From Kitchen Table to Open Sign, the First Steps of Starting a Small Business

Nobody has ever gotten rich waiting for a consultant to tell them they were ready. Every open sign on every Main Street in America started as a person at a kitchen table with a skill, a hunch and a stack of unopened mail.

Here is the good news, and I say it with real affection for the folks who do this: the first steps of starting a small business are knowable. They are not secret, they are not expensive, and they do not require a lawyer on retainer or a business degree. They require a customer, a notebook and a willingness to fill out some forms. The steps below run roughly in order, and each one says what to do, why it matters and where the free help is.

A word before we start. This is general information about how the process works, not legal or tax advice. Rules differ by state and city, and your situation is yours. Where a step touches the law or taxes, the last line of that step tells you who should have the final word.

Step 1: Test the demand with real money

Before a logo, a website or a business card, find out whether a stranger will pay you. Not a friend, not your mother, a stranger. Sell one thing to one person at a price that covers your costs and your time.

How to do it. Pick the smallest version of what you want to sell: one lawn, one cake, one bookkeeping client, one repaired deck. Price it above your costs. Tell people who do not love you. Write down what they said, what they asked for and what they refused to pay for.

Why it matters. Three paying customers teach more than a hundred survey answers. A survey asks people what they would do. A sale records what they did. Many a business plan has died on the day somebody asked the founder to name the first customer.

If at least a few strangers pay, and a couple come back or send a friend, you have a business in embryo. If nobody pays, you have saved yourself a great deal of money and learned something for nothing. Both outcomes are wins.

Step 2: Do the three numbers

Before you commit savings, work out your price, what each sale costs you to deliver, and what you must pay each month whether or not anybody buys. The arithmetic is simple, and The Side Business Test, How to Know Whether Your Idea Can Pay Its Own Way walks through it with a labeled example. The short version: subtract the cost of each sale from its price, and divide your monthly fixed costs by that difference. The result is how many sales you need each month to break even.

If the number of sales you need is more than you can deliver in the hours you have, change the price, the cost or the idea before you spend a dollar on equipment.

Step 3: Write a one-page plan

Forget the fifty-page document with the pie charts. Write one page, and answer six questions in plain sentences.

1. What do I sell, and to whom?
2. Why would that person buy it from me instead of someone else?
3. What does it cost me to deliver one sale?
4. What do I charge?
5. How will customers find me?
6. How much money do I need to start, and where does it come from?

Why it matters. A plan this short can be read in two minutes by a banker, a spouse or a mentor, and they can tell you in two minutes where it is weak. A long plan hides its weak spots under formatting. If you ever apply for a loan, the one page will become the skeleton of a longer one, and the thinking will already be done.

Step 4: Choose a structure, in general terms

This is the step people dread, and it is smaller than it sounds. The structure is the legal form your business takes. In broad terms there are four common ones.

• Sole proprietorship. You and the business are legally the same person. It is the default if you simply start selling. It takes the least paperwork, and it gives you no legal separation between your personal assets and the business's debts.
• Partnership. Two or more people share the business. It is simple to form and should be backed by a written agreement about who puts in what, who does what and what happens if someone leaves.
• Limited liability company, or LLC. A form created by state law that is designed to separate the owners' personal assets from the business's debts, within limits. It involves a filing with your state and usually a fee, and the rules vary from state to state.
• Corporation. A separate legal entity with shareholders. It brings more formality and more complicated taxes, and it often suits businesses that plan to raise money from outside investors.

Which is right depends on your risk, your state's rules, your taxes and your plans. Many one-person businesses start as sole proprietorships and change form once they have real revenue or real risk. The person to ask is an attorney or a tax professional in your state, and an hour of their time at this step is an inexpensive way to avoid a costly mistake later.

Step 5: Get an EIN from the IRS

An Employer Identification Number, or EIN, is a nine-digit number the IRS assigns to a business, like a Social Security number for the enterprise. You need one if you hire employees, and many banks ask for one before opening a business account. Even if you are a sole proprietor with no employees, an EIN lets you give customers and banks a number other than your personal Social Security number.

How to do it. Apply directly through the IRS website. The IRS issues EINs at no charge. Be wary of any website that charges a fee for the same thing, since the IRS application is free and takes a few minutes online for most applicants.

Why it matters. Protecting your Social Security number is worth ten minutes of paperwork, and the EIN is the number you will use on tax forms, bank accounts and, if you grow, payroll.

Step 6: Find the state and local licenses

This is where small businesses are most often tripped up, because there is no single list. Licensing in America is a patchwork. Some trades, such as electricians, plumbers and contractors, require a state license that depends on training and exams. Food businesses face health department rules. Many cities require a general business license or a permit to operate from a particular address. Some home-based businesses must meet zoning rules about customers, signs and deliveries.

How to do it. Start with your state's business website, usually run by the secretary of state, and your city or county clerk. Ask two questions: what license does this kind of business need, and does zoning allow it at my address? Then ask a third question of a person who already does the work locally: what did you wish someone had told you?

