While starting a small business online has never been easier, an incredible amount of work still has to go into it. And skipping steps can make it or break for you (like, you could get sued, ya’ll 😨).
👎🏽 Don’t lose money before even making it.
👍🏽 Do take our advice.
In Part 1 of our guide, we walk you through the preliminary stages for the first year of your new small business, showing you how to properly research and create a business plan FTW. We also show you how to choose the right business structure and take care of your finances because ya know, they’re also kinda important.
Make sure to put it all into practice in Part 2, where we’ll discuss how to legally register, promote, and run your business. You CAN start and build your side hustle into a profitable main gig with confidence.
You became a freelancer to drop the 9-5, be your own boss, and do things your way. So, what could owning a business do for you that freelancing hasn’t already? We could just give you the answer right about… now. But we think it’s more powerful for you to come up with the answer yourself.
What we will do for you is give you some things to keep in mind when making the transition:
(Pro tip: As you’re going through both parts of this comprehensive guide, think about what these will look like for you in your new business.)
You’ll notice a trend across our guides. Research is always first. Always.
Yes, it can be boring. Yes, it takes time. But you’ll be SO much more prepared if you actually do the d*** work. Trust us.
Let’s dive in.
In case you haven’t caught our Ultimate Guide To Becoming A Freelancer In 2021, creating buyer personas is the way to go. Age, occupation, education, and other lame demographics usually make up the brunt of these semi-fictional representations of your ideal customers.
However, to get the most out of them, you have to dig deep into the minds of your target customers and identify things like:
Put all of this in a nice little template, and you’ve got yourself a buyer persona. Actually putting in the work here will help you better serve the real people they represent — uhm, hellooo, your customers! So, even though your target customers got 99 problems, what you solve for them won’t be one 😏
But in all seriousness. We want you to realize that last point on the list is key. What will make your ideal client buy from you instead of the competition? What’s your secret sauce? What value do you bring to the table? These are all incredibly important questions to ponder.
Now that you have target customers, it’s time to narrow it down even more.
Find your niche.
Again, as we mentioned in our Ultimate Guide to Becoming a Freelancer in 2021, you don’t necessarily need a niche starting off, even as a business owner. You may have absolutely no idea what you want to specialize in, or you want to be a catch-all, and that’s OK! But if you’re ready to choose a specific industry, we promise you won’t go back.
Having a niche increases your perceived value and gives you a leg up over competition as well as a competitive advantage. For example, if you start a marketing agency, maybe you only target selling services and products to environmentally conscious brands. Or, maybe you start an accounting firm solely for local, family-owned small businesses in your area.
A tip here is to take those buyer personas from the step before and backtrack a bit. Think: What industries are these people working for? With that answer, you’ll know exactly where to find your ideal clients and others like them.
Either way, there’s a reason why they say the riches are in the niches.
This is fancy talk for scoping out your competition. Start by handpicking comparable businesses to measure up. To make sure it’s fair game, ensure the other businesses are:
The point of this is to see how you fit into the existing business landscape so you can adapt and pivot as necessary. Then, move on to your SWOT analysis.
Before starting, have a clear objective in mind. What’s your end goal with the analysis? Will you introduce a new product or service? Do you want to adjust how you’re currently doing things?
When you have your clear objective, fill out the four areas of the analysis:
Finally, develop a strategy to address key issues, putting all four areas of the exercise side-by-side for reference. For example, you can see how your strengths can help you maximize opportunities available in your field, or you can try to think of how you can minimize weaknesses to overcome potential threats.
Going through this process will help you prepare the ground to “define a competitive edge that creates sustainable revenue.” (As said best by the U.S. Small Business Administration.) Which leads us nicely into our next point…
Your unique selling proposition (USP), or competitive advantage, is what makes you you. It’s as much intertwined with your business, products, and services as it is with you as a person. A USP is a single attribute that is unique to you and no other competitor. It comes to mind as soon as a person thinks of your business or your brand.
👉🏽 Here’s a few: Walmart’s “everyday low prices,” Amazon’s 2-day shipping, and Nike holding the monopoly for… running shoes. That’s right.
👊🏽 If you aren’t already known for something, take your competitive advantage into your own hands.
Remember: What you say and what you do should align with that unique attribute you’re trying to be known for. With that USP, you’re effectively moving from a red ocean to a blue ocean. But if you want to just keep swimming among the seas of competition, who are we to tell you otherwise?
Sooner or later you’ll catch the drift.
As we’re wrapping up on the preliminary data stage, we - and our friends at Entrepreneur - want to give you some final tips so you don’t stress as much:
Woohoooo! We've reached the end of researching. Now, let’s draft up a steadfast plan to get your new small business rolling.
With research done, get ready to put pen to paper (or voice to Notes) to start developing an actual plan.
Think of your small business plan as a roadmap that will help you figure out where you’re even going. With a good plan, you can sell the idea of your company and its long-term vision better. Actually, one survey found that those who take the time to create a business plan are two times more likely to “successfully grow their business and attract lenders or investors” in comparison to those who didn’t bother doing so.
Kinda sounds like NOT creating one is like throwing money out the window.
Don’t be like this baby. Just make a plan. It’s really not that hard. Plus, we’ve already done the hard part for you - figuring all this stuff out!
