research the competition with a competitive analysis and a SWOT analysis.
  • Conduct a financial feasibility analysis in order to determine how much it will cost to start the business (aka start-up capital), the on-going expenses, and the earning potential.

Another option would be to open a franchise of an established company. Even though it’s not your idea, the brand and business model are already in place. You also have a built-in customer base. You’ll simply need to determine a location and source of funding.

If you’re looking for some inspiration, here are some of our favorite business idea lists:

2. Make a Business Plan

Make a business plan

This wouldn’t be a very good guide on how to start a business if we didn’t break down the cornerstone of your new venture: the business plan.

What is a business plan?

A business plan is simply a blueprint that will guide your business from the start-up phase through establishment and eventually business growth since it will answer vital questions like:

  • What is the purpose of your business?
  • Who are you selling to?
  • What are your end goals?
  • How will you finance your startup costs?

Even if you’re solopreneur, having a business plan is a must. Thankfully, a business plan doesn’t have to be overly complex. In fact, as long it clarifies what you hope to achieve and how you plan to do it, you plan could be jotted down onto the back of a napkin.

Highlights of Writing a Business Plan

We previously discussed how to write a business plan, but are the highlights for you to focus on writing your business plan;

  • Executive Summary. This sums up your entire plan, including what you want to accomplish and what sort of financing you are looking for. It’s placed after the title page of your plan document.
  • Business Description. This is where you actually describe your business, as well as provide an overview of the entire industry.
  • Marketing Plan. This will discuss the strategies you’ll be using to market your product or service.
  • Analyze the Competition. Here you will share the weaknesses and strengths of your competitors and what makes your different.
  • Product/Service Description. This section provides more detailed information on what you offer.
  • Management and Operations. This describes the management team and member responsibilities.
  • Finances. Here you’ll discuss the costs associated with your business, and how long you expect it will take until you are profitable.

Again, this doesn’t have to be extremely long or complicated as long as it can assist you in figuring out where your company is headed, how it will overcome potential difficulties, and the resources you’ll need to sustain it

3. Plan Your Finances

Plan your finances

Starting a small business doesn’t mean that you need a lot of money upfront. In fact, it’s possible to start a business with little to no money. However, every business will require some sort of initial investment, as well as the ability to cover ongoing expenses until you’re making a profit. Because of this, you need to plan your finances before you get too far.

You can start by putting together a spreadsheet that estimates your one-time start-up costs, such as licenses and permits, equipment, legal fees, insurance, branding, market research, inventory, trademarking, and property leases. You also need to anticipate the amount you’ll need to keep your business operationational for at least 12 months by listing your rent, utilities, marketing and advertising, production, supplies, travel expenses, employee salaries, and your own salary. Once you have those numbers, you’ll need to combine them to determine the initial investment needed to start your business.

Funding Options

After coming-up with that ballpark figure, you can start looking for ways to finance your business venture.

  • Bank Loan. This a traditional method of financing a business. However, banks have tightened their loan requirements so it may be more difficult to obtain a loan these days.
  • Refinance Your Home Loan. This can be risky, but it can be a quick way to obtain initial funding.
  • Side Hustle. You could get a second job to finance your business, but this may method may drain your energy.
  • Downsizing. You could consider cutting back on your expenses, like moving into a smaller home, and using those savings to find your business.
  • Life Insurance. You can also borrow against your life insurance policy, but you may be charged interest.
  • Credit Card. A quick and convenient way to secure some start-up funding, but the high-interest rates make this a risky option.
  • Find a Partner. You could someone with the capital and knowledge to finance the business. In return, they’ll become a partner.
  • Cash in Retirement Savings. You can also cash-in in your retirement savings. But by prepared to be penalized.
  • Crowdfunding. This has become an increasingly popular way to not only fund a business, but also validate your idea.
  • Get an SBA Loan. The U.S. Small Business Administration offers guarantees on loans that both new and small businesses can use to get off the ground.
  • Product Presales. You could also sell your product before your business has officially launched.
  • Micro Loan. These are small loans through microlenders that are ideal for anyone without a good credit history. However, they do come with higher interest rates.

Determine your legal business structure

Generally speaking, a business becomes a reality as soon as the person engaging in the activity says it does. This is because the label business is merely a statement that you’re intending this activity to make money by providing goods or services to others.

A company, however, is a particular operating structure that has to be registered in some jurisdiction. Additionally, they come with substantial rights and responsibilities.

Because of this slight confusion, it’s not uncommon for entrepreneurs or potential business owners to ask whether their businesses should become companies through a process called “incorporation” or not. If so, when and what form of company?

