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November 18, 2002
URL: http://www.Entrepreneur.com/article/0,4621,304669,00.html

Small-Business Start-Up Guide
A small-business advisor answers the most common questions about starting a business.

There is a lot you have to face when you're considering starting up your own business. First, you need to come up with an idea that takes advantage of your skills and experience while fulfilling an untapped need of your market. You then have to conduct extensive research to learn more about the industry you're in, the market you'll be serving, and the companies you'll be competing against. You also need to create a plan of action that will get your business moving. Finally, there are a lot of nuts-and-bolts issues you need to confront -- from dealing with licenses, permits and other red-tape, to determining the correct legal structure for your company, to determining your financing needs.

Our Small Business Advisor regularly gets asked about how to go about starting a small business. We've put together some of the most common start-up questions she's received. By clicking on the questions below, you'll get detailed information on the topic.

Developing a business idea is a matter of creating a vision, leveraging your strengths and determining what the market needs. These three steps should get you started.

Create a vision

Close your eyes for a few minutes and conjure up a detailed image of what you want your life to look like in 5 years. Be as specific as possible.

  • Where do you live?
  • How do you spend your days?
  • What kind of work do you do?
  • Do you work alone or with other people?
  • Who are you surrounded by?
  • What do you do when you aren't working?

Don't limit yourself to these questions; create a vivid vision of yourself, touching on things that are important to you. These are all personal issues that will impact the type of business you pursue being a city or country person; wanting to travel or sit at your computer; liking to meet people or work on the phone. This activity will help you create a foundation for choosing a business, making business decisions, and setting clear goals.

It is best to do this exercise with someone else and share your vision. If you can't, write it down to make your vision more concrete.

Determine what you're good at and what you like to do

It's often useful to look inside yourself to figure out what you like and dislike, and where your talents lie. It's one thing to come up with a winning business idea. It's another to come up with one that fits your skill set and interests you. Your business has to keep you excited so you can thrive over the long haul.

One of the best ways to do this is to make three separate lists:

List 1: What you're good at
Everyone is good at something and many skills can be the foundation for a business. You might be naturally organized or have a knack for fixing things. You may be so used to your skills that they don't immediately come to mind, so assemble this list by observing yourself for a few weeks with an eye out for your aptitudes and by asking people who know you well for their impressions of what you excel at.

List 2: Skills you've acquired over the years
Whether or not you've worked in a conventional environment, you no doubt have accumulated many. Write down all the work responsibilities you've had; think about the varied tasks you know how to complete. Make sure this list is complete -- there should be at least 10 distinct items.

List 3: Things you like to do
List the things you enjoy doing. This may not be as easy as it sounds. This list should be at least 10 items long. Stretch beyond your hobbies and interests that spring to mind immediately. If you're stymied, ask people who have known you for a long time -- particularly people who knew you as a kid -- what they have seen you doing when you're happiest.

Keep these three lists in an accessible place (for instance on your desk) for several weeks, and every time an idea comes to you, jot it down in the proper category. Ask people who know you well for their input or to help you jog your memory.

Figure out what the market needs

So far, you've been looking inward to come up with your business idea. Now its time to look outward to discover an unfilled need that you can meet with your product or service.

There are plenty of "Top 10" or "Hot New" business lists out there. These may stimulate some ideas, but the best business ideas will come from you and will be based on who you are and what the market is looking for. So while you're doing your soul searching and list making, put up your antenna and look out for business opportunities.

<< Back to Small-Business Start-Up Guide Once you've determined what you're good at and what the market needs, its time to do some research. This may seem obvious, but its one area where many would-be entrepreneurs fall short. Just because you like an idea doesn't mean it makes a viable business.

Now is the time to roll up your sleeves and ask a lot of questions. You will need to find accurate, reliable information about your industry, your market, and the companies you will compete against. Much of the information you get will be extrapolated from reports (both from the government and commercial companies), newspapers and magazines, trade associations, university studies, and other research. This type of information is often available at business research libraries, as well as at various online databases. You'll also be doing a lot of investigating on your own. Read on to learn more about how to take advantage of these various research methods.

Talk to potential customers and suppliers

Who will you be selling your product or service to? Contact some of these people and take an informal survey. Ask them if they would be interested in a product or service such as yours. Find out what they'd be willing to pay for it. Determine how they currently meet this need to learn about your competitors. Ask about ways your type of product or service could be improved. Suppliers and sales reps often know what other companies are up to, and can also help you get an idea of industry trends.

Talk to people already in the business

This is an excellent way to learn the pitfalls and nuances of running a particular business. You'll be surprised how many people will be willing to help you, provided you don't intend to compete with them directly (although in some cases, direct competitors may even offer assistance). Often, you just have to ask. Contact five or ten people who are excelling in the business you want to start. Tell them that you admire what they've done, and ask them if you can have a few hours of their time to discuss "the ropes" of the business. You can even offer to pay them for their time as "consultants".

