Empowering Yourself to Start a Small Business
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Starting a small business is a dream and goal for many people, but knowing how to get started can feel overwhelming. You must choose an appropriate structure for your business; you have to navigate local and sometimes federal fees and licensing; you must file all your paperwork and get your taxes in order. The list goes on with the practical day-to-day operations and building of a client or customer base. It's no wonder 92 percent of people with a business idea don't follow through on it (of course, other factors contribute to this, such as access to funding and health insurance).
You don't have to let your small business dream or idea fade away before it even has a chance. Empower Creative Agency LLC's project managers have helped more than seven people start small businesses that have continued to thrive. We will walk you through the steps that will empower you to commit to your small business.
How Do I Start a Business?
The first hurdle to starting a business is... getting started. After a certain point, a hobby business can't keep flying under the radar. But what is that certain point? The IRS says you are required to file a tax return if your net profits are $400 or more.
But before even diving into the tax side of things, you need to make sure your business idea is sound. You can accomplish this by doing market research: checking out potential competition in your area and the potential for a customer or client base. Once you know there is a market for your business, you can move on to the next step, which is writing your business plan.
A business plan lays out step-by-step how you will structure, operate, and grow your business. It can be essential in securing funding through partners, investors, and even business grants. People who want to help your business want to know that you have a plan for success instead of just an idea that you're testing out. A traditional plan will include a combination of: general introduction to your business, company description, market analysis, organization and structure, product or service description, marketing and sales plan, financial projections, and funding request if applicable.
Before starting any business, a person needs to research, learn, and take notes, said Gina Davis, a California based photographer and small business owner. All these things will allow you to launch your business with a plan in place.
“Be determined, be organized, be self-motivated,” she said. When you establish a goal, you have something to keep working toward. Whether it's a certain number of clients, a certain amount of income per month, or another goal, always be working toward it, Davis said.
Davis has done photography off and on since high school, she said and she earned a degree in photography from San Francisco Academy of Arts. Throughout the years she fine-tuned her photography style until she was confident in it and had enough interested clients to make some money. In 2018 she began accepting paying clients regularly and in 2021 she launched her business full-time, thanks in part to life changes brought about by the Covid-19 pandemic.
When you're getting started, take notes on everything, Davis said. Fill notebooks with your ideas and samples, she said.
Your business plan will also be a living document. While you may originally only map out a 3-5 year plan, you'll want to return to your plan periodically and update it for the next few years, adjusting your goals based on what you've already accomplished.
What Structure Will Best Empower My Business?
Every business must have some sort of legal structure that informs and guides processes such as taxes, legal protections and benefits, as well as guiding the day-to-day operations. So how do you know which one is right for your small business idea? Here's a quick look at your options.
Sole proprietor: if you operate as a business but have never filed any kind of paperwork (i.e., you make money off your crafts or do freelance work on the side), you are automatically considered a sole proprietor. The good news is that this kind of business structure might not require much more from you. For taxes, you file your business income with your federal return via a Schedule C. A downside is that your personal assets are not separated from your business. So if your small business incurs any debts or other financial hardship, your personal assets can be required to cover your business debts. In general, sole proprietorship is a good choice for either testing a higher-risk idea before launching or if your business is low-risk to begin with, such as freelance writing or design, a photography business, personal trainer, tutor, or housekeeper.
Partnership: any time you bring someone else into your small business, you move into a partnership, at a minimum. There are two main kinds of partnerships: a limited partnership, wherein one partner has unlimited liability and all other partners have limited liability. In a limited liability partnership, all partners have limited liability, protecting everyone personally from business debts and the actions of their partners. This structure is often used by professionals such as lawyers or health care providers.
Limited liability company: almost a kind of combination of a partnership and corporation, an LLC's big incentive for small business owners is the general protection of personal assets. But it's important to remember that, as the/an owner of an LLC, you are still technically self-employed and are subject to self-employment tax. An LLC is a good option for any number of small businesses. Unlike partnerships and proprietorships, an LLC is less specific in the kind of business it represents and more about the legal protections and structure it offers.
