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How to Start a Software Company

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Published on May 31, 2022

Updated on August 12, 2022

How to Start a Software Company

How to Start a Software Company

If you’re a software developer, congratulations — your industry is going through the roof! 

The U.S. software market has more than doubled in the last decade and shows no signs of slowing down. If you think you have the “next big thing” in software, or want to develop software for others, you could start your own software company and haul in serious dough in a booming market.

But before you put on your developer’s hat, you’ll need to learn the business side of things. Fortunately, this step-by-step guide has all the business bases covered and will prepare you to launch a successful software company. 

Fast Facts

Investment range

$3,550 - $8,100

Time to build

0 – 3 months

Industry trend

growing

Revenue potential

$130,000 - $520,000p.a.

Profit potential

$117,000 - $156,000p.a.

Commitment

flexible

Step 1: Decide if the Business Is Right for You

close-up view pros and cons conceptual keyboard

Pros and cons

Starting a software company has pros and cons to consider before deciding if it’s right for you. 

Pros

  • Massive Market – The U.S. software industry is worth nearly $430 billion
  • Good Money – Hundreds per hour to develop software
  • Ridiculous Potential – Create the next big tech tool and the sky’s the limit!

Cons

  • Education Required – Specialized skills are necessary to develop software
  • Crowded Market – Lots of big players in the software industry

Software industry trends

Industry size and growth

Trends and challenges

Trends in the software industry include:

  • Low-code and no-code software development products are becoming more popular, which allow software developers to handle the process more easily.
  • Thanks to Big Data, data management software is in high demand.

Challenges in the software industry:

  • As technology evolves, developers often struggle to keep up with new trends.
  • Because software is such a huge industry, it’s becoming more and more competitive, which means software companies must find a way to stand out.

Demand hotspots

What kind of people work in software?

How much does it cost to start a software business?

Startup costs for a software company range from $3,500 to $8,000. Costs include a computer, programs for development projects, and a website.

If you’re not already a software developer, you can get an online software engineering degree from a place like SNHU

Start-up CostsBallpark RangeAverage
Setting up a business name and corporation$150 - $200$175
Business licenses and permits$100 - $300$200
Insurance$100-$300$200
Business cards and brochures$200 - $300$250
Website setup$1,000 - $3,000$2,000
Computer$1,500 - $3,000$2,250
Programs and software$500 - $1,000$750
Total$3,550 - $8,100$5,825

How much can you earn from a software business?

Software development companies charge about $250 per hour, sometimes more, for developing software to a company’s specifications. If you’re going to develop software to be sold directly to consumers or businesses, you’ll likely charge a monthly subscription fee. This is the software as a service (SaaS) model, and subscriptions cost anywhere from $10 to $400 per month, or even more. 

These calculations assume you’re going to start with the first option, charging $250 per hour. Your profit margin should be about 90%. In your first year or two, you could work from home for 10 hours a week, bringing in $130,000 in annual revenue. This would mean $117,000 in profit, assuming that 90% margin. 

As your company gains traction, you could work 40 hours a week. At this stage, you’d rent a commercial space and hire staff, reducing your profit margin to around 30%. With annual revenue of $520,000, you’d make an outstanding profit of $156,000.

If you get to the point where you’re developing software to sell directly to consumers, the sky’s the limit to how much you can make if your products are successful.

What barriers to entry are there?

There are a few barriers to entry for a software company. Your biggest challenges will be:

  • The education necessary to be a software developer
  • Facing a market that is crowded with software development companies

Step 2: Hone Your Idea

Now that you know what’s involved in starting a software company, it’s a good idea to hone your concept in preparation to enter a competitive market. 

Why? Identify an opportunity

Research software companies in your area to examine their products and services, price points, and customer reviews. You’re looking for a market gap to fill. For instance, maybe the local market is missing a company that offers a software solution for financial management, or a custom delivery app software company.

You might consider targeting a niche market by specializing in a certain aspect of your industry, such as software for retailers or software products for startup companies. This could jumpstart your word-of-mouth marketing and attract clients right away. 

What? Determine your products or services

You’ll probably start out by developing software solutions for businesses and charge an hourly rate for software engineering. For example, if someone wants to start a delivery service similar to DoorDash, you’ll develop the software for them. You can also offer web development and mobile app development. 

