You have found the perfect business idea, and now you are ready to take the next step. There is more to starting a business than just registering it with the state. We have put together this simple step guide to starting your app development company. These steps will ensure that your new business is well planned out, registered properly and legally compliant.
STEP 1: Plan your Business
A clear plan is essential for success as an entrepreneur. It will help you map out the specifics of your business and discover some unknowns. A few important topics to consider are:
- What are the startup and ongoing costs?
- Who is your target market?
- How long it will take you to break even?
- What will you name your business?
Luckily we have done a lot of this research for you.
What are the costs involved in opening an app development company?
If you want to start with a professional development team, you will need to establish an LLC company, rent a space, install high-end computers, license the appropriate software, and pay the utilities, which includes the electricity and the Internet connection fees.
A typical start-up team of software developers will require these start-up expenses:
- LLC and Business license fees - The average is around $1,000 depending on the state.
- Facility rent and security deposits - $5,000 to start, and $2,000 per month thereafter.
- Computers with monitors - $3,000 each to buy them, $150 per month to lease them. This expense depends on the team members. Typical teams are six people.
- Software licenses - $1,000 to $2,000 per person.
- Desks - up to $250 per person.
- Desk Chairs - up to $150 per person.
Many developers decide to start out by themselves, taking less projects, and working increased hours.This helps save on some of the above costs, until the company starts to experience so much demand that it is necessary to hire others.
What are the ongoing expenses for an app development company?
You will need to rent a space and pay for Internet for your software development team. Other costs may include monthly subscriptions to development software, computer maintenance, and, of course, payroll.
Who is the target market?
If your business model includes creating apps for other companies, you will want to find companies who will give you a steady workflow to keep your software programmers busy and also pay you a fair price for the work.
If your business model includes selling the apps you create yourself, your customers will be as many people as you can possibly find in your target market. If the app has a lot of interest by the general public it will sell easily. On the other hand, if the app solves some critical problem for a niche market it will sell to a smaller group of people or companies, but at a higher price.
How does an app development company make money?
There are four business models for applications and various combinations of them, which are:
- Work For Hire - Getting paid to create applications for others.
- Advertiser Supported Free Apps - An app that is popular can earn revenues from associated advertisements.
- Free to try (or limited version) with Premium Paid Service - An entry level app is either a free trial for a specific time or a limited version. Those who pay for a premium version get enhanced features and can remove advertisements.
- Paid Apps – These apps charge for their use by timeframe, by the number of users, or by other means, such as a license fee. There are no free versions. These apps may be highly specialized and very valuable to those who pay for them.
How much can you charge customers?
The charge for clients that want you to develop software applications for them is usually based on a set fee, with a very specific request for the work to be done. If the work is more open-ended then you can charge based on the hourly rates for the level of skills the programmers have, who are assigned to the tasks. Because of the global competition, these rates can be minimal or much higher depending on where the individual software programmers live.
Software development rates per hour range from the low end of $5 per hour for international programmers, to $75 per hour for programmers from the US.
An example of a recent project to develop a mobile phone app had three software developers. One was in Pakistan and the other two were in India. About 15 global freelancers were used to translate the software display results on mobile phones into multiple languages. The total project cost was less than $2,000 and took one month to complete. This same project would cost over $50,000 if made solely in the USA.
The average cost for a paid app is $0.99.
When you sell apps online, the best method is to give a modified version away for free and offer enhanced services for those that like the free version and want to have more features. This is a very successful business model. There may be, for example, tens of millions of free users that make a specific app very popular. Of those tens of millions, a smaller percentage will want to pay for the enhanced services. Even if only capturing five to ten percent of millions that use your free version, who pay for the enhanced services, the revenue stream is exceptional.
How much profit can an app development company make?
You may make nothing to billions. The amount you make comes from your app’s popularity.
How can you make your business more profitable?
Make sure you are creating apps for things people really want. In some ways, the market for apps is becoming oversaturated, so you will have to find your own unique niche in order to thrive as a business.