Register with the government and IRS.

First things first. To become an officially recognized business entity, you must register with the government. Corporations will need an “articles of incorporation” document that includes your business name, business purpose, corporate structure, stock details, and other pertinent information regarding your company. Otherwise, can simply register your business name, which can be your legal name, a fictitious “Doing Business As” name, or the name you’ve come up with for your company. As a reminder, you may also want to take steps to trademark your business name for extra legal protection.

Once you’ve register your business, you next need to obtain an employer identification number (EIN) from the IRS. Even though this is not required for sole proprietorships with no employees, applying for one keeps your personal and business taxes separate. The IRS has put together a checklist that can determine whether you will require an EIN to run your business. If you do, you can register online for free.

Even if you do not require an EIN, you will still need to file certain forms in order to fulfill your federal and state income tax obligations. These forms are determined by your business structure. You’ll also need to find state-specific tax obligations, as well as any required federal or state licenses and permits you’ll need in order to operate. You can use the SBA’s database to search for licensing requirements by state and business type.

The advantages of disadvantages of registering your business.

“Registering your business with a state, federal or international certification board offers many advantages, writes William Lipovsky. “First of all, it makes it much easier for potential customers to research and find you. Registration is often a cheap form of marketing.”

“Registering a business is usually a simple process. You can often simply register the business yourself, online, in a matter of minutes. Registrations costs vary, but they typically are modest. However, most business registrations expire yearly and must be renewed.”

“Registration may entitle your business to certain perks, such as special credit cards or wholesale discounts. Furthermore, registration may help improve your credit score as well. However, always use caution with certain business credit cards, as they may involve certain risks and not be suitable for everyone,” adds Lipovsky.

Since registered businesses are seen as part of “the establishment” it may be easier for your company to obtain bank credit.

Disadvantages to Consider

“Registration does not provide any significant liability protection. If you don’t incorporate your business, you are personally responsible for its liabilities. If your company is sued, or encounter financial hardship, your personal assets could be at risk,” states Lipovsky.

“Registration also offers few tax advantages. If you are a sole proprietorship, the IRS will tax your business at your personal income tax rate. This could potentially land you in a higher tax bracket and increase your tax liabilities. Did your business’s profits take you by surprise last year? If it did, it shows why your company’s structure is important when it’s tax time.”

“Registering your small business doesn’t protect your name or brand. If name or brand are important with you, consult an attorney, and consider establishing copyright or trademark protections.”

“Most registrations aren’t transferable at point of sale. You can sell the business’ assets, but the new owner will be responsible for obtaining a new registration.”

When to incorporate when Starting a Real Business?

The decision to incorporate your business takes careful deliberation after discussions your professional advisors, such as a lawyer or accountant. Some factors which typically counsel incorporation are:

  • You’ve been advised by your lawyer or accountant to incorporate immediately. This is a proactive measure to protect your assets.
  • You want to share partnership with someone else. Unfortunately, business relationships dissolve. Since LLCs and corporations have well-established mechanisms for removing a partner or winding down a business entirely, this can prevent future headaches.
  • If you plan on accepting an invest. You potential investors want to know that, in return for their investment, they’ll share in the agreed-upon economic proceeds of the business. This is easier to guarantee for corporate entities than for unincorporated businesses.
  • You’re planning on hiring your first employee. As an employer, you must be compliant. If you’re not incorporated then you’re not separated from the business personally. This means you personally will be held responsible for any workplace mistakes – whether if that’s them getting hurt on the job or them accidentally customers payments information.
  • Your business approaches material size or complexity. As your business grows, it will become complex and sophisticated. As a result, you may attract the attention of nefarious individuals. Incorporation will help limit your personal exposure to any potential risks which that come associated with your business, such as staying protected from patent trolls.

What types of companies are there?

In the United States, companies are regulated at the state level and not at the federal level. The laws of the 50 states typically provide for limited liability companies (LLCs), corporations (commonly referred to as “C corps”), and a few more unique options that are generally not relevant to internet companies.

With that in mind, here’s a brief rundown from the SBA on the most common business structures.

  • Limited Liability Company. An LLC is designed to provide the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership. Learn more about how LLCs are structured.
  • Corporation. A corporation is more complex and generally suggested for larger, established companies with multiple employees. Learn more about how Corporations are structure.
  • S Corporation. An S corporation is similar to a C corporation but you are taxed only on the personal level. Learn more about how S corporations are structured.
  • Sole Proprietorship. A sole proprietorship is the most basic type of business to establish. You alone own the company and are responsible for its assets and liabilities. Learn more about the sole proprietor structure.
  • Partnership. There are several different types of partnerships, which depend on the nature of the arrangement and partner responsibility for the business. Learn more about how these are structured.
  • Cooperative. People form cooperatives to meet a collective need or to provide a service that benefits all member-owners. Learn more about how cooperatives are structured.

