Starting a business is a deceptively complicated process. It’s not as simple as “coming up with a great business idea” and “putting that idea into action.”
You have to decide how you’re going to incorporate your business—LLC, S-Corp, C-Corp—and how you’re going to fund your business during the startup phase.
You have to decide how much of your own money you’re going to put into the business, and at which point you’ll close the business if it hasn’t started bringing in revenue (or isn’t bringing inenoughrevenue).
You might need to decide whether you’re going to bring on a business partner (or partners), and how you and your partner(s) will divide the responsibility and the profits.
You should also meet with both a lawyer and a CPA to understand the legal and tax implications of your business. That’s the step many first-time small-business owners skip, and it can cost them a lot of money later in the process.
So, before you put your great business idea into action, ask yourself—and your prospective business partner(s), and your CPA, and your lawyer—these questions.
Questions to ask yourself before you start a business
How will this business make money?
This might seem like a no-brainer, but take some time to think about it. Are you selling a product? A service? Are you providing content for free and monetizing via ads and sponsorships?
Once you’ve gotten that far, ask yourself why a person would make the decision to give your business money. What are they actually buying? A tool that makes their lives easier? A skill they can use in their future career? An emotional experience? The more you know about your business’s unique selling proposition, or USP, the better prepared you’ll be to sell the USP to potential customers.
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How much money does this business need to make?
Many business owners assume that their businesses won’t make any money, at least at first; however, it’s important to ask yourself bothhow much money the business needs to make to cover its expensesandhow much money you need to earn from your business to cover your expenses. (Plus the amount of money you’ll need to set aside for taxes.)
Once you’ve got some numbers drafted, ask yourself when your business needs to start earning that money. If you don’t have a lot of money to live on while you get your business up and running, your business might need to hit your minimum earning numbers by the end of its first quarter. Other business owners might be able to go for a year or so without taking any money out of their businesses to pay themselves—but they’ll still need a business that brings in enough money to cover its own expenses. (And taxes.)
What career capital am I bringing to this business?
In his bookSo Good They Can’t Ignore You,Cal Newport explains that many small business owners jump into a new business without first building upcareer capital—the skills, resources, and network required to succeed in a given career.
Newport uses the example of a woman who decided to start a yoga studio after taking a one-month teacher training; since the woman had very few teaching skills (compared to more experienced teachers) and none of the resources she might have built up had she spent more time working in the yoga industry before starting her own studio, her business was unsuccessful.
Have you done the work of building career capital, or are you starting a business in an industry or field that is new to you? Beware of launching a small-business passion project before taking the time to build up the capital you need to make it successful.
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What actual capital am I bringing to this business?
Some businesses require more start-up costs than others. If your business falls into the “heavy start-up costs” camp, do you have the funds to cover its expenses without jeopardizing your own financial stability?
Likewise, how much money are you willing to put into your business before it starts making a profit? Knowing your number will make it easier to make business decisions—including the difficult decision of when to give up on a business idea.
Who are my customers?
Doing the work of creating an ideal customer profile is great; starting a business that already has a group of potentially interested customers is even better. Think of the people who go from blogging to teaching courses, for example; they already know who’s interested in their work and can design their courses based on their audience’s needs.
This is also where career capital can come in handy; if you plan to go into consulting, for example, your first clients should naturally derive from your network.
You can also use services like Kickstarter to test new business ideas and see if you have a group of potentially interested customers—though you’ll still need to do the work of identifying your ideal customer and using your current network to help you reach that customer.
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How will I connect my business to new customers?
Customer attrition is a real thing; if you aren’t constantly connecting with new customers and cultivating those relationships, your sales and revenue will go down instead of up.
Think about how you might reach out to new customers. Are you going to advertise? Collaborate with other small-business owners? Attend conventions? Create YouTube how-to videos?
What’s my plan for growth?
Where do you want your business to go, once you get it started? What does realistic growth look like over the next year? The next five years? Knowing what a realistic success path looks like for a business like yours can help you set SMART goals and benchmarks to help you get there.
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Under what circumstances would I close down the business?
When will you decide to stop building your business? When revenue drops below a certain number and stays there for six months? When you’ve put X amount of cash or time into the business and haven’t seen growth?
