Starting a Business in Rhode Island

Last Updated: April 13, 2018

Step 1 - Write a Business Plan

Write a Business Plan

Perhaps the most important, but often undervalued step to starting a business in Rhode Island is writing a business plan.

A lot of people only write a business plan because the bank won’t loan them money until a business plan is submitted.  That’s a valid reason, but there is a more important benefit.  Writing a business plan gets the ideas out of the entrepreneur’s head and helps to create a roadmap for where they want the business to go.  Business planning is a critical element to creating a successful business.

There isn’t a set formula for how to write a business plan since every business plan is unique.  Here are five sections that need to be included.

1. Executive Summary – The first section of the business plan is a summary of the entire plan. What makes the executive summary unique is that it is at the beginning of a plan, though it is written last. This gives the reader, usually a lender or investor, a quick summary of what the business owner is wanting to do. They can decide whether to continue reviewing the plan or not.

2.Business Overview – This section paints a picture of what the business sells and why it’s a good opportunity. It’s important to provide relevant details since the plan will end up going to a review committee. Keep the overview focused, easy to understand and show there is a need for the company to fill.

This is the section where long-term goals will be discussed.  Sometimes there are phases of a business that will need multiple rounds of funding.  If the plan can capture the reader with the long-term vision, getting the loan for the next phase will be much easier.

3.Management & Employees – Here, details of day-to-day operations, staffing needs, salaries, etc. will be addressed. The owner’s experience will also be discussed in this section. The experience of the owner is a huge factor in getting a loan, so be sure to provide all relevant details.

4.Marketing – A marketing strategy needs to be developed to ensure there are enough customers to financially support the business and how to best advertise to them. While this section isn’t as important to the bank it may be the most important one to the business owner. Many people gloss over this section because they will figure it out later as they feel the business idea is more important. The most important thing to keep in mind is a business must have customers giving trading money for that business’s product or service.  Without a clear plan to acquiring customers, there may ultimately be no business.  It’s usually not as easy as posting on social media and then customers start coming in the doors.

A few things to focus on in the marketing section:

  • Who is the primary target market and how many of them are there? What are the common demographic characteristics (age, gender, income) or interests (hobbies, organizations, etc) the primary target market share?  These common characteristics help group people into categories to make it easier to market to them.  Figuring how many potential customers are in the geographical market provides insight on the feasibility of a business.  This in no way means you plan on excluding people, but you can’t effectively advertise to everyone.  Grouping the largest numbers of people who are most likely to purchase a product or service makes advertising more effective.
  • How will the business be promoted? Once the target market is identified, it’s time to figure out how to market to them. Find out what websites they visit, watch on TV, newspapers they read, etc and develop a marketing strategy. Don’t guess at how much this advertising will cost. Get actual quotes as advertising tends to cost more than anticipated.
  • Who are the competitors? Perform a SWOT analysis (strengths, weaknesses, opportunities and threats). Also, what does this business do better and different than the competition?  If the new business doesn’t do anything different, why will customers shop there?
5.Financial Projections – are the section a lender or investor is going to analyze the closest. They are also important to the business owner to evaluate whether the idea can potentially make a profit. When preparing financial projections for a start-up, it’s next to impossible to know how much the business will make.  Therefore, the business owner will need to make financial assumptions based on limited information. What is important is that those assumptions are reasonable and preferably have some data to back them up.

Some of the elements in the financial projections include:

  • Business start-up costs
  • Sales projections
  • Financial statements (Cash flow projections, profit & loss statement, balance sheet)
  • Break-even analysis
A lot of people struggle with the financial statements and some of the resources below will help.

Step 2 - Select a Business entity

Select a Business Entity in rhode islandThe next step to start a business in Rhode Island is selecting a business entity. 

The business entity is sometimes referred to as the business structure.  This is how a business is legally organized to do business.  The four primary business entities include the sole proprietorship, partnership, corporation and LLC.  A brief description of each is below.

A Sole Proprietorship is an individual entrepreneur that decides to go into business for themselves. This is the easiest and least expensive of the four entities to set up.  The owner is personally responsible for all debts and actions of the company.  This is called unlimited liability and is the biggest downside to the sole proprietorship. This means if the business is sued, the owner’s personal assets are potentially at risk.  The owner will also pay self-employment tax on all business profits and may pay more in taxes than other entities.

There is no filing for a sole proprietorship in Rhode Island. 

General Partnerships consist of two or more people conducting a business together. Like the sole proprietorship, there is no formal filing.  Also like the sole proprietorship, the partnership has unlimited liability.  If the partnership were to be sued, each of the partner’s personal assets are potentially at risk.  The partnership itself does not pay tax from business income.  Instead, profits and losses are passed through to the owner’s personal tax return.  This income is subject to self-employment tax.

