How to Start a Small Business: A Step-by-Step Guide for First-Timers
If you are wondering how to start a small business, you are in good company. Every January, my office gets the same kind of phone call. Someone has spent the holidays thinking about quitting their job, and now they want to know how to start a small business without making a mess of it. Some of them already have a logo. A few have already signed a lease. Almost none of them have looked at a tax calendar.
I have been a Certified Public Accountant for most of my working life, and the bulk of my clients are small operations: bakeries, bookkeeping practices, landscaping crews, online shops, a couple of physical therapists, and one very determined man who restores vintage motorcycles. I sat down recently for a long conversation about what first timers get right, what they get wrong, and what order to follow when figuring out how to start a small business. What follows is that conversation, edited for length and clarity.
Where Should Someone Actually Begin?
Q: Let’s start simple. Someone comes to you and says, “I want to start a business.” What is the first thing you ask them?
I ask who is going to pay them, and why. Not what they want to sell. Who pays, and why that person would choose them over whatever they are already doing.
People skip this because it feels less exciting than naming the company. But the Small Business Administration puts market research as step one in its own startup framework, and for good reason. Market research tells you whether there is a real opportunity, by gathering information about potential customers and the businesses already operating in your area. In my view, learning how to start a small business begins right here, before anyone spends money.
Market Research for Regular People
Q: What does good market research look like for a regular person, not a corporation?
It starts with talking to twenty people who might buy from you and asking what they currently pay, who they currently use, and what annoys them about it. Walk into three competitors and note their prices. Then check whether the demand is steady or seasonal. AI tools can speed up the desk research, but they cannot replace those twenty conversations.
I had a client who wanted to open a smoothie shop near a college campus. Great foot traffic, she said. Then we looked at the academic calendar together. The campus was nearly empty for close to four months of the year. She did not abandon the idea, but she changed the plan: a smaller space, a catering arm for local offices, and a summer menu aimed at the families in the neighborhood. That single afternoon of research probably saved her business.
Do People Still Need a Business Plan?
Q: Honestly, do first timers still need a formal business plan?
You need a plan. Whether it is forty pages or four is up to you. The SBA describes the business plan as the foundation of a business and a roadmap for how to structure, run, and grow it. I agree with that, but I would add something from the accountant’s chair: the plan is really a set of assumptions, and the numbers section is where those assumptions get tested. Anyone serious about how to start a small business should treat the plan as a working document, not a school assignment.
What Belongs in the Plan
Q: What should be in it, at minimum?
Start with who your customer is, what you sell, and at what price. Add how customers will find you. Then list the cost to open the doors, the cost to keep them open every month, and how many sales you need before the business pays for itself.
That last one, the break even point, is where I spend most of my time with new clients. If your monthly fixed costs are $6,000 and each sale leaves you $40 after the cost of the product, you need 150 sales a month just to stand still. When I show people that number in plain terms, the room usually gets quiet. Then we start adjusting prices, trimming costs, or rethinking the model. That is the plan doing its job.
Q: Any template you recommend?
The SBA’s own business guide is free and perfectly good. It covers the standard sections, including an executive summary, market analysis, marketing and sales strategy, a funding request, and financial projections. Most banks will recognize that format if you ever apply for a loan.
How Much Money Do I Really Need?
Q: Money is usually the big fear. How should someone figure out what it will cost to start?
Split it into two buckets. Startup costs are the things you pay once to open: equipment, deposits, initial inventory, website build, legal fees, licenses. Operating costs are what you pay every month to keep running: rent, software, insurance, payroll, your own draw.
Then here is my rule, and I will not budge on it: have enough cash to cover at least six months of operating costs, on top of your startup costs, before you launch. Revenue almost always arrives slower than people expect. Customers pay late. The busy season comes a month after you thought it would. Cash is the oxygen of a young business.
Why a Six Month Cushion Matters
Q: Why six months?
Because the early months are where businesses die. Federal numbers back that up. According to Bureau of Labor Statistics data through March 2025, 77.9% of new employer establishments survive their first year and 51.4% survive five years. So roughly one in five does not make it through the first twelve months. When I look at the ones that fail in my own client base, it is rarely because the product was bad. It is because the money ran out before the product found its audience.
