Starting a Business

What It Means

Starting a business involves many activities related to organizing the organization. The process includes generating of an idea for the enterprise (called concept development), researching the idea’s potential for success, and writing a business plan. Someone who is starting a new business is called an entrepreneur. This person takes on the financial risks of the initiation, operation, and management of the business. An entrepreneur may want to establish a small, local business organized as a sole proprietorship (a business owned and operated by a single person), or he or she may hope to one day grow his or her business into a large, multinational business organized as a corporation.

Starting a business of any size requires an investment. Entrepreneurs who want to build large companies or corporations often look to investors, called venture capitalists, to finance the start-up costs in exchange for a share of ownership, called equity. Once the business is established, the entrepreneur may decide to raise more money, or capital, by selling shares to the public through an initial public offering (IPO), which is the company’s first sale of stock.

Regardless of the size of a business, it must be unique in order to succeed. Many large, successful corporations began as small organizations with a business idea that was significantly different from anything else on the market. An entrepreneur must be assured that his or her business idea offers a unique good or service to customers. The entrepreneur must also have a sense of who his or her potential customers are and what products they might choose. Finally, the new business owner must have a plan for running and growing the company through its first year and beyond. The business plan may cover short-term goals, ranging from 6 to 12 months, and long-term goals, ranging from two to five years.

When Did It Begin?

Entrepreneurship and small businesses in the United States have their roots in the trading practices and pioneering spirit of early American settlers. Many early business enterprises in the United States were agricultural. These agricultural enterprises were supported by a federal law passed in 1862 called the Homestead Act, which granted undeveloped land to individuals for farming if the landholder agreed to meet certain requirements, such as building a structure on the property and farming the land for a minimum of five years.

During the nineteenth century the Industrial Revolution introduced mass production into U.S. business. Companies in the mining, railroad, and other industries grew into corporate giants, dominating certain areas of the economy and reaping huge shares of the country’s industrial output. Small businesses, including many sales and service firms, continued to prosper throughout the nineteenth and twentieth centuries.

The U.S. government has taken action on numerous occasions to support the formation of small businesses. During World War II the federal government created the Smaller War Plants Corporation, which provided loans to private business owners and gave corporations incentives for extending credit to small businesses. The Small Business Administration was formed in 1953 with the passage of the Small Business Act. It was not only designed to provide assistance and protection to small businesses but also required that a portion of government contracts be offered to small business contractors.

More Detailed Information

The preliminary stages of planning a new business idea can be challenging, but they are important to other aspects of building the business. A business owner must answer several key questions about the business: What does the owner want to achieve with the business? What is the business’s product or service? How large or small will the business be? How many employees will the business have, if any, and how will they be managed? Who will be the business’s customers?

Potential customers can provide helpful information to the business owner during the research phase of business planning. Many new business owners conduct customer surveys during the preliminary phases of starting a business to find out more about customers’ habits, needs, and behaviors. The business owner should determine what unmet needs customers have and how the new business will answer those needs. Customers’ perceptions, both positive and negative, of competitors and of the new business can be very helpful in planning sales and marketing efforts. Customers and their level of satisfaction with a business’s goods and services are a critical aspect of a business. The business owner should have a firm grasp on how the business will make an impact on customers and how customers’ satisfaction with the company will be measured.

The competition, or other businesses operating within the same industry as the new business, is an excellent source of information. Competitors and their products can provide information about what is missing in the market and how the new company can fill a niche. The entrepreneur should carefully analyze the competition’s approach to and place within the market to determine how the new business can improve on what the competition offers.

Planning for costs and obtaining the money needed to start a new business are major challenges that the entrepreneur faces. How the business will make money, how much it will spend, and how much potential it has to earn money are all part of a segment of business research called financial projections. Other elements of the financial projections for a new business include the amount and source of start-up money, sales forecasts, and the amount the business will spend every month on rent, insurance, salaries, and other operating costs. A business owner also needs to be aware of how the company will pay the suppliers who sell it the raw materials it needs and how payment will be collected from customers. The business owner must plan how these accounts will work together to keep the company operating profitably.

A company’s market research and financial information is included in a master plan for the business called a business plan. This written document describes the business, its marketing, finances, and management. The plan specifically outlines the strategies the business will use to accomplish its financial goals, usually planning for several years into the future. The financial section of the plan may include information about the business’s applications for loans, lists of its equipment and supplies, detailed financial projections of profits and losses, and other documents.

Before a business can be legally recognized, the owner must decide what type of business he or she will establish. This decision will determine two important things: which income tax return the owner will have to file and who will be liable for the business. Sole proprietorship, partnership, and corporation are the most common types of businesses. In a sole proprietorship and a partnership, the owner or owners are financially liable (responsible) for the debts of the business, and they control any profits that the business makes. In a corporation, individuals called shareholders invest money in the business and receive partial ownership of the company. The shareholders are not held financially liable for all the debts of the business. If the business does not succeed, the company’s shareholders lose only the investment they put into it. If the business makes a profit, the shareholders gain a percentage of that profit based on their share of ownership.

Every business, no matter its size, is subject to state and federal laws. In general, businesses are required by the government to have an Employer Identification Number (EIN; also known as a Federal Tax Identification Number), which is used to identify a business the way a social security number identifies an individual. If a business is small, simple in structure, has no employees other than the owner, and fulfills other basic requirements, it does not need an EIN. The EIN is used on tax forms and other documents exchanged with the Internal Revenue Service (IRS). Some types of business are required by the state in which they operate to obtain a license in order to legally conduct business. Examples of businesses that need licenses to operate are barbers and hairstylists, attorneys, doctors and health practitioners, dentists, insurance brokers, opticians, and veterinarians.

Recent Trends

Technological advances have fundamentally changed the ways in which new businesses are established and operated. By the late twentieth century, businesses were able to use e-mail and the Internet to speed communications with suppliers and customers, conduct market research, manage taxes, and complete many other tasks. Other technology, such as the personal digital assistant (PDA) and the mobile phone, permitted businesspeople to send and receive e-mail, place telephone calls, and browse the Internet from their home, from the office, or in transit at any time of the day.

The high-tech tools that were once available only to large corporations are now available to small businesses. For example, a small business can now easily set up its own Intranet (a restricted-access network that enables a business to share resources, such as organization policies, announcements, or information about new products, with its employees without making confidential information available to those outside the company). Small businesses use the global, online marketplace to tap into relationships far beyond their local environment. A business’s website has become an extremely important marketing tool. The Internet allows limitless opportunities for customers to conduct research, and customers increasingly expect a high level of information, convenience, and specialized treatment on a business’s website.