Later, you may want to develop your own proprietary software that you can sell, such as business management software. When you do so, you might want to start with a minimum viable product (MVP), which is a basic version of your product that you can use to test the market and then determine features to add based on customer feedback.

How much should you charge for software?

Hourly rates for a software development company are about $250. Your profit margin when you’re working by yourself should be about 90%.

Once you know your costs, you can use this Step By Step profit margin calculator to determine your mark-up and final price points. Remember, the prices you use at launch should be subject to change if warranted by the market.

Who? Identify your target market

Your target market will be businesses or aspiring entrepreneurs. You can connect with both on LinkedIn or find business owners on Google and Yelp and call them directly. 

Where? Choose your business premises

In the early stages, you may want to run your business from home to keep costs low. But as your business grows, you’ll likely need to hire workers for various roles and may need to rent out an office. You can find commercial space to rent in your area on sites such as Craigslist, Crexi, and Instant Offices.

When choosing a commercial space, you may want to follow these rules of thumb:

  • Central location accessible via public transport
  • Ventilated and spacious, with good natural light
  • Flexible lease that can be extended as your business grows
  • Ready-to-use space with no major renovations or repairs needed
Should you start a software business

Step 3: Brainstorm a Business Name

Your business name is your business identity, so choose one that encapsulates your objectives, services, and mission in just a few words. You probably want a name that’s short and easy to remember, since much of your business, and your initial business in particular, will come from word-of-mouth referrals.

Here are some ideas for brainstorming your business name:

  • Short, unique, and catchy names tend to stand out
  • Names that are easy to say and spell tend to do better 
  • Name should be relevant to your product or service offerings
  • Ask around — family, friends, colleagues, social media — for suggestions
  • Including keywords, such as “software” or “software development”, boosts SEO
  • Name should allow for expansion, for ex: “Jim’s Bakery” over “Jim’s Cookies”
  • Avoid location-based names that might hinder future expansion
  • Use online tools like the Step by Step Business Name Generator. Just type in a few keywords and hit “generate” and you’ll have dozens of suggestions at your fingertips.

Once you’ve got a list of potential names, visit the website of the US Patent and Trademark Office to make sure they are available for registration and check the availability of related domain names using our Domain Name Search tool. Using “.com” or “.org” sharply increases credibility, so it’s best to focus on these. 

Finally, make your choice among the names that pass this screening and go ahead with domain registration and social media account creation. Your business name is one of the key differentiators that sets your business apart. Once you pick your company name, and start with the branding, it is hard to change the business name. Therefore, it’s important to carefully consider your choice before you start a business entity.

Step 4: Create a Business Plan

Every business needs a plan. This will function as a guidebook to take your startup through the launch process and maintain focus on your key goals. A business plan also enables potential partners and investors to better understand your company and its vision:

  • Executive Summary: Brief overview of the entire business plan; should be written after the plan is complete.
  • Business Overview: Overview of the company, vision, mission, ownership, and corporate goals.
  • Product and Services: Describe your offerings in detail.
  • Market Analysis: Assess market trends such as variations in demand and prospects for growth, and do a SWOT analysis.
  • Competitive Analysis: Analyze main competitors, assessing their strengths and weaknesses, and create a list of the advantages of your services.
  • Sales and Marketing: Examine your companies’ unique selling propositions (USPs) and develop sales, marketing, and promotional strategies.
  • Management Team: Overview of management team, detailing their roles and professional background, along with a corporate hierarchy.
  • Operations Plan: Your company’s operational plan includes procurement, office location, key assets and equipment, and other logistical details.
  • Financial Plan: Three years of financial planning, including startup costs, break-even analysis, profit and loss estimates, cash flow, and balance sheet.
  • Appendix: Include any additional financial or business-related documents.

If you’ve never created a business plan, it can be an intimidating task. You might consider hiring a business plan specialist at Fiverr to create a top-notch business plan for you.

Step 5: Register Your Business

Registering your business is an absolutely crucial step — it’s the prerequisite to paying taxes, raising capital, opening a bank account, and other guideposts on the road to getting a business up and running. 

Plus, registration is exciting because it makes the entire process official. Once it’s complete, you’ll have your own business! 

