Setup the HR Department for Your Small Business in 16 Simple Steps

Setup the HR Department for Your Small Business in 16 Simple Steps

R Prakash
R Prakash
Table of Contents
Table of Contents

54% of small businesses handle employment matters themselves without a proper HR department or personnel, research shows.

And that's because far too many small business owners consider HR a time-consuming task, so it's a more straightforward step to neglect until it blows up in their face.

In fact, less than 50% of small business owners are confident in how their company handles HR matters, and that's because they pass on HR responsibilities to employees with little to no training in the field.

If this sounds exactly how you're handing your human resources to small businesses, then know that you're not alone.

Why Do Small Businesses Require an HR Function?

First, we need to understand why it is essential for you as a business owner to make an effort to set up your HR Department.

Human capital is fundamental and directly proportional to your business growth.

An HR Department is vital to handle the talent in the company.

It helps streamline all your resources so that the productivity of business increases and improves the company's profitability.

So, if it is so important to invest in such resources, we must know why it has become essential to support the HR Department's setting.

Importance of HR Tech to Small Businesses ( Source: Capterra )
Importance of HR Tech to Small Businesses ( Source: Capterra )
The HR department can unlock the true potential of your employees, & help your small business grow fast. Find out how you can achieve it in 16 simple steps

In this guide, we will go through the following to create a solid foundation for your HR Department.

  • Creating an HR Department in a Startup or New Facility
  • Formulate an HR Staffing Plan
  • Set An HR budget
  • Be Compliant with Tax obligations
  • Payroll system and administration
  • Incorporate a Company Wide staffing plan
  • Hiring procedures
  • Craft Job descriptions
  • Define the Pay structure
  • Benefit plans
  • Employee handbook
  • Employment posters
  • Organize your Personnel files
  • Performance evaluation process

#1. Formulate an HR Staffing Plan

Do you have trouble hiring the right HR people?

Hiring an experienced and qualified HR professional is not a straightforward task for a small company. Some firms may turn to an external recruiter, an HR consultant, or an outsourced HR company to help staff the HR department.

A one-person HR department, or solo practitioner, would most often be staffed with an HR generalist or HR manager.

What will be your requirements?

  • The years of HR experience and the level of responsibility in those years of experience (i.e., was the candidate a generalist, a manager or a specialist?).
  • Should have experience working with startups or organizations of similar industry or size.
  • Education level and HR-related certifications.
  • Should have a clear understanding of employment laws and other compliance issues.
  • Ability to conduct research, access resources, prioritize and juggle multiple projects, adjust to a startup's quickly changing needs, and communicate directly with upper management.

#2. Set An HR Budget

It is the responsibility of the HR Manager to strategize and align the budget with the organizational policies and guidelines.

You must systematically collect information and data to project the capital required to support your company's needs.

If you are a new company and need to start from scratch, there won't be any previous budget for comparison; therefore, estimation is a must for the initial HR budget.

What do you need to set an HR budget?

From an HR perspective, the data needed to create a new budget include the following:

  • The number of employees projected for the year.
  • Benefits cost projections.
  • Projected turnover rate.
  • Costs already incurred in the current year.
  • New benefits or programs are planned.
  • Anticipated legal expenses.
  • Recurring or unique training needs.
  • Business strategies, laws, and regulations that may affect costs.

#3. Be Compliant With Tax Regulations

Be Vary of all the taxes applicable to your Payroll

Many entrepreneurs do not have the necessary training in managing human resources and therefore are not aware of most governmental laws that apply to their companies.

No matter what business you do, some procedures and laws are essential even before the onboarding process.

Ensure you check the local laws about employee welfare, workplace safety, contract labor, diversity inclusion, payroll, and, most importantly, taxation.

You need to consult a legal or a tax expert who can share some expertise on the regulations necessary to comply with from day one.

Pro Tip For The United States:

All new companies must register with the IRS(Internal Revenue Service).
You will receive a Federal Employer Identification Number for the company, which is useful for complying with federal, state, and local constituencies for payroll taxes.

Depending on the organization's size and structure, these functions may be handled by the accounting or finance departments.

#4. Have A Robust Payroll System

Make sure your Payroll System can handle the complexities of your workforce
Make sure your Payroll System can handle the complexities of your workforce

As a small business owner, payroll is one of the company's most critical functions; therefore, setting up payroll should be a priority.

The HR personnel in your company may wish to work with an external vendor for payroll to reduce the administrative burden and assist with payroll compliance.

Outsourcing payroll to third-party administrators or having a payroll software would be ideal if there is a small HR team as it will help them focus on people rather than the process.

It will help employers meet deadlines for filing requirements with ease.

