5 Things to Know Before Starting Your Own Business

Starting your own business is an exciting time. But amidst the joy of building something with your own hands and the alluring promise of an escape from your 40-hour-a-week grind, inexperienced entrepreneurs often forget to do their due diligence. Build a strong foundation for your business by understanding these five important things:

1. Target Audience

Who are you building the business for? But more importantly, is there a market to serve? Not having a market or having a significantly small one can limit your business' growth over time. You'll want to determine if you have a target audience and who they are. This should be the first test that your idea must pass in order to proceed forward. If your proposed business does not fill a gap or need, you will have difficultly getting any traction or upward momentum. That said, businesses that innovate often do not have a market to serve; they simply create a need for their products or services. In this case, ask yourself - who does my business benefit?

2. Capital Requirements

Businesses have different capital requirements. Some commercial ventures, such as real estate development firms and manufacturing companies, are relatively more cost-intensive than others, such as eCommerce websites and thrift stores. Regardless, determine how much capital you'll need to raise to get your business up and running. You can do so by determining overhead and operating expenses. Overhead expenses are the costs to keep the business running, such as office space, business insurance, and utilities. Meanwhile operating costs are the byproduct of a business' day-to-day operations, such as employee salaries and equipment.

3. Funding Options

Now that you have some sense of the dollar amount required to start your business, start comparison shopping for funding sources. There are different sources of business funding - family and friend loans, credit cards, crowdfunding platforms, traditional bank loans, angel investors, and venture capital. Each option has its own pros and cons that you'll have to weigh in comparison. You'll want to choose a funding source that aligns with your interests. Don't just go for the first investor or lender who offers you money. If the money comes in the form of a loan, check its repayment terms, interest rates, lender reputation, customer satisfaction rate, and any miscellaneous charges that may be tacked on.

4. Personal Limits

Understanding your competencies and the amount of resources you are prepared to commit is also an invaluable data point that must be addressed before you take the leap. When running a business, you need to know what area you are good at and where you need help in. Do you need to hire an accountant to manage the books? Perhaps a lawyer to protect your business from lawsuits? Not knowing your skillset puts you at risk of trying to take on everything that the business requires. Successful entrepreneurs acknowledge the fact that their abilities are limited, and that they need help from other industry experts. Aside from helping you figure out who to hire, understanding your personal limitations gives you the opportunity to address and strengthen them over time. When you're not running the business, you can enroll in an online class or find mentors who can teach you the ropes.

5. Legal Requirements

To start a business, you'll need to know the four items listed above. But to keep it running, you'll need to understand the legal implications surrounding businesses. For starters, identify what legal structure your business should be incorporated in. The main legal structures to choose from include: sole proprietorship, LLC, partnership, and corporation. Determine which structure best aligns with your business model. Next, register your business into the government and IRS databases.

If you did not incorporate as a sole proprietor, you'll likely have to acquire several local permits and licenses to legally operate your newly incorporated enterprise. Applying for these permits and licenses means that you'll have to prepare documents in advance. This includes articles of incorporation and operating agreement, DBA agreement, income tax forms, and an employer identification number to name a few.

Conclusion

As the old aphorism goes - measure twice, cut once. Starting your own business is easy; planning and preparing for it is the hard part. By understanding the five things aforementioned in this article, you minimize the risk of running into surprises that could delay or destroy your budding company.