Best Business Formation Tips For Entrepreneurs Starting A New Business
Despite the frustrating economic conditions, driven by soaring interest rates and sticky inflation, new business applications and formations in the United States remain above their pre-pandemic levels.
For July 2023, there were roughly 469,557 new business applications, an increase of 0.5% on an adjusted seasonal variation, compared to June 2023, according to data from the United States Census Bureau.
New business formations remained strong, with roughly 32,115 new formations recorded for July 2023, representing a decrease of 0.2% compared to June 2023.
Against a backdrop of slower consumer spending, and overall economic activity, largely driven by higher prices, experts remain positive over the possibility of a soft landing in the coming months, as the central bank’s inflation-busting monetary policy is putting a damper on inflationary concerns.
A Burst Of Entrepreneurship On The Back Of Cooling Economic Conditions
While several sectors experienced a strong decline in operations during the height of the pandemic, a burst of new entrepreneurs have leaped to bet on themselves, contributing to the somewhat strong rebound of the American economy as pandemic fears started to wane.
Despite countless businesses closing their doors throughout the pandemic, and later on followed by the fear of an impending recession, the business outlook has likely seemed more positive this year for new entrepreneurs and small-medium business owners.
Small business activity typically increases during recessionary periods, and a 2022 Small Business Now Report found that nearly 90% of surveyed small-medium business (SMB) owners said that they are positive they will still be in business a year from now, even if a recession had to take place within this year.
Against a backdrop of cooling economic conditions, entrepreneurs are leveraging new possibilities to establish their businesses and further recession-proof their venture capital investments.
On top of this, the widespread adoption of technology, and changing consumer trends, especially in the eCommerce ecosystem have only helped fast-track the development of small online businesses and helped entrepreneurs get their businesses up and running quicker.
While countless obstacles remain burdensome challenges for new entrepreneurs stepping into the market, the overall outlook remains bright, as we steadily begin to approach the tail-end of the year.
Business Formation Tips For Starting A New Business
The consumer landscape has seen radical changes over the last several years, yet despite these new happenings, demand for online consumer goods and services remains steady with the peak experienced during the pandemic.
While entrepreneurs may experience numerous obstacles along the way, having a clear understanding of how the process works, and how they can form their new business can help set them up for success.
Compile A Business Plan
This might seem mundane, however, the importance of having a well-structured business plan will ensure that entrepreneurs have a clear forward-looking strategy that can be used as a road map throughout the process.
Typically, the business plan is a comprehensive document that contains the business idea, function, and role of the owner(s). Having a well-detailed business plan can also be used to attract investors, or apply for business funding.
Additionally, a business plan helps to determine forward-looking financial projections, which include initial start-up costs, operating expenses, and potential revenue of sales. Entrepreneurs can use their business plan as a blueprint that can help them better understand how different functions of the business work, and what their core value proposition may be.
Decide On A Business Structure
Deciding on the right business structure can have long-term implications on any business, as this will affect how much state and federal taxes a business owner needs to pay, whether they can hire employees, and what type of licenses or permits they require.
As an entrepreneur, there are several different business structures to choose from:
Forming a sole proprietorship is one of the quickest ways to start a new business, however, there are some pitfalls with this type of structure. For starters, the business is not formally organized as a separate business structure, which does not separate the assets of the entrepreneur from the business.
Secondly, seeing as there is little separation between personal and business assets, the business owner would be held accountable in the event of a lawsuit, or the business going bankrupt. This business structure is typically used for smaller informal businesses such as blogging, photography, or freelance-focused work.
Limited Liability Company
With a Limited Liability Company or LLC, there is a legal separation between the business owner and the business, which would protect the personal assets of the business owner, in case of bankruptcy or lawsuits.
Additionally, an entrepreneur can form a single-member LLC (SMLLC) if they are going to be the sole owner of the business. Businesses with more than one owner would form their business as a multi-member LLC (MMLLC), however both an SMLLC and MMLLC enjoy similar tax benefits.
For a business with more than one owner, or several owners, a partnership is often considered to be the better option, as the business would be formed under the partner’s names.
This would mean that in the event of any legal actions, the partners of the business will be held liable. This formation structure is typically associated with businesses that have less associated risks, lower liability and are less profitable.
