How to Start a Software Development Business
Software is ubiquitous in today’s world, and many people and organizations can no longer function without the programs they rely on. These programs, of course, must be created, distributed and maintained. That’s the work of software development companies.
The software development industry is both big and strong. According to IBISWorld, the software publishing industry has an annual revenue of $238 billion and a growth rate of 3.9 percent per year. In total, the industry employs more than a half-million people.
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Learn how to start your own Software Development Business and whether it is the right fit for you.
Start a software development business by following these 10 steps:
- Plan your Software Development Business
- Form your Software Development Business into a Legal Entity
- Register your Software Development Business for Taxes
- Open a Business Bank Account & Credit Card
- Set up Accounting for your Software Development Business
- Get the Necessary Permits & Licenses for your Software Development Business
- Get Software Development Business Insurance
- Define your Software Development Business Brand
- Create your Software Development Business Website
- Set up your Business Phone System
There is more to starting a business than just registering it with the state. We have put together this simple guide to starting your software development business. These steps will ensure that your new business is well planned out, registered properly and legally compliant.
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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 much can you charge customers?
- What will you name your business?
Luckily we have done a lot of this research for you.
What are the costs involved in opening a software development business?
The costs associated with opening a software development company can range from very little (i.e. less than $1,000) to extremely high sums (i.e. venture capital funds). The money invested in a business typically goes toward:
- website hosting expenses and data storage fees
- specialized programs that a project requires
- copyright, trademark and patent fees
- additional employees or contract workers
The variance in startup costs is primarily due to the number of employees and contract workers brought onto the project. Workers speed up the development timeline, but also increase costs.
Paul Jarvis’ company OfCourseBooks is a good example of how a successful business can be started for very little. Jarvis and his team spent $1,125 in startup costs. The funds paid for a website, specialized fonts, stock photography, legal fees, the first month’s operating expenses and a couple other miscellaneous items.
John Sung Kim took a different approach with his company, getting a $40,000 initial investment before developing a call center software program.
What are the ongoing expenses for a software development business?
The ongoing expenses for a software development company also vary. OfCourseBooks costs $45 per month to maintain. A program like Microsoft Dynamics 365 require many more servers and a lot more personnel to maintain, and therefore, has much higher operating expenses.
Who is the target market?
The target market for a software development company can be almost anyone, but it must be well-defined. Business owners need a clear understanding of a need that people or businesses have, and how a program addresses that specific need.
How does a software development business make money?
Software development companies have traditionally charged customers on a per-license basis, but many companies are transitioning to a software-as-a-service (SaaS) structure instead. In SaaS arrangements, customers pay an ongoing fee in order to use the developing company’s program. Some level of support is usually included in this fee.
A few outlying software development companies don’t charge license or subscription fees. Instead, these companies typically either build advertisements into their programs or offer training that does have a fee associated with it.
How much can you charge customers?
There is a great range in how much computer programs cost. Simple apps are frequently free or just a few dollars. Complex enterprise solutions can cost tens of thousands of dollars. For example, Angry Birds originally cost $0.99 to $2.99 and is now free. Microsoft Dynamics 365 can be $190 per user / per month.
How much profit can a software development business make?
While not every business reaches this level, the profit potential for a software development business can be enormous. John Sung Kim stayed with Five9 until its revenue reached $10 million. An IPO on the NASDAQ valued the company at $350 million.
Even much more modest companies have substantial profits. For instance, OfCourseBooks brought in a little over $11,000 in profit before even launching a program.
How can you make your business more profitable?
Software development companies can increase their profits by providing additional services to clients. Expedited support, extra training and program customizations might be offered at an extra cost.
What will you name your business?
Choosing the right name is important and challenging. If you don’t already have a name in mind, visit our How to Name a Business guide or get help brainstorming a name with our Software Development Business Name Generator
If you operate a sole proprietorship, you might want to operate under a business name other than your own name. Visit our DBA guide to learn more.
When registering a business name, we recommend researching your business name by checking:
- Your state's business records
- Federal and state trademark records
- Social media platforms
- Web domain availability.
It's very important to secure your domain name before someone else does.
STEP 2: Form a legal entity
The most common business structure types are the sole proprietorship, partnership, limited liability company (LLC), and corporation.
Establishing a legal business entity such as an LLC or corporation protects you from being held personally liable if your software development business is sued.
Form Your LLC
Read our Guide to Form Your Own LLC
You can form an LLC yourself and pay only the minimal state LLC costs or hire one of the Best LLC Services for a small, additional fee.
