Starting a new business is an extremely exciting time. You’re filled with determination and the drive to make this venture a success. Unfortunately, it’s all too easy to get caught up in this excitement, leading to mistakes that can have massive consequences further down the line, including the complete failure of the business. In fact, 20.4% of businesses fail in their first year, illustrating just how often this happens. So, how do you avoid becoming part of this statistic? Well, there are several common mistakes that, when avoided, can give your business the best chance of success.
Skipping a Business Plan
When people start a new business, they want to hit the ground running. The last thing they want to do is spend hours poring over a business plan, obsessing over every detail. However, the truth is that a business plan is a necessity. It doesn’t just state what your business does, it defines the goals of the business, states which customers will be targeted, and outlines growth strategies.
When a business plan is neglected, it is like running into a forest without a map. You will have no idea where your business is heading or what to do when you get there. You will also constantly find yourself reacting to crisis situations, whereas a business plan could have helped you anticipate them. Additionally, without a business plan, you’ll find it extremely difficult to secure financing or attract investors. If you’ve never written a business plan before, the Small Business Administration can help you. They have a guide that outlines exactly what should be included in your plan.
Choosing the Wrong Business Structure
Which business structure to use is a decision that should not be made in haste. Your business structure affects more than day-to-day operations. It also has a massive impact when it comes to personal liability protection, taxation, operational flexibility, management, and future growth. The wrong decision here often leads to exposed personal assets, incorrect tax payments, or missed funding opportunities. Options for your business structure include:
- Limited Liability Company (LLC)
- Sole Proprietorship
- C Corporation
- S Corporation
- General Partnership (GP)
- Limited Partnership (LP)
- Limited Liability Partnership (LLP)
- Nonprofit Organization
You should take your time when deciding which of these to choose. Do your research and understand the nuances of each business structure. Better yet, hire professional entity formation services. An expert will review your business plan, assets, and goals, allowing them to determine which business structure will best meet your needs. They will also help with the process of legally forming the business, such as filing the necessary paperwork.
Mixing Personal and Business Finances
When first starting out, many people think it’s easier and more convenient to just mix their personal and business finances. This is one of the biggest mistakes you can make. While it may seem like the simpler option in the beginning, in the long run it will serve only to complicate bookkeeping and tax preparation. It can also open you up to total personal liability, stripping away the legal protections of your business structure if the company faces lawsuits or debt.
Instead, you should open dedicated business accounts and credit cards. These should only be used for deposits, withdrawals, and purchases directly for the business. This will do a great deal to ensure accurate bookkeeping and legally protect you when tax season rolls around.
Ignoring Legal Requirements
Too often, new entrepreneurs get caught up in the excitement of starting a business and forget about the legal requirements. They forget to obtain a business license or other required permits. This is one of the biggest mistakes you can make. Ignoring these legal requirements can lead to fines, penalties, or delays in operations. For this reason, you should always consult an attorney or other expert before officially opening your business. They will be able to inform you of all legal requirements, including what licenses and permits are needed.
Trying to Do Everything Alone
Knowing what you don’t know can really help you to become a successful entrepreneur. The most successful business people in the world do not do everything themselves. They recognize the areas in which they don’t have the necessary expertise, and they hire people that can fill that skill gap. This can include attorneys, financial advisors, accountants, business consultants, and more. Build a team that supports your vision and can help make it a reality. When you try to do everything on your own, it is almost guaranteed that you will make a mistake that will harm the business. Even if you don’t, without support, you will eventually burn out and the business will suffer. Remember, the most successful entrepreneurs delegate and surround themselves with passionate people who have the necessary skills to help the business grow.
Neglecting Written Agreements
When first getting started, many entrepreneurs are doing business with people they know, either personally or professionally. This feeling of familiarity can make it very easy to forego written agreements in favor of verbal ones. However, written agreements should be used whenever possible. They clarify expectations and responsibilities, while also helping to avoid misunderstandings. Written agreements are especially vital when it comes to:
- Partnership agreements
- Operating agreements
- Employment contracts
- Vendor agreements
Having these important agreements in writing will save you major headaches down the road when someone doesn’t hold up their end of the bargain.
Underestimating Startup Costs
Underestimating costs is one of the most fatal mistakes on this list. If you run out of money before you have enough coming in, it’s game over. Many new entrepreneurs only consider the costs of their inventory and employees, forgetting about other costs like licenses, insurance, professional services, and marketing.
Before officially starting your business, you need to outline all costs in the foreseeable future, ensuring that you leave nothing out. You can then build a realistic budget and emergency reserve to ensure that your business will make it past the initial few months.
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