A corporation is somewhat different, as this is considered a separate legal entity, with the majority of the business owned by shareholders, and operated by a board of directors.
Often entrepreneurs would form a corporation in an attempt to attract investors or seek new venture capital funding. The business is registered as a separate entity, and shareholders will share in any profits. Corporations are taxed differently, with shareholders being taxed on distributions they receive from the company.
Conduct Market Research
Low market demand for products and services is one of the biggest reasons why small businesses fail within the first couple of years after opening. Data suggests that roughly 35% of new SMEs fail as a result of decreasing consumer demand, the second highest reason, after running out of cash.
With this in mind, entrepreneurs must conduct thorough market research, to understand consumer trends, and to decipher whether or not there is a demand for their products or services.
Doing market research is one of the critical components of starting any new business, and should be included in the business plan. This would help provide more clarity considering the forward-looking goals of the business, and how resources will need to be distributed across the business to meet market demand.
Obtain Business Funding
Having enough money to start any new business is one of the main obstacles many new entrepreneurs and business owners will need to overcome. Often, some entrepreneurs will use their savings, or personal credit to start a new business, while many others will save capital from previous business ventures to fund their next business idea.
Another way to obtain funding is through a business loan, often provided by a bank or registered financial service provider. This is often the most used route, as banks can provide entrepreneurs with the necessary cash they need to get their business started.
However, with a business loan, entrepreneurs will be responsible for repaying the loan, plus interest, which could take several years to pay off. This can however be a financial burden for both the owner and the business, and there is the risk of defaulting on these loans in the event the business runs out of cash.
As an alternative, entrepreneurs can source funding through a private investor, friends family, or even crowdfunding. This may be somewhat easier, however, it would require the owner to provide investors with company shares, which is often considered another potential drawback.
Register The Business
The business registration process may be different depending on which city and state an entrepreneur may be starting their business. Each state holds different jurisdictions and guidelines in terms of business registration, and can take anything from a few days to a couple of weeks, or even several months before the registration has been successful.
On top of this, entrepreneurs will need to compile the necessary documentation that needs to accompany the registration, this includes the business plan, business name, and perhaps financial records.
Additionally, entrepreneurs need to consider that in the event they are registering a business under a different name or entity, they will need to register it with the federal government, and perhaps their local state government as well.
Obtain Permits, Licenses, And Employment Identification
Before an entrepreneur can open their doors to the public, they will need to obtain the necessary business permits, licenses, and perhaps an employment identification number from the federal or state government.
These permits and licenses may depend on the type of business an entrepreneur is opening, and also the business structure. Additionally, an employment ID is typically used for tax purposes, and to allow entrepreneurs to employ staff.
Keep in mind that several factors may influence the type of permit or license required to operate a new business, as this is often governed on a state, county, or city level.
Open A Business Bank Account
As a newly formed business, entrepreneurs will need to open a separate business bank account that can be used to make business-related purchases. Keeping business and personal finances separate can help business owners keep better track of their income and expenses, and is also used when completing tax filings.
On top of this, a business bank account is used to secure payments with suppliers and set up different payment accounts, and oftentimes a business bank account will have different features or benefits compared to a standard personal check or banking account.
Consult With Professionals
As a measure of caution, entrepreneurs looking to open a new business, are advised to consult with a business professional, financial adviser or planner, or accountant to help throughout the process.
Consulting with these professionals will ensure that entrepreneurs follow all the necessary steps throughout the process, while also remaining compliant with different federal, state, and tax guidelines.
Using professional services would mean that an entrepreneur will need to budget for these expenses, however, the process can often become complex without the right assistance. Having a professional along the way will ensure that the necessary documentation is provided to authorities and that all tax filings remain up to date.
Final Thoughts For Entrepreneurs
Starting a small business can become a financial lifeline for many entrepreneurs, however, without the appropriate guidance, navigating the business landscape can oftentimes feel tricky, and outright complex.
While there are key steps to follow throughout the process, entrepreneurs need to ensure that there is enough market demand to sustain their business idea, but also that they have substantial financial support for times when market demand declines.
On top of this, obtaining the necessary licenses, permits, and employment identification is yet another step before a business can become operational. Over time, as more of these steps are completed, entrepreneurs will get closer to setting up their business, and eventually, with enough support and guidance, open their doors, even virtual doors, to the consumer market.