Why it matters. Operating without a required license can mean fines and a forced shutdown, which is a poor way to learn the rules. It is also an area where the conservative case for lighter regulation has real force. Where a license protects customers from genuine harm, it earns its keep. Where it exists mostly to protect existing businesses from competition, it is a toll booth in front of the American dream. You can read more about the second kind of rule in California's AB5 put freelancers out of work, and voters pushed back and tax complexity is a subsidy for lobbyists, and the code shows how it works. Either way, learn which one applies to you before you open.

Step 7: Separate business money from personal money

Open a bank account used only for the business, and run every sale and every expense through it. Do not pay for groceries from the business account, and do not pay supplier bills from your personal one.

How to do it. Take your EIN and your state registration papers to a bank or credit union, and ask for a basic business checking account. Many offer low-fee options for small operators. If you use a credit card for business purchases, use a separate card for the business only.

Why it matters. Three reasons. First, taxes: a clean record shows exactly what the business earned and spent, and an honest set of records is the best defense in any dispute with a tax authority. Second, liability: if you chose an LLC or a corporation, mixing personal and business money can weaken the separation you paid to create. Third, clarity: you cannot tell whether the business is working if its money is tangled up with the grocery bill.

Step 8: Keep basic books from day one

Bookkeeping is the boring discipline that tells the truth about your business. You do not need to be an accountant. You need a habit.

How to do it.

1. Record every sale: date, customer, amount.
2. Record every expense: date, vendor, amount, purpose.
3. Keep receipts, on paper or as photos, in one place.
4. Once a month, sit down for an hour, reconcile the books against the bank statement and look at the numbers.
5. Set aside money for taxes each time you are paid. A common habit is to move a fixed share of every payment into a separate savings account so the tax bill never comes as a surprise. The right share depends on your income and your state, and a tax professional can set it.

A spreadsheet is enough to begin. Plenty of inexpensive accounting software exists when you are ready for it.

Why it matters. Profit and cash are different things, and only books can show you the difference. A business can be profitable on paper and still run out of cash because customers pay slowly. And a shoebox of receipts in April is a poor basis for a tax return.

Step 9: Register for sales tax where it applies

Most states, and some cities, levy a sales tax on retail sales of goods and some services. If you sell taxable items, you will usually need to register with your state's department of revenue, collect the tax from customers and send it in on a schedule. That money is not yours. You are holding it for the state, and spending it is how small businesses end up in serious trouble.

How to do it. Visit your state's department of revenue website and find the registration for a seller's permit or sales tax license. Ask which of your products and services are taxable, because states differ, and ask how often you must file. If you sell online or across state lines, the rules are more involved, and a tax professional is worth consulting.

Why it matters. Sales tax is one of the few areas where a beginner can create a large liability without noticing. Registering early and collecting properly is far cheaper than a bill for back taxes with penalties.

Step 10: Use the free help

Here is the part that surprises people. America runs a surprising amount of free business counseling, and most beginners never use it.

• The Small Business Administration, or SBA, is the federal agency for small business. It publishes guides on starting and running a business, explains its loan programs and funds a network of counselors. Its loan programs work mostly by guaranteeing part of a loan made by a private lender, which is different from the government making the loan itself.
• SCORE is a nonprofit network of volunteer mentors, many of them retired or working business people, who offer free counseling and workshops.
• Small Business Development Centers, or SBDCs, are located across the country, often at colleges and universities, and offer free or low-cost advising on plans, financing and compliance.

How to do it. Look up the SBA, SCORE and SBDC sites, find the office or chapter nearest you, and book one free session. Bring your one-page plan, your three numbers and a list of questions.

Why it matters. A seasoned mentor can look at your one page and, in thirty minutes, name the mistake you were about to make. That is a better bargain than any course that costs money.

A few habits that separate the survivors

The steps get you open. These habits keep you open.

• Pay yourself, eventually, on purpose. Many founders work a year for nothing and call it a business. It is a hobby until it pays you.
• Keep fixed costs low early. Rent a room before you rent a building, and buy used before new.
• Say no to the wrong customer. One customer who pays late and demands everything can eat the profit from ten good ones.
• Treat a first mistake as tuition. Everyone makes one. The only costly mistake is the one you repeat.

Starting a business is also a civic act. A family that builds something of its own is a family that depends on no one's permission to eat, and a country of such families is hard to push around. For the larger case, see Work as a Calling, What Scripture and the Reformers Said About an Ordinary Job and Madam C.J. Walker Built a Fortune From Hair Care, Hard Work and Nerve, the story of an American who began with almost nothing.

The case in brief

1. Test demand with real paying strangers before spending money on anything else.
2. Know your price, your cost per sale and your monthly fixed costs, and write a one-page plan.
3. Choose a structure with a professional's help, get a free EIN from the IRS and learn your state and local licenses.
4. Keep business money separate, keep simple books, and register for sales tax if you sell taxable goods.
5. Use the free help from the SBA, SCORE and the Small Business Development Centers before you pay anyone.

What you can do: this week, book one free counseling session with your nearest Small Business Development Center or SCORE chapter and bring your one-page plan.