Going to school and getting a good education used to be a recipe for success. However, these days it takes a lot more than an education and a willingness to work hard to be successful. Your next great idea could be the one that, if properly developed, could change millions of lives including yours. Whether you have 100 ideas or you are searching for your first, this guide will help you get started making your idea a reality. The ordering of the steps is simply a guide and depending on your individual situation, it may make sense to perform them in a different sequence.
Step One: Adopt the mindset of an entrepreneur
Anyone who has watched Shark Tank has learned that investors generally look for products and services that are selling rather than ideas that may sell. Monetizing your idea will generally involve starting a business around that idea and proving to investors that you can make sales before trying to raise money or sell your company.
Adopting the mindset of an entrepreneur is the first step towards selling your idea. There are a plethora of online resources that are useful to new entrepreneurs. In addition, you should look for entrepreneur-related groups in your local community. Local colleges and universities often sponsor departments and outside enterprises to provide business advice to local entrepreneurs. For example, if you’re in Wilmington, North Carolina, the local community college operates a small business center providing courses and advice to the general public generally free of charge. In addition, you’ll find a number of other groups that provide networking opportunities for local business people. Look for local business journals and magazines, professional groups and even tech companies to sponsor networking events and seminars.
Step Two: Document the idea and build a prototype
When you have an idea for a new business, product or service, you want to be able to document what you have created in as much detail as you can. You should document your idea regardless of whether you think it can be protected with some form of intellectual property because sometimes you need to prove your idea is really yours.
To the extent you have conceived a unique product, design, plant, creative work or process, it should be documented in a notebook, with consecutively numbered pages that cannot be taken out or replaced and should also be witnessed and/or notarized. Documenting an idea or invention will not necessarily preserve all intellectual property rights, but it will help protect your right to claim any intellectual property as yours. There is no need to mail the notebook to yourself as that does absolutely nothing to preserve your rights. Not every idea for a new product or service can be patented, trademarked or copyrighted, but in the early stages, you should assume there is a possibility some aspect of your idea is protectable.
You should also build a prototype. Your first prototype can and should be made of things from around the house or at the local hardware store. Later, when it makes sense to spend more money, you can pay for help creating a more sophisticated prototype. You will learn a lot about your product by making it and refining it and this is good information to make sure you have properly documented.
Step Three: Research the market and become an expert
There is no point in paying to prosecute a patent application or register a trademark, much less to start a business, if there is no market for the product or service you want to sell. That is presumably one of the reasons investors are looking to see if your business or product generates revenue before investing in or buying a company.
There are dozens of ways to perform market research, but the first step is figure out what you need to know. Start out by learning who your customers are likely to be, what they buy and where they buy it. Study the industry you are contemplating entering – become an expert! Depending on what type of data you are looking for, there are free public resources as well as private companies that sell all kinds of information about the general public.
You are looking to get a general sense of who is going to buy from you. In addition, you need to consider what will make consumers buy the product or service from you. Something about what you are selling has to distinguish you from the competition. Research companies similar to the one you are going to run to see how they operate and perform. Conduct interviews with potential customers and people who work in the field or a related field. Again, study the industry you are about to enter.
Step Four: Research the idea
Market exclusivity can be a huge advantage. If you think that you have an idea for something that might be patentable, then perform a patent search. Generally, most people will start with an internet search looking for a similar product or service being marketed. It is important to realize that just because you determine a product is not on the market does not mean that it is not described somewhere in the patent literature. There are also a handful of free resources that you can use to search the patent literature prior to contacting an attorney to help you. Google Patents is currently very accessible. Plug in the terms that describe the novel aspects of your invention and read through what comes up narrowing your searches until you find the most relevant patent literature. Keep a record of the most relevant references no matter how different your invention is from those described in the literature. If and when you file for patent protection, you will have an ethical obligation to disclose these references to the USPTO.
If you cannot locate anything similar in the literature yourself, then hiring a professional search service to perform a search and consulting with a patent attorney or patent agent to help you order the report and interpret the results will provide you with a lot more information than the informal searches described above. The untrained eye will be able to spot their exact invention if they discover it in the literature, but they will probably not understand how a patent examiner will use other references to piece together an obviousness rejection. There is no substitute for the assistance of a licensed professional in this regard.
