How to Start a Small Business: A Step-by-Step Guide for First-Time Owners

I have sat across the table from a lot of first-time owners trying to figure out how to start a small business. Some of them walked in with a thick binder and a spreadsheet for every scenario. Others walked in with a napkin sketch and a gut feeling. Here is the funny part: the binder did not always win. The people who made it were usually the ones who asked good questions early, listened to the answers, and kept their costs low while they figured things out.

So if you are wondering how to start a small business and you have never done this before, pull up a chair. I am going to walk you through it the same way I would in a free counseling session at a Small Business Development Center or a SCORE mentoring meeting. No fluff, no hype. Just the steps that matter, in the order they usually matter, and the mistakes I watch people make over and over.

Let me start with a number that tends to get people’s attention.

First, a Little Honesty About the Odds

According to Bureau of Labor Statistics data analyzed by LendingTree, about 22.1% of new private-sector businesses close within their first year. By year five, roughly 48.6% have closed. By year ten, about 65.3% are gone.

I am not telling you that to scare you off. I am telling you because every single one of those owners believed their business would be the exception. Most of them were not lazy, and most of them were not bad at what they did. The ones I have seen struggle usually ran into the same three walls: they did not really know who their customer was, they did not plan the money, and they spent too much too soon.

The good news? Every one of those walls can be seen from a distance if you know where to look. That is what this guide is for.

Step 1: Test the Idea Before You Fall in Love With It

When people ask me how to start a small business, this is the step I bring up first, and it is the one almost everyone wants to skip. You have an idea, you are excited, and you want to get to the fun part: the logo, the name, the website. I get it. But I always ask the same question in our first meeting, and I will ask you too.

Who is going to pay you, and why would they pay you instead of someone else?

If you can’t answer that in two sentences, you are not ready to spend money yet. And that is perfectly fine. It just means you have homework.

Simple Ways to Do Market Research

Here is what I usually recommend for market research at this stage:

• Talk to real people. Not your mom, not your best friend. Talk to at least 20 people who fit the description of your ideal customer. Ask them what they currently use, what they pay for it, and what annoys them about it. Do not pitch your idea. Just listen.
• Look at the competition honestly. If nobody else is doing what you want to do, that is not always a good sign. Sometimes it means there is no market. Competition often proves that people are already spending money in that space.
• Check the numbers for your area. Your local SBDC can often pull market research reports for free, including demographic data, industry benchmarks, and consumer spending patterns. Most people have no idea this is available to them. The SBA also points first-timers toward free census and industry data through its business guide.
• Run a tiny test. Sell ten units. Book three clients. Run a pop-up table at a weekend market. Before you commit to a lease or inventory, find out if strangers will actually hand you money.

A Real Example From a Counseling Session

I once worked with a woman who wanted to open a bakery storefront. Before signing anything, she sold at a Saturday farmers market for three months. She learned her best seller was not what she expected at all, and she learned she hated the 4 a.m. starts. She ended up launching a wholesale business supplying coffee shops instead. That three-month test saved her a lease she would have regretted.

Step 2: Write a Business Plan (Yes, Really, but Keep It Practical)

When I say “business plan,” I can see some people’s eyes glaze over. They picture a 40-page document nobody will ever read. That is not what I mean.

A good business plan for a first-timer is a thinking tool, and it is the most useful document you will write while you learn how to start a small business. It forces you to answer the hard questions on paper before the market answers them for you, usually at a much higher price.

The SBA describes two main styles. A traditional business plan is detailed and is what banks and investors typically expect. A lean startup plan fits on a page or two and focuses on the essentials. If you are not asking anyone for money right now, start lean. You can build it out later.

What Your Plan Should Cover

At minimum, your plan should cover:

• What you sell and who buys it. Be specific. “Everyone” is not a target market.
• How you will reach customers. Word of mouth, social media, local ads, partnerships, a storefront with foot traffic. Pick the two or three channels that make sense and think about what each one costs.
• What it costs to open the doors. Equipment, inventory, deposits, licenses, insurance, your first few months of rent. Write it all down.
• What it costs to keep the doors open every month. This is the one people underestimate. Rent, payroll, software subscriptions, utilities, loan payments, and yes, paying yourself something. If you have never built one, start with how to make a budget.
• When you expect to break even. How many sales per month do you need to cover your costs? Is that realistic based on what you learned in Step 1?

Get Your Plan Reviewed for Free

SCORE offers a free “Simple Steps for Starting Your Business” workbook series, and I hand those out constantly because they walk you through all of this without the jargon. If you want someone to review your plan, a SCORE mentor or SBDC advisor will do it at no cost. That is not a sales pitch. It is literally what we are there for.

