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Starting a business is more challenging than it appears. It's not simply about coming up with a great idea and turning it into reality.
You need to determine how to structure your business—whether as an LLC, S-Corp, or C-Corp—and figure out how to fund your business during its early stages.
You must decide how much personal money you'll invest in your business, as well as when to shut it down if it’s not generating enough income or any income at all.
You might have to consider bringing in a business partner (or partners), and figure out how responsibilities and profits will be shared between you and your partner(s).
It's also crucial to consult both a lawyer and a CPA to fully understand the legal and tax consequences of your business. This is often overlooked by first-time small-business owners, and can result in costly mistakes later on.
Before bringing your business idea to life, ask yourself—and your potential business partners, CPA, and lawyer—these key questions.
Essential Questions to Consider Before Starting a Business
How will this business generate revenue?
It might seem like an obvious question, but take the time to reflect on it. Will you be selling a product or offering a service? Or maybe providing free content and earning revenue through ads and sponsorships?
After reaching that point, ask yourself why someone would choose to invest in your business. What are they actually purchasing? Is it a tool that simplifies their life, a skill for their future career, or an emotional experience? The more you understand your business's unique selling proposition (USP), the better equipped you'll be to pitch it to potential customers.
How much revenue does this business need to generate?
Many entrepreneurs expect their businesses to be unprofitable initially. However, it's crucial to determine both how much revenue your business must generate to cover its costs and how much income you need to draw from the business to meet your personal expenses (including the money set aside for taxes).
Once you have some financial projections in place, consider when your business should begin to bring in that income. If funds are tight while you’re getting started, your business may need to meet its minimum revenue targets within the first quarter. Some entrepreneurs might afford to go a year or more without drawing a salary, but their business still needs to cover its own costs—and taxes.
What valuable experience or skills am I contributing to this business?
In his book So Good They Can’t Ignore You, Cal Newport discusses how many aspiring entrepreneurs dive into business without first acquiring career capital—the essential skills, connections, and resources needed to succeed in a particular field.
Newport illustrates this with the story of a woman who opened a yoga studio after just a month of teacher training. Lacking both teaching experience compared to seasoned instructors and the resources that would have come from more time spent in the yoga industry, her business ultimately failed.
Have you invested time and effort into building career capital, or are you venturing into a business in a field that’s unfamiliar to you? Proceed with caution when launching a small-business passion project without first developing the necessary capital to ensure its success.
What tangible capital am I contributing to this business?
Certain businesses require higher startup costs than others. If your business falls into the “high startup costs” category, do you have the financial resources to cover its expenses without putting your personal financial stability at risk?
Similarly, how much money are you prepared to invest in your business before it becomes profitable? Understanding this threshold will help guide your business decisions, including the tough choice of when to walk away from a failing idea.
Who are my target customers?
Creating an ideal customer profile is essential, but starting a business with an existing group of potential customers is even better. Consider individuals who transition from blogging to creating courses; they already have an audience and can tailor their courses to meet their followers' needs.
This is where career capital proves valuable. For instance, if you're venturing into consulting, your initial clients should naturally come from your professional network.
You can also leverage platforms like Kickstarter to test new business ideas and determine if there’s an audience of potential customers. Still, you’ll need to put in the effort to define your ideal customer and tap into your current network to reach them.
How will I attract new customers to my business?
Customer retention is important; if you aren’t consistently engaging with new customers and nurturing those relationships, your sales and revenue will decrease rather than grow.
Consider how you plan to reach potential customers. Will you use advertising, collaborate with fellow small-business owners, attend industry events, or create instructional YouTube videos?
What is my strategy for business growth?
What are your goals for your business once it’s up and running? What does sustainable growth look like in the short term (next year) and long term (the next five years)? Understanding the potential growth path for your business can help you set realistic SMART goals and benchmarks to guide your progress.
Under what conditions would I close the business?
At what point will you decide it’s time to stop building your business? When revenue consistently falls below a specific threshold for six months? Or when you’ve invested a set amount of time or money without seeing any progress?