There is a caution you will need to understand regarding earning a “fair price” for the work. Software development of apps is a global business. In countries where the standards are lower and the cost of living is substantially less than the more developed countries, there are programmers that work very cheaply. If you are not in one of these countries you can still use the programmers from the areas of the world with lower labor costs. If you do not do this, you will not be competitive and you will probably not get much work from other companies that want your software development team to make apps for them.
An example of the price differential for labor is that a highly qualified computer programmer in the USA might cost $80,000 per year, whereas international programmers with the same skills might cost only $20,000 per year. The labor costs are a big part of developing software apps, so you really need to understand the global dynamics.
Though international outsourcing comes with certain financial benefits, US-based programmers may come with other advantages, including the ability to work locally. This can greatly help when it comes to communication and meeting project deadlines.
What will you name your business?
Choosing the right name is very important. We recommend checking if the business name you choose is available as a web domain and securing it early so no one else can take it.
STEP 2: Form a legal entity
Establishing a legal business entity such as an LLC prevents you from being personally liable if your app development company is sued. There are many business structures to choose from including: Corporations, LLC's, and DBA's.
You should also consider using a registered agent service to help protect your privacy and stay compliant.
For most small businesses forming an LLC is a great option, but if you still want to weigh all your options check our our article, What Structure Should I Choose for My Business?
STEP 3: Register for taxes
You will need to register for a variety of state and federal taxes before you can open for business.
In order to register for taxes you will need to apply for an EIN. It's really easy and free!
You can acquire your EIN for free through the IRS website, via fax, or by mail. If you would like to learn more about EINs and how they can benefit your LLC, read our article, What is an EIN?.
STEP 4: Open a business bank account & credit card
Using dedicated business banking and credit accounts is essential for personal asset protection.
When your personal and business accounts are mixed, your personal assets (your home, car, and other valuables) are at risk in the event your business is sued. In business law, this is referred to as piercing your corporate veil.
Open a business bank account
- This separates your personal assets from your company's assets, which is necessary for personal asset protection.
- It also makes accounting and tax filing easier.
Get a business credit card
- This helps you separate personal and business expenses by putting your business' expenses all in one place.
- It also builds your company's credit history, which can be useful to raise money and investment later on.
STEP 5: Set up business accounting
Recording your various expenses and sources of income is critical to understanding the financial performance of your business. Keeping accurate and detailed accounts also greatly simplifies your annual tax filing.
STEP 6: Obtain necessary permits and licenses
Failure to acquire necessary permits and licenses can result in hefty fines, or even cause your business to be shut down.
State & Local Business Licensing Requirements
Certain state permits and licenses may be needed to operate an app development business. Learn more about licensing requirements in your state by visiting SBA’s reference to state licenses and permits.
Most businesses are required to collect sales tax on the goods or services they provide. To learn more about how sales tax will affect your business, read our article, Sales Tax for Small Businesses.
In addition, certain local licensing or regulatory requirements may apply. For more information about local licenses and permits:
- Check with your town, city or county clerk’s office
- Get assistance from one of the local associations listed in US Small Business Associations directory of local business resources.
Services Contract (e.g. MSA)
App development companies should require clients to sign a services agreement before starting a new project. Such agreements clarify client expectations and minimize risk of legal disputes by setting out payment terms and conditions, service level expectations, and intellectual property ownership (who will ultimately own the app). Here is an example of one such services agreement.
Recommended: Rocket Lawyer makes it easy to create a professional service agreement for your app development business when you sign up for their premium membership. For $39.95 per month, members receive access to hundreds of legal agreements and on call attorneys to get complimentary legal advice.
Trademark & Copyright Protection
Because an app development business may be creating its own apps and related intellectual property, it is prudent to protect your rights by registering for the appropriate trademarks and copyrights. Learn more about trademark and copyright protection.
STEP 7: Get Business Insurance
Insurance is highly recommended for all business owners. If you hire employees, workers compensation insurance may be a legal requirement in your state.
