Business Startup FAQ

Yes, provided you know what you are getting into and provided you feel comfortable with your state of knowledge about the business you have chosen.You should also have a strong drive to succeed even when the hours get long and the decisions difficult. All types of people make it in small business and all types fail. There is no personality type or educational level that qualifies or disqualifies anyone from succeeding in small business.

Hundreds of thousands of people do it every year. It is an individual choice that should be made only after serious study, self-examination, and business advising. Your individual preparation is your key to success. For more information on this topic, find your local SBDC and talk to a business advisor today.

Choose a business activity that you will enjoy doing. Look at your interests, hobbies, and aptitudes. Don’t pick one that has an uncertain market. There are a lot of small business startups that are doomed from the beginning because there simply are not enough customers wanting that product or service. If you look in the back of some magazines you will find many products and services being offered as potential businesses for which there is very little market potential.Avoid over-crowded areas of business. Many cities have far too many restaurants, retail stores, auto service centers, etc. for the population. The same is true in many smaller communities. One of the disadvantages of our free enterprise system is that too many business often start.

Study the businesses you think you might like. Satisfy yourself that they will fit your needs. There are so many alternatives available, you shouldn’t be too quick to choose. Understand that there are few inherently bad businesses or few that are inherently good. Just about any business can fail and any can succeed.

Be sure to do a quick feasibility study on any business you pick before making up your mind for certain. Remember, your choice needs to work for YOU, in YOUR situation, in YOUR location, in YOUR market, and given YOUR special set of circumstances. Your circumstance is unique. You should test it as a unique opportunity, unlike any other.

Begin with a feasibility study that answers these three questions:

  1. What am I going to do?
  2. What will it take in money and skills to do it?
  3. What will it give me in terms of money and satisfaction?

Get business advising from a Small Business Development Center, S.C.O.R.E., or some other organization that regularly deals with business startups. Set out to learn all you can about your new business BEFORE you make the decision to start it. Learn about the market, your target customers, the competition, pricing practices, typical profit margins, sources of supply, and anything else that will help you fully understand the nature of your new business.

If you can talk to business owners in similar businesses or work as an employee for a time in such a business, do so. Talk to suppliers who sell to your type business. Read trade publications and magazines dealing with your chosen business. Attend seminars that deal with subjects important to your business. If there are franchises doing what you plan to do, study them. Request information about them and talk to franchise owners.

When you have finished your research and feel comfortable that you are doing the right thing, prepare a business plan to outline in detail the start up of your new business. Gather together the money you need and get the equipment, people, and other things you need to start. When all this is in place, start. BUT NOT BEFORE!

As long as it takes you to complete your feasibility study, prepare your business plan, gather together your money, buy what you need to buy, and arrange your business operation affairs. This could take a few weeks or many months. If you have difficulty with any of these items, the time to learn and solve problems must be added.Each individual entering this process brings his or her unique set of skills, knowledge, confidence, and time. If you already know a lot, have good skills, feel confident of what you are getting into, and have time to do this work, you can be up and running in short order. If, on the other hand, you lack basic business knowledge, need development of some of your skills, do not feel confident of what you are doing, and/or have limited time to do the research and planning, your time frame will be longer – months or even years.

It is critical that you not allow your enthusiasm or need to hurry to push you into business before you are ready. Premature starts are a common reason for small business failure. You will know when you are ready. It is a gut feel. Don’t go against this gut feeling.

You will need two sources of money. The initial source will pay for the things you need to get your new business off the ground. The other source will be used to pay your operating expenses until your business reaches break-even point; the point where you are taking in the same amount of money you are paying out.To estimate the first source of money, make a list of all the things you will need to start your business. This might include equipment, tools, inventory, fixtures, lease costs, office supplies, vehicles, signs, pre-opening advertising, fees and permits, and everything else you can think of. These are often referred to as “start-up” costs. Opposite each of these items, put an estimated cost. If you don’t know the cost, find out. If you have uncertainties, estimate on the high end.

The second source of money, to be used for operating expenses, involves estimating your cash outflow for all the things you will have to pay for after you start your business. This might include such things as rent, utility bills, gas for vehicles, supply replacement, payroll, payroll taxes, advertising, insurance, bookkeeping or legal fees, etc. If you will estimate each of these items for one month, you can multiply the months’ totals by the number of months you think it will take you to reach cash break-even.

