Building a business from scratch is one of the most exciting ventures a person could undertake. However, it is also one of the most difficult. There are many procedures aspiring entrepreneurs must fulfill, and they need to take note of the legal requirements to start their business.
In this guide, aspiring business owners will learn everything they need to open a business in the United States. This guide will cover the benefits of opening a business in this country, the steps entrepreneurs must follow when starting their new business, and actionable tips for them to kickstart their new venture.
1. Why Start a Business in the United States
The United States is considered a prime location for opening a business. It has been consistently ranked as one of the best when it comes to market competitiveness, and it has been recognized for how easy it is to do business across the country. The United States encourages free enterprise and competition, making for a healthy business environment.
Here are some of the other benefits of starting a business in the United States.
Financial incentives from local government units
Various states and cities across the country offer financial incentives for locals and foreigners starting up a business. These incentives may come in the form of tax credits for foreign investors and financial assistance programs for residents.
Level playing field
Businesses owned by both residents and foreigners are treated equally. This means businesses that are owned by foreigners are protected by the same laws as domestically owned businesses.
New markets to explore
Aspiring business owners are spoiled for choice when it comes to where they can set up their business. The United States also has trade agreements with 20 countries across the globe, which gives special consideration to manufacturing companies based in the United States.
Efficient movement of products
Services in the United States can provide efficient transport and shipping options via land, air, and sea. Seven of the 10 most efficient cargo airports are located in the United States.
Advancements in technology
The United States is home to technological innovations in just about every industry. That means that by setting up business there, aspiring business owners can gain access to the emerging technologies to optimize the way that they do business.
Aside from these benefits, the country’s democratic government structure also offers companies across all industries more flexibility and economic freedom. While some states’ requirements for setting up a business vary, the processes that aspiring business owners will need to follow are similar.
2. Conducting Market Research
In every business, it is crucial to determine what potential customers want and need. All businesses come with a considerable amount of risk but conducting market research reduces that risk and provides aspiring business owners with valuable insight.
By analyzing both economic trends and consumer behavior, business owners get a clearer view of what to do with their business. The following factors must be researched:
• Consumer demand
• Size of the market
• Potential income
• Ideal location for the business
• Competing brands or businesses
• Ideal price of product or service to be offered
To properly conduct market research, business owners must first determine their target audience and compile demographic information on those customers. Relevant factors may include age, occupation, and financial standing.
It is also important for business owners to stay on top of the latest trends in business and economics to ensure they can anticipate potential opportunities in what to implement and improve in their own business.
Aspiring business owners can also benefit from researching their competitors to see what they can do to improve their own customers’ shopping experience.
Conducting a SWOT analysis of prominent competitors is an excellent way to get a clearer picture of how each competitor is performing in the market, and gain insight into how certain practices can add value to or improve their own business processes.
Market research can be conducted either by using existing sources and information or by conducting direct research. Analysis of the gathered data is crucial to planning how a business would operate.
Choosing to use existing sources and information can save business owners a lot of time, but this is only if the information they need has been previously studied by reputable agencies.This leads to the downside of choosing this option, where existing sources may not necessarily be able to go as in-depth as necessary as they are often more suitable for answering quantifiable and general questions.
Direct research is best for gathering more in-depth and specific insights onto certain demographics. Business owners can ask their target audience specific questions that can help them improve their product or service by addressing pain points and expectations.
Here are common ways to conduct direct research:
• Focus group discussions
While direct research is an effective research method, it is far more time consuming and expensive than simply researching using existing sources. If aspiring business owners intend to do this, they must allot an appropriate amount of time and resources to compile and properly analyze data to maximize it.
3. Drawing Up a Business Plan
A business plan is the skeleton of the business. They guide aspiring business owners from the start up to execution of their businesses, and they can help business owners acquire funding or investors by providing a clear direction and assurance.
The most important factor in developing a business plan is that it must be clear in how it meets the needs and goals of a business. Owners may create either a traditional business plan or a lean startup plan. Traditional business plans are more detailed and comprehensive, while lean startup plans focus more the key elements of a business while allowing room for flexibility.
4. Locking Down a Business Structure
Before a business can be registered, business owners must first choose a legal business structure. A business structure determines the amount a business pays in taxes, the ownership of the business, and the paperwork that a business owner needs to file.