Other considerations.

You actually have the ability to choose an initial business structure, and then reevaluate and change your structure as your business grows and adapts. However, depending on how complex your business us, it’s in your best interest to consult with an an attorney or CPA to ensure that you’re using the right structure for your business.

One final note, a majority of tech companies choose to have a C corporation, specifically, a Delaware C corporation. The reason? Forming your company in Delaware is the easiest and most efficient.

5. Get Your Bookkeeping and Accounting in Order

Get your bookkeeping and accounting in order

Have you recently gotten paid for the goods or services that your business provides? Congratulations! You’ve officially created something that people are willingly to pay for. But, the journey has just begun. To ensure that your business grows and stays healthy you’re going to have to pay close attention and record how money is coming in and out of your business.

In other words, welcome to bookkeeping and accounting 101!

What is bookkeeping?

As defined by the Accounting Coach;

“Bookkeeping involves the recording, storing and retrieving of financial transactions for a company, nonprofit organization, individual, etc,” with the common financial transactions and tasks:

  • Billing for goods sold or services provided to clients.
  • Recording receipts from customers.
  • Verifying and recording invoices from suppliers.
  • Paying suppliers.
  • Processing employees’ pay and the related governmental reports.
  • Monitoring individual accounts receivable.
  • Recording depreciation and other adjusting entries.
  • Providing financial reports.

“Today bookkeeping is done with the use of computer software. For example, QuickBooks (from Intuit) is a low-cost bookkeeping and accounting software package that is widely used by small businesses in the U.S.

Bookkeeping requires knowledge of debits and credits and a basic understanding of financial accounting, which includes the balance sheet and income statement.”

What is accounting?

“Accounting is the systematic and comprehensive recording of financial transactions pertaining to a business, and it also refers to the process of summarizing, analyzing and reporting these transactions to oversight agencies and tax collection entities,” explains Investopedia. “Accounting is one of the key functions for almost any business; it may be handled by a bookkeeper and accountant at small firms or by sizable finance departments with dozens of employees at large companies.”

Accounting also involves generating reports and statements, such as balance sheets, based on information from your business’s books, that determine its financial health. Furthermore, accounting can be used to determine the structure of your business and tax planning and tax preparation.

What are ‘books’?

For those new to bookkeeping and accounting, books are simply a ledger that describes the movement of value into and out of the business. This varies from business to business, but in most cases the ledger lists the amount, description, date, and notion of where the money is coming from and where it is going.

Most businesses use double-entry bookkeeping. This is where the business keeps multiple logical ledgers with each representing an account of the business. With this technique, every transaction recorded twice: as a credit to one account and a debit to another. This prevents any potential errors and shows the impact of each transaction.

Today, accounting and bookkeeping have become less distinct and easier to manage thanks to computers and accounting software.

Cash vs. accrual accounting.

When it comes to accounting, there are two methods you should become familiar with: cash and accrual.

The cash method, as described by Carrie Smith for Quickbooks, is where “you record income as it’s received and expenses as they’re paid. This does not take into account any accounts receivable or payable, as it only applies to payments from clients when the cash is in hand, and expenses when the transaction clears your bank account.”

“For example, if you invoice a client for $1,000 on March 1 and receive payment on April 15, you would record the income in April’s bookkeeping. This is when the money was received and in hand.”

Many small businesses prefer to use this method because it simplifies the bookkeeping process. Also, you do not have to pay income tax on any revenue until the moment it’s deposited into your bank account.

The one downside with this method is “that it can produce an inaccurate overall picture of your finances.” This is because “it doesn’t account for all incoming revenue or outgoing expenses, it can lead you to believe you’re having a very high cash-flow month, when in actuality this is a result of last month’s work.”

Accrual accounting “is basically the complete opposite of the cash method. Income and expenses are recorded when they’re billed and earned, regardless of when the money is actually received.”

“Using the example from above, and applying the accrual basis of accounting, you would record the $1,000 as income in March’s bookkeeping versus in April when you actually received the funds.”

This method can provide small business owners with a more accurate and realistic picture of income and expenses during a certain period of time.

The drawback “is that it doesn’t account for cash flow or funds that are available in your bank account.”

Substantive requirements.

