So, you’re thinking about opening up a retail store? In today’s digital age with same day ecommerce deliveries, your friends and family may think you’re crazy; but we see genius.
According to the National Retail Federation (NRF), retail supports 1 in 4 American jobs; that equates to 42 million US jobs. What’s more surprising is more than 98 percent of those businesses are considered small businesses that employ less than 50 people – just like you!
Numbers like these are very encouraging for small business owners and should give you confidence that traditional retail isn’t dead.
However, that doesn’t mean it’s easy. Opening a retail shop and being in business for yourself can be very rewarding, but if you’re not careful it can quickly go downhill. Like all other successful milestones in life, like owning your first home, it takes time, dedication, and hard work to find the perfect house and turn into a home, your home. The same applies to starting a business. You need to take the time to plan, go through the proper channels and steps, and dedicate yourself to making it successful. So, before you jump into the retail waters head first, sit down, pour a cup of coffee, and read through this so you can understand the process and steps it takes to make your dream of opening a retail store a successful reality.
Define Your Legal Structure
The very first thing you need to do (even before you start writing a business plan, but more on that later) is deciding on a legal structure for your business. Although it’s one of the less glamorous aspects of owning a business, it’s also a necessity. It will affect how you pay taxes, the amount of personal liability for the debt, the ability to raise capital, and have shareholders – all factors that have a significant impact on how you operate your business. Let’s take a look at the different options so you can find the one that works best for you.
Sole Proprietorship. This is by far the simplest structure, but that doesn’t always mean it’s the best choice. A misconception about a sole proprietorship is that it is a legal entity, when in fact it is not. It does not draw a line between the business itself and the owner. Meaning, the person who owns the business is personally responsible for the debt.
On the flip side, the tax aspect is appealing because the income and expenses from your business are included as part of your tax return, which the IRS refers to as a “pass-through” entity. This is alluring because the losses your business may suffer can offset any income you’ve earned from other sources and you only have to file one tax form – an IRS 1040 Form.
Also, unlike all the other business structures we’re going to talk about, with a sole proprietorship, you don’t need to apply to be a business. The best example of this would be freelancers. Until they take steps to license, incorporate, form an LLC or partnership, they are considered sole proprietors.
Partnership. A partnership is a legal agreement between two or more individuals that form an agreement to be co-owners of the business and can have varying degrees of vested interest. The degree of investment that each individual partner owns depends on what type of partnership you set up. Here are your options:
General Partnership (GP). With this kind of partnership, each partner participates in day-to-day operations and has control over the business and share liability as owners for debts and judgments against the business such as lawsuits. For instance, friends or family members that want to open up a retail store and all parties want to have control over management and operations, may enter into a general partnership agreement.
Limited Partnership (LP). Limited partnerships have a general partner that is responsible for day-to-day activities as outlined above, and they also have a partner(s) who are not involved in the daily operations. Thus, they have less liability than a general partner. The most common example of this would be a silent partner. Someone who provides capital for the business but is not involved in daily operations. The only liability they have is the capital or investment they put in.
Limited Liability Partnership (LLP). A Limited Liability Partnership (LLP) means that all the partners share limited personal responsibility for the business and all partners can participate in management tasks and operations. The best example of this type of business is in the professional services industry such as lawyers, accountants, and financial advisors. This kind of partnership is popular amongst service professionals because it protects each partner from the debts of another that may arise from a malpractice suit or other lawsuit resulting from another partner’s actions.
Corporation. Corporations are one of the more complicated business structures to set up and maintain because it involves extensive record keeping, reporting, and tax requirements – resulting in higher operational costs. Like partnerships, there are varying degrees or different types of corporations you can form based on your specific goals.
C Corp. This kind of corporation is a legal entity completely separate from its owner(s). The separate entity allows the corporation to make a profit, record losses, be taxed, and held legally liable independently from the owner. The biggest advantage of a C Corp is the protection from personal liability. Conversely, the greatest disadvantage is taxation. In some cases, corporations are taxed twice – once upon earning a profit and another when dividends are paid to shareholders.
S Corp. An S Corporation is more attractive to small business owners opening up a retail store than a C Corp because it’s a hybrid of a corporation and partnership. With an S Corp, profits and losses passed through the personal income tax of its owner(s) or shareholders like that of a partnership. On the other hand, an S Corp also provides personal liability protection like that of a corporation.
Limited Liability Company (LLC). An LLC is another type of business structure that is a hybrid of a corporation and partnership. From a tax perspective, an LLC is like that of a partnership where profits and losses are passed through to the owner’s personal income tax rather than filing a separate corporate tax return. Limited Liability Companies also enjoy personal liability protection like corporations do.
Another way to think about an LLC is as a more formalized partnership. You will need to file articles of organization with the state, but you won’t need to hold annual meetings for directors or shareholders and keep detailed records of those meetings and major business decisions like you would if you were a corporation.
If all this talk about different types of corporations and partnerships still has you a little confused, here is a great comparison chart that will help you visualize the difference between the various structures.
Everyone Needs a Business Plan
Once you’ve settled on a legal structure, you can start drafting your business plan. Don’t worry. You don’t need a degree in Business Administration to create a solid business plan. It doesn’t have to be an elaborate document unless you plan on going the C Corp route mentioned above. In which case you will need a very detailed plan as a way to attract investors and file with the state. However, most retailers typically set up sole proprietorships, partnerships, or one of the hybrid structures where documentation is a less stringent.
As an entrepreneur and small business owner, the core concept behind your business plan is your ideas and goals. Why do you want open a brick and mortar store in the first place? Who will your customers be? What makes your idea or concept unique? What will set you apart from your competitors?
Once you’ve answered these questions, you need to figure out how you’re going to get there. How are you going to reach your goals? That my friends, is where a business plan comes into play.