Sole proprietorships give a business owner total control over their business venture. Business assets and liabilities are tied with a business owner’s personal assets and liabilities, which means they will be held accountable for business obligations.Those who are starting out and would prefer a lower amount of risk would benefit from a sole proprietorship business structure.
Two or more people working together with equal ownership of a business creates a partnership type of business structure. There are different kinds of partnerships, but the two most common types are limited liability partnerships and limited partnerships.
1. Limited Liability Partnerships
In this type of partnership, all partners are given limited liability. This means that partners aren’t held responsible for the actions of other partners, which provides each partner with considerable legal protection should something go wrong with the business.
2. Limited Partnerships
Limited partnerships mean that one partner has unlimited liability, while the other partners have limited liability. This protects other partners from any repercussions should something go awry, but the partners with limited liability also tend to have less control over the business. Additionally, the partner with unlimited liability must pay self-employment taxes.
Limited Liability Company
Limited liability companies (LLCs) allow entities to combine the benefits of having partnership and corporation business structures. Limited liability companies protect the business owner from personal liability, and personal assets won’t be affected in case something goes wrong with the business. However, LLC partners must pay self-employment taxes.
Corporations are business entities entirely separate from their business owners. This business structure tends to be more expensive, but it allows companies to profit, holds them legally liable, and requires extensive bookkeeping. Additionally, they protect business owners from personal liability.
Corporations are required to pay income tax on their declared profits. Companies and businesses that fall under this type of structure often have an advantage when it comes to fundraising because they can legally sell stock.
5. Securing Funding for the Business
Some businesses require funding to raise the capital needed to start operations. Securing funding and choosing the type of funding option for a business is one of the most important financial decisions a business owner could make.
There is no one-size-fits-all financial solution for businesses, and aspiring business owners must determine how much they need to get their business off the ground. With different funding options available for businesses, an aspiring business owner can determine the best one for them after assessing how much is necessary for them to get started.
Self-funding, or bootstrapping, allows would-be business owners to use their own personal resources to kickstart their business. Aspiring business owners can also turn to their peers and family members to pool money for capital and use their 401(k).
This type of funding model allows the business owner to have full control over the business’s operations, but it also comes with a considerable amount of risk for personal finances. When choosing this funding model, a business order should take stock of all their assets and make sure that they are spending what they can afford.
Additionally, bootstrapping can be done using revenue earned from the business to grow or expand the business further. However, this requires a steady stream of income and often means that the business owner will not earn much in terms of profit during the business’s first few years.
Getting Investors or Working with Venture Capitalists
Investors can step into the picture when a larger amount is necessary. Venture capital investments can be given to business owners in exchange for an active role in the business’s operations and share of ownership.
This differs from traditional funding models because venture capital investors only work with companies with a higher potential for immense growth and are willing to take bigger risks for potentially high returns. Additionally, venture capital is not considered as a loan. Rather, the capital invested is expected to turn into equity.
Aspiring business owners can request funding from the public, and this method can be likened to donations. This low-risk funding model allows business owners to request for financial assistance without putting their own resources on the line and while maintaining full ownership over their business.
There are various crowdfunding platforms available on the Internet, and business owners will need to read the fine print of each one before deciding which platform to utilize.
Taking Out a Business Loan
Business owners can also apply for straightforward business loans from banks. Doing so still allows the business owner to have full control over their business, but they will be obligated to pay back the amount that they owe after a set amount of time with interest on top of the original amount they borrowed.
It’s important to note, however, that not all business loans get granted. For more chances of a business loan getting approved, business owners must develop a comprehensive business plan showcasing financial projections over the next five years and prepare a budget and expense plan to show to authorities. If the business looks promising, the bank is more likely to provide a business loan.
6. Selecting an Ideal Business Location
A business’s location is crucial, especially if it will be relying on foot traffic for in-store business. Business owners will need to register their business, punctually pay their taxes, and secure the appropriate licenses and permits at their chosen location.
They should also take careful consideration of their target market, costs, and the legal requirements of setting up shop at a particular place. While business owners should ideally choose a place that is easily accessible to provide more convenience to potential customers, it should be noted that these locations are often more expensive.
As mentioned earlier, some local government units offer incentives and benefits for businesses. This depends on the city or state a business is located in, but these incentives are often offered to businesses in the job creation, urban planning and redevelopment, technology, and energy industries.
While all of the states in the United States are suitable for starting a new business, the U.S. News has narrowed down the ten best states to set up a business based on their growth, employment, and business environment:
7. Naming the Business
A business name must accurately represent a brand’s products and services and showcase the brand’s identity. It’s also important to protect the business name by registering it to secure its intellectual property and prevent potential issues of multiple or similar business names in the chosen location.