Choose where to register your company

Your business location is important because it can affect taxes, legal requirements, and revenue. Most people will register their business in the state where they live, but if you’re planning to expand, you might consider looking elsewhere, as some states could offer real advantages when it comes to software companies. 

If you’re willing to move, you could really maximize your business! Keep in mind, it’s relatively easy to transfer your business to another state. 

Choose your business structure

Business entities come in several varieties, each with its pros and cons. The legal structure you choose for your software company will shape your taxes, personal liability, and business registration requirements, so choose wisely. 

Here are the main options:

  • Sole Proprietorship – The most common structure for small businesses makes no legal distinction between company and owner. All income goes to the owner, who’s also liable for any debts, losses, or liabilities incurred by the business. The owner pays taxes on business income on his or her personal tax return.
  • General Partnership – Similar to a sole proprietorship, but for two or more people. Again, owners keep the profits and are liable for losses. The partners pay taxes on their share of business income on their personal tax returns.
  • Limited Liability Company (LLC) – Combines the characteristics of corporations with those of sole proprietorships or partnerships. Again, the owners are not personally liable for debts.
  • C Corp – Under this structure, the business is a distinct legal entity and the owner or owners are not personally liable for its debts. Owners take profits through shareholder dividends, rather than directly. The corporation pays taxes, and owners pay taxes on their dividends, which is sometimes referred to as double taxation.
  • S Corp – An S-Corporation refers to the tax classification of the business but is not a business entity. An S-Corp can be either a corporation or an LLC, which just need to elect to be an S-Corp for tax status. In an S-Corp, income is passed through directly to shareholders, who pay taxes on their share of business income on their personal tax returns.

We recommend that new business owners choose LLC as it offers liability protection and pass-through taxation while being simpler to form than a corporation. You can form an LLC in as little as five minutes using ZenBusiness’s online LLC formation service. They will check that your business name is available before filing, submit your articles of organization, and answer any questions you might have. \

Step 6: Register for Taxes

The final step before you’re able to pay taxes is getting an Employer Identification Number, or EIN. You can file for your EIN online or by mail or fax: visit the IRS website to learn more. Keep in mind, if you’ve chosen to be a sole proprietorship you can simply use your social security number as your EIN. 

Once you have your EIN, you’ll need to choose your tax year. Financially speaking, your business will operate in a calendar year (January–December) or a fiscal year, a 12-month period that can start in any month. This will determine your tax cycle, while your business structure will determine which taxes you’ll pay.

The IRS website also offers a tax-payers checklist, and taxes can be filed online. It is important to consult an accountant or other professional to help you with your taxes to ensure you’re completing them correctly.

Step 7: Fund your Business

Securing financing is your next step and there are plenty of ways to raise capital:

  • Bank loans: This is the most common method but getting approved requires a rock-solid business plan and strong credit history.
  • SBA-guaranteed loans: The Small Business Administration can act as guarantor, helping gain that elusive bank approval via an SBA-guaranteed loan.
  • Government grants: A handful of financial assistance programs help fund entrepreneurs. Visit Grants.gov to learn which might work for you.
  • Venture capital: Venture capital investors take an ownership stake in exchange for funds, so keep in mind that you’d be sacrificing some control over your business. This is generally only available for businesses with high growth potential.
  • Angel investors: Reach out to your entire network in search of people interested in investing in early-stage startups in exchange for a stake. Established angel investors are always looking for good opportunities. 
  • Friends and Family: Reach out to friends and family to provide a business loan or investment in your concept. It’s a good idea to have legal advice when doing so because SEC regulations apply.
  • Crowdfunding: Websites like Kickstarter and Indiegogo offer an increasingly popular low-risk option, in which donors fund your vision. Entrepreneurial crowdfunding sites like Fundable and WeFunder enable multiple investors to fund your business.
  • Personal: Self-fund your business via your savings or the sale of property or other assets.

Bank and SBA loans are probably the best option, other than friends and family, for funding a software business. You might also try crowdfunding if you have an innovative concept. 

If you have a unique idea for a software that you can develop to put on the market, you may be able to attract angel investors or venture capital. Tech startups are considered very investable because they have the potential for huge growth.

