How to start an IT services business
IT service providers are in demand across the country and in multiple industries, which is certainly an incentive for technology professionals to start their own businesses.
A recent Gartner report stated that global IT spending is predicted to grow by 2.4% in 2023. The report predicts that IT spending should remain strong, even as inflation reduces consumer spending on devices.
As a tech entrepreneur, you can capitalize on this need by starting your own IT services business, though it’s going to take plenty of entrepreneurship to do so.
In this guide, we’ll give you some business ideas and outline the steps you can take to create a successful IT services business.
Table of contents
Decide on your IT service offerings
Your first step to starting your own business is choosing the type of IT services you’ll offer, based on your own experience and market demand. There are many options to choose from.
Your IT services might include some combination of:
- Network design and installation
- Software installation and updates
- Tech support
- IT budgeting and procurement decisions
- Hosted services and storage
- Risk assessments
- Security strategy
- Remote admin management
It can be tempting to offer services outside of your skill set in hopes that you’ll win more clients. Keep in mind that taking on an IT project you have no experience with can backfire.
Research your market and competitors
Once you’ve settled on potential IT services, determine the type of clients you’ll pursue. You might choose your target market by business size or type of industry. You could also focus on companies in sectors where you’ve made a name for yourself, as well as ask your connections for referrals to help gain new customers.
Some cities are more difficult to start a business in than others in terms of customer base, competition, and expenses. Do market research on competing IT businesses in your city.
Misjudging the demand in your area is among the top mistakes made by startups today.
Finding out what services they offer is relatively easy, but it’s also important to dig deeper to learn how much they charge. A competitive analysis will help you identify opportunities to fill gaps in your local IT services market.
You can use our study of the seven best cities to start an IT consulting business to get a sense of which areas have the most potential. Some cities are pricier to do business in than others, but you can charge higher rates for your services in these cities.
Investing the time and effort into covering all your bases increases the chances that your business will enjoy long-term success.
Choose a business structure
When you're starting an IT services company, don’t overlook defining the type of business entity. It’s not enough to simply have the required experience and enough money to get started.
Most small IT services businesses opt for a sole proprietorship, a partnership, a limited liability company (LLC), or an S corporation (S corp). The structure you select for your company will impact your taxes, the amount of paperwork you’ll need to do, and your personal liability.
For instance, sole proprietorships are among the easiest business structures for single-person companies because you won’t have any paperwork to file with your state. Just be aware that if a client sues you, there’s no distinction between personal and business assets.
Forming an LLC can cost up to $500, and your state could take a few weeks to process the paperwork. However, an LLC shields a small business owner’s personal assets in the event of a lawsuit.
S corps and partnerships each require their own paperwork and filing procedures. They also have different tax structures and various restrictions. Your accountant can provide advice on what makes sense for your current state and future plans for the business.
Get a business license
Once you decide on a company structure, you may need a business license. The process of getting a business license varies by state and profession, but applying for one is usually straightforward.
Your state’s business licensing website will offer specifics, but expect to submit basic information about your company, such as:
- Employer Identification Number (EIN) available from the IRS
- Business name and type
- Contact information and business address
- Name of the business owner
- Number of employees, if any
Depending on your state, you may have to pay a filing and/or processing fee. Once your application is approved, make sure you know how long your license is valid for. Some states require small business owners to reapply for their business license every few years.
Write a business plan
A business plan is essentially a snapshot of your company’s current state and a road map for its future growth. If you want to get funding for your business, investors and banks will probably require one.
The U.S. Small Business Administration (SBA) offers templates for traditional and lean startup business plans. And while traditional business plans are longer and take more time to write (which you’ll probably want to use if you're seeking major funding), tech startup business plans can be a bit more streamlined.
Business plans typically include:
- A company summary
- Your DBA (doing business as) name
- Your business structure
- Product or service offerings
- A competitive market analysis
- Funding sources
- Budget
- Financial projections
- Marketing strategy (and target audience)
- Hiring strategy
Open a business bank account and dedicated business credit card
A business bank account will make it easier to keep your personal and business finances separate.
Separating business earnings and expenses from personal money makes bookkeeping and taxes less complicated. It’s easier to calculate your income and keep track of deductions by keeping separate accounts for personal and business use.