Step 3: Figure Out How You Will Fund It

Money is where dreams meet reality, and it is the part of how to start a small business that keeps most people up at night. So let’s talk about it plainly.

The first question is not “Where do I get money?” It is “How much do I actually need?” Go back to your startup cost list from Step 2. Then add a cushion. I usually tell people to plan for at least three to six months of operating expenses on top of the startup costs, because revenue almost always arrives slower than you hope.

Common Ways to Fund a Small Business

Once you know your number, here are the common paths:

• Personal savings. This is how most small businesses get started. It keeps you in control and keeps you out of debt. The risk, of course, is that it is your money on the line. Keep a separate personal emergency fund that the business never touches.
• Friends and family. This can work, but put everything in writing. Is it a loan or an investment? What happens if the business closes? I have seen more family arguments over informal loans than I care to remember.
• SBA-backed loans. The SBA does not usually lend money directly. It guarantees loans made by partner lenders, which makes banks more willing to lend to newer businesses. The 7(a) loan program is the most common. For smaller amounts, the SBA Microloan program offers loans up to $50,000 through nonprofit intermediary lenders, and many of those lenders also provide free business training.
• Local and state programs. Many cities and states run small business grant or low-interest loan programs, especially for certain industries or neighborhoods. Your SBDC advisor will usually know what is available in your area.
• Investors. Angel investors and venture capital are a fit for a small slice of businesses, usually ones built for fast, large growth. If you are opening a landscaping company or a boutique, this probably isn’t your path, and that is okay.

A Word of Caution About Grants

People often come to me hoping for “free grant money” to start a business. Those grants do exist, but they are competitive and usually narrow. Treat them as a bonus, not a plan.

Step 4: Pick Your Location

Where you do business affects your taxes, your licensing, your zoning, and your customers.

If you are running a storefront, restaurant, or anything that depends on foot traffic, location can make or break you. Look at parking, visibility, neighboring businesses, and how people actually move through that part of town. Visit at different times of day. Talk to the owners next door.

If you are running a service business or selling online, you might start from home. That is how plenty of successful companies began, and a few habits for staying productive working from home go a long way. Just check your local zoning rules and any homeowners association rules first, because some neighborhoods restrict home businesses, especially ones with customer visits or signage.

And here is a big one: do not sign a long commercial lease without having someone review it. Commercial leases are not like apartment leases. They often include personal guarantees, maintenance obligations, and escalation clauses. I have watched people get locked into five-year commitments for a business that needed to pivot after six months.

Step 5: Choose a Business Structure

This is where people start getting nervous, because it sounds like legal territory. And partly it is. Your structure affects how you pay taxes, how much paperwork you file, and how much personal liability you carry if something goes wrong.

Here is the plain-language version of the most common options:

• Sole proprietorship. The simplest option. You and the business are legally the same. It costs little or nothing to set up, but it offers no protection for your personal assets. If the business is sued or goes into debt, your house and savings could be on the line.
• Partnership. Similar to a sole proprietorship, but with two or more owners. If you go this route, please, please get a written partnership agreement. Decide now what happens if one of you wants out.
• Limited Liability Company (LLC). This is the structure most first-timers I work with end up choosing. It separates your personal assets from business debts in most situations, and it is relatively simple to maintain. Profits generally pass through to your personal tax return.
• Corporation (C Corp or S Corp). More formal, more paperwork, and more rules. Corporations make sense for some businesses, especially ones planning to raise investment money or with specific tax situations. An S Corp election can also make sense for certain LLCs once profits reach a certain level.

My honest advice is this: talk to an accountant before you decide. A one-hour consultation costs far less than fixing the wrong choice later. Your SBDC can also walk you through the basics at no charge.

Step 6: Choose and Register Your Business Name

Picking a name is fun, but it has to pass a few practical tests.

Is it available in your state? Could it be confused with another company already working in your industry? Is the domain name free? And can people spell it after hearing it once?

Once you have a name, how you register it depends on your structure. If you form an LLC or corporation, your name is registered with your state when you file your formation documents. If you operate under a name that is different from your legal name or entity name, you will usually need to file a “Doing Business As” (DBA) name with your state or county.

You may also want to look into a federal trademark through the U.S. Patent and Trademark Office if you plan to grow beyond your local area. Registering with your state does not automatically protect your name nationwide.

Step 7: Register Your Business and Get Your Tax IDs

Now we make it official.

If you chose an LLC or corporation, you will file formation paperwork with your state, usually through the Secretary of State’s office. Fees vary widely by state.

Next, you will likely need an Employer Identification Number (EIN) from the IRS. Think of it as a Social Security number for your business. You will need it to open a business bank account, hire employees, and file certain tax returns. Here is something that surprises people: applying for an EIN directly through IRS.gov is free. You will see websites charging $100 or more to “help” you get one. You do not need them. Go straight to the IRS website.

