Small businesses are big business for local economies

Money SmartsMay 20, 2022

Steps to consider in starting your own business

Small businesses, start-ups, and entrepreneurs are some of the most important influencers of economic growth in local economies because they represent more than 90 percent of all employers and create 60 to 80 percent of all new jobs, annually. In 2018, there were 30.2 million small businesses in the US, which represented 99.9 percent of all businesses in the country, employing about 58.9 million people. Out of the total number of small businesses, 39 percent were owned by women, who contributed to eight percent of employment and generated 4.2 percent of the revenues.*  

Are you dreaming about starting your own company?

Starting a small business isn’t just a dream that benefits you — it’s a step forward for your community. Small businesses benefit the local economy as a whole, even people who aren’t customers or employees. In fact, if you have a small business, here is a few ways you are already doing that:

  1. You Employ Local Workers

Even taking on a few employees part-time can help them pay rent, cover basic expenses, and sustain themselves with a reliable income.

  1. You Create Job Vacancies in Other Companies

Even if you don’t hire other employees and only run the business yourself, you can still create vacancies at other companies. The full-time job you leave to start your business will likely need to rehire for your position. The vendors that you buy from and the marketing agencies you partner with may need to expand their team to accommodate you and other clients like you.

  1. The Money You Earn Stays in the Community

When a large chain business opens in a community, a portion of the profits leave the city (likely the state) and contribute to corporate earnings.

On the other hand, the money earned by your small business goes back into the community. It is used to support local restaurants, builds up regional farmers, and gets donated to small nonprofits. Your dollar can stretch much further when it is spent locally because it’s compounded across partners, vendors, and employees. 

  1. You Contribute to Local Taxes

When your customers spend money at your business, they are investing in their communities through income and sales tax. The taxes you pay will support local schools, help improve the roads, allow the city to create parks and other community areas, and fund social service programs.

  1. You Make Your City a Better Place to Live

Local businesses are the lifeblood of communities. Small businesses are what attract people to live in local communities. Your business, along with others in the area, will bring more residents to your town, attract tourists (and the money they spend on vacations), and encourage large-scale job creators to move in.

  1. You Help the Environment

If you can source items locally and customers can buy them from your small business, then you and your customers can both reduce your carbon footprints. You can cut down on emissions created by shipping products to make the environment healthier and the air cleaner.

Everyone benefits from local businesses in your area, from kids enjoying the fresh air in parks provided by tax dollars to your employees who rely on you for a paycheck. Keep these benefits in mind as you begin planning your small business.

11 steps to consider now that you have decided to start your own business

  1. Conduct market research

Market research will tell you if there’s an opportunity to turn your idea into a successful business. It’s a way to gather information about potential customers and businesses already operating in your area. Use that information to find a competitive advantage for your business.

Competitive analysis helps you learn from businesses competing for your potential customers. This is key to defining a competitive edge that creates sustainable revenue.

Your competitive analysis should identify your competition by product line or service and market segment. Assess the following characteristics of the competitive landscape:

  • Market share
  • Strengths and weaknesses
  • Your window of opportunity to enter the market
  • The importance of your target market to your competitors
  • Any barriers that may hinder you as you enter the market
  • Indirect or secondary competitors who may impact your success

Several industries might be competing to serve the same market you’re targeting. The Department of Justice provides a diagram of Porter’s Five Forces as one way you can differentiate your competitive analysis by industry. Important factors to consider include level of competition, threat of new competitors or services, and the effect of suppliers and customers on price.

  1. Write Your Business Plan

Your business plan is the foundation of your business. Learn how to write a business plan quickly and efficiently with a business plan template. There are many examples online.

A good business plan guides you through each stage of starting and managing your business. You’ll use your business plan as a roadmap for how to structure, run, and grow your new business. It’s a way to think through the key elements of your business.

Business plans can help you get funding or bring on new business partners. Investors want to feel confident they’ll see a return on their investment. Your business plan is the tool you’ll use to convince people that working with you — or investing in your company — is a smart choice.

Pick a business plan format that works for you. There’s no right or wrong way to write a business plan. What’s important is that your plan meets your needs.

  1. Fund your business

Your business plan will help you figure out how much money you’ll need to start your business. If you don’t have that amount on hand, you’ll need to either raise or borrow the capital.

Every business has different needs. Your personal financial situation and vision for your business will shape the financial future of your business.

Once you know how much startup funding you’ll need, it’s time to figure out how you’ll get it.

There are several options for funding your business:

  • Self Funding – Self-funding can come in the form of turning to family and friends for capital, using your savings accounts, etc.

With self-funding, you retain complete control over the business, but you also take on all the risk yourself. Be careful not to spend more than you can afford and be especially careful if you choose to tap into your savings.

  • Investors – Investors can give you funding to start your business in the form of venture capital investments. Venture capital is normally offered in exchange for an ownership share and active role in the company. So be prepared to give up some portion of both control and ownership of your company in exchange for funding.
  • Get a small business loan – If you want to retain complete control of your business, but don’t have enough funds to start, consider a small business loan.

To increase your chances of securing a loan, you should have a business plan, expense sheet, and financial projections for the next five years. These tools will give you an idea of how much you'll need to ask for and will help the bank know they’re making a smart choice by giving you a loan.

Once you have your materials ready, contact Great Lakes Credit Union to get the best possible terms for your loan. Visit www.glcu.org for a loan tailored for your business.

  1. Pick your business location

Your business location is one of the most important decisions you’ll make. The choice you make could affect your taxes, legal requirements, and revenue.