Once the payroll process is set up, the payroll must be processed based on the pay schedule, like weekly, monthly, semi-monthly, or more.

You would also need to decide whether the running of payroll will fall under HR or the finance department.

The person who administers the payroll should understand the federal and local wage laws; some include the minimum wage, overtime pay, and more.

#5. Incorporate A Company-Wide Staffing Plan

Did you know that 72.8% of employers struggle to find relevant candidates for their businesses.(Source: TalentNow)

The HR manager should work with the management team to understand the staffing needs in both the short- and long-term staffing and budgets.

A staffing plan will determine the workforce's composition based on the company's current and future business objectives.

Working with the founders or management, the HR specialist should create a three- to six-month staffing plan and budget to determine how much time has to be expended on staffing the company adequately.

Longer-term staffing plans might involve the HR department's staffing needs as well.

HR needs to have a list of positions that need filling; if they don't, then the first step is to compile one.

Now the HR should work with the hiring expert, external or internal, to craft a recruiting plan. Your business should also include the budget for hiring in the recruiting plan.

What should you include in the recruiting plan?

  • Skill sets required
  • Identify people involved in the interviewing process
  • Identify people responsible for the hiring decision
  • Hiring sources to be used (Hiring agency, Internet, media, and more)
  • Timelines to Hire
  • Resources required (Budget, Training and Staff time)

What's next, you ask?

The HR needs to determine the appropriate sourcing activities to meet the company's recruitment needs while gathering data about each source's success rate.

Pro-Insight: Highly inclusive organizations generate 1.4X more revenue and are 120% more capable of meeting financial targets. (Source: The Lasalle Network)

#6. Create Clear-Cut Job Descriptions

What Is a Job Description?

A job description is a useful and straightforward tool that describes the duties, tasks, responsibilities and the function of a position.

It will entail who performs a distinct type of work, how that work is to be done, and the regularity and the purpose of the job as it relates to the organization's mission and goals.

What Are the Job Descriptions Used For?

  • For determining the salary levels
  • Conducting performance reviews
  • Clarifying missions
  • Establishing titles and pay grades creating reasonable accommodation controls
  • Tool for recruiting
  • Career planning
  • Establishing legal requisites for compliance


A job description will give an employee a clear and concise manual to be used as a source of truth for job performance.

Similarly, a manager will be able to use a job description to identify performance metrics to ensure if the employee is meeting job expectations.


Pro-Insight: Organizations that invest in a strong candidate experience improve the quality of their new hires by 70 percent. (Glassdoor)

#7. Have A Competitive Pay Structure

Developing a competitive and fair pay structure is one of the most significant aspects of attracting and retaining talent.

Determining and crafting a pay structure based on the market from scratch includes the following steps:

  • Collecting the background data with secondary research from similar businesses.
  • Determining your sources of external market data and getting the data ready.
  • Conducting market data analysis.
  • Developing the pay structures.
  • Calculating the costs of the pay structures.
  • Implementing and evaluating the new pay structures.

#8.Establish Benefit Plans

As a small business owner, you need to establish what benefits are mandatory and what is voluntary.

Do you want to offer any paid time off or other paid holidays such as sick, vacation, or a PTO that encompasses all the leaves?

What Are the Benefits You Might Require?

  • Group health benefits (including vision, dental, and medical insurance)
  • Disability insurance (Short/Long Term Disability)
  • Life insurance
  • Flexible spending accounts
  • Employee assistance programs
  • Retirement and Pension Plans (e.g., 401(k) Roth, Individual retirement accounts, or IRAs).

Mandatory benefits include workers' compensation insurance and unemployment insurance under state laws.

Besides, some states mandate paid disability insurance and/or paid sick leave for employees.

You should check their states' laws for more information on the required benefits.

As a small business, you may start off providing merely a few benefits and then offer more benefits as your business grows.

Sometimes business owners may want to offer a comprehensive benefits package to help attract and retain talent from the start.

Small businesses will often enlist the benefits broker to obtain benefits quotes from providers in the area and compare benefits offerings against the budget.

Pro-Insight: Every dollar invested in wellness programs returned the original dollar plus $2.38.(Source: The Lasalle Network)

#9. Employee Handbook


Human resource professionals recognize an employee handbook as an essential tool for communicating workplace culture, benefits, and employment policy information to the employees.

An employee handbook usually details the:

  • Employer's employment practices
  • Benefits
  • Equal opportunity commitments
  • Attendance guidelines
  • Pay practices
  • Leave-of-absence procedures
  • Safety issues
  • Labor relations
  • Consequences for misconduct.