When you will reach cash break-even is a judgment call by you based on what you know about your business and like-type businesses. If you are going to err…err on the side of conservatism. It will be far better to have too big a pot of operating money than to run out of operating money.

Three out of four new business startups use only money from the owner or owners. Some startups can borrow from banks, but it is difficult. You must have a good equity investment in the business (usually 30% or more) and you must have a sound business plan. The Small Business Administration will guarantee a bank loan for a new startup, but it also has requirements for equity and business plans.Personal and business credit cards can provide money for a business, but it comes at a high cost. It is recommended that credit cards be used sparingly and only for short term needs.

Relatives and friends often can provide money. Care is suggested, however, for mixing business with relations and friendships can be risky. It is best to keep these money relationships as business-like as possible and not depend heavily on the personal relationship to make the transaction. Ask: “Would this deal stand up with a non-relative or non-friend?”

Mortgaging personal assets and borrowing against cash value life insurance can also be sources of money.

Local and state government agencies sometimes have money available for new businesses, but it is not common and it is usually restricted to very special circumstances. Nevertheless, it might pay to check around. Business advisors and agencies involved in economic development usually know about these programs.

Contrary to popular belief, grants of cash for business are virtually nonexistent. There are rare instances where a cash grant has been given for some highly specialized type of business or for some unusual situation, but for the great majority of business situations, there are no cash grants.There are many government grants designed to assist business, but these usually don’t go directly to the business. Instead, they go to agencies and organizations that perform some service for business or benefit business in some way. The Small Business Development Centers throughout the United States operate partly on a grant from the federal government.

The books and late-night television infomercials that tout government grants for business are usually exercises in cleverly misleading entrepreneurship. Read the fine print carefully and “buyer beware.”

A majority of SBDC services are geared specifically towards those challenges faced by existing businesses – management reorganization, expanding into Internet commerce, redesigning a business or marketing plan, financing an expansion, entering international markets… and many more.

Please see our Permits & Licenses page for a listing of agencies.

Depending upon the type of business, you should consider the following types of insurance:

  • General liability insurance
  • Personal property, fire, theft insurance
  • Vehicle insurance
  • Business interruption insurance
  • Medical insurance

Talk to an insurance agent about your needs. If you have employees you will need workers’ compensation insurance. You should carry a general business policy, which includes liability and other standard coverage. Your place of business, if you own it, should be insured; and if you rent, you still should have your own coverage, too. Don’t rely on the landlord’s insurance. Depending on your industry, you may need additional types of insurance (for example, food service requires product liability insurance). If you already have insurance coverage, start with your agent. Feel free to get quotes from several agencies, but be sure that you compare coverage as well as price.

Worker safety and health is guided by OSHA, the Federal Occupational Safety and Health Administration. Each state must interpret these Federal guidelines. Compliance involves proper use of safety equipment and worker training on safe procedures. Non-compliance can result in fines or, possibly, closure but preventing injuries or loss of life is the most important reason to understand the regulations.

No. However, a SBDC can help you assemble the paperwork needed to apply for a business loan. They can help you prepare a business plan if you don’t already have one. When they have helped you develop the whole loan package then you are ready to approach a bank for a loan.

SBDC’s are funded in part by the Small Business Administration. The two agencies work closely together to provide free business advising to businesses. They also co-sponsor some of the training sessions that are available to businesses.

There is no charge for SBDC business advising. There are often minimal fees required for the training courses that are offered.

Each local SBDC office offers training in the counties that they serve. Click here for the county in your area.

A business plan is an outline or road map for your new business. It tells what it is, where it is, how it will operate and whom it will serve. It includes information about your customers, your employees, and you. It explains something about the industry you will be a part of and briefly explains the market for your product or service. It expresses these things with both words and numbers.The numbers of a business plan are especially important, for they translate the anticipated activities of the business into the language common to all business. If your business plan will be viewed by bankers or other financial types, your income statements, balance sheets and cash flow statements will take center stage. You will use them to paint a picture of your businesses near term financial future.

Yes, you need one. You need one for your own use and you may need one for others: partners, investors, bankers, relatives, employees, etc. They are great tools for analysis and they help in communicating with others. Bankers usually insist on them when considering loan requests. Investors won’t work without them.

Business plans take many forms and can be brief or lengthy, informal or formal, optimistic or pessimistic, and typed or hand written. The important thing is that one exists.