Where you locate your business depends in part on the location of your target market, business partners, and your personal preferences. In addition, you should consider the costs, benefits, and restrictions of different government agencies.

Costs that can vary significantly by location include standard salaries, minimum wage laws, property values, rental rates, business insurance rates, utilities, and government licenses and fees.

  1. Choose a business structure

The legal structure you choose for your business will impact your business registration requirements, how much you pay in taxes, and your personal liability.

Your business structure affects how much you pay in taxes, your ability to raise money, the paperwork you need to file, and your personal liability.

You'll need to choose a business structure before you register your business with the state. Most businesses will also need to get a tax ID number and file for the appropriate licenses and permits.

Choose carefully. While you may convert to a different business structure in the future, there may be restrictions based on your location. This could also result in tax consequences and unintended dissolution, among other complications.

Consulting with business counselors, attorneys, and accountants can prove helpful.

Common business structures:

Sole proprietorship – Sole proprietorships do not produce a separate business entity. This means your business assets and liabilities are not separate from your personal assets and liabilities.

Partnership – Partnerships are the simplest structure for two or more people to own a business together. There are two common kinds of partnerships: limited partnerships (LP) and limited liability partnerships (LLP).

Partnerships can be a good choice for businesses with multiple owners, professional groups (like attorneys), and groups who want to test their business idea before forming a more formal business.

Limited liability company (LLC) – LLCs protect you from personal liability in most instances, your personal assets — like your vehicle, house, and savings accounts — won't be at risk in case your LLC faces bankruptcy or lawsuits.

LLCs can be a good choice for medium- or higher-risk businesses, owners with significant personal assets they want protected, and owners who want to pay a lower tax rate than they would with a corporation.

Corporation – a legal entity that's separate from its owners. Corporations can make a profit, be taxed, and can be held legally liable.

Corporations offer the strongest protection to its owners from personal liability, but the cost to form a corporation is higher than other structures. Corporations also require more extensive record-keeping, operational processes, and reporting.

Corporations can be a good choice for medium- or higher-risk businesses, those that need to raise money, and businesses that plan to "go public" or eventually be sold.

  1. Choose your business name

It’s not easy to pick the perfect name. You’ll want one that reflects your brand and captures your spirit. You’ll also want to make sure your business name isn’t already being used by someone else.

You can find the right business name with creativity and market research. Once you’ve picked your name, you should protect it by registering it with the right agencies.

  1. Register your business name

Once you settle on a name you like, you need to protect it. There are four different ways to register your business name. Each way of registering your name serves a different purpose, and some may be legally required depending on your business structure and location.

Entity name protects you at a state level - in most cases, your entity name registration protects your business and prevents anyone else in the state from operating under the same entity name. Check with your state for rules about how to register your business name.

Trademark protects you at a federal level - Trademarks prevent others in the same (or similar) industry in the United States from using your trademarked names. Businesses in every state are subject to trademark infringement lawsuits, which can prove costly. That’s why you should check your prospective business, product, and service names against the official trademark database, maintained by the United States Patent and Trademark Office.

Doing business as (DBA) doesn’t give legal protection, but it might be legally required - A DBA lets you conduct business under a different identity from your own personal name or your formal business entity name. As an added bonus, getting a DBA and federal tax ID number (EIN) allows you to open a business bank account.

Domain name protects your business website address - f you want an online presence for your business, start by registering a domain name — also known as your website address, or URL.

Once you register your domain name, no one else can use it for as long as you continue to own it. It’s a good way to protect your brand presence online.

  1. Get federal and state tax IDs

You’ll use your employer identification number (EIN) for important steps to start and grow your business, like opening a bank account and paying taxes. It’s like a social security number for your business. Some — but not all — states require you to get a tax ID as well.

Your Employer Identification Number (EIN) is your federal tax ID. You need it to pay federal taxes, hire employees, open a bank account, and apply for business licenses and permits.

It's free to apply for an EIN, and you should do it right after you register your business.

State tax ID number

To know whether you need a state tax ID, research and understand your state's laws regarding income taxes and employment taxes, the two most common forms of state taxes for small businesses.

The process to get a state tax ID number is similar to getting a federal tax ID number, but it will vary by state. You'll have to check with your state government for specific steps.

  1. Apply for licenses and permits

Most small businesses need a combination of licenses and permits from both federal and state agencies. The requirements — and fees — vary based on your business activities, location, and government rules.

  1. Open a business bank account

A small business checking account can help you handle legal, tax, and day-to-day issues. The good news is it’s easy to set one up if you have the right registrations and paperwork ready.

As soon as you start accepting or spending money as your business, you should open a business bank account. Common business accounts include a checking account, savings account, credit card account, and a merchant services account. Merchant services accounts allow you to accept credit and debit card transactions from your customers.

You can open a business bank account once you've gotten your federal EIN. Most business bank accounts offer perks that don't come with a standard personal bank account.

  1. Get documents you need to open a business bank account

Opening a business bank account is easy once you've picked your bank. Simply go online or to a local branch to begin the process. Here are some of the most common documents banks ask for when you open a business bank account. Some banks may ask for more:

  • Employer Identification Number (EIN) (or a Social Security number, if you're a sole proprietorship)
  • Your business's formation documents
  • Ownership agreements
  • Business license

When you’re ready to open your business banking account, contact Great Lakes Credit Union to make sure your account is right for you and your business.

*Source: the pioneer, December 2018, Small Business, Big Contribution

**Source: https://www.sba.gov/business-guide/10-steps-start-your-business

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