A business credit card makes also helps you separate business expenses. These cards typically offer better terms and higher limits than personal cards. Plus, you can enjoy perks like rewards points and cash-back offers.
Most banks offer competitive small business checking accounts and credit card options. You may also want to consider talking with your accountant about banking options.
Choose your workspace
One of the major benefits of self-employment is choosing where you work.
You can opt for a traditional office, a co-working space, or your home office. Your decision should factor in your budget, working style, plans for possibly hiring employees, and how often clients will visit.
Examine your risks and how you’ll cover them
This might include everything from property damage to cyber security threats and lawsuits from injured parties or unsatisfied customers. The risks you face will have a direct impact on the types of business insurance you’ll need for your tech startup. Tech startups can benefit most from the following policies:
General liability insurance
Most businesses start with general liability insurance. It insures against common business risks such as customer injury, damage to a customer’s property, and advertising injury.
Tech E&O insurance
If a client ever claimed your work was late, inaccurate, or never delivered, technology errors and omissions insurance (E&O) covers the cost of a lawsuit and settlements. It combines errors and omissions insurance with cyber liability insurance, which protects your business against the high costs of a data breach or malicious software attack.
It also helps pay for customer notification, credit monitoring, legal fees, and fines. Some clients may require you to have this coverage before they’ll do business with you.
Commercial property insurance
If you plan to rent office space, most landlords will want you to carry commercial property insurance to protect against theft or damage to items in your space.
Business owner’s policy (BOP)
You might also consider a business owner’s policy. It combines your general liability coverage and your commercial property insurance into one policy. It’s usually less expensive than buying each policy separately.
Worker’s compensation insurance
Workers’ comp is required in most states for businesses with one or more employees. It covers the medical costs and wages for employees suffering from work-related injuries and illnesses.
Fidelity bonds
Your clients might require you to have fidelity bonds to guard against employee theft and fraud.
Commercial auto insurance
Home-based IT service businesses that do most of their work at client sites should consider commercial auto insurance or hired and non-owned auto insurance. Most personal auto insurance policies won’t pay for accident damages that occur when you’re driving for business purposes.
Employment practices liability insurance (EPLI)
You might also consider employment practices liability insurance (EPLI) to protect against lawsuits over wrongful termination, harassment, and similar issues.
Create a basic budget to start
Understanding the startup costs for your IT services business can help you save money over time. Before you start making big investments in your business, create a simple budget to help you stay on track.
Here’s how you can get started:
- Calculate the costs: Add up your business expenses, including loans, rent, software licenses, insurance premiums, and so on. If your business hosts websites or applications for customers, you may need servers and other expensive equipment.
- Estimate your revenue: Determine how much money you expect to make monthly, quarterly, and annually. If you’ve already started making money, you can use that as a baseline to forecast your cash flow. If not, you can estimate revenue based on your financial goals.
- Calculate your profit margin: Your profit margin is the percentage of money left over from sales after your business expenses. Monitoring your profit margin allows you to see if you’re charging enough and keeping expenses in check as your business expands.
Track your budget monthly by tallying your revenue and expenses at the end of the month. This will help you spend responsibly.
As your business grows, so will your budget needs. You may want to review steps for a thorough small business budget now to help you plan for your business’s financial future.
Secure funding
Before you can get your business off the ground, certain costs may stand in your way. If you can’t foot the bill with your savings or help from friends and family, you have options.
Raising money from venture capital firms can be helpful. You’ll want to find a venture firm that works specifically with IT services businesses. For example, America’s Seed Fund is one of the leading investors for early-stage IT companies.
Besides a business plan, venture capitalists will want to see a compelling pitch that explains why they should invest in your business and what return you hope to offer them.
You might also be eligible for a grant through the SBA, such as the 7(j) Management and Technical Assistance Services grant. This grant provides funding to companies that offer technical assistance and management services to other small businesses.
If these options don’t seem like the right fit, research business grants that are funded by third-party companies and organizations. For example, the National Association for the Self-Employed awards small businesses grants for purchasing equipment, hiring part-time help, creating a website, and more.
Other small business funding sources include SBA microloans, low-interest credit cards, and crowdfunding platforms.