Then check your state’s requirements. Depending on where you are and what you sell, you may need a state tax ID for sales tax, unemployment insurance, or withholding.

One recent change worth knowing about: for a while, new small businesses were told they had to file beneficial ownership reports with FinCEN under the Corporate Transparency Act. Under FinCEN’s 2026 final rule, U.S. companies and U.S. persons are permanently exempt from that requirement. If you see an old article or a scary email telling you to file, check FinCEN’s official website before you pay anyone anything. Scammers love a confusing rule change.

Step 8: Get the Right Licenses and Permits

As you work out how to start a small business, this is the step that trips up more first-timers than almost anything else, simply because nobody tells them it exists until they get a letter.

Almost every business needs some combination of federal, state, and local licenses or permits. Federal licenses are only needed for certain regulated activities, like selling alcohol or firearms, or operating in aviation or agriculture. State and local requirements are much more common.

Depending on your business, you might need:

• A general business license from your city or county
• A sales tax permit if you sell taxable goods
• A health department permit if you handle food
• A professional or occupational license for trades like cosmetology, contracting, or real estate
• Zoning or signage permits for your location
• A home occupation permit if you work from home

The fastest way to find out what applies to you is to call your city or county business office and ask. Your local SBDC often has a checklist for your specific area. Do this before you open, not after. Fines for operating without the right permit can be steep, and some violations can shut you down outright.

Step 9: Open a Business Bank Account

I will keep this one short because it is simple, but it matters more than people realize.

Do not run your business through your personal checking account.

Mixing personal and business money makes taxes a nightmare, makes it harder to know if your business is actually profitable, and, if you have an LLC, can weaken the liability protection you set it up for in the first place.

Open a business checking account as soon as you have your EIN and formation documents. Consider a business credit card for expenses so you start building business credit. Then set up simple bookkeeping from day one. Free or low-cost cloud-based accounting software works fine for most new businesses. Many owners also set aside a percentage of every payment in a separate savings account for taxes, so estimated tax payments don’t catch them off guard.

Step 10: Get Insured

Insurance is one of those things nobody wants to pay for until the day they wish they had.

Common coverage for small businesses includes:

• General liability insurance, which covers injuries or property damage connected to your business.
• Professional liability insurance (sometimes called errors and omissions), which matters if you give advice or provide professional services.
• Commercial property insurance for your equipment, inventory, and space.
• Workers’ compensation insurance, which most states require once you have employees.
• A business owner’s policy (BOP), which bundles several common coverages together and is often the most affordable starting point.

Also, if you run your business from home, call your homeowner’s or renter’s insurance company. Most personal policies exclude business activity, which means your inventory or business equipment may not be covered at all.

Step 11: Build Your Team and Your Support System

Even if you are the only employee, you are not really alone. Or at least you shouldn’t be. Using AI at work can take drafting and admin off a solo owner’s plate, but you still need people in your corner.

Every first-time owner needs a small circle of advisors. At minimum, I recommend:

• An accountant who works with small businesses in your industry.
• An attorney you can call for contracts, leases, and bigger decisions.
• A mentor who has been where you are going.

That last one is where I get a little passionate. SCORE mentors are volunteers, many of them retired executives or business owners, and they meet with you for free, as often as you need. SBDCs are funded in part by the SBA and hosted by universities, colleges, and state agencies, and they offer free one-on-one advising plus low-cost training. You can find your local SBDC through America’s SBDC website, and SCORE has chapters all over the country, with virtual mentoring too.

When you are ready to hire, learn your obligations first. Hiring employees means payroll taxes, withholding, workers’ compensation, and new hire reporting. Many small businesses start with independent contractors, but be careful here. Misclassifying employees as contractors is a common and costly mistake. The IRS has clear guidelines, and your accountant can help you sort it out.

Step 12: Launch, Then Keep Learning

Opening day is not the finish line. Honestly, it is closer to the starting gun.

Here is what I tell every owner as they get ready to launch:

• Start marketing before you open. Build a simple website, claim your Google Business Profile, and tell your network. Let people know you are coming.
• Track your numbers weekly. Revenue, expenses, cash in the bank, and where your customers are coming from. Cash flow problems rarely happen overnight. They creep up when nobody is watching.
• Ask for feedback constantly. Your first customers will tell you exactly what to fix if you ask them. Listen, even when it stings.
• Be willing to adjust. Remember the bakery owner? The business she ended up with was better than the one she planned. Flexibility is not failure. It is how small businesses survive.
• Keep meeting with your mentor. The owners who check in regularly tend to spot problems earlier. It is not about needing someone to hold your hand. It is about having someone outside the business who can see what you can’t.