Corporations: When you move into bigger business structures like corporations, your start-up costs are likely to increase, as well as your taxes, but your business is completely separate from any and all personal assets, and your business becomes its own legal identity. Unlike the structures already discussed, corporation profits are subjected to income tax. Your corporation also has the option to sell shares of stock to raise money.
S Corporation: This is a specific kind of corporation that is able to avoid the potential for double taxation that is common among general corporations. Losses and profits can pass through an owner's personal income without being subjected to corporate tax rates. While appealing, not all corporations can be an S-corp, so you'll need to consult with a professional if you intend to pursue S-corp status.
B Corporation: although no different from a general corporation for tax purposes, a B-corp includes some kind of public benefit, alongside the financial profit for its shareholders.
Nonprofit Corporation: nonprofits, just as the name implies, do not operate with financial gains in mind. These corporations are focused on public benefits, often charity, religious, or educational work. A nonprofit is able to apply for exemption from federal and state taxes on its profits.
When considering which structure empowers your business for the most success, you can ask yourself a few questions:
How much are you willing to risk your personal assets?
The structure you choose will either leave you personally liable or separate your business and personal property. A sole proprietorship and certain partnerships may leave you financially on the hook for business debts, expenses, or even lawsuits. So if you're borrowing or putting up a lot for a business, the risk to reward ratio may favor a limited liability structure.How do you plan/expect to be taxed?
Many small businesses are structured as pass-through entities, meaning the profits are passed through the business and taxed on the owner's individual return. If your business is a C-corp, profits will be taxed at the corporation level as a separate entity from it's owner(s). Any dividends paid out are taxed at the individual level.How formal do you want your management to be?
Corporations are required to have a board of directors to look out for shareholder interests. Smaller business structures can be overseen by either the named partners/members or managed by agreements written out beforehand.
You may find other questions are helpful in determining which business structure is right for you. This article from Nerd Wallet offers more considerations for making the choice.
Legalizing Your Business
Although Davis has done photography for many years, pursuing it in a business capacity off and on since 2013, it wasn't until 2021 that she finally buckled down to commit to it as a full-time profession.
With the help of her sister, a tax accountant, Davis was able to get her business up and running—and legal.
“You have to put in for a fictitious business name,” Davis said. “That is what you are doing business as.”
If your sole proprietorship operates under a name different than your own name, you must report/register that with your local city or county office. This also allows you to create business accounts, where necessary and appropriate. For her business, structure, and location, Davis has been able to operate Gina G Photography with just a business license and a fictitious business name, keeping her licensing and permit costs fairly low each year.
As she continues to grow her business, her next step will be to further investigate the benefits of an LLC, she said.
How Much Will It Cost to Start a Small Business?
Perhaps one of the biggest barriers to starting a small business, other than the know-how, is money. Regardless of the type of business, you will have start-up costs. This could be an initial investment into supplies to create your products, purchasing the products themselves, renting or leasing office space, or buying equipment and/or programs that you need for your business. You may also encounter permit and licensing fees, possibly fees for your market research and analysis, and other marketing fees (depending on how you plan to spread the word about your small business).
Once you've made a list of all your start-up costs you'll need to research exactly how much each one is or make estimates based on research. This will allow you to get a fuller picture of how much your business will cost to get up and running, as well as a monthly budget so you know how much you need to keep your business running. Generally, estimates say that it takes three to four years for a business to begin making a profit. Before then, the money earned is usually going back into the business to break even.
There's no hard and fast rule about how much a specific kind of business costs to start; you'll have to make the calculations yourself based on what you need and what you may already have or be able to use. Call it a right of small business passage.
Keep in mind that the amount of money it takes to start your business is not the same as the amount it takes to run your business.
What fees will I pay?
