From Startup Costs to Business Plans: What You Need to Start Your Own Business

By Melanie Pinola

You are reading: Chapter 2 of 8

"I believe that this is the age of the entrepreneur, and as job security has increasingly become a thing of the past, we have no choice but to become self-reliant. Small business is the foundation of growth in America, and it starts with one person, with one vision."- Gary Bredow, host and creator of the Start Up show

If you've ever dreamt of being your own boss, there's never been a better time than now to start. The internet connects us to billions of potential customers, partners, and employees, not to mention hundreds of online tools that simplify running every aspect of a business.

Before you start your own company, though, you'll want to carefully consider your idea or product, how much you should charge, and understand the downsides to entrepreneurship. Then, to make the leap and actually establish your own company, you'll need to consider how much money you'll should have to start, how to structure your company legally, and, perhaps, create a business plan to keep you on course. We'll walk you through these important topics below.



How to Determine Your Startup Costs

old register

You can start your business without spending a single dime. After work hours or on weekends, you could develop your app, write freelance articles, hand-make products, or do any kind of side business suited for working from home.

Odds are, though, you'll need to spend something at least–to pay for supplies needed to create your product, web hosting and design fees, and business cards, perhaps. If you're thinking about eventually running a business full-time, especially, you'll need to consider funding. How much will it cost you to start and maintain your business until it becomes profitable?

The $100 Business

Many businesses were founded with less than a $100 investment, something Chris Guillebeau, author of The $100 Startup researched. Guillebeau interviewed 1,500 micro businesses (small operations typically run by one person) that made over $50,000 per year but were started with little investment—the majority for less than $1,000 and nearly half for under $100. As Guillebeau shares on the Four Hour Workweek blog, excepted from his book:

In Vancouver, Canada, Nicolas Luff started with only $56.33, the cost of a business license. Others started only with a domain name and a free WordPress account.

It wasn’t just online businesses that started on the cheap. Michael Hanna started an unconventional mattress store after being laid off from his job in media sales. A friend of his who owned a furniture store offered him an unwanted truckload of mattresses, figuring that Michael could sell them one at a time on Craigslist. Instead of Craigslist, though, Michael found a car dealership that had recently gone out of business. He was able to rent the space at a huge discount, and he opened his first store while learning on the job.

Even though Michael originally knew nothing about the mattress business, three years later Mattress Lot produces more than $1 million in revenue.

Here's a chart of the average startup costs from those covered in The $100 Startup:

startup costs
Image via The $100 Startup

So you can start quick and start cheap, depending on the type of business you want to open.

Figure Out Your Startup and Ongoing Costs

To start your business, you'll need to take into consideration these costs:

  • One-time startup costs (state business registration fees, lease deposits, and more)
  • Labor costs (your salary plus anyone else's salary you pay)
  • Overhead costs (monthly office rent, utilities, taxes, amortized equipment such as computers, any costs associated with producing your product, and more)

Spreadsheets are your friend with planning business finances—and Quickbooks offers a startup expenses spreadsheet to help you accurately budget monthly and one-time expenses for your business.

Create a Cash Cushion for Your Company

You know when your car gets a flat tire and you're thankful you have enough savings in the bank to cover the repairs or replace the tire? You also need an emergency fund for your new business. That is, a large emergency fund—enough to cover perhaps 50 tire replacements in a year.

The US Small Business Administration recommends having at least 3-6 months of cash reserves to cover your slow months in business, for those unknown or variable expenses.

This will also depend on whether you're starting your business on the side or going full-in, quitting your job. If your business is a part-time endeavor and you're still earning a salary, the 3 months of emergency funds might give you peace of mind. If you're starting a new endeavor with no other income, you'll want more to get you through lean times.

Find Funding

Once you've determined how much your business will cost, there's one more financial question to answer: How will you pay for your great idea? If you have significant startup costs and want to cover both the cash cushion and the first few months or even year of operating expenses, you'll need money. Thankfully, there are a ton of options for raising it.

"Remember, though, that your purpose isn't to raise money. Your purpose is to create a viable business, with products or services that make a difference in the world."

You could get a loan from your family or friends, but if your business goes south, that might harm your relationship. You could tap your credit cards or take out a second mortgage, but interest rates could be prohibitive. Better loan options include the Small Business Association, your local bank, or new types of online lenders. Also, Business USA offers a tool for finding government financing programs.