A Corporation is a legal business entity that is separate from the individual.  While corporations are more expensive and complicated than sole proprietorships and partnerships to form, the major advantage is that the corporation shields the owner’s personal assets should the corporation be sued. 

There are multiple ways a corporation can elect to be taxed.  Also, there is no self-employment tax with a corporation as income to the owner(s) will come from either a salary or dividends. 

To form a corporation, the Articles of Incorporation need to be filed with the Secretary of State. The filing fee is $230 for companies with under 75,000,000 shares.

The Limited Liability Company (LLC) is a popular business entity choice. It provides the liability protection of a corporation with the ease of operation like a sole proprietorship.  The Limited Liability Company does not have the many burdens a corporation such as holding a board of directors meeting, shareholders meeting, taking minutes, etc.  The LLC also has the greatest tax flexibility of the four entities.  Income can be taxed as a pass-through entity like the sole proprietor or partnership or as a corporation.    

To form a Rhode Island LLC, the Articles of Organization needs to be filed with the Secretary of State. The filing fee $150.

To compare the pros and cons of each of the entities, see our comparison chart of business entities.

Step 3 - Register a Business name

Register a Business Name in Rhode IslandAfter deciding on a business entity, the next step in starting a business in Rhode Island is to register a business name. 

HOW TO FILE A DBA IN RHODE ISLAND FOR SOLE PROPRIETORSHIPS & GENERAL PARTNERSHIPS

If you are a sole proprietorship or general partnership in Rhode Island and doing business under your full first and last name, John Smith for example, there is no filing, but if the business will operate under a fictitious business name or DBA (Doing Business As) like John Smith’s Handyman Service, Mr. Handyman, etc, you will need to file a Trade Name Certificate, sometimes known as a DBA or Doing Business As with the Town or City Clerk’s office where the business will be located.

The Rhode Island DBA filing fee varies but is typically under $25.  In some parts of Rhode Island this is a one-time fee and others there is an annual fee.

HOW TO RESERVE A BUSINESS NAME IN RHODE ISLAND FOR A CORPORATION OR LLC

Corporations and LLCs have to pick a name at the time of filing for the entity and each corporation/LLC has to be uniquely named. 

To check the availability of names, visit the Rhode Island Secretary of State.

Registering does not necessarily keep others from using the business name.  For more details on registering a business name and protecting it with a trademark, click here.

Step 4 - File for an ein

How to File an EIN in Rhode Island

The Employer Identification Number or EIN (sometimes referred to as the Federal Employer Identification Number or FEIN) is a nine-digit tax identification number from the Internal Revenue Service (IRS). This number identifies a business operating in the U.S, tracks tax returns and is used to open a bank account. Much like what a social security number is to a person, the EIN is a social security number for a business. While most businesses will need to get an EIN, some do not.

Partnerships, corporations and many LLCs OR sole proprietorships with employees must file for an EIN.

Sole proprietorships or a single-member LLC with no employees is NOT required to get an EIN. In these instances, the owner’s social security number is used.

Filing the EIN online only takes a few minutes and the number is available immediately. Filing can also be done by mailing the SS-4 form or by calling the IRS. For more information about how to apply and to see our video with a step-by-step guide, check out how to file for an EIN.

Step 5 - Apply for Business licenses & Permits

how to get a business license in rhode island

To start a business in Rhode Island, a company may require special permits and/or licensing. While there is no general state of Rhode Island business license, a business may need to register with a variety of agencies before opening. 

Sales Tax Permit – Retailers of tangible personal property need to register for a sales tax permit in Rhode Island. Generally speaking, physical products sold at retail are taxable within Rhode Island, while services are generally not taxable. 

More information about the Rhode Island Sales Tax Permit is available from the Rhode Island Division of Taxation.

Professional & Occupational Licenses – A variety of professionals in the state are regulated and need to register such as accountants, landscapers, auto body repair, brewpubs and many more.  Additional information, fees and licensing requirements for professions are available from the state of Rhode Island Department of Business Regulation.

In addition to professional licenses, businesses in a variety of industries such as food establishmentsdaycaressalvage yards and many others require licensing.

Local Business Licenses – Most cities, towns and/or counties in Rhode Island require a business to register, even occasionally those that are home-based businesses.   Each local entity has its own rules for business activity, so requirements vary depending on location as some require a business license while others have requirements for zoning, building/ building improvements, signage requirements, liquor licenses, etc.  

The city hall, mayor, economic development office or even the Chamber of Commerce are all good places to contact and find if you need a business license in your community. 