A Few Mistakes I See All the Time

Before we wrap up, let me share the patterns I watch for in almost every first meeting with someone learning how to start a small business:

• Spending on the wrong things first. Fancy branding and expensive equipment before you have a single paying customer.
• Underpricing. First-timers almost always charge too little, especially service businesses. If you are busy but broke, look at your prices.
• Not paying yourself. It is common not to take a salary at first, but have a plan for when you will. A business that can never pay its owner is an expensive hobby.
• Ignoring taxes until April. Set money aside every month. Estimated tax payments are real, and penalties add up.
• Going it alone. This is the one that breaks my heart the most, because the help is free and it is sitting right there.

Final Thoughts From Across the Table

If you take one thing away from this guide on how to start a small business, let it be this: you don’t have to know everything on day one. Nobody does. You just have to be willing to test, plan, ask for help, and keep your costs in check while you learn.

The people I have watched succeed were not always the smartest or the best funded. They were the ones who kept showing up, kept asking questions, and kept adjusting. You can absolutely be one of them.

So go talk to 20 potential customers this week. If you keep putting it off, here’s how to stop procrastinating. Then book a free session with a SCORE mentor or your local SBDC. Bring your questions, bring your napkin sketch, and let’s get to work.

Frequently Asked Questions

How much money do I need to start a small business?

It depends entirely on the type of business. Some service businesses start for a few hundred dollars, while a restaurant or retail storefront can take tens of thousands or more. List every startup cost, then add three to six months of operating expenses as a cushion. The SBA’s guide to calculating startup costs is a helpful place to start.

Do I need an LLC to start a small business?

No. You can legally operate as a sole proprietor in most places with just the right local licenses. However, an LLC separates your personal assets from business liabilities in most situations, which is why many first-time owners choose it. Review the SBA’s overview of business structures and talk to an accountant before deciding.

Is it free to get an EIN?

Yes. Applying for an Employer Identification Number directly through the IRS website is completely free. Avoid third-party sites that charge a fee for the same service.

Can I start a small business while keeping my full-time job?

Yes, and many people do. Starting on the side lets you test your idea and build income before taking the leap. Just review your employment agreement for any noncompete or conflict-of-interest clauses first. SCORE shares practical tips in its article on what you should know before you begin.

Where can I get free help starting a business?

Your local Small Business Development Center and SCORE both offer free one-on-one mentoring and advising. The SBA also runs Women’s Business Centers and Veterans Business Outreach Centers, all listed on its local assistance page.

Do I need a business plan if I’m not asking for a loan?

I strongly recommend one, even a simple one-page lean plan. A business plan helps you think through your costs, customers, and pricing before you commit money. The SBA’s business plan guide explains both traditional and lean formats.

What licenses do I need to start a small business?

Most businesses need at least a local business license, and many need state permits or professional licenses depending on the industry. Check the SBA’s licenses and permits guide and call your city or county business office to confirm local rules.

Why do most small businesses fail?

Common reasons include a lack of market focus, poor financial planning, and spending too much too early. According to BLS data analyzed by LendingTree, about 22.1% of new businesses close within the first year, and nearly half close within five years.

Do new small businesses need to file a beneficial ownership report?

Not anymore for U.S. companies. FinCEN’s 2026 final rule permanently exempts U.S. entities and U.S. persons from beneficial ownership reporting under the Corporate Transparency Act. Check FinCEN’s official BOI page for current details.

References

• U.S. Small Business Administration. “10 Steps to Start Your Business.” sba.gov
• U.S. Small Business Administration. “Write Your Business Plan.” sba.gov
• U.S. Small Business Administration. “Choose a Business Structure.” sba.gov
• U.S. Small Business Administration. “Apply for Licenses and Permits.” sba.gov
• U.S. Small Business Administration. “Microloans.” sba.gov
• U.S. Small Business Administration. “Small Business Development Centers (SBDC).” sba.gov
• SCORE. “Simple Steps for Starting Your Business Workbook.” score.org
• SCORE. “Starting a Business: What You Should Know Before You Begin.” score.org
• SCORE. “Launching a Small Business? How to Start Smart.” score.org
• America’s SBDC. “Find Your SBDC.” americassbdc.org
• Internal Revenue Service. “Get an Employer Identification Number.” irs.gov
• FinCEN. “FinCEN Permanently Ends Beneficial Ownership Reporting Requirements for Millions of Small Business Owners.” fincen.gov
• LendingTree. “22.1% of New US Businesses Close Within a Year.” lendingtree.com
• USAGov. “How to Start and Fund Your Own Business.” usa.gov
• U.S. Chamber of Commerce CO. “How SCORE Can Help You Start a Business.” uschamber.com