Probably not. Making the decision to start a business solely because you can’t find a job is usually not a good idea. Self-employment might be an alternative, but starting a business – no.The differences between self-employment and business ownership are considerable. You don’t need to know near as much to work as a self-employed person as you do to successfully operate a small business. If your primary concern is making a living just for yourself, keep looking for a job or go the self-employed route.

The chances are you can, but you had better check with your local zoning authority to be sure. Many types of small businesses can be run from the home. With improving technology in communications and computers, many small business owners choose to avoid the expense of a separate business location.Thought should be given to your neighbors in making this decision. If your business activity will bother them or be objected to because of noise, odors, parking, or other issues, perhaps you should not do it.

Your personal home situation should also be seriously considered. Can you effectively allocate your time between personal and business matters? Will family members object?

Home based businesses are becoming increasingly popular. For many new business startups, they are a good idea.

You should consider it. There are some definite advantages to starting out with a franchised business. Of course, there are all different kinds of franchises. Some are good and some are not. Some offer fair value for what you pay and others are rip-offs.Usually, the advice is to seriously consider a franchise if you are not very knowledgeable about business and don’t have any experience. A franchise can often get you off to a running start. The franchisor has done some of the market study and other startup work for you. Depending on the franchise, you might be able to buy a turnkey business that will train you and put you in a good position to succeed.

It is smart to consider both a franchise and a startup on your own without the franchise. The franchise will cost you, but you will receive some benefits. Evaluate whether the benefits are worth the costs to you. Also remember that a franchise is often an on-going relationship that is not always easy to break. You are not totally independent and can not always do as you please. The franchisor usually has something to say about how you operate your business.

Research is key. Investigate any franchise thoroughly. Talk with other franchisees. Study the franchise agreement and understand what it says. Get legal or business advising advice. Look hard before you leap, but look. With something like 40 percent of present day retailing done through the franchise method, there must be something very good about it.

It may be a good idea if you can make it fit. The advantage of buying an existing business is that it is already established in the market. It has customers and is carrying on business. You avoid the hassle and expense of starting from scratch. The trick is making it fit your desires and capabilities. Is it the kind of business you want? Can you afford it? Can you operate it?Businesses that are offered for sale are offered for all kinds of reasons. Often the business is in less than good condition. That’s okay if you know it and the price reflects it – and you can fix it. Sometimes the owner is just tired of it and wants to retire. Knowing the real reasons for the sale helps in your evaluation.

Sound financial and business analysis is a key to buying an existing business. The business analysis is to determine if you want to buy it. The financial analysis is to determine how much you should pay for it. It may be a good business, but it costs too much. It may be cheap in price, but a failing business.

You should definitely consider it. Incorporation gives you certain liability protection that you can’t get if unincorporated. It also can make it easier to borrow money because the business is a separate legal entity with its own assets and liabilities. It is independent of you, the owner, and has a life separate and apart from yours. It makes the business easier to sell and offers tax flexibility because of the two taxing entities (your and the corporation). Incorporating does cost more and requires some ongoing added expenses for separate tax returns, but these expenses are not large.

A sole proprietorship is an individual carrying a business activity without incorporating and without a partner. The business and the owner are one in the same. There is no legal distinction between them. The debts and obligations of the business are the debts and obligations of the owner. What is owned by the business is owned by the owner. If the business is sued, it is really the owner who is being sued. If judgments are awarded against the business, they are awarded against the owner. The life of the business is tied to the life of the owner. If the owner dies, the business dies. Approximately 70% of all businesses in the United States are operated as sole proprietorships.

If both parties have properly registered their names, then either the parties need to work it out and come to some agreement – or the courts will decide in a lawsuit. Working it out between the parties with compromises is a much better alternative. Issues like who was using the name first often become important in court decisions.

No. When you incorporate with the Secretary of State in your state of incorporation, you may do business anywhere in the state without the need for an Assumed Name Certificate (DBA).

Many states, including Texas, require businesses to file assumed name certificates if they are not incorporated. Even without this requirement, filing is a good business practice. It informs the public about the existence of the business and is often required by banks before they will open business checking accounts or grant business loans.While this filing gives the business no state protection against other businesses or imparts any rights, it is an accepted business practice that gives your business legitimacy and credibility.