Step 8: Apply for Licenses/Permits

Starting a software business requires obtaining a number of licenses and permits from local, state, and federal governments.

Federal regulations, licenses, and permits associated with starting your business include doing business as (DBA), health licenses and permits from the Occupational Safety and Health Administration (OSHA), trademarks, copyrights, patents, and other intellectual properties, as well as industry-specific licenses and permits. 

You may also need state-level and local county or city-based licenses and permits. The license requirements and how to obtain them vary, so check the websites of your state, city, and county governments or contact the appropriate person to learn more. 

You could also check this SBA guide for your state’s requirements, but we recommend using MyCorporation’s Business License Compliance Package. They will research the exact forms you need for your business and state and provide them to ensure you’re fully compliant.

This is not a step to be taken lightly, as failing to comply with legal requirements can result in hefty penalties. If you feel overwhelmed by this step or don’t know how to begin, it might be a good idea to hire a professional to help you check all the legal boxes.

Step 9: Open a Business Bank Account

Before you start making money, you’ll need a place to keep it, and that requires opening a bank account.

Keeping your business finances separate from your personal account makes it easy to file taxes and track your company’s income, so it’s worth doing even if you’re running your software business as a sole proprietorship. Opening a business bank account is quite simple, and similar to opening a personal one. Most major banks offer accounts tailored for businesses — just inquire at your preferred bank to learn about their rates and features.

Banks vary in terms of offerings, so it’s a good idea to examine your options and select the best plan for you. Once you choose your bank, bring in your EIN (or Social Security Number if you decide on a sole proprietorship), articles of incorporation, and other legal documents and open your new account. 

businessman working in the office while using his laptop

Step 10: Get Business Insurance

Business insurance is an area that often gets overlooked yet it can be vital to your success as an entrepreneur. Insurance protects you from unexpected events that can have a devastating impact on your business.

Here are some types of insurance to consider:

  • General liability: The most comprehensive type of insurance, acting as a catch-all for many business elements that require coverage. If you get just one kind of insurance, this is it. It even protects against bodily injury and property damage.
  • Business Property: Provides coverage for your equipment and supplies.
  • Equipment Breakdown Insurance: Covers the cost of replacing or repairing equipment that has broken due to mechanical issues.
  • Worker’s compensation: Provides compensation to employees injured on the job.
  • Property: Covers your physical space, whether it is a cart, storefront, or office.
  • Commercial auto: Protection for your company-owned vehicle.
  • Professional liability: Protects against claims from a client who says they suffered a loss due to an error or omission in your work.
  • Business owner’s policy (BOP): This is an insurance plan that acts as an all-in-one insurance policy, a combination of the above insurance types.

Step 11: Prepare to Launch

As opening day nears, prepare for launch by reviewing and improving some key elements of your business. 

Essential software and tools

Being an entrepreneur often means wearing many hats, from marketing to sales to accounting, which can be overwhelming. Fortunately, many websites and digital tools are available to help simplify many business tasks. 

You may want to use project management software such as Notion, Zoho, or FunctionFox, to manage your projects, workflows, and collaboration. 

Accounting

  • Popular web-based accounting programs for smaller businesses include Quickbooks, Freshbooks, and Xero
  • If you’re unfamiliar with basic accounting, you may want to hire a professional, especially as you begin. The consequences for filing incorrect tax documents can be harsh, so accuracy is crucial.

Marketing

Some of your business will come from the casual online visitors, but you should still invest in digital marketing! Getting the word out is especially important for new businesses, as it’ll boost customer and brand awareness. 

Once your website is up and running, link it to your social media accounts and vice versa. Social media is a great tool for promoting your business because you can create engaging posts that advertise your products: 

  • Facebook: Great platform for paid advertising, allows you to target specific demographics, like men under age 50 in the Cleveland area. 
  • Instagram: Same benefits as Facebook but with different target audiences.
  • Website: SEO will help your website appear closer to the top in relevant search results, a crucial element for increasing sales. Make sure that you optimize calls to action on your website. Experiment with text, color, size, and position of calls to action such as “Schedule Consultation Now”. This can sharply increase purchases. 
  • Google and Yelp: For businesses that rely on local clientele, getting listed on Yelp and Google My Business can be crucial to generating awareness and customers.