There are a million different templates and styles you can choose from to create a business plan. (We didn’t count all of them, but we’re pretty sure that’s how many there are. I mean, have you tried Googling it???)
Anyways, most business plans fall into one of two categories: traditional or lean startup. Let’s break them down real quick:
Whether traditional or lean startup, here are some key components to include in your business plan:
Before you finish, we beg your attention on the following:
Really, there is no right or wrong way to create a business plan. What’s important is that it fits your needs, and that you actually USE IT. What’s worse than throwing money out the window? Wasting several hours or days creating a document that collects digital dust.
OK. You’ve done your research. You’ve made your plan. Now what? It’s time to look into how you’ll structure your business. This is one of THE most important decisions you can make as a small business owner BY FAR. It not only affects the taxes you pay, but also the amount of paperwork you file, how much liability you hold as a person, and how easily you raise funds.
Roll up your sleeves cuz we’re diggin’ in deep on this one.
Here are the most common types of business structures along with quick explanations and pros and cons of each:
If you have not legally registered your business as a company, this is where you sit as a freelancer. Truth be told, this is actually where most people begin because it’s so common and so easy to form. Basically, as its name suggests, sole proprietorships are owned by one person, and that one person reports all profits and losses on his/her personal tax return.
It is extremely straightforward and easy to start (Hellooooooooo, you don’t have to file any paperwork 👏🏽). Also, there is an abundance of free and cheap resources out there to make sure you’re doing it right. However, you’re responsible for your business’ liabilities, and raising money to fund yourself can be limited.
Many sole proprietors rely on their personal savings or family loans to fund themselves, while others start making money right away and grow slowly.
Partnerships are owned and operated by several individuals. There are a few to pick from:
Partnerships are 💣 for their tax benefits. Profits and losses are “passed through” to the individual partners, and each will report his/her share on his/her personal tax return.
However, you’re not so easily off the hook when it comes to personal liability. General partners are liable for each other’s actions and debts. This means that if one partner takes out a loan, the other partners are legally bound to that loan as well.
(We’re warning you not to partner with a Karen. If you don’t listen to us, you’ll pay the price… literally 🤑)
They’re also just more expensive to set up since they require more legal counsel and accounting services in comparison to a sole proprietorship.
Next up we have corporations and their varying types:
(Yes, we realize it’s starting to get complicated. So, feel free to bookmark this page and come back when you’re ready to expand your business empire)
But just reading through the list, you can see how creating a corporation is definitely more complex and more expensive than other business structures. It’s because it’s considered an independent legal entity separate from its owners. Therefore, it has to follow more regulations and tax obligations.
Even so, the liability benefits of corporations are on point. Any debt incurred on behalf of the C corporation by its owners is not personal. This means that if you take a loan out for $500,000 under your C corporation’s name, your personal assets aren’t at risk if you fail to repay it. Owners of C corporations can also retain some of the company’s profits without paying taxes on them.
Limited liability companies (LLCs) combine the best of both partnerships and corporations, allowing there to be just one owner as well. They were created to offer business owners liability protection - similar to a corporation - with profits getting taxed on the member level (a.k.a. avoid double taxation). There is also no limitation on the number of shareholders, and owners of the LLC can all fully participate in business operations. (Remember this isn’t the case for limited partnerships.)
We know. We knowww.
But honestly, we would rather lay it all out on the table for you now than have you come across this later and be like wtf, why did no one ever tell me this before? Well, here we are, telling you. Because we’re always lookin’ out for ya 😘
Nice talk. Back to biz.
While it is possible to switch business structures later down the road, do your research and decide on what you want now so you can save yourself the headache. Not only would you waste time in legalities, but you’d also spend a pretty penny in the process, too. Not tryna scare you, but doing this part wrong can cause you some serious financial distress, like steep penalty fees from the IRS if you miss quarterly tax payments.
So, do yourself a favor and answer the following questions before choosing which structure to open for your new small business.
If you’re feeling up for it, we recommend you wade through the IRS’ legal and tax considerations for each business structure. They won’t fail you. Or ya know, ask your accountant. (Yes, you should have your own CPA to make life easier for you as a business owner. Please don’t do this alone).
You should already have an idea of how much you need to build your business and what you’re going to invest in over the next five years.
Reminder: There’s more than the initial startup costs. Think about funding needed to bring you to a point of consistent profitability, like purchasing subscriptions to programs and apps as well as any website costs, to name a couple.
If you see you have enough to get things going today and in the future, you can skip this section and continue on to the next.
For those who need ideas on how to rake in the moolah, here are a few ways to fund your business endeavour:
Basically, the ways to secure funding as a new small business are as varied as your...
If that wasn’t enough for you already, we’ll just drop this here, too, before moving on: The Small Business Administration (SBA) offers some programs to help entrepreneurs fund their businesses and get things off on the right foot. So, if this sounds up your alley, check out the SBA’s investment programs to see if your business qualifies for any of them.
Before we move along to Part 2, where we’ll show you how to register your business and make it official, you need to come up with a name.
While yes, technically any name will do, here are some things to think about with the naming process:
When you’ve come up with a few options, test the waters. Pass the shortlisted names to family, friends, potential customers, and others to see what their feedback is.
When you’ve chosen the perfect one, the next step is registering your business name to make it legal.
🐇 Hop on over to Part 2 of The Comprehensive Guide to The First Year of Your New Small Business to catch this and much more.