Know when you’ll quit before you start, and you won’t end up throwing good money after bad.
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Under what circumstances would I sell the business?
There’s a lot of value in running a profitable business, especially if it generates passive income. There’s also a lot of value in selling a business. Ask yourself when you might be willing to sell, and continue to ask yourself that question every year you remain in business.
Questions you should ask a prospective business partner
Why do you want to partner on this business?
People want to partner on businesses for a variety of reasons: to pursue a dream, to use their skills to help others, to earn passive income, to invest in a company that they might sell in the future, etc.
Knowing why your prospective partner wants to be involved in the business will help you determine whether this is the right partner for you. A business partner who is primarily focused on helping others will often make different business decisions than a business partner who is hoping to create an asset that can be sold. Does their vision of what this small business could be match—or complement—yours?
How much money does this business need to make?
Yes, you already asked yourself this question—but if your partner has a very different answer, you’re going to want to discuss it. A business where one partner can afford to go without income and another partner can’t, for example, might lead to disagreement on business decisions.
Where should this business be located?
If this is the type of business that operates out of someone’s home, whose home will serve as the official business address? Will you get a separate business mailbox, or will one person be responsible for receiving the business’s mail? The way you and your prospective partner discuss this question—whether your partner puts thought into the decision, says they don’t care, or presents an argument and refuses to listen to yours—will tell you a lot about how you might work together in the future.
What career capital are you bringing to this business?
Choosing a partner with considerable career capital can help your business grow more quickly. If your prospective partner doesn’t have a lot of career capital, what other skills, resources, or assets are they bringing to the partnership?
What actual capital are you bringing to this business?
Is your prospective partner putting their own money into the business? If so, how much? Be aware that the amount of capital you and your business partner put into the business may effect how each of you get paid in the future; that is, depending on how your operating agreement is structured, the partner that made the larger capital contribution may be entitled to a larger distribution of income from the business. (This’ll be a good question to bring up with your lawyer.)
Who do you think is our ideal customer? How do you think we should connect our business to new customers?
Make sure you and your prospective partner are on the same page. If one of you sees your ideal customer as a 35-year-old man and the other thinks the ideal customer is a 50-year-old woman, you probably aren’t seeing the business (and its unique selling proposition) in the same way.
What do you see as realistic-but-ideal business growth over the next year? The next five years?
A business partner who thinks success equals “getting into the local small business expo” is going to be very different from a partner who thinks success equals “getting onShark Tank.” You’ll also want to confirm that your prospective partner understands the path towards their vision of success. Can they set and achieve SMART goals?
Under what circumstances would you close the business? Under what circumstances would you sell?
Again, you’re going to want to make sure you’re roughly on the same page here. (You’ll also want to ask these questions every year you remain business partners.)
How will we resolve disagreements?
It’ll be hard to know how you’ll resolve disagreements until you’reactually in the middle of a disagreement, but discussing how you might address disagreements. Will you bring in a third party? Will you evaluate the options on a financial or growth metric? Will you look for a win-win solution? Answering these questions will help you prepare for future conflict.
More importantly, this kind of discussion will establish you and your business partner asmembers of the same team. It’s not you vs. your business partner. It’s you and your partner and your business vs. the world.
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What happens if one of us wants to continue working on the business and the other wants to stop working on the business?
Of all the questions you and your prospective business partner might discuss, this one is relatively easy! You can work with a lawyer to create an operating agreement that states what each partner is entitled to if they leave the business. Take a look at some sample operating agreements to see what typically happens in these situations, because having the discussion with your partner before meeting with a lawyer will help the conversation—and the document creation—go more smoothly.
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What happens if both of us want to continue working on the business but we no longer want to work with each other?
Unfortunately, two business partners cannot split up and still share custody of a business. If the two of you decide it is time to end your relationship, one of you is going to have to leave the business or get bought out—or the two of you will have to agree to shut the business down. At that point, you’ll refer to your operating agreement to determine how any remaining money is distributed, as well as any other assets the business may have generated.
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Questions you should ask a CPA
What type of business structure is most beneficial, tax-wise?
