9 min read

What You Need to Consider Before Starting a Small Business


Grace N Monene
Business and Personal Finance Expert
Contributor
small business
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Starting a small business, whether online or brick and mortar, may look simple especially for newbie entrepreneurs. What can be easier than writing a one-page business plan, renting a retail space and stocking the shelves with merchandise?

In reality, starting a profitable business from scratch is harder than it looks. Even though failure rates for small businesses are declining, plenty of work goes into founding a business that can churn out tidy profits year after year. You must get several aspects of starting a business spot on, including formulating a viable business idea, finding an ideal business location and choosing the right legal structure.

The following is a compilation of practical tips and expert advice on what you need to consider before starting a small business.

Business Idea

Generating a compelling business idea is one of the keys to building a successful company. Before starting a business, you must assess the commercial viability of your idea. Does it solve a problem or fulfill an existing customer need? Is it unique or innovative? Can it stand the test of time? In general, you should have a good handle on the potential demand for your product or service, the type of customers who are likely to purchase your offerings and the strengths and shortcomings of your competitors.

Once you are satisfied that your idea can be turned into a functioning business, the next step is to create a business plan. This document describes the organizational structure, product and service offerings, sales and marketing strategies, risk analysis and financial projections of your business. It is important to focus on writing a solid business plan, because it’s usually the first impression lending institutions and potential investors get about your enterprise.

Business Structure

Selecting the right structure for a business is another important decision entrepreneurs must make.

Here is a brief description of the common types of structures:

  • Sole Trader/ Proprietorship- With this type of structure, you own the entire business, and are fully responsible (unlimited liability) for all the financial obligations of the business. It’s the easiest and simplest type of business to start.
  • Partnership – When two or more people pool resources to start a business, a general or limited partnership is formed. In a general partnership, all the partners are jointly and equally liable for the debts of the business, while in a limited partnership (LP), partners who are not involved in the day to day affairs of the business have limited liability.
  • Corporation – This is a complex and expensive business structure. It’s an independent legal entity with tax and regulatory obligations, so owners are completely shielded from liability.
  • Limited Liability Company (LLC) –LLCs are legal entities, distinct from the people who own or run them. They provide the liability protection and tax efficiencies of a corporation, and the ease of operation of sole proprietorships and partnerships.

Different types of business structures are suitable for different types of businesses, so it’s vital to select one that best suits your enterprise. The following conditions can influence your choice:

  • Number of owners – If you are planning to start your business with a friend or relative, a partnership is the most suitable structure.
  • Control – If you are the type of person who loves being in total control, you need to be a sole trader.
  • Liability – Businesses come with a myriad of risks. To what level would you like to be held liable for debts, regulatory fines or lawsuits? If you want to protect your personal assets, then you wouldn’t want to be a sole trader or general partner.
  • Ease and cost of formation and administration (Paperwork) – Sole traders and partnerships are cheap to form and have minimal reporting requirements. On the other hand, LLCs and corporations are costly to form and operate.

If you settle on a partnership, it is necessary to prepare a partnership agreement, which outlines the roles and responsibilities of all partners. Prospective members of LLCs must prepare articles of organization and the owners of corporations must fill out articles of incorporation, which can be obtained from the Starting Business website.

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Company Name

A thoughtfully-crafted name can contribute to the growth and success of your brand. A lot of research and creative thinking went into crafting the names of today’s iconic brands like Google, Twitter and Apple.

While there is no universal formula for choosing a perfect company name, it should sum up what your business is about, be unique and available for registration. Check with the company registry in your local jurisdiction to determine whether the name is available and make a reservation even if you don’t intend to open the business right away.

Business Location

Location can make or break a business. Your company may be selling products that are genuinely great, but if it’s located in a place that is inaccessible or unfriendly to customers, sales revenues will stay down. Before starting your business, you need to investigate potential locations. To zero in on the best site, consider:

  • Population density – You will have more potential customers to sell your products and services to if you choose a location that is densely populated
  • Population trends – What is the average age of the customers in your preferred location? If your business targets young people, avoid locations with a large graying (aging) population
  • Number of competitors – Avoid locations with a high number of businesses that directly compete with you for customers
  • Zoning regulations – Find out whether regulations that prohibit commercial activities on certain spaces exist and evaluate how they will affect your business
  • Safety and ease of access– An ideal location should be safe and easily accessible to customers and employees.