Know when you plan to walk away before you even start, so you won’t end up wasting more resources on a failing venture.
Under what conditions would I sell my business?
Operating a profitable business is valuable, especially if it generates passive income. However, selling a business can also be a lucrative option. Ask yourself when you might consider selling, and make it a habit to revisit this question every year that you continue in business.
Questions to ask a potential business partner
Why are you interested in partnering on this business?
People seek business partnerships for many reasons: to follow a passion, to apply their skills for others, to generate passive income, to invest in a venture with plans to sell it later, and more.
Understanding your potential partner's motivations will help you decide if they’re the right fit for you. A partner focused on helping others may make decisions differently than one looking to build an asset to sell. Does their vision for the business align with or complement yours?
How much revenue does this business need to generate?
Yes, you’ve asked yourself this question already—but if your partner has a very different perspective, it’s crucial to discuss it. For example, if one partner can afford to go without a salary while the other cannot, it could lead to tension when making business decisions.
Where should the business be based?
If your business operates from someone’s home, whose home will serve as the official business address? Will you have a separate business mailbox, or will one person take responsibility for receiving the mail? How you and your prospective partner approach this question—whether your partner has thought it through, is indifferent, or becomes resistant to your ideas—will reveal much about how well you may collaborate in the future.
What career capital are you bringing to the table?
Selecting a partner with significant career capital can accelerate the growth of your business. If your potential partner lacks career capital, what other valuable skills, resources, or assets are they contributing to the partnership?
What tangible capital are you contributing to this business?
Is your potential partner investing their own money into the business? If so, how much? Keep in mind that the capital contributions from you and your partner may affect how profits are distributed in the future. Depending on the structure of your operating agreement, the partner who invests more money could be entitled to a larger share of the business income. (This is a key point to discuss with your lawyer.)
Who do you believe is our target customer? How do you think we should attract new customers to our business?
It’s important that you and your potential partner align on this. If one of you envisions the ideal customer as a 35-year-old man, while the other sees a 50-year-old woman, then your understanding of the business (and its unique selling proposition) is likely not in sync.
What do you consider to be realistic, yet ideal, business growth over the next year? What about in the next five years?
A business partner who sees success as simply “attending the local small business expo” will have a very different perspective from one who views success as “getting on Shark Tank.” It’s also important to ensure your potential partner understands the path toward their vision of success. Are they able to set and achieve SMART goals?
Under what conditions would you choose to close the business? What would make you consider selling it?
It’s important to make sure you’re both aligned on these matters. (And remember to revisit these questions every year as business partners.)
How will we resolve disagreements when they arise?
It may be hard to know exactly how you’ll resolve conflicts until you’re actually in the midst of one, but it’s crucial to discuss potential approaches. Will you bring in a third party? Will decisions be based on financial or growth metrics? Will you aim for a win-win resolution? Answering these questions now will help you prepare for conflicts in the future.
More importantly, having this kind of conversation will solidify you and your business partner as members of the same team. It’s not you against your partner; it’s you and your partner, alongside your business, facing the world together.
What should we do if one of us wants to continue working on the business while the other wants to stop?
Of all the topics you and your prospective business partner might discuss, this one is relatively straightforward! With the help of a lawyer, you can draft an operating agreement that outlines what each partner is entitled to if they decide to leave the business. Reviewing sample operating agreements beforehand can help you understand what typically happens in these situations, making the conversation and the document creation process go more smoothly.
What happens if we both want to keep working on the business, but no longer wish to work together?
Unfortunately, when two business partners split up, they can’t just share custody of the business. If the relationship between you two comes to an end, one of you will need to leave or be bought out, or you’ll have to agree to shut the business down. From there, you’ll refer to your operating agreement to determine how any remaining funds or assets should be distributed.
Questions to ask a CPA
Which business structure is most advantageous from a tax perspective?
Don’t automatically assume your business should be an LLC or an S-Corp without consulting a CPA. Each business structure has its own pros and cons, and it’s crucial to understand which one will benefit you most—and why—before making the decision to incorporate. These choices have tax implications that could either save or cost you a lot of money, so it’s wise to get a CPA on board at the start of your process.