#10. Employment Posters

Employers in some countries have to post relevant federal and state employment law posters in each workplace where employees can readily see them.


The Department of Labor (DOL) mandates the usage of posters, which you can find here.

Employee Posters may be mandatory: Check your local compliance ( Source: Virtually )

#11.Optimize Your Hiring Procedures

As a small business owner, you would choose from a variety of practices for the hiring process.

The hiring process usually involves

  • Application forms
  • Interviews
  • Pre-employment testing
  • Employment Contract
  • Onboarding/Orientation

There are no concrete practices that work for every company; therefore, ideating which methods would be best for the role, and its culture would usually yield the results that will work for you.

Pro Tip: All employees of a new business need to complete an I-9 form verifying eligibility to work in the United States and federal and state tax withholding forms. Employers are also required to submit new-hire reports to state agencies.

#12.Organize and Maintain Personnel Files

Human personnel records are the repository of legal, organizational, and personal data and documents regarding individual employees and their relationship with the employer.

You can be held liable for many issues if the personnel files are not maintained properly.

Check with your legal/HR expert on what records must be kept and for how long, and how to clear the data once timelines expire.

#13. Have Clearly Defined Roles and Responsibilities

A clear and well-defined structure with set roles and responsibilities should be the priority.

While upgrading and adding employees fast is natural for a growing small business, it needs to identify and merge with the structure.

Now employees know what is clearly expected out of them and will increase the workforce's overall productivity.

The best teams are not the ones with the highest skills and knowledge but equally important; they have to share common goals and vision.

  • Ensure your teams are clear about your company's aims and aspirations. Many entrepreneurs create teams, de
  • legate tasks, and leave them to it.
  • Making a strong team will require constant inter-communication with your people to leverage your workforce.
  • The modern Management approach tends to be towards a much leaner structure with constant feedback to identify and fix performance gaps.
  • With a process-oriented outline, you will find your team functioning effectively and winning your admiration for being the Best people to work with.
  • Be a thought leader to your employees and help your team improve.

#14. Nurture a Positive Work Culture

The workplace culture is more important than most small businesses think as they often de-prioritize this task.

75% of employees would stay longer at an organization that listens to and addresses their concerns.

Disengaged employees are almost twice as likely as engaged employees to seek new jobs.

A healthy workplace determines employee satisfaction and consequently boosts productivity.

Besides addressing the employee's concerns, nurturing their interests, and engaging them is the secret to a supremely driven team.


How Do You Achieve A Good Work Environment?

  • Craft a system with mentoring and regular constructive feedback to develop a positive work culture. This will decrease the possibility of any office politics that could be unfavorable to your small business.
  • It would help if you held more regular team building activities to increase the cohesiveness.
  • Be supportive of fair and impartial interactions with the employees and create an employer branding for the future's potential hires.

#15. Evaluate Performance Systematically

The performance review process includes both periodic—usually annual—formal feedback and continuous informal feedback.

A company's HR is usually the cornerstone of the effective and efficient administration of the performance management system.


Having an HR team that is well-prepared to train the company's managers in the system and assist them with issues or questions is critical to its smooth functioning.

#16. Embrace Rewards And Recognition

The Genx employees of today would not just be inclined with monetary benefit but also the recognition and quality of work-life.

At times, a startup entrepreneur is too focused on meeting the market challenges and getting hard-pressed to achieve productivity from their employees.

To create high functioning teams, you need to develop workplace productivity through regular rewards and recognition programs.

If Employees are always critically reviewed without any timely reward system, they will become disengaged soon.

Structure a rewards program to encourage and boost employee morale.

Pro Insight: Companies with recognition programs that are highly effective at improving employee engagement have 31% lower voluntary turnover. (Source: Deloitte)

Key Takeaways:

With the above steps, we hope you have the foundation and structure in mind for your HR department.

To make it easy for you , let's go through the salient points.

  • Hire the right HR Personnel for your HR Department.
  • Along with your HR Department identify a budget for hiring, setup your payroll while being compliant with tax obligations.
  • Incorporate a staffing plan with structured hiring procedures.
  • To keep your employees happy and productive, craft a good company culture with competitive pay and recognition.

Well, that's about it, but it might seem tedious and time-consuming to set up everything manually and similarly continue doing the daily  process manually.

Here's where payroll software comes in, helping you focus on growing the business rather than the process. Start your free trial today!

You can generate payroll and payslips in minutes. Employees can view their payslips, apply for time off, file their claims and expenses online, and run unlimited payroll with Deskera People.

A cloud-based system with the capacity to handle most of the administrative tasks leaves you and your HR department with time to manage other functions without concern.

Make sure to follow the Deskera blog for the best content on managing your business!"




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