“One of the most important best practices regarding your individual tax return is to keep good records for the items you put on your tax return. Income items, tax deductions, and tax credits — all of them,” writes Mark Steber, Chief Tax Officer, Jackson Hewitt Tax Service Inc. “The documents and receipts related to deductions and credits you take on your tax return support the amounts during a tax audit, if needed. It is a funny thing, but sometimes the IRS audits a taxpayer’s tax return and generally if you cannot prove the existence of a tax deduction or support a tax credit, the IRS may deny it on the tax return. If you claim that you drove 50 miles to the doctor, or spent $2,000 on a new computer for your business, you need to be ready to prove it. So keep good records.”

Addressing requirements.

Here’s what Steber suggests you keep track of and how:

  • Keep copies of your tax return information, supporting documents, and documents that identify sources of income and expenses. You should also keep documents that back up claims for credits as well as for adjustments and deductions, such as Forms W-2, Forms 1099, bank statements, brokerage statements, and mutual fund statements. For expenses you can use canceled checks, receipts, sales slips, invoices, and account statements.
  • “If you travel for your business, you must be able to substantiate the business use of a vehicle with written documentation. This generally includes a record of the dates of business trips, customers visited, purpose of the trips, number of business miles traveled, and the total number of miles the vehicle was used during the year,” states Steber. If you deduct actual expenses, “you must save records for gas, oil, insurance, licenses, and other car maintenance receipts.” You can also deduct items like charitable contributions and office expenses.
  • In order to “deduct an expense on your tax return, you must be able to prove that payment was made and the payment was for something deductible,” such as bank or account statements.

You should keep these records for “as long as they are relevant for your tax situation.” However, you should keep your tax returns and records for at least three years.

For more on your business and tax deductions, check out the following resources:

Separating your finances.

The lines between your personal and professional finances can get murky. But, it’s imperative that you keep them separated.

As Max Palmer explains, “it’s important to keep your personal and business finances separate. You might think that it doesn’t matter that much (it all goes to the same place in the end), but it is an important distinction.”

Furthermore, the IRS “makes a distinction between your business and personal finances. If you use items for personal purposes, you can’t deduct them as business expenses and use them to offset your business income. Being able to separate out your personal and business finances is an important part of making sure that your taxes are accurate, and that you reduce the chances that you will be subject to a tax audit.”

Finally, your record-keeping is also less complex when you separate your business your personal needs since it proves getting items mixed-up. And, having everything “separate makes it easier to analyze your budget categories and plan for the future, on top of being smart practice when it comes to the IRS.”

You can keep everything separated by opening a bank account specifically for your business and obtaining a line of credit, such as a credit card, that will be solely used for business expenses.

Accounting tips for small business owners.

Even if you outsource your accounting and bookkeeping or hire an accountant, you should still become familiar with the basics so that your business can thrive

  • Give payment incentives and rewards. “Whether you’re pricing your goods for your store or you’re sending an invoice it’s always a good idea to give your customers incentive to make payments,” writes Renzo Costarella.
  • Utilize current payment technology and accounting software. In order to scale, you’ll need a cloud accounting service. “Many of the top payments companies offer online invoicing and accounting solutions for businesses of all sizes. These platforms operate in the cloud so you can access your finances from anywhere. Pricing and features are often set on a tiered structure so it’s super easy to scale the software with your business.”
  • Keep a cash reserve. “Most financial analysts suggest having at least three months of runway (basic operating expenses) on hand at all times, adds Costarella. “However, I suggest having at least six months of runway since things never go exactly as planned.”
  • Consider multiple financing options. “It’s good to bootstrap as long as you can. However, there comes a time in nearly every startup’s life cycle when they need to raise money.” Explore alternative sources of funding if you need cash more quickly.
  • Delegate your accounting to someone else. Accounting isn’t for everyone. After learning the basics, “find another employee or service to handle your day-to-day finances.”

6. Understand Business Taxes

Understand business taxes

Business taxes aren’t the most exciting task. On top of that, they can be intimidating for new business owners. But, as a business owner, calculating and paying taxes is both a legal obligation and a responsibility.

While you should still seek professional advice from your accountant, you should become at least somewhat educated on the following subsection of taxes.

  • Delaware franchise tax. Like many states, Delaware charges all companies that are incorporated in Delaware a “franchise tax.” This is essentially an annual fee to renew the registration of a corporation—in some states, however, the fee is indeed called a fee. It is calculated either in principle start at a relatively low number and scale with the complexity of the company. You can quickly calculate your franchise tax after reviewing the rules and formulas are on the State of Delaware’s website.
  • Sales tax. In the United States, all businesses are required to collect sales tax by their local jurisdiction (city, county, etc) and by their state. This happens in every jurisdiction where the company has both a transaction take place and has a “nexus” of economic activity. You’re also generally required to collect sales tax from customers for each transaction. Filing sales tax can get complicated, so gain, consult a professional and review the SBA’s Sales Tax 101 for Small Business Owners and Online Retailers.
  • Corporate income tax. Profits of C corporations are taxed at the federal level and at the state level. The main form for the federal return is Form 1120. Keep in mind that income tax is only levied on income as opposed to
  • revenue.