What do we need to understand about paying business taxes?
If you thought personal taxes were complicated, wait until you start handling business taxes. Does your business income pass through to the partners, and if so, what percentage does each partner get? How much should you set aside for estimated tax payments? What about payroll taxes? Can setting up a SEP IRA help you lower your tax liability?
The more you understand about how business taxes operate, the less likely you are to make costly errors (like failing to set aside enough money for tax obligations). The better you grasp tax optimization, the more money you can either save or reinvest into your business or pocket.
So, reach out to your CPA. They’ve been through this before and know exactly how to guide you through the process.
What tax forms will we need to file, and when are their deadlines?
Besides the usual 1040, you’ll likely need to submit additional tax forms for your business throughout the year. For example, if your business hires freelancers, you may need to file 1099 forms, which are due on January 31—not the typical April 15 deadline. Businesses with partners or employees face even more forms to manage.
A good CPA will help you stay on top of these requirements and deadlines, but it’s also wise to understand what forms are needed and when they should be scheduled into your workflow.
What’s the most efficient way for us to manage our bookkeeping? How should we handle inventory?
Your CPA should be able to guide you in setting up your small business bookkeeping system, and they may have a preferred bookkeeping software to recommend. They can also offer advice on managing inventory, tracking capital accounts, and more.
Do we need any specific business licenses? Are work-from-home permits required? Any other documentation?
Each business type has its own licensing needs, and local governments may impose additional permits. Ask your CPA to help you identify which forms must be filed to ensure your business complies with both state and local regulations.
Do we need to file biennial reports? Are there other reports or requirements we should be aware of?
As a small business, you’ll likely need to file biennial reports with the state where your business is incorporated. Check with your CPA to understand the specific reporting requirements and what should be included in these reports.
Questions to ask a lawyer
Is our business name suitable? Should we consider trademarking it?
A lawyer can assist in selecting a business name that meets both your business needs and your state’s legal requirements. They can also help you assess whether trademarking your business name is worth the cost and effort involved.
How can we draft an operating agreement that outlines the terms of our partnership and safeguards the interests of all business partners?
Instead of simply downloading a standard operating agreement from the internet, take the time to consult your lawyer about crafting one that is tailored to your business. This agreement should be fair to both you and your business partner, address any specific situations (such as unequal capital contributions or one partner bringing in intellectual property that becomes the core of the business), and ensure your individual rights and those as business partners are protected.
What kinds of contracts should we prepare?
If you're planning to collaborate with freelancers, clients, or vendors, you'll need formal contracts. Your lawyer can assist in creating them.
If we intend to work with freelancers or hire employees, what legal aspects should we consider?
You want to avoid misclassifying someone as a contractor when they're essentially an employee. Likewise, you don't want to ask prohibited questions during job interviews or neglect to provide the legally required breaks for employees.
It’s important to be aware of your legal obligations whether you're working with freelancers or hiring employees. A lawyer can guide you through both the clear-cut rules (such as the requirement to pay employees at least the minimum wage unless your state permits lower pay for specific types of tipped work) and the lesser-known legal responsibilities.
Are there any federal or state regulations, such as safety standards, that could impact our business?
If you’re launching a food truck, you’ll need to understand food safety laws. If you’re starting a hair salon, learning about OSHA’s formaldehyde standards is crucial. If you’re a blogger earning income through affiliate links, you’ll want to familiarize yourself with the FTC’s disclosure requirements.
Have your lawyer help you navigate which federal and state regulations apply to your business and ensure you're in compliance with them.
Do we need to obtain liability insurance or other types of coverage?
Your lawyer can help clarify why your business may require insurance and which types of coverage you should consider acquiring.
These are just a few questions to get you started as you prepare to launch your business. They’ll likely spark even more questions along the way. Keep in mind: the more you understand before starting, the less likely you are to make a costly mistake that could set your business back before it even has a chance to take off.