Contact trade associations

Trade associations often conduct research on their respective industries. This data is usually distributed only to members, although sometimes they will make parts of their reports available to non-members and the press as well. Trade groups also publish member directories that can be useful in tracking down what firms you may be competing with. Again, these directories are usually for members only, although you can sometimes use them at your local chapter.

You also might want to speak to a trade group's "publications" department. Many trade groups publish handbooks for companies looking to get involved in their particular industries that contain helpful hints and statistics. Others offer books and courses that can aid you during your start-up phase.

To find out what trade associations follow your industry, consult:

  • Encyclopedia of Business and Professional Associations (Gale Research)
  • The Small Business Sourcebook (Gale Research)
  • Business Information Sources (University of California Press)

Read newspapers, magazines, trade publications, and newsletters

Periodicals are an excellent source for industry statistics as well as information on your competitors. Trade publications - newspapers and magazines that focus on issues affecting a particular industry - often run articles that focus on recent research reports, or they publish their own proprietary market data. You can also find news developments about your competitors and their products. The Wall Street Journal and other business publications can give you information on business trends or other economic issues that may impact your business. Local newspapers and business journals can provide you with a window into your local scene.

To find these publications, consult the following sources:

  • Wilsons Business Periodicals, Infotrac, UMI Periodical Abstracts - contain information on popular and business periodicals

  • National Newspaper Index, Wall Street Journal Annual Index, New York Times Index - as the names suggest, indexes of articles from leading newspapers.

  • Bacons Media Directories - used mostly by public relations professionals, lists trade and consumer magazines by subject category, while the newspaper directory is categorized by region.

Use industry directories

There are a wide range of directories that can provide you with information about specific companies and industries. Here is a sampling of some of the more comprehensive:

  • Duns Million Dollar Directory - identifies companies by SIC (Standard Industrial Classification) code, geographic location, and size. Dun & Bradstreet also publishes a number of other useful directories, including State Sales Guides, Regional Business Directories, and the Census of American Business.

  • Thomas Register - lists data on more than 100,000 manufacturing companies by type of product, company name, and location. Also includes product catalogs of many firms.

  • Moodys Manuals - comprehensive information on companies listed on the U.S. stock exchanges, including corporate history, income statements, and balance sheets.

  • MacRaes State Industrial Directory - includes product/service, SIC and company name indexes arranged by county and city.

  • Macmillan Directory of Leading Private Companies - contains information on 12,500 privately-held companies

  • U.S. Industrial Outlook - this Department of Commerce study includes growth statistics for 200 industries, including 5-year projections, background information, statistics and trend forecasts.

  • Statistical Abstract of the United States - has more than 1,000 pages of statistical information from government and private sources. Excellent for reference citations.

Consult demographic/census data Federal, state and local governments are excellent sources of demographic information. On the federal level, the Census Bureau has details from the last U.S. census -- extremely useful for viewing your regional market. Almost every state and county publishes their own census tracts - population density and distribution figures. These show you the number of people living in specific areas such as precincts, water districts, and neighborhoods.

Also contact your local chamber of commerce of economic development authority. Since they are looking to encourage businesses to locate in their areas, they can provide you with information on population trends, payroll statistics, income characteristics, etc. Utilities (the gas and electric company) and banks may also have this kind of information available.

<< Back to Small-Business Start-Up Guide Business licensing requirements vary from city to city, county to county, and state to state. Some require all businesses to register, and they collect annual business licensing fees. Others don't require licenses or registration for unincorporated businesses unless you are doing business under a fictitious name (also known as a DBA or "doing business as"). This means that if you are operating as Alice Jones, caterer, you may not be required to register, but if you do business as Gourmet Delights Catering you will have to register.

Begin the process by calling the city licensing bureau, the county recorders office, or the county registrars office to find out their licensing requirements and the application procedure. This way, you will have all the necessary materials ready when you go to fill out your application. Applications are usually processed through your city or county clerks office, located at city hall or the county administrative building (the same bureau that processes documents like marriage licenses). Look in the government blue pages of your local phone directory for the location.

When you visit your city/county government, be sure to describe your business in detail and ask a lot of questions. This way, you will be sure to find out about all the permits and licenses you will need. Remember, it is your responsibility as the business owner to adhere to any and all regulations that apply to your business -- even if it is only a part-time venture.

Here are some other regulations you may need to be concerned with:

  • Sellers permit - mostly for retailers in states with a sales tax, this is also known as a resale permit; it allows you to avoid paying sales tax on merchandise when you purchase it from wholesalers; this permit is issued through the state entity that is responsible for taxes.

  • Food permit - for businesses that make or sell food; may require inspection by your local health department.

  • Liquor license - necessary if you intend to sell alcohol; regulated at the state level and sometimes the local level.

  • Building permits, fire certificates, zoning permits - these are regulated by your local planning department.

  • Police permit - some businesses require police clearance or permit.

  • State occupational licenses - some occupations such as doctors, lawyers, day care facilities, general contractors, etc. require special state or local licenses; your state consumer affairs office should be able to help you.

