Tips for starting a small business: A step-by-step guide

Think it's finally time to get that idea off the ground or offer your services as a freelancer? Starting your own business may be the right move for you, but there are some important things to consider before diving into such a life-changing decision.

If you've started a business recently, you're in good company. New business applications averaged 430,000 per month in 2024 and have increased significantly since the COVID-19 pandemic. More people are embracing entrepreneurship than ever before, and with the right business idea, you may be able to join them. Here are some important tips for starting a small business to help you lay a foundation for success.

1. Do market research

To ensure your small business has a strong chance of succeeding, it's important to carefully evaluate the market to see how your competitors are doing. Having competition isn't necessarily a bad thing. If they are successful, it may indicate high demand for your products or services.

Here are some things to consider as you research the market:

• Market size and growth rate: Determine the overall size of the market in terms of revenue and potential customers. Is the market growing?
• Customer demographics: Identify your primary customers and the problems or needs they may have. How will your business address them?
• Direct and indirect competitors: Study your competitors and businesses that offer similar products and services. How will your business stand out?
• Regulatory and legal environment: Find out what regulations govern the business you are thinking of starting. Will they be easy to follow? Are there potential legal challenges?
• Competitor marketing: Assess the marketing strategies your competitors are using. Can you do a better job of promoting your business?

2. Make a business plan

You will need a business plan, even a quick one-pager that collapses all of your ideas into one place. This way, you can collect your thoughts and prep your "elevator pitch" for potential customers, investors and lenders. A written plan tests the feasibility of your idea and can help you secure business financing.

Revisit your plan as your business grows. A more thorough business plan (one that outlines the organizational structure and key performance indicators of your business) could serve as a roadmap to keep you and your team on track to achieve your goals. Potential lenders and investors may also request your business plan to assess the viability of your company, so it's worth your time to develop a detailed document.

3. Conduct a SWOT analysis

A helpful tool you can use to evaluate your business idea is the SWOT analysis. SWOT is short for strengths, weaknesses, opportunities and threats:

• Strengths: Determine what your business does well. Think about what you provide for your customers that sets you apart from your competitors and any other areas where you believe you excel.
• Weaknesses: What weaknesses or challenges are keeping your business from reaching its full potential? This could include issues with your product, finances, technology, customer service or reputation.
• Opportunities: What are the external factors that could positively impact your business? These may include events like an increased demand for your product or one of your competitors shutting down.
• Threats: These are the external factors that could negatively impact your business. Rising supply costs, new competitors, poor market conditions and natural disasters are all possible threats to a business.

Be sure to document everything and then review your analysis to gain valuable insights. Revisit and adjust your SWOT periodically as your business grows and market conditions change.

4. Map out your business finances

It takes a lot of passion to start a business, but it also takes money. Know your numbers — always. A business budget can help you identify cash flow opportunities, challenges and the minimum revenue your business will need. Be sure to set realistic earnings goals when creating your business budget, and don't forget to include a reserve for unexpected expenses.

You also need to keep your business's cash and banking activities separate from your personal checking and savings accounts. You can do this by opening a business bank account. Not only will this make managing your finances easier at tax time and help protect your personal finances from liability and risk, but it will also give you a clearer picture of your revenue, expenses and profit.

5. Choose the right business structure

The business entity you choose will depend on your industry, location, growth potential and other factors. Each business structure has its own benefits, tax implications, fees and shares of ownership, so be sure to carefully examine your options.

Here are some common business legal entities:

• Sole proprietorship: This is the simplest business entity. It's owned and run by one (sole) person. There is no legal distinction between the owner and the business.
• Partnership: A partnership is a business with two or more owners who agree to operate together and share the profits and losses.
• Limited liability company (LLC): An LLC ensures that business and personal assets remain separate so the owner's personal assets are not at risk.
• S corporation: With a maximum of 100 shareholders, S corporations are taxed on a "pass-through" basis and offer limited liability protections.
• C corporation: Also offering limited liability protections, C corporations are open to unlimited shareholders and profits could be subject to double taxation.

6. Register your business

Once you've decided on a legal entity, it's time to officially register your business with the IRS and the state you will be doing business in.