Taxpayer ID numbers.

Tax returns are associated with taxpayer identification numbers, and here are the several common varieties of this:

  • Social Security Numbers (SSNs). U.S. citizens and anyone authorized to work in the U.S. are issued a nine-digit number by the Social Security Administration.
  • Individual Taxpayer Identification Numbers (ITINs). If you can not receive a SSN, you ask the IRS for an ITIN by filing W-7 form.
  • Employer Identification Numbers (EINs). EINs identify corporate persons (i.e. companies) and not natural persons (actual people). You can only receive an EIN after filing an SS-4 with the IRS.

Informational returns.

All businesses have an obligation to report certain transactions to the government through something called “informational returns.” This is where the government matches informational returns against the tax filings of individuals and corporations as a way to ensure that taxpayers are actually paying their taxes on the income that they have received.

While there are several varieties of informational returns, you’ll most likely issue the W-2, which records wage income to an employee, and the 1099-MISC, which shows payment for services to an individual contractor.

Also know that informational returns reflects total volume of payment not necessarily income (profits).

The IRS has put together a useful guide that explains information returns in more detail.

Transfer pricing.

If you’re conducting business internationally, then you should learn more about transfer pricing.

As perfectly explained by the Tax Justice Network:

“Transfer pricing happens whenever two companies that are part of the same multinational group trade with each other: when a US-based subsidiary of Coca-Cola, for example, buys something from a French-based subsidiary of Coca-Cola. When the parties establish a price for the transaction, this is transfer pricing.”

Transfer pricing is not, in itself, illegal or necessarily abusive. Also known as transfer pricing manipulation or abusive transfer pricing, it is illegal or abusive. Also, transfer mispricing is a form of trade mispricing, which includes trade between unrelated or apparently unrelated parties. Reinvoicing is an example.

However, “If two unrelated companies trade with each other, a market price for the transaction will generally result. This is known as ‘arms-length’ trading, because it is the product of genuine negotiation in a market. This arm’s length price is usually considered to be acceptable for tax purposes.”

Audits

Just the word “audit” could keep you up all night trembling in fear. The fact of the matter is that audits aren’t as scary as you may believe.

Audits are simply a formal inquiry by a taxation agency to verify information on your tax return. Most audits are “correspondence audits.” In this case, the tax agency sends you a letter because a computer compared informational returns to your filed tax return and identified a possible discrepancy. Your accountant typically writes a response.

In the situation where the IRS requires more information or asks you to pay a visit to the local IRS office, don’t hesitate in hiring professional representation since they can be stressful. Also, your accountant will inform which documents you’ll need in order to resolve the audit as quickly as possible.

The best way to avoid an audit is to keep well-organized and accurate records of your business.

For more information regarding your business taxes, check out the following priceless resources:

7. Set Up Your Business Location

Set up your business location

Where you set-up your business is incredibly important – regardless if you have a home office, a shared or private office space, or a retail location. This is because you need to take into consideration:

  • The income and sales tax in your state. Are they favorable for business owners?
  • Rent and other costs, availability of labor, taxes, regulations and government economic incentives in the city that you want to set-up shop.
  • How far is the commute?
  • Is the location consistent with your brand’s image?
  • The proximity to streets, parking lots, and other businesses?
  • The type of location. Do you need retail, office space, or warehouse?

For example, if you’re a freelancer working remotely from home is perfectly acceptable and location doesn’t necessarily matter – unless you live in a high-priced area and aren’t making enough money.

However, running a daycare out of your home will require permits and licenses, while it’s also highly unlikely that you’ll be allowed to manufacture products or open a retail shop out of your home. Instead, you’ll need to find a commercial location.

For more tips on finding the right location for your business — and deciding if you should have a home-based business — read the following articles:

8. Hire Employees (or, don’t)

Hire employees or don't

Out of all of your assets, your employees are your most valuable. That’s because their hard work and dedication keeps your business moving forward. And, without them, your company probably won’t be able to achieve much.

As such, it’s important for you to know how to hire the right team and provide them with the basics—decent livable wages, community, health and wellness, and more.

Considerations before hiring your first employee.