<< Back to Small-Business Start-Up Guide If you are a sole proprietor who has employees, or you are a partnership or incorporated, you will have to get a federal tax ID number, also known as an Employer Identification Number (EIN). If you are a sole proprietor with no employees, your social security number will serve as your ID number. You use your EIN for filing and paying the various withholding and social security taxes you are required to make as an employer.

To get an EIN, you fill out and file Form SS-4 with the Internal Revenue Service. You can get this form from your local IRS office, or by calling the IRS help line at 800-829-3676 (800-TAX-FORM).

You may also be required to get a separate state tax ID number. Check with the state agency responsible for collecting taxes (often your state department of taxation or state treasury department) for the correct forms. You can find the address and phone number in the government blue pages of your local phone directory.

For more information about what taxes your business may be responsible for, click on the link below.

<< Back to Small-Business Start-Up Guide Naming your business should be done carefully -- this is a decision that you will have to live with for a long time. A successful name gives people an idea of the nature of your business, and helps project the image you want for your enterprise. It also helps your customers remember who you are, and sets you apart from your competitors.

Once you come up with a name, you need to make sure it is not already being used. Begin with a search of your local telephone directory and local government offices. You can also check in various trade directories, the Federal Trademark Register, or corporate name listings from your state's Secretary of State office.

You can also hire someone to do the search for you. Firms such as Thomson & Thomson conduct searches online or over the phone. Expect to pay anywhere from $80 to $500 for such a service.

If you use a fictitious business name (also called a "DBA" or "Doing Business As"), or if your name implies greater ownership (using words such as "and company" or "& son/daughter"), you will need to register it. You file your DBA with your country clerk. You will also likely have to publish it in a general circulation newspaper once a week for four weeks in the country where your business is located. You will then have to file an affidavit of publication with the country clerk.

State registration will protect your business name only in the state you are registered in. For national protection, you may want to register your company name as a trademark or service mark. To do so, contact the U.S. Patent and Trademark Office in Washington, DC.

For more information about trademark protection, click on the link below.

<< Back to Small-Business Start-Up Guide The question of business structure is an important one. The legal form that's right for you depends on a variety of factors. First off, you need to determine the potential liability involved in your business -- since only corporations and limited liability structures provide you with this shield. You also will have to determine which form will give you the most desirable tax situation, since each legal structure calculates and pays taxes differently.

Many experts recommend that you begin with the simplest and easiest business structure that meets your liability needs. The simpler the business structure, the more flexible it is. For instance, during your start-up phase, you might want to begin as a sole proprietorship or partnership. This will make it easier for you to shift the direction of your business or even change your name -- decisions which otherwise could make it necessary for you to dissolve your corporation. Then, as your liability needs change, you can evaluate incorporating or some other more complex business form.

<< Back to Small-Business Start-Up Guide Conventional wisdom is that you should have up to 12 months worth of living expenses put away before you start your own business, although the figure depends on the type of business you're starting, your projected income, and your potential expenses. Service businesses, for example, often require less of an investment than retail or wholesale businesses.

It's unrealistic to think that you must have this amount of savings. Many successful businesses have been built on less. You ultimately have to determine what your own comfort level is by analyzing your level of risk and the flexibility of your expenses.

During your planning stages, you might want to sit down with an accountant who is familiar with small business issues as well as the issues in your industry. Ask this advisor how long they expect it will take you to generate income. This will help you come up with realistic projections, since your own projections may be overoptimistic.

You may need to think about alternative ways of earning money in the short term. Is there some kind of part-time work you can do such as consulting, bookkeeping or assistant work? Can you work a few days a week for a family member or associate? Think about how "creative" people like actors make ends meet -- they often take on these types of alternative jobs so they can continue to hone their craft, go on auditions, and pursue their true careers.

Take some time to determine your personal budget. How much do you need to live on? You might want to analyze your personal finances by looking at your various expenses, including (but not limited to) the following:

  • Groceries and food
  • Sundries
  • Car payments
  • Credit card payments
  • Other loan payments and debts
  • Entertainment
  • Home maintenance costs
  • Taxes
  • Insurance
  • Tuition/educational expenses
  • Savings/retirement plan/investments

<< Back to Small-Business Start-Up Guide Planning is a critical part of starting any small business, but unfortunately it is an area where many potential entrepreneurs fall short. To give your small business a chance to succeed, you need to know where you're going and how you'll get there. This is where your business plan fits in.

Creating a plan forces you to set goals, determine the resources you will need to carry out your plan, and foresee any problems that might otherwise broadside you. Taking the time to do this exercise correctly ensures that you research and learn about your business. It will help you evaluate the viability of your enterprise, and assist you in setting the right course.

To learn more about what goes into a successful business plan, click on the link below.

<< To Creating Your Business Plan
<< Back to Small-Business Start-Up Guide

The views and opinions contained herein are not necessarily those of American Express and are intended as a reference and for informational purposes only. Please contact your attorney, accountant or other business professional for advice specific to your business.

Copyright 2002 American Express Company. All Rights Reserved

Copyright 2002 Entrepreneur.com, Inc. All rights reserved.

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