How to Become a Small Business Owner
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Small businesses took a hit during the pandemic, but future entrepreneurs have incentives to open shop.
The Economic Tracker, a Harvard University project, showed there were 37.5% fewer U.S. small businesses in operation in June 2021 than there were in January 2020. Despite the economic downturn, small business owners can receive grants, tax credits, and "free money" to grow their companies.
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The Office of Advocacy of the U.S. Small Business Administration (SBA) generally says a small business is an independent company having fewer than 500 employees.
Some 81% of all small businesses have no employees.
The SBA also defines a small business by revenue and employment. Although it varies by industry, privately owned companies or corporations that make between $1 million-$40 million and have 100-1,500 employees also can qualify as "small businesses."
You do not need a college degree to become a small business owner. Most small business owners do not have a degree.
Successful small business owners have a wide range of educational backgrounds. Some have high school diplomas. Others may decide to pursue a bachelor's in business management or bachelor's in entrepreneurship.
How can you start a small business? This page guides you through the steps to help you become a small business owner. It explains the advantages and disadvantages of opening your own business.
What Are the Advantages of Being a Small Business Owner?
It may seem like a risky business venture to start a company in the wake of the economic crisis caused by the pandemic. However, being a small business owner still offers many benefits, such as freedom, independence, and control.
Advantages to being a small business owner can include:
- Building Equity: Small business owners often invest their own money to build their business. That investment represents the business equity. You can calculate your business equity by subtracting the liabilities from the tangible and intangible assets.
- Choosing Your Co-Workers: Work in an environment surrounded by investors, partners, and employees who fit your business mission.
- Financial Incentives: The better the business does, the more small business owners make. When you own a small business, you can give yourself a salary increase without consulting a supervisor.
- Giving Back to Others: Small business owners of established companies can give back to communities and organizations that matter to them.
- Grants: Federal, state, or local grants benefit eligible small business owners. States and community organizations can also receive grants through the SBA, including ones that specifically help businesses affected by the COVID-19 pandemic.
- Independence and Flexibility: Small business owners have the autonomy to make business decisions about investments, marketing campaigns, and product development.
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What Are the Disadvantages of Being a Small Business Owner?
Failing as a business owner remains a real possibility, especially in these uncertain economic times. Some 79.4% of businesses that opened in 2018 made it to 2019 and about 68.6% made it to 2020, according to the U.S. Bureau of Labor Statistics (BLS).
Disadvantages to being a small business owner can include:
- Financial Risk: Small business owners invest much of their personal money into their businesses. If a business fails, the owners stand to lose much of their investment and may even go bankrupt.
- Inconsistent Salary: What you make as a small business owner depends on your profits. New companies may not make a profit, and owners may not earn a salary.
- Legal Liabilities: Liabilities for accidents, property damage, and negligence could fall on the business and its owner. Using intellectual property such as music or artwork could also result in a copyright infringement lawsuit.
- Long Hours: Small business owners rarely have set hours. About 33% of small business owners said they worked more than 50 hours a week, and 25% worked more than 60 hours a week, according to the New York Enterprise Report.
- More Responsibility: You can learn how to do every position in a company when you own it. This offers the chance to gain new skills. However, it also places added responsibility on the small business owner.
- More Stress: Heavy debt loads often put a burden on small business owners. They then feel added pressure to see that their companies succeed.
Small Business Owner Career Outlook and Salary
Salaries for small business owners can fluctuate much like sales do. As of November 2021, small business owners reported making an average annual salary of about $66,240, according to Payscale.
No rule dictates how much small business owners pay themselves. Many business owners do not earn a salary in the first few years after opening a business.
About 32.5 million small businesses operate in the United States as of November 2021, according to the SBA's Office of Advocacy. The employment outlook for small business owners varies depending on the industry. In 2016, the United States had some 9.6 million self-employed workers, and the BLS projected 10.3 million by 2026.
Steps to Becoming a Small Business Owner
Opening a business takes more than just a dream. Small business owners need a business plan, resources, and legal paperwork to operate.
The following steps can guide small business owners in the right direction to get a solid start. They also may be able to help small business owners avoid penalties and financial pitfalls as they start out.
Brainstorm and Refine Your Idea
Brainstorming marks the first step in opening a company. Small business owners need to brainstorm key aspects of the business, such as their target customers, business name, location, budget, and catalog of products.
Your target market matters because you need to be aware of the potential business risks. Understanding your customers — those who have purchased your services and products — can help you predict sales trends.
During the brainstorming process, also think about how you will reach your customers. Will you open a brick-and-mortar store or operate an online shop? Marketing focus groups and customer surveys can help you identify untapped audiences.
Another step in the early business process includes picking a name that customers can easily pronounce and remember. Search current trademarks through the Trademark Electronic Search System and domains to see the availability of business names.
Draft a Business Plan
A business plan serves as a guide to opening and operating a company. Investors also decide whether to invest in your company based on the business plan. The plan outlines the company's growth strategy, history, market research, and target market.
Small business owners can pick from many business plan templates. Two common business plans are traditional and lean startups. Investors often prefer a more detailed traditional business plan, rather than a shorter lead startup plan that focuses on key business objectives.
Business plans feature key aspects of the business such as the company description, principal members, legal structure, target markets, the company structure, products, and marketing strategies.
Business plans also explain any funding needed and financial projections. It helps to also include marketing research in a business plan to explain how your company and its product differ from established businesses.
Assess Your Finances
New businesses often take years to make a profit. Funding sources such as loans and grants can help a business open, add new staff and products, and/or change locations. The funding options a small business owner seeks depend on their needs, credit, business history, and growth potential.
- Business Line of Credit: A business line of credit offers small business owners short-term financial help with more flexible repayment terms than a traditional loan. Credit cards, a popular option for business purchases, often have lower limits and higher interest rates than a business line of credit.