STEP 8: Define your brand
Your brand is what your company stands for, as well as how your business is perceived by the public. A strong brand will help your business stand out from competitors.
How to promote & market an app development company
The best apps, by being very useful, promote themselves. It is very easy to put an app for sale in the Apple Store or on Google. You can offer a two-tiered system with a “free version” and a paid enhanced version and put your software available for download on download.com run by CNET.
Attending trade shows is an excellent way to meet potential customers if you want to do work-for-hire. There are many freelance systems online that you can use to find customers looking for software developers with specific skills. Giving public speeches and becoming known as an industry leader is a great way to increase the popularity of yourself and the applications made by your company.
Recommended: Get started with local advertising for your business with a $300 credit from Yelp.
How to keep customers coming back
Your reputation says it all. There are two types of reputations. The first one is with clients that hire you to create applications for them. The second type is a public reputation for apps you sell directly. Both reputations are enhanced when your app serves an important need and the users fall in love with the app, as well as they tell all their friends about it on social media and in other ways.
STEP 9: Establish your Web Presence
A business website allows customers to learn more about your company and the products or services you offer. You can also use social media to attract new clients or customers.
Start An App Development Company In Your State
Select your state below for an in-depth guide on completing each of these steps in your home state.
Anyone who loves computer programming or general problem-solving would be great for this business. It helps if you have experience working on software development teams that produce popular applications before you try to go off on your own to start an application development company.
Software programmers often work very long hours without immediate reward, because solving the programming problem is the driver that pushes them forward. In this type of work, it is rare to have regular working hours, so you should be prepared to adopt a schedule that can adjust according to changing workloads.
What happens during a typical day at an app development company?
As a business owner of a software application company, you will need to be able to interface with clients (if doing work-for-hire) and manage the interface with the public if your programs are sold on an advertiser-supported model or on a subscription basis.
Your other main job is to manage the software development team. Your software development team may be on the edge of eccentricity and on the border between genius and insanity. This is normal for this business.
Your daily job is to create an amazing creative environment where other geeks will want to stay in and spend many days or maybe many weeks creating software code without much need for doing anything else.
Another part of your job is to keep the team heading in the best direction. Really intelligent people have a tendency to wander off into tangential thoughts that are not part of the project they are supposed to be working on. As the business owner, your job is to guide them towards producing positive and useful outcomes.
What are some skills and experiences that will help you build a successful app development company?
Having a degree in computer programming is helpful although not necessary. Knowing programming code, even if self-taught, is extremely valuable. You will succeed if you love what you do. If you would develop apps as a hobby simply because you enjoy doing it, you will definitely succeed in this business.
You will have to enjoy working long hours, sometimes through the night, and not necessarily getting paid for your time when you first get started. Your goals, when you start, are to learn as much as possible.
One way to get the “chops” necessary to succeed in this business is to volunteer on an open source program to help improve it. Everyone working on an open source program works for “free.” However, they get paid by what they learn from the others that are more advanced than they are.
There are very few “brick-and-mortar” schools that offer this level of expertise and real-time learning. Software programmers who are the best in the world are renegades. The really superb ones want to teach skills to others. However, you better be quick and learn fast because they have no time for slow-learners.
What is the growth potential for an app development company?
Depending on your skills to make apps that attract attention and gain paying customers, you can start with a single successful app and build a business worth many billions. Software development is always about being new, innovative, and showing your paying customers ways to do things they never imagined before.
Any newly starting company has the same chance to create an industry disruption coming from their new ideas.
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One of the greatest resources an entrepreneur can have is quality mentorship. As you start planning your business, connect with a free business resource near you to get the help you need.
Having a support network in place to turn to during tough times is a major factor of success for new business owners.
How and when to build a team
This is all about budget. If you can pay to add staff and have enough work that is paid work for them to do, then, by all means, hire more staff to help you. Use freelancers as much as possible in the beginning and find the best ones by giving them small tests of things to do to advance your projects.