There are four different ways to register a business name:
• Entity name. This protects a business at a state level.
• Trademark. This protects a business at a federal level.
• DBA. This doesn’t offer any legal protection, but it may be required by the city or state a business is operating in.
• Securing a Domain Name
It’s more necessary than ever for businesses to operate in the digital space and raising awareness online has become a crucial part of many businesses’ marketing efforts.
A domain name represents a business’s identity online and getting the domain name registered offers a business considerable legal protection against copycat sites. In today highly digitally world, there are many options to register a .US domain to secure a web site with a local domain name extension.
Registering as an Entity
A legal entity name is how a state identifies a business. The rules for registration differ per state, but generally, states don’t allow businesses to register the same name as an existing business. Additionally, most states require the entity name to show the type of product or service a business offers.
By registering as an entity, a business is offered protection from other businesses registering and operating under the same name. However, there are exceptions to this depending on the state a business is located in.
Registering as a Trademark
Trademarks protect the name of a business at a national level. The same protection is offered to goods and services, and this prevents others in similar industries from using the same name. For example, if a business wants to operate in the technology industry, they can trademark the name of their products to prevent copycats.
If a trademark infringement case happens, the perpetrator can be subject to hefty fines. Aspiring business owners should refer to the official trademark database in the United States Patent and Trademark Office to stay informed and ensure they are not infringing on any trademarks.
How to register a trademark
The United States Patent and Trademark Office encourages business owners to file trademark applications online via their Trademark Electronic Application System. Roughly 85% of trademark applications are filed and processed using the digital platform. These are the types of applications you can file:
• Word Mark
• Design Mark
• Color Mark
• Shape Mark
• Sound Mark
• Scent or Flavor Mark
• Touch Mark
• Motion Mark
• Certification Mark
• Collective Membership Mark
Business owners may file either a use-based application if the mark is already in use or an intent-to-use application if the mark is part of the business’s future as per sections 1(a) and 1(b) of the Lanham Act. However, for the latter, the mark will only be registered once the applicant has shown that it is already in use.
Non-residents may also file an application for a mark if they have already applied to register or have already registered the mark in question in their home country. Foreign applicants may file their application via the Madrid Protocol.
Here are the basic requirements for filing for a trademark:
• Name of the applicant
• Address of the applicant
• Clear description or image of the mark
• List of products and services that will be connected to the mark
• Filing fee for chosen trademark classes
Getting Professional Assistance for Trademark Application
US trademark registration may seem like pretty straightforward process. However, it can be quite daunting to get all of the requirements together and do a proper trademark search. With the many kinds there are, it can be confusing choosing which trademark class to register for.
To ensure a smooth application process, consider working with qualified agencies. They can help sort out requirements and handle of everything related to trademark filing and application.
Registering as a DBA or “Doing Business As”
This is also known as the business owner’s trade name, assumed name, or fictitious name. This doesn’t have any legal protection on its own, but this is required by most states. Additionally, a DBA allows business owners to do business using a different identity or entity name.
8. Securing Tax ID Numbers
The IRS requires all businesses in the United States to have a Taxpayer Identification Number. LLCs and corporations are also required to have an EIN, or an Employer Identification Number. This allows the IRS to determine the appropriate amount a business must pay in taxes.
Federal Tax ID Number
This is also known as a business owner’s EIN. This is needed to pay taxes, open a business bank account, apply for permits and licenses, and hire employees. This must be secured after registering a business. Getting an EIN, and business owners need to apply for one if they do any of the following:
• Pay salary to employees
• File tax returns
• Withhold income taxes
• Use a tax-deferred pension plan (Keogh Plan)
Business owners can apply for an EIN through the IRS assistance tool. The process is straightforward, and the nine-digit ID number is immediately available once it is verified.
State Tax ID Number
Getting this tax ID number depends on whether the state a business is located in requires the business to pay state taxes. For business owners to have a better grasp of what they need to do, they must familiarize themselves with state laws and research whether they would need to pay income taxes and employment taxes.
The process for securing a State Tax Identification Number is similar to applying for a Federal Tax Identification Number. However, the exact process and requirements will depend on the state where the business is registered.