Where the Money Comes From
Q: Where do first timers typically get the money?
Personal savings, mostly, often built by saving a little every month or from a side hustle they tested first. Family is next, followed by small loans and credit cards, which I beg people to avoid for startup costs. The SBA has loan programs and lender matching, and local credit unions are often friendlier to small borrowers than big banks. Whatever you choose, write down the terms. If a relative lends you $20,000, put it in a simple signed agreement with a repayment schedule. It protects the relationship as much as the money.
The Startup Cost Deduction
Q: Is there any tax help for those startup costs?
Yes, and people miss it constantly. According to the Congressional Research Service, a taxpayer may deduct up to $5,000 in startup costs in the business’s first year, and that deduction is reduced dollar for dollar for startup costs above $50,000, so no immediate deduction remains once costs pass $55,000. Whatever is left over gets amortized across 180 months, beginning in the month the business starts. There is also a separate allowance for organizational costs like legal fees to form an LLC. The catch is that you need records. Keep every receipt from the planning stage, even the $12 market research survey tool.
Which Business Structure Should I Choose?
Q: This is the question everyone asks their accountant. Sole proprietorship, LLC, S corporation. Where do you land?
Choosing a structure is one of the biggest decisions in how to start a small business, and the honest answer is that it depends. Let me explain what it depends on.
The legal structure you choose affects your registration requirements, how much you pay in taxes, and your personal liability. Those are the three things I weigh with every client.
Sole Proprietorship vs. LLC
A sole proprietorship is the default if you simply start selling. The IRS, in Publication 583, calls it the simplest form of business to start and maintain, and notes that the business has no existence apart from you, the owner. That simplicity is lovely until something goes wrong, because your personal assets are exposed to business debts and lawsuits.
An LLC gives you a layer of liability protection under state law, and for tax purposes a single member LLC is usually treated like a sole proprietorship by default. You report the profit on your personal return. It costs a filing fee and, in some states, an annual fee, but for most service businesses with any real risk, I think it is worth it.
When an S Corporation Makes Sense
Q: And the S corporation? People hear it saves taxes.
It can. An S corporation election lets you pay yourself a reasonable salary through payroll and take the remaining profit as a distribution, which is not subject to the self employment tax. But it adds payroll, a separate business tax return, and more bookkeeping discipline. I generally do not recommend it until the business is producing steady profit, often somewhere past the point where the tax savings clearly beat the extra accounting and payroll costs. For a brand new business with uncertain revenue, it is usually premature.
Q: So what do you tell most first timers?
Start as an LLC if you have liability exposure. Stay taxed the default way in year one. Revisit the S corporation question with your accountant once you have twelve months of real numbers. And please do not choose your structure based on something you saw in a thirty second video.
What’s the Paperwork I Can’t Skip?
Q: Walk us through registration and the official side.
Registration is the least exciting part of how to start a small business, but it is not optional. First, the name. Check that it is available with your state and that the domain and social handles are free. If you plan to operate under a name different from your own, you will need to register it with the government, possibly at both the federal and state level.
Second, form your entity with the state if you are going the LLC or corporation route.
Third, get your Employer Identification Number from the IRS. The SBA compares the EIN to a Social Security number for your business, and you will need it for tasks like opening a bank account and paying taxes. Even sole proprietors often get one so they are not handing out their Social Security number to every client who needs tax paperwork from them. That is basic online privacy for business owners.
Getting Your EIN
Q: Is getting an EIN complicated?
Not at all, and it is free. When you apply online through the IRS website, the number is issued immediately once your information is validated. The US Chamber of Commerce warns people to be careful with third party sites that charge a fee to get an EIN for you, and I will second that. I have seen clients pay $250 for something the IRS gives away in ten minutes.
Licenses, Permits, and Insurance
Q: Licenses and permits?
This is where local rules matter most. The licenses and permits a business needs vary by industry, state, location, and other factors. A home bakery, a hair salon, and a contractor will have completely different requirements. Call your city or county clerk and ask directly. Also ask about sales tax registration with your state if you sell physical goods, because collecting sales tax without a permit, or failing to collect it at all, creates a liability that follows you.
Q: What about insurance?