Even if your invention is not patentable, there are other ways to protect business information – specifically, trade secret law, copyright law, and trademark law. The basic differences between these types of protection are summarized in a separate article. Briefly, trade secret law protects business information that is not generally known or easily discovered by your competitors; copyright law protects expressions of ideas or information in tangible form from being copied, displayed and disseminated; and trademark law protects a company’s investment in branding; e.g. logos, company and product names, etc. Sometimes one or a combination of these protections is appropriate.
Step Five: Write a business plan
A business plan does not have to be a formal 40-50 page double spaced document that reads like a CSPAN transcript. A business plan is simply a road map that shows how your business is going to operate, what it needs to do so and what its goals are. This is where you get into the details of how much money you will need to start your company, where and how you will raise it. You may also address questions such as: where is the business is going to be located, will the company lease or buy a location, what kind of equipment and employees will be necessary and what kind of permits or licenses will be needed? While nothing ever really goes according to plan, nothing beats a solid business plan.
Step Six: Determine licensing requirements
First, look to any state or other government entity that licenses the people that will use your product or service, or that restricts the sale of similar items. For example, cosmetics, drugs and food are generally regulated by the U.S. Food and Drug Administration; and restaurants are going to be regulated by the county health department; but the North Carolina Department of Agriculture and Consumer Services regulates home businesses and ice cream parlors. Moreover, you will likely need a state privilege license. The North Carolina Department of Revenue has a good summary of the requirements.
Step Seven: Pick a business form
Before you launch your product, it would be wise to form a legal entity separate from yourself. There is a lot of flexibility here, but there are some key principles regardless of which form you choose.
- Corporations, partnerships, limited liability companies and the like are created and regulated at the state level. Each type of entity is governed by a separate statute in North Carolina and most other states. The governing statutes specify default rules that you can and should contract around by written agreement. Each type of entity has different rules regarding what can be modified by contract.
- It is crucial that you keep your business finances separate from your personal finances and other business finances. When companies fail to follow and document corporate formalities, the people operating can lose the benefits of limited liability. Please see my article describing piercing the corporate veil for more information on the limits of corporate liability.
- Regardless of what type of entity you create, the law generally does not protect you from liability for your own acts. As a result, it is crucial that you consult with an insurance professional and determine what type of insurance coverage you are going to need when operating your business. Note, there may be problems relying on your personal automobile and homeowner’s policies when operating home-based businesses.
- There are various ways for someone to “buy into” your company, but not all of those ways require you to give the person management authority. This is where carefully drafted company organizational documents come into play.
- While it is easy to create a company on paper, managing it is another matter entirely. Consult an attorney to draft organizational documents governing how the company will run.
Below are some of the more common business forms:
Sole proprietorship: By default, any individual operating a business without formally incorporating is operating as a sole proprietorship. The sole proprietorship offers no insulation from liability at all and the owner is personally liable for any action they take as well as actions of others that work for them. In the state of North Carolina, if you are operating under a name other than your personal name or the name of an incorporated entity you need to file an assumed name certificate in the county in which you operate.
Partnerships: By default, any group of individuals operating a business without formally incorporating it is operating as a partnership. Partnerships simplify tax considerations by allowing income to “pass through” to the partners. However, one of the main drawbacks of the partnership is that each partner is liable for any action taken by the other partner. There are a variety of different partnership formats available, including limited liability partnerships in which only one partner retains unlimited liability with other partners only risking their investment in the partnership.
Corporations: Corporations are by far one of the more common business forms. The designation of C or S corporation status is generally based on tax considerations. C corporations pay taxes on corporate profits and then the shareholders pay taxes on the dividends they are paid. This is often referred to as double taxation. This concern has been lessened recently as the corporate tax rate was significantly reduced. S corporations are taxed much like partnerships. The corporate form allows the company to issue different types of stock to different types of stock owners, allowing for flexibility in determining how profits are distributed and who has management authority. Generally corporations are run by a Board of Directors that may or may not own stock in the company. However, there are a number of formalities that must be adhered to such as the need for annual stockholder meetings and regular board meetings. These requirements can be a hassle for small companies who do not have the time or possibly the patience for the extra work.