Kickstart Marketing

Take advantage of your website, social media presence and real-life activities to increase awareness of your offerings and build your brand. Some suggestions include: 

  • In-Person Sales – Offer your software to local businesses. 
  • Email marketing/newsletter – Send regular emails to customers and prospects. Make them personal. 
  • Start a blog – Start a blog and post regularly. Change up your content and share on multiple sites.
  • Paid ads on social media – Choose sites that will reach your target market and do targeted ads.
  • Payper-click marketing – Use Google AdWords to perform better in searches. Research your keywords first.
  • Do a webinar – Share your software expertise online with a video seminar
  • Testimonials – Share customer testimonials about how your software helped them

Develop your website

Website development is crucial because your site is your online presence and needs to convince prospective clients of your expertise and professionalism. They are unlikely to find your website, however, unless you follow Search Engine Optimization (SEO) practices. These are steps that help pages rank higher in the results of top search engines like Google. 

You can create your own website using services like WordPress, Wix, or Squarespace. This route is very affordable, but figuring out how to build a website can be time-consuming. If you lack tech-savvy, you can hire a web designer or developer to create a custom website for your business.

Focus on USPs

Unique selling propositions, or USPs, are the characteristics of a product or service that sets it apart from the competition. Customers today are inundated with buying options, so you’ll have a real advantage if they are able to quickly grasp how your software company meets their needs or wishes. It’s wise to do all you can to ensure your USPs stand out on your website and in your marketing and promotional materials, stimulating buyer desire. 

Global pizza chain Domino’s is renowned for its USP: “Hot pizza in 30 minutes or less, guaranteed.” Signature USPs for your software business could be: 

  • Custom software for your hot startup 
  • Streamlined management software to keep your business running smoothly
  • Manage your finances with our custom software solutions

Networking

You may not like to network or use personal connections for business gain. But your personal and professional networks likely offer considerable untapped business potential. Maybe that Facebook friend you met in college is now running a software business, or a LinkedIn contact of yours is connected to dozens of potential clients. Maybe your cousin or neighbor has been working in software for years and can offer invaluable insight and industry connections. 

The possibilities are endless, so it’s a good idea to review your personal and professional networks and reach out to those with possible links to or interest in software. You’ll probably generate new customers or find companies with which you could establish a partnership. 

Step 12: Build Your Team

If you’re starting out small from a home office, you may not need any employees. But as your business grows, you will likely need workers to fill various roles. Potential positions for a software business include:

  • Software Engineers – assist with software development
  • General Manager – scheduling, accounting
  • Marketing Lead – SEO strategies, social media

At some point, you may need to hire all of these positions or simply a few, depending on the size and needs of your business. You might also hire multiple workers for a single role or a single worker for multiple roles, again depending on need. 

Free-of-charge methods to recruit employees include posting ads on popular platforms such as LinkedIn, Facebook, or Jobs.com. You might also consider a premium recruitment option, such as advertising on Indeed, Glassdoor, or ZipRecruiter. Further, if you have the resources, you could consider hiring a recruitment agency to help you find talent. 

Step 13: Start Making Money!

As a software developer, you know how in demand your services are. The software industry in the U.S. has taken off in the last decade, more than doubling to reach well over $400 billion. Your own software company could open up a world of opportunity for you and allow you to build great software solutions for businesses all over the world. You could even grow your company into the next Microsoft!

You’ve added business knowledge to your resume now, so it’s time to get to work and launch your successful software company. 

Software Business FAQs

How much does it cost to start a software company?

You can start a software company for as little as $3,500. You just need a computer, and some programs and software to use for your development projects.

How profitable can a software company be?

For software companies, the sky’s the limit in terms of profitability. Software is a massive and growing industry, so if you’re a developer, there’s plenty of opportunity.

Do I need a license to start a software company?

You may need various business licenses and permits at the state and local levels. Check with your local governments for requirements or visit MyCorporation’s Business License Compliance page.

What prices should my software company charge?

Software development companies charge about $250 per hour, sometimes more, for developing software to a company’s specification. If you’re going to develop software that you’ll sell directly to consumers or businesses, you’ll generally charge a monthly subscription fee of $10 to $400 or more.