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Written by: Carolyn Young
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.
Edited by: David Lepeska
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 September 13, 2023
Investment range
$2,300 - $15,300
Revenue potential
$75,000 - $500,000p.a.
Time to build
0-6 months
Profit potential
$45,000 - $125,000 p.a.
Industry trend
Growing
Commitment
Full-time
Here are the most important factors to consider when you want to start an online business:
You May Also Wonder:
Is an online business profitable?
Yes, an online business can be profitable, but success depends on various factors, including the business model, market demand, competition, execution, and the value you offer to customers. Many online businesses have proven to be highly profitable due to the low overhead costs, global reach, and the ability to target specific niches.
Do I need an LLC for an online business?
The answer to the title question is “no”, you don’t need an LLC to sell online. But you should know that an LLC has many benefits. Most importantly it protects your personal assets, which a sole proprietorship does not. If you’re unsure about what type of business entity to form, consult an attorney and an accountant for advice on what is best for your company.
What is the growth potential of an online business?
The growth potential of an online business can be substantial. With the right strategies, you can scale your business quickly due to the ability to reach a global audience and the potential for automation. Online businesses can experience exponential growth if they tap into a high-demand market, offer unique products or services, and effectively market their offerings.
What type of business is an online business?
Can you start an online business on the side?
Yes, many people start online businesses on the side while maintaining their regular jobs. This approach allows you to test your business idea, build your brand, and generate income before transitioning to full-time entrepreneurship. Starting on the side also reduces financial risk and gives you time to refine your business model and strategies.
While it’s hard to pinpoint the size of the online business market in dollars, it’s known that about 28% of all business in 2023 is conducted online.((https://www.ibisworld.com/us/bed/percentage-of-business-conducted-online/88090/))
The largest online business segment is retail ecommerce.
Trends
Challenges
It’s difficult to project the startup costs for an online business since there are so many business possibilities. If your business doesn’t involve inventory or digital product development, you just need a computer, website, and a marketing budget, for which you might need about $2,500.
If your business will involve inventory or digital product development, you might need $15,000 or more.
| Start-up Costs | Ballpark Range | Average |
|---|---|---|
| Setting up a business name and corporation | $100 - $500 | $300 |
| Business licenses and permits | $100 - $300 | $200 |
| Insurance | $100-$500 | $300 |
| Website | $500 - $1,000 | $750 |
| Computer | $1,000 - $2,000 | $1,500 |
| Inventory or digital product development | $0 - $10,000 | $5,000 |
| Sales and marketing budget | $500 - $1,000 | $750 |
| Total | $2,300 - $15,300 | $8,800 |
Income from online businesses can vary greatly, depending on the product or service. These calculations will assume that you’ll sell products for an average of $50 and have about a 60% profit margin when you’re working from home on your own.
In your first year or two, you could work from home and sell 1,500 items online in a year, bringing in $75,000 in revenue. This would mean $45,000 in profit, assuming that 60% margin.
As you gain traction, sales could climb to 10,000 items a year. At this stage, you might have an office and hire staff, reducing your margin to around 25%. With annual revenue of $500,000, you’d make a tidy profit of $125,000.
There are a few barriers to entry for an online business. Your biggest challenges will be:
Now that you know what’s involved in starting an online business, it’s a good idea to hone your concept in preparation to enter a competitive market.
Navigating the digital business landscape often starts with personal introspection. Your unique skills, passions, and experiences are the first clues in uncovering potential market niches. Ask yourself: What am I passionate about? What skills or expertise do I possess? Have I had experience with e-commerce or perhaps worked in digital marketing consultancy?
The subsequent step involves identifying pain points in the market. Your aim is to find a gap that your business can address. As an illustration, there might be a demand for an online gardening course or an upcycled furniture e-commerce store that hasn’t been met.
You might consider targeting a niche, such as an online store that sells home improvement products.
Lastly, immerse yourself in current market trends, understanding consumer preferences, and staying updated with emerging technologies. Leveraging tools like Google Trends or industry reports can be invaluable in spotting up-and-coming niches. Take, for instance, the burgeoning field of artificial intelligence (AI); it’s a sector brimming with opportunities for an entrepreneur.
Here are five profitable opportunities for an online business:
Description: E-commerce involves selling physical or digital products online. Whether you’re creating your own products or sourcing them from suppliers, an e-commerce store allows you to reach a global market without the overhead of a physical storefront.
Potential: As consumers increasingly shift to online shopping, there’s enormous potential in e-commerce. Utilizing platforms like Shopify, WooCommerce, or BigCommerce can simplify the process. Dropshipping, where you don’t hold inventory but instead transfer customer orders directly to a manufacturer or wholesaler, is another popular e-commerce model.
Description: This involves promoting other people’s products or services and earning a commission for every sale made through your referral link.
Potential: By partnering with companies or platforms like Amazon Associates, CJ Affiliate, or Shareasale, you can tap into an existing product base. The key is to focus on niches or products you’re genuinely passionate about and create authentic content (blogs, reviews, videos) to promote them.
Description: Subscription businesses provide customers with regular shipments of products or access to exclusive content. This can range from curated boxes of gourmet foods to access to online courses or premium content in a specific niche.
Potential: The recurring revenue model makes subscription-based businesses appealing. It ensures a steady stream of income as long as you can retain subscribers. It works especially well when you offer unique, high-quality goods or content that caters to a dedicated audience.
Description: Share your expertise by creating online courses, tutorials, or workshops. These can be hosted on platforms like Teachable, Udemy, or your own website.