Draft and use client contracts for every engagement
Before you start working for a client, have contracts that outline your terms and conditions. Contracts can protect you from lawsuits and let your clients know exactly what they can expect from you – and what you expect from them.
A basic IT services contract should include the following information:
- Scope of the work
- Price and frequency of invoicing
- Timelines for the project
- Termination clauses
- Dispute resolution details
While it may be tempting to write your own contracts to save money, it’s a good idea to consult an attorney who can draft one for you or look over contracts before you sign them. This can help you avoid a breach of contract lawsuit.
Hire strategically
When your business begins to grow, it could be time to consider hiring employees or freelancers. Beyond lightening your workload, it can allow you to take on new projects.
Don’t necessarily hire the first person who applies. Every new hire should undergo a thorough background check.
You may be trusting these employees to handle confidential and potentially sensitive information. Call their references, and make sure that all terms of employment and wages are clear in the offer letter.
Invest in marketing and networking
Finding new customers for your new IT services company can be a challenge, yet it’s an important step for long-term success. That’s why your marketing plan and networking approach are critical.
As an IT business, digital marketing is a must. Many potential customers will find your business through search engines. If your budget allows, hire a web firm or freelancer to create your website. A search engine optimization (SEO) consultant can help boost your site’s Google rankings.
If you don’t have the budget for professional help, try designing a site yourself with online tools like Squarespace, Wix, or WordPress. Starting a blog can also be an effective way to attract clients and improve your search rankings.
Social media platforms are another powerful tool for reaching prospective clients by posting content relevant to the industry and your potential clients. You can also run ads that target users by a variety of criteria, such as location and demographics.
While LinkedIn, Twitter, and Facebook are the most obvious social media options, there are pros and cons to each platform you’ll need to think about. You might also consider social media insurance coverage, depending on how active you are.
You can meet new potential clients by reaching out to current and former colleagues. You can also attend business conferences and networking events, where you can make connections and hand out business cards.
There are many networking organizations to choose from, so you should have no problem finding one that works for you. Contacting your local chamber of commerce could be a good first step.
Make continuing education and certifications a priority
Earning IT industry certificates and accreditations can make your new business stand out from the competition.
Continuing education will help you stay up-to-date on trends and best practices and give you the chance to learn new skills. CIO Magazine offers a list of the top certifications for IT professionals, and you can find many more programs online depending on your area of expertise.
Some popular certifications include:
- Certified in the Governance of Enterprise IT (CGEIT): The CGEIT tests your ability to manage security threats and your understanding of IT governance.
- Certified Information Systems Security Professional (CISSP): A CISSP cert proves your knowledge about IT security, including information assurance, organizational structure, budgeting, risk management, and more.
- Information Technology Infrastructure Library (ITIL): An ITIL cert shows your expertise in the ITIL framework, with a focus on using effective strategies to manage teams and improve efficiency across an organization.
- Six Sigma Certification: Six Sigma’s certification program helps IT professionals hone their project management and leadership skills, especially when it comes to organizational transformation.
- Certified ScrumMaster (CSM): Earning the ScrumMaster badge means you understand how to keep IT projects on track, limit distractions, and improve project team efficiency.
- Certified Associate in Project Management (CAPM): The CAPM certification tests your ability to oversee multiple IT projects at a given time, as well as manage a product or service lifecycle.
Your business can also pursue certifications for a vendor’s technology. This includes companies like Microsoft, Cisco Systems, and Amazon Web Services (AWS). These certs can be a huge selling point for potential clients.
Starting an IT services business provides a significant opportunity to pick your own projects, boost your income, and work for clients in a range of industries. Investing the time and effort into covering all your bases increases the chances that your business will enjoy long-term success.
Find the right insurance for your IT startup
We can help you find the right insurance for your IT business. Complete Insureon’s easy online application today to compare insurance quotes from top-rated U.S. carriers. You can also consult with an insurance agent on your business insurance needs.
Once you find the right types of coverage for your small business, you can begin coverage and get your certificate of insurance in less than 24 hours.
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Elizabeth Rivelli, Contributing Writer
Elizabeth is a freelance writer with extensive experience covering commercial insurance and personal insurance lines. Her work has been featured in dozens of online finance publications, including Forbes, Bankrate, and Investopedia. Elizabeth also writes for several insurance carriers.