“For many business owners, the goal is to expand to a point where it becomes necessary to hire additional employees,” writes Miranda Marquit.

Here’s what to consider if you decide to hire additional employees:

  • W-2 vs. 1099. “One of the first things you have to determine is whether you are hiring an actual employee, or whether you are hiring a contractor. A W-2 employee comes with more regulations than a 1099 contractor. You also have more control over how a W-2 employee does his or her job. When making this decision, you need to consider things like payroll taxes, whether or not you want to control hours that the person works, and other issues..” If you’re stuck, the IRS has three tests to determine if someone is an employee or contractor: The relationship test; the behavioral control test; and the financial control test.
  • Benefits. “Once you start expanding and hiring employees for your business, you need to think about the types of benefits you offer. Are there ways to encourage talented people to stick around? Providing benefits is one way to attract talented people to work for you and help you grow your business. However, providing benefits also means that you have to be ready to set up the proper health care plans and retirement accounts,” adds Marquit.
  • Payroll. As your business expands your operation might mean payroll changes. Right now, my payroll is simple. I don’t have to worry about paying myself a salary because of my business organization. For example, if you have an independent contractor you don’t need to be concerned about payroll. However, when you hire W-2 employees or if you hire more people, you must calculate and withhold an anticipated amount of taxes.
  • New Premises. Hiring a remote contractor probably means that you can remain working from your home. But, if you hire several new employees you may have to look for a larger workplace to accommodate everyone.

Hiring and employing your first employee.

If you you’re ready to hire your first employee, Erika Welz Prafder, author of Keep Your Paycheck, Live Your Passion: How to Fulfill Your Dream Without Having to Quit Your Day Job, states in Entrepreneur that “you need to understand that extra manpower entails a whole new string of legal obligations, liabilities, expenses and, of course, paperwork.”

To help you “navigate the legal ramifications of the hiring process,” here are the steps and precautions “you should follow to ensure you make informed decisions, while staying within legal and ethical boundaries.”

  • Don’t trust your instincts. Do a thorough background check and ask for original educational credentials and references.
  • Test for illegal substances. To protect others, even your employees, mandate pre-employment and random drug testing.
  • Screen for unwanted behavior. Depending on the position, you can use screening options like psychological testing, handwriting analysis, skill and aptitude tests, and even lie detector tests.

hiring a team

Interviewing employees.

When you’re ready to officially hire a new employee, here the do’s and don’ts to keep in mind when interviewing potential employees;

  • Know which questions are off-limits. Questions regarding an applicant’s age, sexual orientation, marital status, religious affiliation or race are off-limits. Also the “nature of a physical, emotional or mental handicap can only be asked if an applicant will need special accommodations for performing a specific job..”
  • References. Always ask for at least three references; two professional and one personal.
  • Set a salary and choose the employee’s classification.“When it comes to paying and classifying a new employee, federal laws provide clear guidelines when it comes to both.” Start by finding out your state’s minimum wage by visiting the Department of Labor website. For tax purposes, you’ll also have to determine whether the employee is an independent contractor, common-law employee, statutory employee or statutory nonemployee. These are vital components of employee compensation that can derail the business before it properly starts!

Onboarding new employees

Get your records straight. Before your newest team member logs in a single hour of work, there’s a folder’s worth of records you’ll need to complete and process. According to the U.S. Department of Labor , there are 12 records an employer must maintain on each member of their staff for the length of their employment:

  • Employee’s full name and social security number
  • Mailing address, including ZIP code
  • Birth date, if the employee is younger than 19
  • Sex and occupation
  • Time of day and day of the week when employee’s workweek begins, hours worked each day, and total hours worked each workweek
  • How employee’s wages are paid (weekly, bi-monthly, and so on)
  • Regular hourly pay rate
  • Total daily or weekly “straight time” earnings for each workweek
  • Total overtime earnings for each workweek
  • All additions to or deductions taken from employee’s wages
  • Total wages paid each pay period
  • Date of payment and the pay period covered by the each payment

Immigration and Insurance.

  • Handle immigration issues carefully. “To avoid civil and criminal penalties and audits to your company payroll, you must also file an I-140 form (Immigrant Petition for Alien Worker) on his or her behalf with the U.S. Citizenship and Immigration Service (USCIS). An Employment Authorization Document, also known as an I-9 check, must accompany such credentials.” For additional information, contact the USCIS.
  • Get the right insurance coverage. Despite the fact that Puerto Rico, California, Hawaii, New Jersey, New York and Rhode Island “require employers to provide income to disabled employees who get hurt off the job, many experts advise buying disability (or loss of income) insurance for yourself and key employees from the get-go.” There are two types of disability insurance. Short term disability insurance covers 12 weeks to one year, and long term disability insurance covers anything over a year.