Perhaps you can start a campaign on a crowdfunding site to generate the cash–which might also be a good way to test out your business idea's viability.

Remember, though, that your purpose isn't to raise money. Your purpose is to create a viable business, with products or services that make a difference in the world. As O'Reilly Media founder and CEO Tim O'Reilly said: “Money is like gasoline during a road trip. You don’t want to run out of gas on your trip, but you’re not doing a tour of gas stations.”

If you're able to, self-fund your business and focus on creating a great product or service and finding your first customers. The company can then hopefully soon be bootstrapped, funding itself from its revenue.

How to Find Legal and Financial Help

assistance

Even if you're starting a company of one, you're going to need help getting your business launched. Besides the customers or clients needed to turn your business into a reality, several people and services will play key roles in creating a solid foundation for your company.

Services for Setting Up Your Type of Business

There are four main types of business structures: sole proprietorships, partnerships, limited liability companies, and corporations. For legal and tax purposes, you'll need to decide which type you'll operate under—though if you need to, you can always switch to a different business type later as your company grows.

Sole proprietorships: This is the simplest type of business to start and run. If you never organize your company formally, this is what your business will be considered. It basically means that you are the company—all assets and debts for the company are yours personally too. Bookkeeping is fairly simple: you record all income and deduct business-related expenses, and then pay taxes on the difference. The downside to a sole proprietorship is that you'll have to personally answer to any business obligations—such as a lawsuit from a customer or client or unpaid debts. That makes this business structure the riskiest, legally speaking.

Partnerships: are just like sole proprietorships, except—you guessed it—there's more than one owner. Co-owners typically structure their business relationship with partnership operating agreements. These spell out each person's responsibilities and rights, how much money each person invests in the company, and so on. As with sole proprietorships, all parties are liable for the company's legal and financial obligations—and also share in the profits. Forbes suggests checking your local bar association website to see if they have ownership agreement samples to use as a starting point.

Limited Liability Companies and Partnerships (LLC and LLP): LLCs and LLPs offer the simplicity of bookkeeping that partnerships and sole proprietorships have but with added legal protection (hence the "limited liability" part of the name). When you form an LLC or LLP, you work as a "member" of the company, along with any partners you form the company with. If the company goes into debt or gets sued, your personal assets are protected. And compared to corporations, there's less paperwork and smaller startup costs.

But there's more paperwork and regular fees. Companies like Legal Zoom can file the required documents for your state for about $200. Or you can check with your state for the requirements and do it yourself. The downside of LLCs and LLPs: potentially more taxes, depending on the state you file in. Also, these kinds of companies are US-only and not recognized outside of the US—though there may be a similar type of company in your region.

Corporations: When you incorporate, you create a separate legal entity that owns all of the assets and liabilities for the company. Corporations have to be structured and chartered according to the state's rules, and there are more complex tax and legal requirements (more paperwork, basically, as well as higher startup and operating costs compared to other types of businesses). Why bother? Corporations are usually more attractive to outside investors—you can "go public" with an initial public offering (IPO) and raise money through selling stock in the company. This option might be best for well-established companies with employees.

Forming a corporation is complex, but one company is trying to change all that. Payment service Stripe recently introduced Atlas, a way for anyone to incorporate a US company, set up a US bank account, and start accepting payments through Stripe. This is huge for entrepreneurs around the world who want to start a global business. As Patrick McKenzie wrote on his blog Kalzumeus after joining the Atlas team:

Our future colleagues are presently prevented from starting by a host of logistical difficulties and informational barriers. They don't have business bank accounts. They don't know what bookkeeping is. They've never negotiated a master services agreement. These are all things that can be learned, but the depth and breadth required from an aspiring entrepreneur feels forbidding.

So I'm joining Atlas to work on community and communication, which means something like "scalably educate the world's Internet-enabled entrepreneurs, reduce any barrier to entry, and assist the global community of practice in growing to accommodate a lot more people."

It's a lofty goal—one that currently can help you open only a US-based company—but soon Atlas may be able to help you start a company in any country you'd like.