- Community Development Loan Funds: Community development financial institutions — including banks, credit unions, loan funds, and venture capital funds — offer loans to businesses and individuals in low-income communities.
- Crowdfunding: Sites such as GoFundMe and Kickstarter give startups (and struggling small business owners) the opportunity to reach a fundraising goal through an alternative revenue source that does not typically need to be repaid. However, fundraisers sometimes offer rewards or incentives to donate such as early access to a product or service.
- Grants: Small business owners can access COVID-19 relief funds and grants, such as the Restaurant Revitalization Fund. They can also search for federal aid through Grants.gov. Women, veterans, and minority groups may be eligible for specialized grants.
- SBA Loans: Banks and credit unions offer loans through the SBA's 7 (a) loan program. Applicants can receive $500-$5 million in financial support.
- Venture Capital: In exchange for ownership rights, private individuals and companies will invest in startups that have growth potential. Venture capital could be seed funding or money for a company that has seen rapid expansion.
To understand at what point your business will see a profit, perform a break-even analysis. This formula explains how much a business needs to make in sales to cover expenses. It can help small business owners to stay within their budget and price services and products to maximum profitability.
Determine Your Business Structure
Small business owners must determine a business structure. It will determine what type of tax return they file. Common business structures include corporations (C-Corps and S-Corps), general partnerships, sole proprietorships, and limited liability companies.
- Corporations: Corporation legal structures remain complex with employees and shareholders who hold ownership, but have limited liability. The different corporations include C-Corps, which operate independently when filing and paying taxes, and S-Corps, which report income through their shareholders who file individual returns. Since a corporation operates as an independent entity, profits may be taxed twice through shareholders and the corporation.
- Partnerships: General partnerships form when two or more people decide to go into business. Any earnings can go directly to partner owners. On the downside, debt and liabilities can directly affect partners.
- Sole Proprietorships: In a sole proprietorship, one owner owns and operates the business, which gives that person complete control of the company and full liability if something goes wrong. No legal distinction exists between the company and the owner in a sole proprietorship.
- Limited Liability Companies (LLC): Combine a corporation, partnership, and sole proprietorship, and you get an LLC. Relatively unstructured, LLCs may get taxed more than other business structures. Any earnings and losses go through members, or owners, who file individual tax returns. Another plus: LLCs withstand all liability, not individual members.
Register Your Business
Your business structure will dictate how you register your business. States require LLCs, nonprofits, corporations, and partnerships to file legal documents. Sole proprietors don't need to register their business at the state level, but they must file "doing business as," or DBAs.
After registering your business name, you must get a tax ID through the IRS. Some companies — such as corporations and businesses with employees — need to get an employer identification number. Many small business owners will use their Social Security numbers for tax purposes.
Even small businesses need a license and/or permit to operate at the state and federal levels. Regulations vary depending on the type of business and the location. For instance, business activities such as manufacturing or selling alcoholic beverages require a license from the Alcohol and Tobacco Tax and Trade Bureau as well as the Local Alcohol Beverage Control Board.
Build Your Team
There comes a time when small business owners need to expand and hire more employees. Recruiting new employees remains one of the more costly expenses for a small business.
Companies may recruit employees when the current staff cannot meet customer demands and they have to turn down jobs. Many small business owners do not have the capacity to handle high turnover rates.
Before hiring new employees, small business owners should determine what roles need to be filled. Owners must decide whether to hire full-time, part-time, or freelance workers.
Small business owners work to build a team that believes in the company mission and fits in with the culture. They also need to consider their sales projections and the roles needed to meet profit goals.
Building a team can happen through word-of-mouth, recruiting companies, or websites that feature job listings. With competitive salaries, benefits, and perks, small business owners should be able to attract top talent.
Market and Advertise Your Business
Marketing and advertising make up a sizable percentage of a company's budget. Small business owners can use email marketing, social media, and networking without spending a lot.
Small business owners want to know that any advertising or marketing campaign will yield a high return on investment. A well-built business website can help draw traffic to services, merchandise, and products.
Small business owners can use sites that allow them to build a professional website without learning a programming language like HTML. They can use search engine optimization to reach customers.
Email marketing can also prove effective for certain small businesses. Marketing software such as Mailchimp allows small business owners to personalize direct messages to new and existing customers.
Another option to reach a target market: social media. Many small businesses use Facebook to directly reach target segments.
Frequently Asked Questions About Becoming a Small Business Owner
Is being a small business owner worth it?
Yes. Self-motivated individuals who have a solid business plan, funds, and work ethic can enjoy a fulfilling -- and potentially profitable -- career as a small business owner. Small business owners do not report to a boss -- they are the boss. The job comes with added responsibility and liability. However, it also offers flexibility and autonomy.
Do you need a degree to become a small business owner?
No. Small business owners do not need a college education. Most small business owners do not have a degree, according to a CNBC/SurveyMonkey Small Business Survey. While they do not need a degree, small business owners may choose to earn a bachelor's in business administration or a bachelor's in entrepreneurship degree.
How do I start a small business with no money?
New companies have succeeded with little resources. If you do not have any money and want to start a business, you will likely face some challenges. However, you can pursue funds through investors, loans, partnerships, and crowdsourcing.
How much does a small business owner make?
Small business owners may earn nothing when starting a company. What a small business owner makes depends on their business earnings. If a company remains in the red, small business owners may not get a paycheck. As of November 2021, the bottom 10% of small business owners reported making an average annual salary of around $30,000, whereas the top 90% earned around $131,000, according to Payscale.
Is it hard to become a small business owner?
If you have a good idea and entrepreneurial skills, you can likely start a small business. Operating a small business remains one of the toughest jobs around. However, many small business owners take pride in having control of their careers.