General liability at a minimum. Professional liability if you give advice or services. And if you hire anyone, workers’ compensation according to your state’s rules. I have watched a single slip and fall claim wipe out a year of profit for an uninsured client. Insurance is boring right up until it is the only thing that matters.
Why Do Accountants Care So Much About Bank Accounts?
Q: You keep coming back to bank accounts. Why is that such a big deal?
Because commingling personal and business money is the single most common mistake I clean up, and it is completely avoidable. If you remember one practical lesson about how to start a small business, make it this one.
When everything runs through one checking account, three bad things happen. Your bookkeeping becomes guesswork. Your deductions become hard to prove if you are ever examined. And if you formed an LLC for liability protection, mixing funds can weaken that protection, because it suggests the business is not truly separate from you.
The SBA advises new owners to open a business bank account as soon as they begin accepting or spending money as a business. I go further: open it before your first sale. Get a separate business card too. Pay yourself by transferring money from the business account to your personal account, and write down what each transfer was.
Q: Any quick habits you’d recommend?
Every time you buy something for the business, pay with the business card or account. If you accidentally use a personal card, reimburse yourself from the business account with a note. It takes thirty seconds and saves you hours in March.
What Does Good Bookkeeping Look Like for a Beginner?
Q: Let’s talk bookkeeping. What’s the minimum a first timer should do?
Bookkeeping is the part of how to start a small business that nobody warns you about. Pick a simple accounting software and connect your business bank account and card. A few productivity apps for receipts and reminders help too. Once a week, sit down for twenty minutes and categorize every transaction. Some owners make it part of their Monday morning routine. At the end of each month, look at three things: how much came in, how much went out, and how much cash is left.
That is it. It is not glamorous. But the owners who do this weekly almost never get blindsided. The ones who wait until tax season to open a shoebox of receipts are the ones paying me extra to reconstruct their year.
Q: What records should they keep?
Receipts, invoices, bank statements, mileage logs if you drive for work, and any contracts. The IRS notes that keeping good records can actually help you save money, and in my experience that is an understatement. Good records are what let you claim every deduction you are entitled to and defend it with confidence.
Q: When should someone hire a bookkeeper or accountant?
Earlier than they think. At a minimum, meet with a CPA before you form the business and again before the end of your first year. A one hour meeting before you choose a structure costs far less than fixing the wrong choice later. Once your transactions run into the hundreds each month, or you add employees, a bookkeeper usually pays for themselves in time alone.
What Taxes Do First Timers Get Wrong?
Q: Taxes seem to be where people get hurt most. What catches them off guard?
Three things, almost every time. Anyone learning how to start a small business should circle these in red.
Self Employment Tax
When you worked for an employer, they paid half of your Social Security and Medicare and withheld the other half from your paycheck. Now you are both sides. The IRS puts the self employment tax rate at 15.3%, made up of 12.4% for Social Security and 2.9% for Medicare. That is on top of regular income tax. People who priced their services based on their old salary are often shocked.
Quarterly Estimated Taxes
Nobody is withholding for you anymore, so the IRS expects you to pay during the year. Generally, you need to make quarterly estimated payments if you expect to owe more than $1,000 when you file after subtracting withholding and credits. For 2026, the due dates are April 15, June 15, and September 15 of 2026, with the fourth payment due January 15, 2027. Miss them and you face penalties and interest, even if you pay everything in full by April.
Sales Tax
Sales tax is the third trap, and I mentioned it earlier. That money is never yours. It belongs to the state from the moment you collect it.
How Much to Set Aside
Q: How much should someone set aside?
I tell most sole proprietors and single member LLC owners to move 25 to 30 percent of every payment they receive into a separate savings account labeled “Taxes.” Do not touch it. Pay your quarterly estimates from it. If you end up over saving, congratulations, that is your first business emergency fund.
Deductions People Miss
Q: Any deductions people commonly miss?
The startup cost deduction we discussed is a big one. Next is the home office deduction, if you truly use a dedicated space regularly and exclusively for the business. Business mileage, software subscriptions, professional development, and health insurance premiums for many self employed people also qualify. And retirement contributions are one of the best tax planning tools a small business owner has. I would rather see a client put money into a retirement plan than buy a new truck in December just to lower their taxes.
How Do You Keep a New Business Alive Through Year One?