You'll need the following information:

• Business name: Have fun choosing your business name — just be sure the name you select hasn't already been taken. Sole proprietors can set up their business with a "doing business as" name with the state so they don't have to use their personal names. You may also want to look into trademarking your business name for added legal protection.
• Business purpose: You'll be asked to fill out some details about your industry, products and services.
• Legal and tax professionals: While not mandatory, seeking legal advice is recommended, especially for business entities that are more robust than a sole proprietorship.

The IRS will issue a Tax ID number, which is also known as an Employer Identification Number (EIN). It's used for filing your business tax returns, opening a business bank account, hiring employees and for other business purposes. There is no cost to obtain an EIN at the IRS website, or by phone, fax or mail.

After obtaining an EIN, you will need to register your business with the state. The process will vary depending on the state and the type of business entity you're forming. New business registrations are usually handled by the Secretary of State office, but other states use the State Corporation Commission or something else. Be sure to contact your state, consult with the Small Business Administration (SBA), or use a legal professional if you aren't sure which office you need.

7. Apply for licenses and permits

Now that your business is officially registered, the next step is to obtain the necessary licenses and permits you'll need to operate legally. Most jurisdictions require business licenses, which are typically issued by local city or county government offices. You will also need to obtain a sales tax permit, which is typically handled by the state Department of Revenue or a similar state tax authority.

Different types of businesses may need additional licenses and permits. For example:

• Health and safety permit
• Zoning permit
• Building permit
• Environmental permit
• Home occupation permit (for home-based businesses)

License and permit requirements vary based on the location, so be sure to contact your local and state authorities to find out what you need. Failing to obtain the necessary business licenses and permits could result in monetary fines and legal action. You could also have your business license revoked, which would force you to close.

8. Obtain Insurance

Making sure your business is protected is essential — to do that you'll need good insurance. Business insurance covers financial losses from unexpected events, like property damage, liability claims and employee-related issues.

General liability insurance is the most common coverage that small businesses obtain, but additional policies may be needed depending on your business type, like product liability, workers' compensation, professional liability and commercial auto. Be sure to talk to an insurance professional to make sure you get the right coverage for your needs.

9. Build your team

As your business grows, you may start to think about hiring employees. Additional team members could help you manage increased workloads, bring new skills and perspectives to the company, and enable you to focus on strategic growth instead of day-to-day operations.

Many small businesses struggle to attract and retain top talent. However, by offering certain perks that larger companies can't match, many job seekers may see your business as the preferred choice. For example, you could offer remote work, flexible hours, generous time off, casual dress or allow employees to bring pets to the office.

10. Grow and scale your business

Once established, you may decide to focus on expanding your business to increase sales, open new locations or diversify your product or service offerings. Scaling your business will require careful planning, and you will also have to set new goals and timelines for completing them.

Perhaps you have a modest goal of increasing sales by 5% each year, or you want to grow your business to a certain point and then sell it to fund your retirement. Regardless of your objectives, it's essential to develop a clear plan, regularly assess your progress, and adapt your strategies as needed to stay on track.

11. Market your business

One of the most important elements of small business success is making sure people know you exist. To do that, you'll need an effective marketing strategy. There are many ways to get the word out about your grand opening, special promotions and ongoing offerings, and you don't have to spend a lot to get results.

Here are some affordable market strategies to consider:

• Social media ads: Paid ads on social media platforms can target people who are interested in the products or services you offer.
• Social media company pages: Create pages for your company on social media platforms to talk about your business and interact with your customers.
• Email marketing: Build an email list and send regular newsletters with updates, promotions and informative articles.
• Online marketing: Build a business website and ensure your business is listed on local online directories and review sites like Yelp and TripAdvisor.
• Referral program: Offer an incentive to existing customers who refer new customers.

And don't leave out a professional-looking website for your business. With a website builder, you can select a template and then update it with your logo, images and business information. Another option is to hire a freelance web designer if you don't feel comfortable building a website or if you are short on time.

Ready to start your small business?

Is running your own business a ton of work? You bet! But this is your opportunity to create something that reflects your vision and values. While the entrepreneurial road does have some rules you must follow, it also offers the freedom to chart your own course.

Starting a small business isn't a decision you should take lightly. There are many steps to successfully launching a new venture, and it will require careful planning to make sure you are positioned for success. The journey may be demanding, and you may face some setbacks along the way, but the reward of seeing your creation thrive makes it all worth it.

Are you starting a business? Open a business checking account today to keep your finances organized and separate from your personal accounts.