Business names are very individual and often personal. A good name is usually considered both descriptive of what the business does and consistent with the public image the business wants to project. “Bubba’s Savings and Loan Association” or “The First Capital Paint and Body Shop” are not real good names. They are confusing by sending mixed signals.It is often suggested that a name be chosen by selecting three or four alternatives and testing these on friends, relatives and potential customers. Note the reactions and listen to the feedback. If you want to project a highly personal image, use your name in the business title. If you want a more formal, “business-like” image, don’t use your name.

Yes. Many people do.

It should be different enough to avoid confusion with other businesses. The reason you use a business name is to help customers identify you. If your name is similar to others, this identification is made difficult. Customers may hear or read your costly ads, but trade with a competitor because they are confused by the similarity of the names.Picking a name that is similar to one already in use might trigger disputes or lawsuits. This benefits no one. Avoid trouble by picking a name that is unique and different enough not to be confused.

Pick another name or some variation of the name that will not conflict.

If you are not incorporated, you need to file an assumed name certificate in each country you plan to do business. If incorporated, file an assumed name certificate in the country of the corporation’s registered office. If the registered office is different from your principle place of business, you should file a certificate in both countries.

A partnership is a form of business organization used by two or more people who want to go into business, but do not want to form a corporation. Instead, they choose to operate like two sole proprietorships joined together in a partnership.Often, this form of business organization is chosen by people who already have a personal or business relationship – as opposed to two or more people who don’t know one another. Because of this preexisting relationship, they often do not define the activities and responsibilities of each partner. They deal with this only in general terms, such as, “We will split the profits down the middle and we will each do half of the work.”

This casual approach can lead to trouble. If one of the partners functions in a way unacceptable to the other partner(s), disputes can arise that are argued with “he said that” and “I said this” statements. With no written point of reference, these disputes are difficult to resolve.

To reduce this potential problem, a written partnership agreement laying out the duties and responsibilities of each partner is recommended.

This is a modification of a regular C corporation to permit taxes of the corporation to be treated in the same way as a sole proprietorship. It is a tax election. With this “Sub – S” election, profits are not taxed at the corporation level. Instead, profits flow through to the owners (shareholders) who include them on their personal tax returns. Without this election, the corporation pays taxes on its profits.

Pick the one best suited to your individual and business needs. No one form is best for everyone. Most small businesses start as sole proprietorships and stay that way. Some start with that form and change to corporations or sub-s corporations later. Groups of owners sometimes choose the corporate form and sometimes prefer partnerships.The best advice is to learn about each form – the advantages and disadvantages – and match your personal situation to those alternatives for the best fit.

A federal tax identification number is obtained from the IRS. Call them (consult your local directory or the Internet) and request the forms needed to apply. This number is for a business what a social security number is for an individual.

Most small businesses do not need special permits. However, many do. To find out if you need one or more, consult local and state authorities having jurisdiction over your area of business and ask. People in your trade or industry can often tell you. SBDCs often know.While not technically a permit, every business should be registered. A corporation is registered with a state agency via papers of incorporation and a sole proprietorship and partnership usually register with a local county courthouse by way of an “assumed name certificate.”

It is an organized study of customers and competition. It can be quite simple and include just a few facts about the population, an approximate count of people who fit your customer profile, and information about existing businesses now serving these customers. It can also be extensive and include all sorts of data about economic trends and conditions, demographics, psychographics, industry characteristics, pricing, demand trends, etc.Any new business startup should do some type of market analysis. The more the better. It does not have to be expensive or sophisticated. It should, however, be thorough enough to provide an understanding of the nature and extent of local customers likely to trade with your business. A common mistake is to assume a market when no market exists – or such a small market exists that sustaining a business based on that market is impossible.

This is a preliminary business plan used to answer the question, “Should I do that?” It includes facts and projections that outline what will happen IF something is done. It does all this before the fact. It allows a businessperson to look at probable results before anything is done to produce those results.These studies can be brief or lengthy. They should fit the subject. A feasibility study to answer the question, “Should I buy or lease that piece of equipment?” is less involved than one aimed at answering, “Should I build a new restaurant?” On the question, “Should I start a new business,” the work should be extensive.

Equity has two different, but related meanings. On the one hand it is the term applied to the money the owner puts into the business – money that is not borrowed or is borrowed from relatives without any requirement to pay it back.Equity also means the same as “net worth,” which is the difference between the assets and liabilities of a business. It is the portion of the assets that the owner would get after all the liabilities were paid.

Equity is one of two sources of capital (money) for a business. The other is debt. Equity comes from the owner and debt comes from others, usually banks or other financing agencies.