Licensing and permits, and their associated fees, will vary depending on your state and the type of business you are starting. Some sole proprietorships will not require any licensing or fees, while others that offer more professional services or sell goods will. More formal business structures will usually come with some start-up fees—in the very least, you're likely to pay some fees for getting your business registered. SquareUp offers this general idea of each state's requirements and where you can look for more information specific to your business.
Some of the most common licenses small businesses need are:
peddlers license
occupational license
vendor license
cleaning license
landscaping license
liquor license
food license
tradesman license
beauty license
building license
Figuring out what licenses and permits you need can feel overwhelming. If you're figuring it out on your own, you'll want to explore state and local government websites to determine what you need to legally operate your business. You may also choose to pay for a service that does the leg work for you.
When it came to navigating the often-confusing domain of small business processes, Davis said she had to muster her courage to simply ask questions.
“Google is my best friend,” she said. By starting with Internet searches, Davis was able to find forums and groups that had many of the answers she needed. If the answer wasn't there, she was usually able to get pointed in the right direction. From there, she would start making calls, she said.
The Small Business Association also gives some general guidelines on licensing and permits.
Federal licenses or permits are required for any federally regulated activities. These include:
agriculture
alcohol
aviation
firearms, ammunition, and explosives
fish and wildlife
commercial fisheries
maritime transportation
mining and drilling
nuclear energy
radio and television broadcasting
transportation and logistics
If your business deals with any of the above, you'll want to start your permit and licensing processes at the federal level.
Regulations at the state level tend to be more prolific, often including auctions, construction (and associated trades such as plumbing and electrical), farming, restaurants, and retail. Advice varies on whether you should start at the federal level and work your way to your local city level for permits and licensing or whether you should begin closer to home and work out. Part of your decision making process may be on how easy it is for you to find the information you are looking for. You may find that your city and county clerks and licensing offices are more accessible and can provide you with information pertaining to state and federal requirements for your business.
At the state level, your starting point may be the Secretary of State's office, a licensing office, the Department of Revenue, or even a business office. Constant Contact has this helpful state-by-state guide that can help you get started wherever you live.
Instead of feeling embarrassed or self-conscious about what she didn't know, Davis embraced the reality that all small business owners have to learn what they don't know, and getting permits and licenses squared away is the most challenging the first time.
“Once you did it once I felt like you were in,” Davis said. Presently, she just has to make sure she's renewing her business license and business name when they come due.
Wherever your community, resources are available, Davis said, you just have to be willing to seek them out.
“Ask questions and don't be afraid,” she said. “Just go for it.”
Paying Small Businesses/Quarterly Taxes
If the paperwork of your small business isn't overwhelming enough, self-employment and quarterly taxes sneak up to add to your plate. As your own employer, you are responsible for paying your own taxes, which includes state and federal taxes, as well as the 15.3 percent self-employment tax to cover social security and medicare. If your small business generates enough income that you will owe $1,000 or more in taxes, you are generally required to make quarterly estimated payments. The easiest way to deal with this is to keep track of your income and expenses and pass it all off to a tax professional who will take care of it for you. If you choose to handle it on your own, you may find our self-employment tax column a helpful place to start.
You have two options for calculating your estimated tax payments. You can calculate the whole year's worth of payments based on your previous year's income or you can crunch the numbers every quarter based on your actual income. If your business income is prone to fluctuation for any reason (such as a lawn care or landscaping business that generates less during the winter), crunching the numbers every quarter, while more tedious, will keep you from overpaying when your business is in a lull.
Ask for Help to Empower Success
Getting a small business up and running can be challenging and overwhelming. Understanding the processes, navigating the paperwork and fees, and getting your structure legally squared away is a full-time job in itself. It is OK to ask for help with the early stages of your business (and the later stages, too!).
The project managers at Empower Creative Agency LLC have helped several clients get their small businesses up and running. Sometimes the best way to empower your project and your success is to recruit the right team to support you. You can schedule a discovery call with an Empower Creative Agency project manager here.