In simplest terms, a business plan is an outline or roadmap for your business that details your goals, objectives, and provides answers as to how you are going to reach them. It’s important to draft a business plan so that you and any outsiders, such as potential partners have the framework in which to build the business. Keep in mind, business plans are not set in stone. They should be considered a work-in-progress that you will continually shape as customers respond and business evolves.
Here are some of the elements you should include in your business plan. Take out a pen and paper, or your phone and jot down some of your answers as you read through these next sections.
Products and Services. You can’t have a business if you don’t have anything to sell, right? This is where you get to write down all your fresh and unique ideas about why you’re going into business in the first place. Are you a children’s boutique that not only sells clothes but offers a monitored play area for kids so parents can shop stress-free? Write down the types of products and services you’re going to provide, how they will be provided, vendor information, and future avenues for growth.
Target Market. This is where you’re going to describe your target market segment, in other words, who are your customers? Using the same children’s boutique example, your target customers are newborns to 5 year-olds. However, those kids can’t make their own purchasing decisions yet, to sell your products, you need to attract their parents or guardians. What motivates them to buy from you over one of your competitors? Is it price, convenience, or quality of service and products?
Marketing Strategies. Since you can’t assume, “if you build it, they will come,” your marketing strategy is where you can get creative and figure out how you’re going to attract your target customers (aka, what motivates them) and what your message is. If the quality of service is a motivating factor for your customers, what can you and your staff do to make sure they consistently receive top-notch, quality service while in your store?
You will also want to touch on how you will acquire these customers. How are you going to create a buzz about your new store? Are you going to have a website, so you come up in local searches? Will an online store eventually be part of your website and business plan? Are you going to leverage social media and target parenting groups for your childrens store? Are keeping it more traditional and putting feet on the street to distribute promotional flyers? Or a combination of all of the above?
Pricing, merchandising, and future partnerships strategies are also areas you want to touch on under the marketing umbrella. To be fair, pricing is something that could go under your outline of products and services as well, so feel free to include it in either or both.
As for merchandising, you would want to describe the layout of your store. Are you going to put your items with the highest profit margin by the entrance of the store or are they things that need to be kept in countertop cases? Future partnerships can include things like partnering with other local businesses or community organizations that complement your business, thus broadening your reach.
Employees and Staff. As much as you’ve said to yourself that you don’t need to hire employees or you can handle it all yourself, chances are you’re going to have to hire some employees. Afterall, you’re a business owner, not a freaking magician! You can’t be there all the time and if you are, chances are your personal life will quickly get neglected – and nobody wants that.
Describe what your staffing requirements will be by day of the week and also peak times throughout the day and any seasonal peaks that may be relevant such as back to school or holidays. How are you going to find these employees? Where are you going to post jobs? What does your screening process and training process look like?
Financial Forecast. Last but not least, a business plan needs to include a financial forecast. You are taking into account all the information mentioned above, and then some to determine a month-by-month snapshot of your revenue and expenses.
The best way to do this is with a pro forma statement. Pro forma statements are used to measure or project future profits of the company. Typically, this is best done using historical data that can easily be pulled a POS system like ShopKeep, to find your sales revenue and Cost of Goods Sold (COGS) on a monthly or yearly basis. You will also need to subtract your expenses and operational costs for the same period to determine your actual business performance – and use that to create your pro forma.
If you don’t have historical data because you’re a new business, you will simply have to estimate these numbers, within reason, and based on factors such as your profit margins and reasonable growth from your marketing efforts, less projected operational expenses such as payroll, and rent for retail space.
Licensing and Permits
If you’re opening up a retail store, you’re going to need a few permits and certificates that often come with a side of retailer license. Failure to obtain the proper permits and licenses can result in a criminal offense and or carry a hefty fine depending on state law. While filing for permits may be frustrating because you’re dealing with government agencies, it is without a doubt a must-do.
Employee Identification Number (EIN). This is probably the quickest, easiest, and most important for filing taxes. An EIN is like a social security number for your business. It’s a way for the government to identify you. Simply go to the IRS website and apply for an EIN. Once the application is complete, it is validated through an online session and issued on the spot.
State and Local Licenses. Since the federal government, the states, cities, and counties have their own requirements for a business license the best advice we can give you is, check with each agency to determine the proper ones needed for your business. The Small Business Administration (SBA) is a great resource for federal and state agencies. As for city and county agencies, this can either be done online or via a phone call to the county clerk’s office.
One thing to note is that most retailers won’t require federal licensing. If you open an apparel store or are a marijuana retailer, chances are you won’t need a federal license to do so. The federal government does not regulate clothing, and the latter is technically still illegal under federal law; although more and more states are permitting the medicinal and recreational use of it. On the flip side, if you’re a wine shop or convenience store that sells alcohol or tobacco, you will most definitely need a license from the federal government to sell such products.
Resale Certificate. As a retailer, you are going to buy products from vendors or distributors and then resell them to your customers. A resale certificate allows you to buy these items without paying tax to the seller.
Seller’s Permit. A seller’s permit allows you to sell your products in the state and also recognizes you as an entity that collects sales tax.
Certificate of Occupancy (CO). Any brick and mortar stores, or even pop-up up shops (depending on local regulations and duration of time) will require a CO. This ensures that the building is in compliance with building codes and other laws that make it suitable for occupancy.
We hope that this has helped provide some guidance and insight into the proper channels you’ll need to navigate to open a retail shop. Also, if you’ve been paying attention, you’ll notice that there is an essential element missing about opening up a retail store. That’s right. It’s startup cost. We feel that this is such an important topic that it deserves an entire blog post dedicated to it – so, stay tuned! In the meantime, check out How to Start a Small Business 101 for more tips and tricks.