 

Step 6 - Find Financing

Financing a Business in Rhode Island

Obtaining financing for a small business can be a stressful and time-consuming process.  Similar to getting a home loan, the bank is going to want lots of documentation on your personal finances in addition to a solid idea and the business plan.

As a rule of thumb, banks will want to see the owner invest 15%-25% of their money (equity) into a start-up business.  That can include cash but also any buildings, tools, vehicles, inventory and equipment that will be used in the business.  It is likely that the bank will want a lien on those items.

Credit score is going to play a large part in getting a loan approved.  Start-up business loans are largely based on the owner’s personal credit.

There are a number of options to finance a business.  A few of the more popular ones include:

Conventional Bank Loan – These are available at many financial institutions like banks and credit unions.  Banks are typically very conservative and place a lot of weight on the owner’s personal credit, equity and collateral.  After reviewing the business plan and personal financial information, they will respond with a yes, no or maybe.  Yes is great but we recommend talking with at least three banks to get the best rates and terms for your business.  No isn’t necessarily bad, as a bank may have many loans with other businesses in your industry or they don’t make loans for your type of business (restaurants are a typical example).   If your loan has more risk than they want or if you don’t have sufficient credit, equity or collateral they may answer with a maybe and want a loan guarantee.

Expect the loan approval process to take anywhere from 2 weeks to 6 months (and possibly more) depending on the amount being borrowed, the complexity of the project and owner’s personal financial condition.

SBA Loan Guarantee – When a small-business loan is riskier than the bank wants to take on, there are loan guarantee programs from the Small Business Administration (SBA).  This is a federal program that provides a guarantee to the bank that will pay a percentage of the loan back to the bank if the loan isn’t paid by the business owner.  The percentage depends on the program but typically ranges from 50%-85%.  Contrary to popular belief the SBA doesn’t provide business financing but they do help in getting money to small businesses by taking a majority of risk and encouraging the bank to make loans.  Another thing to note is that SBA guaranteed loans will cost the owner more in closing costs, fees and interest.

Peer-to-Peer LendingSometimes a bank isn’t the best option, due to the difficulty in getting a start-up business loan, credit purposes or the time needed to get funding.  In this case, peer-to-peer lending provides an interesting way to borrow money without going to a bank.  These are personal loans and rates will vary on the owner’s credit.  Loans will typically go up to the $35,000 – $40,000 range.  Two popular options are Prosper and LendingClub.

Many people will use peer-to-peer lending to get their business off the ground and go after more conventional financing once the business is established.

Grants – There is a lot of information online about all of the free money for businesses and most of it isn’t true.  There are some small business grants.  Most are for established businesses doing research and but occasionally there are private grants for business startups.  Do your research before applying and don’t pay for information telling you where the grants are, no matter how good their money-back guarantee is.  All of the federal grant information is available for free at http://grants.gov.

Step 7 – HIRE EMPLOYEES

How Do I Hire Employees in Rhode Island?Before hiring employees, there are several items that a small business owner needs to be familiar with before making their first hire.    

Register as an Employer – Employers will need to register with the IRS (EIN number) Rhode Island Division of Taxation (Business Registration

Fill Out Paperwork For New Employees – When hiring a new employee there are four forms that will need to be filled out; New Hire Reporting (Rhode Island New Hire Reporting Directory), I9 (Form I-9, Employment Eligibility Verification), W-4 (IRS’s Publication 15 Employer Tax Guide), and the RI-W-4 (Rhode Island Employee’s Withholding Certificate).

Federal & State Income Tax Withholding – Employers withhold money from each employee’s paycheck to pay that employee’s federal and state income taxes. The employer pays no part of the withholding tax, but is responsible for collecting and remitting the taxes that are withheld.

Social Security & Medicare – To comply with the Federal Insurance Contributions Act (FICA), an employer must withhold the employee’s portion of Social Security and Medicare taxes and the employer matches.

Federal & State Unemployment Insurance – Employers are responsible for paying taxes to compensate workers who have recently lost their jobs, which is through federal & state unemployment insurance.

Worker’s Compensation Insurance – Workers’ compensation provides compensation benefits and covers medical costs to employees injured on the job.    Worker’s Compensation Insurance is administered through the Rhode Island Department of Labor & Training.

Labor Laws – Employers should also understand the various regulations and laws pertaining to employees. If you plan to hire employees, learn the rules that apply to your business. Federal laws, depending on your sales volume and number of employees, may supersede state laws.

Consult with the Rhode Island Department of Labor & Training and U.S. Department of Labor to learn more. If you are unsure of your obligations, an attorney’s guidance can be also useful in assisting you to meet legal requirements.