Carolyn Young is a business writer who focuses on entrepreneurial concepts and the business formation. She has over 25 years of experience in business roles, and has authored several entrepreneurship textbooks.
David has been writing and learning about business, finance and globalization for a quarter-century, starting with a small New York consulting firm in the 1990s.
Published on May 31, 2022 Updated on July 22, 2024
Fast Facts
Investment range
$3,550 - $8,100
Revenue potential
$130,000 - $520,000p.a.
Time to build
0 – 3 months
Profit potential
$117,000 - $156,000p.a.
Industry trend
Growing
Commitment
Flexible
Consider these crucial factors when launching your software company:
Define your products and services — Decide on the types of software products or services you will offer, such as SaaS (Software as a Service), mobile apps, custom software development, or specific industry solutions. Understand your target market, identify competitors, and assess the demand for your chosen niche.
Concept and design — Create a detailed concept and design for your software product. Identify key features, functionalities, and user requirements. Use wireframes, prototypes, and mockups to visualize the final product.
Choosing a location — Select a suitable location for your business operations, such as an office space or a co-working environment.
Hire staff — Hire knowledgeable and skilled staff for various roles, including software developers, designers, testers, project managers, and sales and marketing professionals.
Legal business aspects — Register for taxes, open a business bank account, and get an EIN.
Website and online presence — Create a professional website showcasing your products, brand story, and contact information. Consider offering demos, free trials, and detailed documentation to engage potential customers.
Interactive Checklist at your fingertips—begin your software company today!
You May Also Wonder:
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.
Is it hard to start a software company?
Starting a software company can be challenging due to the competitive nature of the industry, the need for technical expertise, and the ever-evolving technology landscape. However, with careful planning, market research, and a solid business strategy, it is possible to overcome these challenges and build a successful software company.
What measures should I take to protect intellectual property and ensure data security in my software company?
To protect intellectual property and ensure data security in your software company, it is crucial to implement several measures. These include obtaining appropriate patents or copyrights for your software, implementing strict access controls and encryption methods, regularly updating security protocols, conducting thorough employee training on data protection, and employing robust backup and disaster recovery systems.
How can I differentiate my software company from competitors in the market?
To differentiate your software company from competitors, you can focus on various strategies. This includes providing a unique and innovative software solution that solves a specific problem or meets an underserved market demand. Additionally, offering exceptional customer support, continuous software updates and improvements, competitive pricing, and cultivating a strong brand identity can help set your company apart in the market.
What is the future of software?
The future of software is incredibly promising. Advancements in artificial intelligence, machine learning, and automation are expected to play a significant role in shaping the industry. Software will continue to permeate various sectors, from healthcare to finance, with increased focus on cybersecurity, cloud computing, and mobile applications. Additionally, emerging technologies such as blockchain, Internet of Things (IoT), and virtual reality (VR) present new opportunities for software development and integration.
Step 1: Decide if the Business Is Right for You
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 US 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
Average level of education – The average software developer has a bachelor’s degree.
Average age -The average software developer in the US is 39.5 years old.
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 Costs
Ballpark Range
Average
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.
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
Related Business Ideas
If you’re still not sure whether this business idea is the right choice for you, here are some related business opportunities to help you on your path to entrepreneurial success.
Step by Step Business values real-life experience above all. Through our Entrepreneur Spotlight Series, we interview business leaders from diverse industries, providing readers with firsthand insights.
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.
Market research will give you the upper hand, even if you’re already positive that you have a perfect product or service. Conducting market research is important, because it can help you understand your customers better, who your competitors are, and your business landscape.
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 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 software solutions
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
Step 3: Brainstorm a Software Company Name
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: “NextGen Tech” over “HealthSoft Solutions”
A location-based name can help establish a strong connection with your local community and help with the SEO but might hinder future expansion
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.
Executive Summary: Summarize your software company’s mission, highlighting the innovative software solutions you plan to offer and your strategies to address specific market needs.
Business Overview: Describe the focus of your software company, including the development of custom software applications, mobile apps, or SaaS (Software as a Service) products.
Product and Services: Detail the range of software products and services offered, like cloud-based solutions, enterprise software, or customer relationship management (CRM) systems.
Market Analysis: Evaluate the demand for software solutions in your target markets, identifying key industries or consumer segments.
Competitive Analysis: Assess the landscape of competing software companies, highlighting your products’ unique features, user experience, or technological innovation.
Sales and Marketing: Outline your strategy for reaching potential customers, using methods like digital marketing, trade shows, or partnerships with technology firms.
Management Team: Highlight the expertise of your management team in software development, project management, and business strategy.
Operations Plan: Describe the software development lifecycle in your company, including design, development, testing, and deployment processes.
Financial Plan: Provide an overview of the financial aspects, such as startup costs, revenue models (e.g., subscriptions, licenses), and funding strategies.
Appendix: Include supplementary documents like technical specifications, market research data, or key partnership agreements that support your business plan.
If you’ve never created a business plan, it can be an intimidating task. You might consider hiring a business plan specialist 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 an 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.
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.
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.
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.
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.
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 Azure DevOps, Zoho, or FunctionFox, to manage your projects, workflows, and collaboration.
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.
Website development is crucial because your site is your online presence and needs to convince prospective clients of your expertise and professionalism.
You can create your own website using website builders. 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.
Your clients are unlikely to find your website, however, unless you follow Search Engine Optimization (SEO) practices. Regularly update content with industry insights and success stories to engage visitors and improve search engine rankings.
Marketing
Here are some powerful marketing strategies for your future business:
Content Marketing – Create valuable and informative content (blogs, whitepapers, webinars) that addresses customer pain points and showcases your software’s unique features.
Social Media Engagement – Actively engage with your audience on platforms like LinkedIn, Twitter, and Facebook to build community and brand awareness.
Email Marketing – Use targeted email campaigns to nurture leads and keep your audience informed about updates, offers, and industry insights.
Customer Testimonials and Case Studies – Share success stories and testimonials to build trust and demonstrate the impact of your software.
Partnerships and Collaborations – Collaborate with other businesses or influencers in your industry to reach new audiences and add credibility.
Free Trials and Demonstrations – Offer free trials or live demonstrations to let potential customers experience your software firsthand.
Paid Advertising – Invest in targeted ads on search engines and social media to reach a wider audience quickly.
Trade Shows and Conferences – Participate in industry events to network, build relationships, and showcase your software.
User Experience and Feedback – Continuously improve the user experience based on customer feedback and stay responsive to their needs.
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: Run a Software Company – Start Making Money!
As a software developer, you know how in demand your services are. The software industry in the US 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.
Comments