5 Questions To Ask Before Starting A Business
When starting a business, it is essential to think through important questions upfront and to identify issues that are likely to arise. Before diving into a first-time venture, prospective entrepreneurs should take this planning step to spot opportunities, minimize complications, and head down the right path. Even seasoned business owners need to consider these cash flow, legal, and tax issues before embarking on their next startup endeavor.
What's My Income?
The number one reason why small businesses fail is there is not enough money to keep them going. To ease the burden on business cash flow, many company founders choose to forgo a salary in the first few years of running a business. As such, the owner should have an emergency fund large enough to fund their personal needs. Plan out anticipated revenue and decide in advance at what point to take a salary or owner's draw.
How Much To Invest?
The Small Business Administration has an interactive startup costs worksheet to help prospective business owners consider anticipated costs. A business's primary funding generally comes from the owner's net worth. Keep track of the initial investment amount, plus any subsequent investments, as these provide the tax basis towards gains in the future. Cultivate relationships with potential investors or lenders so that if the business does not grow as quickly as anticipated or needs additional capital beyond the amount designated, you know who to turn to for additional funding for your worthwhile investment.
What Type Of Business Structure To Use?
Consider the following options when deciding on the legal structure of your business:
- Sole proprietorship: The default and simplest structure for a single owner, business assets and liabilities are not separate from personal.
- Partnership: A pass-through entity that is the default and simplest structure for two or more owners, general partners have unlimited personal liability. However, limited partners can limit their liability in an LP or LLP.
- C-corporation: A separate legal entity, the most formal structure offering the strongest protection to owners; as a separate taxpayer, business profits are subject to double taxation (corporate and shareholder level).
- S-corporation: A separate legal entity that elects tax treatment as a pass-through entity (no double taxation), eligibility restrictions apply, including limits regarding stock classes (one) and the identity and number of shareholders (100 or fewer, with family aggregation).
- Limited Liability Company (LLC): A separate legal entity that shares corporate characteristics (e.g., limited liability) but is unincorporated. An LLC can elect for taxation as a corporation (S or C), partnership, or disregarded entity.
Other considerations when choosing the business structure are:
- State of residence: Forming the business in another state may also provide legal and tax advantages or complications beyond what your home state offers.
- Number of employees (if any)
- Partners: Discuss the effect of triggering events, such as death, disability, divorce, disaster, or disagreement.
- Intellectual property: Consult an attorney regarding trademarks, copyrights, patents, etc.
What Insurance And Licenses Is Needed?
Wondering if you need business insurance? Consider the risks:
- Could your employees be injured at work?
- If you make a mistake, are you exposed to a lawsuit?
- What is your liability if hackers access the customer data you hold? Yes, there's insurance for that.
Your business may need a license or permit to operate. Ensure that all required city, county, state, and federal licenses and permits are in place before you open your doors. If you have employees, register with state agencies, Workers' Compensation Insurance, and Unemployment Insurance.
How Will Books Be Kept And Taxes Be Paid?
Your choice of entity and operations will affect your tax exposure. Depending on your circumstances, you may be able to deduct certain startup costs, home office expenses, health insurance costs, and other business expenses. Also, remember, in most states, if the business sells physical products or certain services, it must collect and pay sales tax which likely requires monthly reporting. Organize a system to track transactions and other business activities. Do not overlook this step from the start. Using proper bookkeeping and recordkeeping practices is essential as it can cripple a business if the books are in disarray. For a comparative list of software, check out business.org.
The Bottom Line
Starting a business is much like having a child. You need to nurture, feed, and watch it day and night until it grows up a little bit. But like preparing for the arrival of a newborn, entrepreneurs need to take the time in advance to prepare for all the changes that happen in life after the business opens. Financially, this means talking to advisors who can help think through the what-if scenarios of funding that new venture. For two decades, the Hurlow Wealth Management Group has helped clients achieve their financial goals, including starting and operating a company. Our financial planners can help you gain the confidence that your business plan will lead to success. Schedule a complimentary consultation today.