Licenses, Permits and Insurance

Entrepreneurs must know the kind of licenses their new businesses require and be familiar with the procedures for obtaining them. Although many small businesses typically require a general business license, there are others that require specific licenses. For example, if you want to open a restaurant in the United States, you will need to obtain a general business license, as well as a public food service license from your state or local authority. Other examples of businesses that usually require special licenses include:

  • Child day care centers
  • Barber shops/Beauty salons
  • Motor vehicle repair shops
  • Specialty practices like dental clinics
  • Construction trades, including plumbing, electrical and gas fitting contractors

In addition to securing the right licenses, you may be required to obtain a permit. For instance, if you intend to sell tangible products or lease properties that attract a sales tax, you will need a seller’s permit. 

Depending on the nature of your business, you may be legally obligated to purchase insurance cover. If you plan to hire employees, you must buy workers' compensation insurance, unemployment insurance and, in some jurisdictions, disability insurance. Besides compulsory insurance, you can obtain any additional cover that is relevant to your business, such as property insurance, home-based business insurance, product liability insurance or professional liability/malpractice insurance, to adequately protect your enterprise against the unexpected.

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Accounting and Tax Reporting Requirements

Every business owner must decide on the accounting method to use. You must choose between:

  • Cash method – With this method, you record an income or expense when it’s actually received or incurred. For instance, if a customer purchases a product worth $100 on June 1 but makes payment on July 1, you will record the income as received on July 1.
  • Accrual method – Under this method, sales and expenses are recorded when they occur, regardless of whether payment is made or not.

Both methods have their benefits and drawbacks. The cash method, for instance, is simple and cheaper to use and ensures you don’t pay taxes on money that you haven’t actually received, but it can give a misleading picture on the financial performance of the business. On the other side, the accrual method gives a clearer view of performance of your business, but it’s complex and requires professional skills to manage.  In the US, businesses that have an inventory system or make over $5 million in gross revenues are legally required to use the accrual method.

You must also choose an accounting period, which will dictate when you file your business taxes. These are your options:

  • Calendar tax year – This is a period of 12 consecutive months beginning January 1 and ending December 31. Most sole proprietorships, partnerships and LLCs use this option.
  • Fiscal tax year – A period of 12 consecutive months ending on the last day of any month, except December (for example, beginning February 1 ending January 31). It's preferred by large businesses and corporations. 

Your tax reporting requirements will depend on your business structure. If you run your enterprise as a sole trader (self-employed), you will report profits and losses on your individual income tax returns. Similarly, partners are required to report the partnership’s income, losses and deductions on their individual returns.

Since corporations are treated as independent legal entities, their owners must obtain a business tax identification number and file corporation taxes at the end of the financial year.

Business tax laws and financial reporting regulations are typically complex, and it’s very easy for a layman to get lost in between. As such, it is advisable to hire an accounting professional to help you prepare accurate tax returns and ensure your business adopts sound accounting practices. If you can’t afford a bookkeeper or an accountant, be sure to use an accounting software.

Labor (Staffing Needs)

Even if you intend to run your business as a one-man show, as it grows you will inevitably need to bring more people on board to help you run it efficiently. Depending on the type of your business, you can hire employees or independent contractors. In most cases, brick and mortar businesses selling tangible products need employees, while online business like content management and web design companies can do with independent contractors/freelancers, or a blend of both employees and freelancers. Independent contractors are considered self-employed and, therefore, responsible for paying their own taxes. 

As a prospective employer, there are certain things you need to do before you can start hiring. You must obtain an employer identification number and set up a payroll system to keep track of employees’ hours, calculate wages and withhold taxes and deductions. Your company must also separately remit unemployment tax.

You should be familiar with government regulations for the workplace. Ensure you provide a safe and healthy workplace for your employees, customers and other people who the business affects. Conduct regular safety assessments to identify new risks or hazards and take appropriate preventive measures.

Finally, prepare the documents you will need when employing staff, such as application forms, staff handbooks, HR policies, contracts of employment and job descriptions. Starting Business provides ready and easily customizable documents to get your recruitment process started on a solid footing.

Evidently, starting a successful business takes more than just offering a product or service that people want to buy. You must make the right decision at every step and have a clear plan on how to make a strong start.

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Grace N Monene Business and Personal Finance Expert
Grace Monene is a graduate business student with over five years' writing experience. Her fields of expertise include business management, human resources, personal finance, financial regulations and travel.
Grace Monene is a graduate business student with over five years' writing experience. Her fields of expertise include business management, human resources, personal finance, financial regulations and travel.

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