Don’t assume that your business will be an LLC or a S-Corp before talking with a CPA. There are specific advantages and disadvantages of each type of business structure, and it’s important to learn which might be the most beneficial to you—and why—beforeyou incorporate. These decisions have tax consequences that could save (or cost) you a lot of money, so it’s worth it to get a CPA on your team at the very beginning of the process.
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What do we need to know about paying business taxes?
If you thought doing your own taxes was complicated, wait until you start doing business taxes. Does your business income pass through to the partners, and at what percentage per partner? How much should you be setting aside for estimated tax payments? What about payroll taxes? Can you reduce your tax burden by setting up a SEP IRA?
The more you know about how business taxes work, the less likely you’ll end up making a costly mistake (like not setting aside enough cash to cover your tax burden). The more you know about business tax optimization, the more money you can put either into your own pockets or right back into your business.
So talk to your CPA. They’ve done this kind of thing before, and they know how to help you.
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What types of tax forms will we need to complete, and when are they due?
In addition to the good ol’ 1040, you’ll probably need to file additional tax forms on behalf of your business throughout the year. If your business pays freelancers, for example, you might need to file 1099 forms—which are due on January 31, not April 15. Businesses with partners and businesses with employees have even more forms to fill out and file.
A good CPA will remind you of these requirements and their due dates well in advance, but it’s still smart to know what to expect and when to plan it into your workload.
What’s the best way for us to handle bookkeeping? What about inventory?
Your CPA should be able to help you set up your small business bookkeeping, and may even have a preferred bookkeeping software. They can also give you tips on tracking inventory, managing capital accounts, and more.
Do we need business licenses? Work-from-home permits? Any additional documentation?
Different types of businesses have different types of licensing requirements, and individual cities may have additional permits you need to secure. Ask your CPA what forms you need to complete before your business is in compliance with state and local laws.
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Do we need to complete biennial reports? Are there any other reports or requirements we should be aware of?
As a small business, you’ll probably need to send biennial reports to the state in which you are incorporated. Ask your CPA about your reporting requirements and what you’ll need to include in those reports.
Questions you should ask a lawyer
Is our business name appropriate? Should we trademark it?
A lawyer can help you choose a business name that works both for your business and for your state’s business requirements. A lawyer can also help you decide whether it would be worth the time and money required to trademark your business name.
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How can we create an operating agreement that clarifies the terms of our business partnership and protects all business partners?
Don’t just grab a standard operating agreement off the internet and assume it’s good enough for your business. Talk to your lawyer about how to create a business operating agreement that is fair to both you and your business partner, covers any unique situations (such as one partner contributing more capital than the other, or one partner contributing a piece of intellectual property that will serve as the foundation of your business), and protects your rights as individuals as well as business partners.
What types of contracts should we prepare?
If you’re going to be working with freelancers, clients, or vendors, you’re going to need contracts. Your lawyer can help you draw them up.
If we plan to work with freelancers or hire employees, what legal issues should we be aware of?
You don’t want to be the type of business that hires someone as a contractor when they’re really doing the work of an employee, right? You also don’t want to be the type of business that asks illegal questions during hiring interviews or the type of business that doesn’t provide state-mandated breaks to employees.
Know your legal responsibilities, whether you’re going to be working with freelancers or hiring employees. A lawyer can help you with both the obvious ones (yes, you have to pay employees at least minimum wage unless your state allows you to pay less than the minimum wage for certain kinds of tipped work) and the ones you might not be aware of.
Are there any federal or state requirements, such as safety requirements, that might affect our business?
If you’re opening a food truck, you’re going to need to get familiar with food safety laws. If you’re launching a hair salon, you’re going to need to learn about OSHA’s formaldehyde standard. If you’re a blogger who earns money from affiliate links, you’ll want to understand the FTC disclosure requirements.
Ask your lawyer to help you understand which federal and state regulations apply to your business, and how to remain in compliance.
Do we need to get liability insurance or any other type of insurance?
Your lawyer can explain why your business might need insurance, as well as which types of insurance you should consider purchasing.
These aren’t the only questions you’ll want to ask as you prepare to launch your business, but they’re a good start—and they’ll probably inspire you to ask even more questions. Remember: the more answers you get before you start your business, the less likely you’ll be to make a mistake that hurts your business before it has a chance to grow.