Recommended: You will need to elect a registered agent for your LLC. LLC formation packages usually include a free year of registered agent services. You can choose to hire a registered agent or act as your own.
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?.
Learn how to get an EIN in our What is an EIN guide or find your existing EIN using our EIN lookup guide.
Small Business Taxes
Depending on which business structure you choose, you might have different options for how your business will be taxed. For example, some LLCs could benefit from being taxed as an S corporation (S corp).
You can learn more about small business taxes in these guides:
- LLC Taxes
- Sole Proprietorship vs LLC
- LLC vs Corporation
- LLC vs S Corp
- How to Start an S Corp
- S Corp vs C Corp
There are specific state taxes that might apply to your business. Learn more about state sales tax and franchise taxes in our state sales tax guides.
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.
Additionally, learning how to build business credit can help you get credit cards and other financing in your business's name (instead of yours), better interest rates, higher lines of credit, and more.
Open a business bank account
Besides being a requirement when applying for business loans, opening a business bank account:
- Separates your personal assets from your company's assets, which is necessary for personal asset protection.
- Makes accounting and tax filing easier.
Recommended: Read our Best Banks for Small Business review to find the best national bank or credit union.
Open net 30 accounts
Net 30 accounts are used to establish and build business credit as well as increase business cash flow. With a net 30 account, businesses buy goods and repay the full balance within a 30-day term.
NetMany net 30 credit vendors report to the major business credit bureaus (Dun & Bradstreet, Experian Business, and Equifax Business Credit). This is how businesses build business credit so they can qualify for credit cards and other lines of credit.
Recommended: Read our best net 30 vendors, guide and start building business credit.
Get a business credit card
Getting a business credit card helps you:
- Separate personal and business expenses by putting your business' expenses all in one place.
- Build your company's credit history, which can be useful to raise money later on.
Recommended: Apply for an easy approval business credit card from Divvy and build your business credit quickly.
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.
Make LLC accounting easy with our LLC Expenses Cheat Sheet.
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 a software 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.
For 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.
Certificate of Occupancy
A software development business is generally run out of an office. Businesses operating out of a physical location typically require a Certificate of Occupancy (CO). A CO confirms that all building codes, zoning laws and government regulations have been met.
- If you plan to lease a location:
- It is generally the landlord’s responsibility to obtain a CO.
- Before leasing, confirm that your landlord has or can obtain a valid CO that is applicable to a software development business.
- After a major renovation, a new CO often needs to be issued. If your place of business will be renovated before opening, it is recommended to include language in your lease agreement stating that lease payments will not commence until a valid CO is issued.
- If you plan to purchase or build a location:
- You will be responsible for obtaining a valid CO from a local government authority.
- Review all building codes and zoning requirements for your business’ location to ensure your software development business will be in compliance and able to obtain a CO.
STEP 7: Get business insurance
Just as with licenses and permits, your business needs insurance in order to operate safely and lawfully. Business Insurance protects your company’s financial wellbeing in the event of a covered loss.
There are several types of insurance policies created for different types of businesses with different risks. If you’re unsure of the types of risks that your business may face, begin with General Liability Insurance. This is the most common coverage that small businesses need, so it’s a great place to start for your business.
Learn more about General Liability Insurance.
Another notable insurance policy that many businesses need is Workers’ Compensation Insurance. If your business will have employees, it’s a good chance that your state will require you to carry Workers' Compensation Coverage.
Recommended: Learn what business insurance for your Software Development Business will cost.
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.
If you aren't feeling confident about designing your small business logo, then check out our Design Guides for Beginners, we'll give you helpful tips and advice for creating the best unique logo for your business.
Recommended: Get a logo using Truic's free logo Generator no email or sign up required, or use a Premium Logo Maker.
If you already have a logo, you can also add it to a QR code with our Free QR Code Generator. Choose from 13 QR code types to create a code for your business cards and publications, or to help spread awareness for your new website.
How to promote & market a software development business
Most software development companies market their programs online, through websites and other platforms. What other platforms are most appropriate for a particular business to use depends on what programs that business creates. A business that makes spell checkers for legal documents won’t want to market in the same place as a video game.
How to keep customers coming back
A software company’s programs must work well, or else customers will switch to more user-friendly and error-free programs. For this reason, the testing and debugging phase of development shouldn’t be rushed.
Still unsure about what kind of business you want to start? Check out the latest Small Business Trends to help inspire you.