Q: Beyond the paperwork, what separates the businesses that make it?
Pricing and cash flow. In that order.
Price for Value, Not to Be Cheapest
Most first timers underprice. They look at what competitors charge and go a little lower to win customers. But a new business has higher costs per sale than an established one, not lower. If you price to be the cheapest, you are signing up to work the most hours for the least money. Price for the value you deliver, then earn it.
Profit Is Not Cash
You can be profitable on paper and still be unable to make payroll, because your customers owe you money they have not paid yet. So send invoices the same day the work is done. Offer a small discount for fast payment if needed. Ask for deposits on large jobs. And watch your bank balance every week, not just your sales.
Q: What’s a warning sign you look for?
When an owner stops paying themselves and starts covering business expenses with personal credit cards, I get worried. It sometimes makes sense for a short stretch. But if it lasts three or four months, the business model usually needs a serious look, not more borrowing.
Q: What about growth? When is it safe to hire, expand, lease a bigger space?
When the numbers say so for at least a few consecutive months, not when you have one great month. Hiring your first employee brings payroll taxes, filings, and workers’ compensation. It is a real commitment. I like to see that the demand is consistent and that the business can cover the new cost even in a slow month.
If You Could Give One Piece of Advice
Q: Last question. If a first timer only remembers one thing from this conversation, what should it be?
Treat your business like a business from day one, even if it is just you at the kitchen table. Separate bank account. Weekly bookkeeping. Money set aside for taxes. A plan that you revisit every quarter.
The people who succeed are not always the smartest or the most talented. They are the ones who know their numbers. When I sit across from an owner who can tell me their monthly break even point without looking it up, I already know that business has a real chance. Knowing your numbers is the quiet secret behind how to start a small business that lasts.
Starting something of your own is one of the most rewarding things a person can do. It is also one of the most demanding, so set boundaries early. Do the boring parts well, and you give the exciting parts room to grow.
Frequently Asked Questions
How much money do I need to start a small business?
It depends heavily on the type of business. A service business run from home can start for a few thousand dollars, while a retail shop or restaurant can require far more. Add up your one time startup costs, then add at least six months of operating costs as a cash cushion. See the SBA startup cost worksheet.
Do I need an LLC to start a small business?
No. You can operate as a sole proprietor without forming anything. An LLC mainly adds liability protection. Compare the options in the SBA business structure guide.
Do I need an EIN if I have no employees?
Not always, but most businesses benefit from one. The IRS notes that most businesses need an EIN even without employees. Apply free through the IRS EIN application page.
When do I have to start paying quarterly taxes?
Generally in the first year you expect to owe $1,000 or more when you file. Details are on the IRS estimated taxes page.
Can I deduct expenses from before my business opened?
Yes, within limits, through the startup cost deduction and amortization. The Congressional Research Service summary explains the rules clearly.
What percentage of small businesses fail in the first year?
Roughly one in five new employer establishments close within twelve months, based on the BLS establishment survival tables.
Where can I get free help learning how to start a small business?
SCORE offers free mentoring, and local SBA offices and Small Business Development Centers offer free counseling and workshops. Use the SBA local assistance finder.
References
- U.S. Small Business Administration. “10 Steps to Start Your Business.” SBA.gov
- U.S. Small Business Administration. “Business Guide.” SBA.gov
- Internal Revenue Service. “Publication 583, Starting a Business and Keeping Records.” IRS.gov
- Internal Revenue Service. “Checklist for Starting a Business.” IRS.gov
- Internal Revenue Service. “What People Need to Know When Starting a Business.” IRS.gov
- Internal Revenue Service. “Self Employment Tax (Social Security and Medicare Taxes).” IRS.gov
- Congressional Research Service. “Selected Issues in Tax Reform: The Start Up Deduction.” Congress.gov
- U.S. Bureau of Labor Statistics. “Establishment Age and Survival Data.” BLS.gov
- U.S. Chamber of Commerce, CO. “How to Get an EIN for Your Business.” USChamber.com
- Fidelity. “Self Employment Tax: What It Is and How to Calculate It.” Fidelity.com
- TurboTax. “How Do I Pay Quarterly Taxes?” TurboTax.com
- USAGov. “How to Start and Fund Your Own Business.” USA.gov