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Theory and Practice 



           Small businesses usually start out as someone’s idea or dream, usually based on a need or a passion. But, it takes much more than a need or a passion to start, and successfully operate, a small business. Starting a small business can be a perilous journey. There are nearly one million new business start­ups each year. The failure rate of new businesses during the first three years is between 10%­85% (Sullivan, 1997).

            The idea or dream is the starting point. At this point you have pretty much decided on the type of business you will be starting. Several questions to ask yourself before you go any farther with your planning. Do I have what it takes to be a small business owner? Becoming a small business owner requires one to be:


  • Self-motivated
  • Willing to collaborate
  • Curious, always finding new ways to improve the business
  • Focused on the Future
  • Self-fulfilled
  • Tech-Savvy
  • Willing to consult professionals

            Once a person has determined they have what it takes to be a small business owner, they must make some critical decisions. After deciding on the type of business to open, it it important to understand the four major business categories. They are, retailing wholesaling, service, and manufacturing.  Each category of business has different characteristics. Retailing, is the most popular. Almost every American comes in contact with at least one retail business everyday. The wholesale business acts as the middle man for most retail businesses. Their business is to buy large quantities of products at discounted prices and sell to retailers or the public at a marked up price. The service industry is the fastest growing of the four categories of business. This is in part due to the low cost of startup. Manufacturing is the most expensive of the four categories in terms of capital requirements, but it can offer the potential for high rewards (Tyson & Schell, 2008). Once the type of business has been decided on, it is time to start the planning process.

Planning a new business shouldn’t be attempted without the help of a professional. As well as consulting an attorney and an accountant several organizations offer assistance and resources for entrepreneurs. These organizations are:


  • Small Business Administration (SBA)
  • Women Business Center (WBC)
  • Senior Corp of Retired Executives (SCORE)
  • The website:  business.usa.gov
  • Local Small Business Development Centers

            The Small Business Administrations (SBA), for example, promises to “aid, counsel, assist, and protect the interest of small business concerns, to preserve free competitive enterprise, and to maintain and strengthen the overall economy of our nation” (Phillips, 2014).

            The website Business.usa.gov, is one-stop-shop for business owners. It guides users through a multitude of business resources and entrepreneurial assistance (Phillips, 2014).

            Another important reason to consult with a professional is to decide whether the business should be a partnership, sole proprietorship, corporation, LLC (limited liability company), or a LLP (limited liability partnership).  Knowing the legal issues pertaining to the type of business is essential. Federal, state, and local government all require different licensing, permitting, and tax reporting requirements.

           Creating a business plan with a mission statement is an important step to starting a successful business. The mission statement sets the stage for the business plan. The mission statement illustrates the business’s goals and purpose. A well written mission statement identifies the business to outsiders, possible clients, vendors, the media, and others. The business plan takes all the research and ideas and organizes them. A business plan strategically plots out objectives, goals, operation procedures, and marketing strategies and combines them with the right combination of working capitol required to start, desired locations, equipment, and expertise so the small business can become a reality (Magos & Crow, 2003). Business plans can range from very simple to extremely complex. The audience for the business plan is the determining factor for the format and elements presented in the plan (Magos & Crow, 2003).

         Registering with the IRS to get a Federal Employer Identification Number (FEIN) as well as the state or county to comply with sales tax laws is the next step. Obtaining a city or county business license should also be considered. It needs to be decided if the business will hire employees. If so, then there is a need for the business to sign up to have FICA (Federal Insurance Contributions Act) deducted from the employee’s checks. The Federal Insurance Contributions Act was designed to hold Medicare, Social Security, and federal taxes out of employee paychecks. The business matches the Medicare and Social Security portion, and then pays the withheld monies back to the federal government monthly or quarterly depending on the amount of money withheld from the employee’s check. Many states also require state income tax to be withheld and paid into the state’s tax department.

            Finding a location, obtaining property, building, renting or deciding whether to run the business from home, are important considerations. These considerations will determine how much capital is necessary to start the business.

Being well prepared before approaching a lending institution is the key to successful financing. Deciding how much to borrow, and how fast the business can reduce the debt, is important. Cash flow projections can establish whether the business will be able to meet its obligation to vendors and lenders. Many lending institutions may require a cash flow projection in conjunction with the business plan. Starting a new business with a huge debt is often the beginning of the end for a new business unable to make the payments.

            Every business needs insurance. The importance of having proper insurance cannot be over-emphasized, but paying for insurance you don’t need can be as detrimental as not having insurance. Liability insurance is probably the most important type of elective insurance a business can have. Liability insurance protects against losses due to damage or injury to others. Workman’s Compensation, which is required by law in most states, protects employees injured on the job (Sullivan, 1997). Both insurances protect the business owner from the consequences of law suits and prevents paying medical and disability.

            Securing bids by competent contractors and going with the less expensive bid can mean less money is needed for start-up, keeping payments manageable.

Once you are ready to open, advertising gets the word out. Keeping customers happy is one of the best means of advertising.

            Starting a new business can be extremely rewarding providing the entrepreneur has done all the necessary research and planning, and taken all the steps. Being prepared can save headaches down the road.















DRAFT: This module has unpublished changes.