If you are planning to start a new business, you should take time to consider the many tasks you will need to complete to get your business up and running and make a plan to complete those tasks. In so doing, you should consider mistakes commonly made by new entrepreneurs, including:
- Failing to select the proper type of business entity;
- Failing to draft a solid business plan;
- Poor financial planning;
- Failing to complete regulatory and administrative requirements.
In order to avoid these mistakes, you should take time to plan your new business, starting with big picture concepts and working through practical considerations affecting the day-to-day operation of your new business.
Initially, you should spend time conducting market research, writing a business plan, and securing funding.
- Conduct market research. Once you identify the products and/or services the business will provide, you should conduct market research to determine demand for those products or services in your market. To the extent possible, your market research should identify competitors and market risks. You should also identify the target demographic for your products or services and determine whether you will sell online or operate out of a physical location.
- Write a business plan. After you are satisfied with your market research, you should draft a business plan laying out your vision for the business. A business plan can be as simple as a one-page summary of the vision you have for the business or a report with multiple pages and sections. Regardless of the length of your business plan, your business plan should lay out your goals for the business, as well as your vision of how the business will accomplish those goals.
- Funding the business. Entrepreneurs commonly fail to fund their new businesses adequately. However, it is critical to the success of your new business that you adequately capitalize your business from the beginning. Your new business will incur startup costs including professional services fees, registration fees, and industry specific costs, such as inventory and equipment costs. You will need to plan for funding these startup costs. Prior to securing financing, you will need to consider how much money your new business will need during the startup phase. In order to get an idea of how much money you will need to fund the business, you should perform a break-even analysis and consult with tax and legal professionals. Your financial analysis will likely affect the types of funding available to you and may make certain sources of funding more appealing than other sources. Of course, you can always invest your own money in the business, but, in addition to investing your own money into the business, you may be able to borrow the money from a financial institution or obtain private financing. You should secure adequate funding before moving too far down the line of practical considerations included below.
Once you have completed the conceptual planning your business requires, you should identify the practical steps needed to bring the business into existence.
- Business name and choice of entity. The type of business entity you choose will affect taxation and affect legal liability variables. Prior to making any decisions, you should discuss the various kinds of entities and their impact on your proposed business with an experienced law firm that understands the risks and benefits of partnerships, corporations and limited liability companies. You should also seek accounting advice relating to your new entity prior to selecting a particular entity type. Failure to consider the tax implications of starting a new business is a common, and easily avoidable, error.
- Business registration. Once you decide on a name and a type of business entity, you will need to conduct a search for the name with the Secretary of State’s office to determine if the name is available. Once you find an available name, your attorney can help you register your business by filing appropriate documentation with the Secretary of State.
- Governing Documents. In addition to registering your business and obtaining a federal tax identification number, you should finalize necessary governing documents for your new entity. The exact nature of the necessary documents will vary based on your choice of entity, but all new businesses require governing documents that govern the day to day operations of the company, tax matters, and, if you intend to own the company with any co-owners, restrictions on transfers of ownership interests, estate planning provisions, and other related matters. Further, financial institutions generally require that, in addition registering with the Secretary of State, your new entity have appropriate governing documents and proper authorization for individuals authorized to act on the new entity’s behalf. The type of documents required varies based on your choice of entity. You should consult with an experienced attorney in order ensure that you put the right governing documents in place for your new business.
- Permits, banking and accounting. At this stage, you should obtain state and federal tax identification numbers, open a business bank account and purchase insurance. You will also need to apply for licenses or permits at the state, local, and federal level prior to offering your service or product to the public.
- Location. Your business will need a physical location, whether it be your home office, a commercial storefront, or an industrial facility. You should identify where you will create the product or provide the service, and what type of registrations, permits, and licenses your city and state will require for your proposed use. In some instances, government incentives or grants may be available if you locate your business. You should also research property zoning rules and the state, county and local rates of income tax, sales tax, property and corporate taxes.
You do not have to make the same mistakes as other new business owners. If you make time for conceptual and practical planning, then you will be more likely to avoid common startup mistakes and to get your business up and running successfully.