Limited Liability Companies: Limited liability companies (LLCs) were formed to combine the tax benefits of a partnership with the benefits of the corporate form while allowing for a great deal of flexibility in how the company is run. By default, LLCs require fewer formalities to operate. For example, the North Carolina statute anticipates that the managers of an LLC will meet informally to discuss company business and make decision and there is no need for an annual shareholder meeting. People are often surprised to learn you can separate (1) who owns what percentage of the company from (2) who has a right to receive profits and (3) who has how much say in how the company is managed. This allows for opportunities to take on investors without giving them the right to manage the company.
Non-profit corporations: The North Carolina Nonprofit Corporation Act governs the creation of a corporation that does not have stockholders and thus does not pay dividends. Generally, the managers of a nonprofit corporation are paid a salary. Not all nonprofit corporations are tax exempt – that requires a certification by the IRS that is given to charitable organizations.
After you have your business formed, you should obtain a Tax Id (EIN) number. You can do this directly with the IRS for free.
Step Eight: Consult with professionals
Consult with a qualified tax professional to make sure you understand how your business will be taxed, how to withhold taxes if necessary, and what you can do to minimize your tax burden. It is better to plan early – some accountants say that LLCs taking advantage of the new Qualified Business Income deduction that was recently passed should have a plan in place at the beginning of the tax year to effectively do so.
As mentioned in an earlier article, no corporate form insulates you from all personal liability for your own actions. Liability insurance is a must. In addition, if you are employing people you will need to know if you are required to have another form of insurance coverage, such as workers compensation insurance.
Other professionals should be consulted as needed, including real estate agents and business advisers. There are a number of free consulting services that are made available in southeastern North Carolina, including SCORE, the North Carolina Small Business and Technology Development Center, and Cape Fear Community College’s Small Business Center.
Finally, see a licensed attorney for any documents that need to be drafted, including contracts you will have with vendors or customers, employment agreements, confidentiality and nondisclosure agreements, corporate organizational documents, patent and trademark applications, assignments and so on. An attorney can also assist with buying and selling a business, enforcing intellectual property rights, regulatory compliance and litigation matters.
Step 9: Research and register your brand name
Obscurity is the biggest enemy of any new business. Promoting the name of your company or the brand under which your goods and/or services are sold is essential to developing customer loyalty. However, when a business invests heavily in its branding or its name, it can be disastrous if they later find out that someone is using a similar business or brand name in another part of the country. Registering a brand name as a trademark with the United States Patent and Trademark Office (USPTO) can provide a company with nationwide protection from other companies selling a similar product or service under a similar brand.
Anyone contemplating launching a new brand should at a minimum, search the USPTO’s Trademark Electronic Search System (TESS) for trademarks that are similar to the one you want to use. Pay attention to the description(s) of the good(s) and/or service(s) listed with each entry. In addition, searching your state’s trademark registration database for similar marks is a good idea. Some states make online searching really easy and some do not. The USPTO maintains listing of state trademark databases here.
In addition to locating other trademarks that will block your registration, there is another strong reason to conduct a thorough trademark search prior to filing an application for registration results – applications are public record from the moment they are filed. Companies with large budgets devoted to enforcing their trademarks monitor applications that are filed and send cease and desist letters to applicants during the registration process. This is an even larger risk for trademark owners that have been using their mark before they applied for registration. In addition, the USPTO allows outside parties to challenge any application that is filed through an opposition proceeding. Blindly filing an application to register a trademark can provoke a battle over trademark rights with a previously unknown competitor.
Trademarks are registered with the USPTO by filing an online application disclosing the date the mark was first used “in interstate commerce,” as well as proof of how the mark is being presented to potential consumers. It is important to remember that the mark must be in use (the product or good sold under the mark) prior to registration being completed. The process usually takes about 10-12 months and results in a registration that can be renewed indefinitely as long as the trademark is in continuous use.
Step 10: Launch!
Experts say not to wait for your product to be perfect, just get out there and sell it. That means actually produce it and sell it to someone for profit, not just market it and offer it for sale. A lot of small businesses are formed with the goal of eventually being bought out by a larger company. Those types of investors buy into businesses that have products that sell and good management teams. So get out there and make something happen!