STEP 9: Create your business website
After defining your brand and creating your logo the next step is to create a website for your business.
While creating a website is an essential step, some may fear that it’s out of their reach because they don’t have any website-building experience. While this may have been a reasonable fear back in 2015, web technology has seen huge advancements in the past few years that makes the lives of small business owners much simpler.
Here are the main reasons why you shouldn’t delay building your website:
- All legitimate businesses have websites - full stop. The size or industry of your business does not matter when it comes to getting your business online.
- Social media accounts like Facebook pages or LinkedIn business profiles are not a replacement for a business website that you own.
- Website builder tools like the GoDaddy Website Builder have made creating a basic website extremely simple. You don’t need to hire a web developer or designer to create a website that you can be proud of.
Using our website building guides, the process will be simple and painless and shouldn’t take you any longer than 2-3 hours to complete.
Recommended: Get started today using our recommended website builder or check out our review of the Best Website Builders.
Other popular website builders are: WordPress, WIX, Weebly, Squarespace, and Shopify.
STEP 10: Set up your business phone system
Getting a phone set up for your business is one of the best ways to help keep your personal life and business life separate and private. That’s not the only benefit; it also helps you make your business more automated, gives your business legitimacy, and makes it easier for potential customers to find and contact you.
There are many services available to entrepreneurs who want to set up a business phone system. We’ve reviewed the top companies and rated them based on price, features, and ease of use. Check out our review of the Best Business Phone Systems 2023 to find the best phone service for your small business.
Recommended Business Phone Service: Phone.com
Phone.com is our top choice for small business phone numbers because of all the features it offers for small businesses and it's fair pricing.
Start a Software Development Business in your State
- District of Columbia
- New Hampshire
- New Jersey
- New Mexico
- New York
- North Carolina
- North Dakota
- Rhode Island
- South Carolina
- South Dakota
- West Virginia
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Is this Business Right For You?
While many different types of people work within the software development industry, business founders tend to be people who bridge the gap between logic and creativity. Writing programs, of course, requires a strong command of logic. Having the vision for a software program that’ll be useful, however, requires creativity.
Want to know if you are cut out to be an entrepreneur?
Take our Entrepreneurship Quiz to find out!
What happens during a typical day at a software development business?
Much of the work that goes on at a software development company is done on a computer. Business owners spend time writing code, testing and debugging programs, marketing their programs and providing support to customers.
What are some skills and experiences that will help you build a successful software development business?
Business owners must themselves know how to code in at least one programming language, and competency in several languages is highly advisable. This technical knowledge is necessary to code and debug programs. Business owners also need it so they can discuss issues with other programmers or developers working on the company’s projects.
People who don’t have sufficient coding knowledge can study different languages through both in-person and online courses. Many community colleges and four-year colleges have computer science programs, and local software developers may offer private tutoring. Regent University, Saint Leo University, Southern New Hampshire University and many other schools offer online degree programs in Computer Science.
What is the growth potential for a software development business?
A software development company can be a small, one-person business, or it can grow into an international corporation. Gorges is a local development company in Ithaca, NY, and Logos is a good example of a niche-specific company. Microsoft and Apple are two of the largest software developers in the world, although their work isn’t limited to only making programs.
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Take the Next Step
Find a business mentor
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.
Learn from other business owners
Want to learn more about starting a business from entrepreneurs themselves? Visit Startup Savant’s startup founder series to gain entrepreneurial insights, lessons, and advice from founders themselves.
Resources to Help Women in Business
There are many resources out there specifically for women entrepreneurs. We’ve gathered necessary and useful information to help you succeed both professionally and personally:
If you’re a woman looking for some guidance in entrepreneurship, check out this great new series Women in Business created by the women of our partner Startup Savant.
What are some insider tips for jump starting a software development business?
Many successful software development companies have raised support on Kickstarter before launching. Jarvis used this strategy to raise over $12,000 before launching OfCourseBooks. Pillars of Eternity, a computer-based role-playing game (RPG) raised almost $4 million on Kickstarter.
How and when to build a team
Whether a software development company hires people depends on the business’ owners expertise, program’s complexity, business’ budget and required timeline.
Business owners who do hire employees frequently bring on computer programmers, computer developers, designers and marketers. All of these people can be hired as traditional employees or on a contract basis. Sometimes, salespeople are brought on board . They may be given a salary, a commission or both.
Get more ideas with our Business Ideas Generator.
Check out our How to Start a Business page.
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