Intellectual property assignments.

As your company continues to grow it’s going to produce “intellectual property” (IP). This includes everything from copyrights, patents, and inventions. In fact, IP can be as simple as a blog post on your website or as complicated as software application.

Because of this, it’s important that you own all IP produced. If not, you could run into the risk of an employee or contractor claiming that you stole their IP. The easiest way around this is by having your lawyer draft IP assignment for you include it in your standard employment agreement or contractor MSA.

However, if money is tight, you can find a free template on PanDoc.

Equity for employees.

“Compensating employees with equity has become the tech world’s go-to strategy for attracting talent and fostering loyalty, particularly for cash-strapped startups,” writes Nellie Akalp for Mashable.

The advantages of equity programs:

  • You can conserve cash for other expenses – which is important when you’re a cash-strapped start-up.
  • Equity-based programs can “help align the employee’s financial interests with those of the business, incentivizing employees to be more invested in the future of the company.”
  • The right kind of “vesting schedule can help minimize employee turnover.”
  • Employers can offer equity-based packages (stock grants, restricted stock grants, and phantom stock plans) as part of their total compensation package.

The disadvantage of equity programs:

  • Equity-based compensation is always more complicated than cash.
  • There’s always “the risk that you’ll end up giving away too much ownership of the company.”
  • If you plan on selling the company, it may be more difficult since some buyers want 100% of the stock.
  • Taxes can get complicated when it comes to equity compensation.
  • You may be required to share the company’s books, financial records, and meeting minutes.

9. Consider — and Manage — Risks to Your Business

Consider and manage risks to your business

There’s no way to sugarcoat it. Starting a business is extremely risky. And, the probability of failure is always there.

However, risk in business is completely manageable. For example, it can be managed when you’re incorporated and there’s limited liability for debts, damages, or injuries.

Again, discuss this with your professional advisors, but here are some starting points.

Insurance

When it comes to managing risk, insurance is one of your best options. It transfers risk from the insured to the insurance company.

For most businesses, you’ll need to following types of coverage:

  • General liability: This protects you if anyone is injured at your business. It also covers any injuries caused by your products or services.
  • Umbrella liability: This fills in any gaps from all other forms of insurance.
  • Property/casualty: If you own a business property, then you’ll need insurance for the structure.
  • Business interruption: This covers your sales if you encounter a blackout, earthquake, or storm that puts your business to a halt.
  • Workers’ compensation: If you have employees, then you’re required to carry workers’ compensation insurance that covers medical bills and lost pay for employees who are injured on the job at the minimum.
  • Disability insurance: Your workers are covered by federal disability programs. However, you’ll also need private disability insurance to compensate owners and key managers if they’re injured and unable to work.
  • Life insurance: If your business would cease to function without you then you can replace that lost income and make sure that your family members are financially secure.

If you want to keep your insurance costs under control, then always shop around for quotes, know which deductions you’re eligible for, and consider a BOP (Business Owner’s Policy) which is a policy package that combines most general liabilities.

Click-through agreements and public policies.

Besides insurance, you can also protect yourself through contracts with your customers. In most cases there are standard contracts and are relatively non-negotiable, like the “Terms of Use” that your accept when downloading an app.

This can vary from company to company, but generally you may want to have:

  • Privacy policy. This is simply a statement or a legal document that discloses how your business is going to gather, use, disclose, and manage the customer or client’s data.
  • Refund, warranty, and return policy. While not necessarily required by law (certain laws govern the disclosure of refund and return policies), this is an effective to build trust among your customers in the event that something with your product or service goes wrong.
  • Terms of service/terms of use. These are the rules by which one must agree to abide in order to use your service. Additionally, terms of service can also be a disclaimer, especially regarding the use of a websites.

Businesses and regulators use the policies to ensure that you’re operating professionally. This is also another topic that you should discuss with your attorney.

10. Know the Necessary Transactions and Agreements

Know the necessary transactions and agreements

At some point you’ve probably signed a contract. It’s just a part of life. However, new business owners may not understand contracts, related agreements, and documentation.  As always, you should review these documents with your professional advisors. Here’s what to cover.

Letters of Intent

A “letter of intent” (LOI), also called a “memorandum of understanding” (MOU), is simply a tool for sales.

As Noah Davis, Esq. explains on Rocket Lawyer, “When you’re negotiating a business deal and the negotiation is getting serious, use a Letter of Intent. It helps protect everyone’s rights and responsibilities, as well as solidifying the relationship between both parties. You’ll want to get the letter in writing before the final negotiations, so that both parties know what to expect.”