Other Important Services for Your Business

State and local business authorities: Consult your local and state government before you start your business to find out what regulations, if any, you'll need to follow. For example, your town's regulations might restrict business use of your home to certain types of home-based businesses. If you plan on doing business under a name other than your own name—for example, "Christine Klein Accounting Services" instead of "Christine Klein"—you'll likely need to file paperwork with your local or state authorities to do business as that company name (often referred to as a "DBA" license). And if you sell physical products, you might have to register with an authority to collect sales tax. You can look for guidance on these regulations online; your best source of information will be the actual town, city, state, and country official websites.

An accountant: You haven't made any money yet, why do you need an accountant? Frankly, to keep more of your income and avoid steep tax penalties. The tax rules for small business owners and even freelancers are too complex and ever-changing to follow without professional help. You can wait to get a good accountant until you see a steady stream of income, but start looking before you make too much money and find yourself at tax time with a huge, unforeseen bill. (In the US, if you make more than $400 a year from self-employment or even have income from a hobby, you're required to report it).

Professional organizations and business support programs: Whether you're a solopreneur or want to form a startup with your friends, you'll find organizations that will help you with networking, funding, and overall guidance—from your local Small Business Administration to startup incubators like Y Combinator. You might find expert advice from a LinkedIn or other social media group, gain important connections from your alumni association, or discover new opportunities through membership in your industry's association. Those are great connections to have—and maintain—as you form your business.

A lawyer: You don't need a lawyer to start a company (even if you're incorporating!). But one could be helpful particularly when you're drafting up and evaluating contracts, such as partnership agreements or independent contractor agreements. Many companies start up without having a lawyer help them out, though, so consider your company's needs before looking for one. There are several resources for business owners to get free legal help, too, including trade associations and your local Small Business Development Center (SBDC).

An independent insurance agent: When making the switch between full-time employee to full-time entrepreneur, you might want to seek out the help of an insurance agent to get you covered for benefits—such as health insurance—that you might be giving up or would want to provide for any employees you hire.

A business bank account or merchant account: Finally, even if you run a sole proprietorship and your business is basically you, life will be easier if you have a separate bank account solely to manage your business income and expenses. Most banks offer business checking and savings accounts that you can open by verifying your business with something like your DBA (Doing Business As) certificate. And if you want to accept credit card payments either online or in person, look into credit card payment processing services.

How to Create a Business Plan

Once you've thought through the topics above, along with the three most important things to think about before starting your own company, you're ready for the next step to starting your own company: Writing a business plan. Although not necessary for starting a business, a plan will help you nail down your goals and expectations. It will be a living document that you can refer to every so often to make sure you're on track or update when your company changes (as it will). You could also use it to pitch investors or get a business loan from the bank.

A business plan can be as long or short as you like. In fact, you can use our free one-page business plan template (PDF) to cover your bases. Questions include: What's the need or problem that your business idea will solve? Who will buy what you sell? And who will be important resources for your company's success?

LeanCanvas is another option. Instead of creating a business plan, it's more of a one-page business model that you can create in about 20 minutes.

If you want to create a more in-depth business plan to secure a loan, for example, this article at Lifehacker gives an overview of the sections your business plan should have, as well as business planning software that can help.

Don't get too hung up on the business plan, though. Facebook founder Mark Zuckerberg's advice: "If you just work on stuff that you like and you’re passionate about, you don’t have to have a master plan with how things will play out." The truth is, you can't be sure how it will play out, so creating a detailed business plan with 5- and 10-year projections won't be the best use of your time–and will perhaps be an excuse for procrastinating and never getting your business off the ground.

The planning is more important than the plan itself.


Thousands of books are dedicated to this subject of starting your own company (over 49,000 listed on Amazon for "start business," in fact)–from how to come up with a business idea to how to market it online. While we can't cover every aspect of starting your own business, the main considerations above will hopefully help you set up shop as soon as possible–maybe even today.

In fact, let's get started on that. In chapter 3, we'll look at the advantages and disadvantages of the best tools for selling online, everything from Amazon and Kickstarter to building your own self-hosted store with WooCommerce. You'll now exactly where to turn when you're ready to turn your business idea into reality.

Go to Chapter 3!

Written by Melanie Pinola.

Image Credits: Title photo by cogdog via Flickr. Old register photo by Andrew Branch. Law photo by Helloquence.

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How to Sell Stuff Online: The 7 Best Places to Start Your Online Store

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