Potential: The e-learning industry is booming, as more people seek to learn new skills or hobbies online. If you’re an expert in a particular field, there’s likely an audience willing to pay for your knowledge.
Description: Develop a software solution that addresses a specific need or problem, and offer it on a subscription basis.
Potential: The demand for digital tools and solutions is ever-growing. Whether it’s a new project management tool, a unique design software, or a niche app, SaaS can lead to substantial recurring revenue. The key is to ensure that your software remains updated, user-friendly, and provides genuine value.
After you’ve decided on your online business opportunity, the next step is to analyze competitors to gain a better understanding of the market and pinpoint further opportunities.
For instance, if you’re considering opening an e-commerce store that sells men’s ties, it’s essential to analyze similar online stores, evaluating their offerings and various other aspects.
This should identify areas where you can strengthen your business and gain a competitive edge to make better business decisions.
Determining the specific products or services for your online business is the next step.
For instance, if you aim to establish a digital marketing agency, you must define the services you intend to provide, such as search engine optimization (SEO), pay-per-click (PPC) advertising, content marketing, social media management, and email marketing campaigns.
On the other hand, if you’re leaning towards a dropshipping business, the essential steps involve sourcing a reliable supplier and identifying a catalog of products you wish to offer. This could range from niche-specific items like eco-friendly household goods to broader categories like fashion apparel.
In both scenarios, a deep understanding of your audience’s demands, combined with thorough market research, can guide your selections, ensuring your offerings resonate with potential customers.
Determining the target market for an online business is tied to the nature and specifics of the enterprise itself. At the core is the product or service being offered. For example, the demographic interested in high-end luxury items will differ starkly from those looking for affordable DIY solutions.
Similarly, the price point of the offering, be it budget-friendly or premium, will directly influence the segment of the market you aim to engage. Also, the business’s niche and industry play a pivotal role; for example, vegan skincare brands will naturally gravitate towards ethically-conscious consumers.
Geographical considerations, even in online ventures, hold significant sway. Your target audience can vary based on whether you cater to local, regional, or global markets, as geographic reach factors in cultural nuances and regional preferences.
Moreover, the way a brand portrays itself – its branding and positioning – will attract corresponding sectors of the audience. A brand emphasizing eco-friendliness will resonate with a different crowd than one highlighting luxury.
Whatever you decide to sell should be priced based on market prices, but also on your costs to source the products or provide services.
Once you know your costs, 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.
In the early stages, you may want to run your business from home (or in a coworking space) 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.
If the online business involves creating physical products, a production facility or workshop might be necessary. For example, a business selling handcrafted jewelry or artisanal goods would need a production space.
E-commerce businesses that handle their own inventory will require storage space. This could range from a spare room for small businesses to large dedicated warehouses for bigger operations. On the other hand, dropshipping businesses would rely on third-party centers to store, pack, and ship products.
Content creators, vloggers, or online course creators might need a professional studio setup for recording high-quality videos or podcasts.
Online businesses that manage vast amounts of data, run complex computations, or operate large-scale websites might require dedicated servers housed in data centers.
Some online businesses, especially those in the retail sector, might have pop-up shops or permanent physical stores.
You can find commercial space to rent on sites such as Craigslist, Crexi, and Instant Offices.
Here are some ideas for brainstorming your business name:
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 and reserve your business name with your state, start the trademark registration process, and complete your domain registration and social media account creation.
Your business name is one of the key differentiators that sets your business apart. Once you pick a name, reserve it and start with the branding, it’s hard to switch to a new name. So be sure to carefully consider your choice before moving forward.
Here are the key components of a 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.
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!
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 are planning to expand, you might consider looking elsewhere, as some states could offer real advantages when it comes to online businesses.
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.
Business entities come in several varieties, each with its pros and cons. The legal structure you choose for your online business will shape your taxes, personal liability, and business registration requirements, so choose wisely.
Here are the main options:
We recommend that new business owners choose an 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.
Choose Your State
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 are completing them correctly.
Securing financing is your next step and there are plenty of ways to raise capital:
Bank and SBA loans are probably the best option, other than friends and family, for funding an online business. You might also try crowdfunding if you have an innovative concept. If you go into a high growth industry, you might even be able to attract angel investors or venture capitalists.
Starting an online 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.
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 online 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.
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:
As opening day nears, prepare for launch by reviewing and improving some key elements of your business.
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.
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 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.
Your customers or clients are unlikely to find your website, however, unless you follow Search Engine Optimization (SEO) practices. 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 “Buy Now” or “Order”. This can sharply increase purchases.
Here are some powerful digital marketing strategies for online businesses:
Take advantage of your website, social media presence and real-life activities to increase awareness of your offerings and build your brand.
Traditional marketing is any form of marketing that uses offline media to reach an audience. Some options that might work for an online business include:
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 product or service 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.
For example, global pizza chain Domino’s is renowned for its USP: “Hot pizza in 30 minutes or less, guaranteed.”
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 an online business, or a LinkedIn contact of yours is connected to dozens of potential clients. Maybe your cousin or neighbor has been working in online businesses 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 online businesses. You’ll probably generate new customers or find companies with which you could establish a partnership. Online businesses might also consider affiliate marketing as a way to build relationships with potential partners and boost business.
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 online business depend on the nature of your business.
At some point, you may need to hire for many 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.
The internet offers convenience and information, but it also offers a whole world of online business opportunities. And the great thing is that you’re not limited by geography when attracting customers. You just need to find your niche and get the word out.
Now that you understand what’s involved in the business, you’re ready to hit the ground running and become a successful online entrepreneur!
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