A Letter of Intent is used during “negotiations for the sale or purchase of a whole or part of a company.” It’s also used when “negotiating the purchase of a company or interest in a company and want to exclude the seller from negotiating with another party.”

Master Service Agreement

As defined by the Vethan Law Firm, P.C., a Master Service Agreement “is a contract between two parties in which both parties agree to most of the terms that will govern future transactions or future agreements.”

An MSA specifies generic terms like:

  • Payment terms
  • Product warranties
  • Intellectual property ownership
  • Dispute resolution
  • Geographic location
  • Venue of law

However, it can also cover corporate social responsibility, business ethics, network or facility access, or any other term critical for all future agreements.

A MSA also allocates risk and provides indemnification.

Statements of Work

“A Statement of Work (SOW) is a document within a contract that describes the work requirements for a specific project along with its performance and design expectations,” states Villanova University. “The main purpose of the SOW is to define the liabilities, responsibilities and work agreements between two parties, usually clients and service providers.”

Keep in mind that the SOW is indeed a contract. This means that it can be subject to contract review and negotiation, but they’re usually less contentious than the MSA.

SOWs generally cover:

  • The scope of the work.
  • Timetables (deadlines and due dates).
  • The price of the project as a single number or a rate.
  • Milestones tied to the timetable.
  • Acceptance criteria, which involves compensation amounts.

Invoices

How do you get paid for a job well done? By sending your clients or customers an invoice.

And invoice is merely a formal written demand for payment that includes the following components:

  • Customer information. This includes the customer contact name, address, and other pertinent contact information.
  • Your information. Also include your contact information in case the customer has a question or concern regarding the invoice.
  • Billing details. This includes the service date, unit price, and unit quantity. At the minimum, it should show a description of the services/products provided and the total due.
  • Due date. This lets the client know when to pay. Payment due dates are usually 15 or 30 days.
  • Payment instructions. This should at least inform the client on how you want to paid. Do you want a check? Do you accept credit cards or bank transfers?
  • Professional design. Include your brand’s logo and colors, and always say “please” and “thank you.”

Check out our Ultimate Guide to Invoicing for absolutely everything else you need to know about invoicing.

Receipts

You also need to provide your customers with a written receipt for every transaction so that they can keep their finances organized. While receipts are formal documents, they’re not as formal as invoices.

Your receipts should at least include:

  • Your business name and address
  • An itemized list of purchases
  • A subtotal
  • Any sales tax assessed
  • The total amount paid
  • The date and time of purchase

Since it’s not uncommon for customers to lose or misplace their receipts, you may want to keep a email the a digital copy or store a keep on your website.

11. Brand Yourself and Advertise

Brand yourself and advertise

Prior to selling your product or service, you should build up some tractions by developing your brand and gaining a following of loyal supporters who will be ready to spend their hard-earned money once the literal or figurative doors open for your business.

Start by creating a logo so that you’re distinguishable from other brands and then use it consistently across all of your platforms, including your company website, social channels, email newsletters, and even invoices. Speaking of social media, use it to spread the word about your new business by either using it as a promotional tool to offer coupons and discounts to followers and to show that you’re an authority figure by creating and sharing relevant content.

For more information on branding and marketing your business, check out the following resources:

12. Grow Your Business

Grow your business

You’ve launched your business entity and made your first sales. You’re onto a great start. But, you’re only at the beginning of journey as a small business owner. If you want to start making a profit and stay ahead of your expenses, you need to always focus on growing your business. And, this is going to take time, effort, and dedication.

Daily growth initiatives.

You can grow your business daily by:

  • Actually enjoying what you do because you’re passionate and you find your work fulfilling.
  • Investing the time. Creating a business plan, doing market research, and all of the other aspects of starting a new business doesn’t happen overnight!
  • Staying organized. For example, creating a bookkeeping system and task management system.
  • Monitoring what people owe you.
  • Advertising through traditional methods, online marketing, or thinking outside of the box, like collaborating with more established brands in your industry or partnering with a charity.
  • Hiring additional employees or contractors who can help your business thrive and grow, such as people who have different skills that you don’t possess like marketers or developers.
  • Keeping focusing on increasing sales and profitability and not sweating the small details.
  • Increasing sales by listening to customers, creating repeat products or services, or implementing a loyalty program.
  • Not getting lazy or complacent. Always look for ways to plan ahead.

Starting a business can be both risky and challenging. But, when you’re armed with the proper tools and information, you can improve the chances of becoming a successful business owner.