Individual Tax ID Number
Non-United States residents do not have Social Security numbers, so they need to apply for an Individual Taxpayer Identification Number. This shows that they are not citizens or are not residing in the United States. Once they are able to secure an Individual Taxpayer Identification Number, they can then apply for an EIN using Form SS-4.
9. Securing the Appropriate Licenses and Permits for the Business
Most small businesses need to secure licenses and permits at both federal and state levels to be able to operate without any hindrances. The requirements vary based on the location of the business.
Federal Licenses and Permits
If the business’s products or services are regulated by a federal agency, the business owner will need to apply for a federal license or permit. Below is the list of federal agencies responsible for regulating certain industries.
- U.S. Department of Agriculture
- Alcohol and Tobacco Tax and Trade Bureau
- Local Alcohol Beverage Control Board
- Federal Aviation Administration
|Firearms and Explosives
- Bureau of Alcohol, Tobacco, Firearms and Explosives
|Wildlife and Fish
- U.S. Fish and Wildlife Service
- National Oceanic and Atmospheric Administration Fisheries Service
|Transportation via Sea
- Federal Maritime Commission
|Mining and Related Activities
- Bureau of Safety and Environmental Enforcement
- U.S. Nuclear Regulatory Commission
|Radio and Television
- Federal Communications Commission
|Transportation and Logistics
- U.S. Department of Transportation
The requirement for each federal agency differs, so business owners must visit the website of their corresponding agency to know what they need to prepare.
State Licenses and Permits
Application requirements and fees for state licenses and permits vary based on the state a business is in and what products and services a business offers. State agencies regulate more industries than the federal government does, and each line of work has a specific body dedicated to it.
Business owners must research and familiarize themselves with state laws and requirements to ensure their business can operate without a hitch.When it comes to state licenses and permits, business owners must keep an eye on their expiration dates. It is much easier to renew an existing license or permit than to apply for a new one.
10. Opening a Bank Account for the Business
Since the passage of the USA Patriot Act, it has become difficult for foreigners to open a bank account in the United States. However, if they have official documents and an ID, it’s still feasible.
These are the requirements for foreign individuals who want to open a bank account for their business:
• Corporation documents including the business’s address in the United States
• ITIN number and corresponding EIN
For residents of the United States, the process is easier. They simply need to prepare the following documents to get their business bank account up and running:
• Social Security number or Employer Identification Number
• Business license
• Ownership contracts or agreements
• Pertinent documents related to the business
Once a business owner has all of these documents ready, they can head to their local bank and request to open a business bank account. This allows business owners to manage their finances more easily and efficiently, and they can also get extra financial protection for their business.
11. Tips for Starting a Business in the United States
Invest in digital marketing
Business owners should consider investing in digital marketing efforts to reach large but targeted audiences more effectively. They can do this by creating social media accounts and leveraging them and creating a website for interested parties to visit.
Businesses that rely on foot traffic will benefit from implementing local search engine optimization strategies to appear high in local searches and connect with potential customers. Over the past two years, online search queries such as “Where to buy” and “near me” have grown by over 200%, which shows the importance of capitalizing upon effective local SEO tactics.
Look into e-commerce
In 2018, online e-commerce sales made up for 9.9% of the total retail sales in the United States. By 2020, that number rose to 15%. The trends show that e-commerce is here to stay and provides customers with a convenient and efficient way to shop from the comfort of their homes.
While nothing quite beats an in-store experience, business owners should consider listing their products on online e-commerce platforms to reach more customers and provide consumers with alternative ways to shop.
Ensure products and services are top quality
A business’s best testament is the quality of its products and services. Business owners should ensure good quality control to provide their customers with the best possible shopping experience. Additionally, high quality products are more likely to be recommended to other consumers, which can potentially increase a business’s customer base.
Focus on providing excellent customer service
Customers expect to be treated well, and efficiently communicating with customers is key to forming solid, long-lasting relationships. This includes fast response times to any customer query and providing customers with a portal where they can speak with a customer service representative.
More established businesses may wish to automate their systems to assist more customers. By providing excellent customer service, a business is more likely to be rated high and recommended to other consumers, and a customer is more likely to be a repeat customer.
If you’re looking to start up a business in the United States, it is important to be well-versed with all of the legal, financial, and practical requirements you need to get your business off the ground.
The United States is considered as one of the best countries for setting up a business because of its healthy, competitive business environment and ease of business.
This guide will show you what you need to prepare as an aspiring business owner and how acquiring professional services can help you secure and compile the necessary requirements.