Inspiration has struck. You’ve got a million-dollar idea. And you’re eager to introduce it to the world. Starting a business is an exciting time, and we applaud your passion, innovation and drive! But striking out on your own doesn’t mean you have to go it alone. Wise entrepreneurs know when to ask for help and how to head off problems before they arise.
In my experience, these are the major landmines new business owners face. Beware of:
Lack of clarity. What need are you meeting in the market that your competition isn’t? What does your business look like two years from now – or five? What’s your end goal? Organize your ideas and vision for the company in a thorough business plan because if you can’t articulate what success looks like, it’s difficult to spur (and manage) business growth.
Waiting too long to ask questions. You’re great at what you do, but you don’t have to be the expert at everything. Small business owners wear a lot of hats – from accountant and marketer to human resources, tech support and legal counsel. But when it comes to starting a business, it’s critical to solicit advice from professionals who can help set you up for success. Ask a trusted friend to recommend a mentor. Investigate local small business workshops or classes. Research the industry and get involved in relevant trade associations.
Putting too much faith in “experts.” I’d like to tell you that everyone you’ll work with has your best interest at heart, is qualified to do the job they promised and will operate with integrity and commitment. Unfortunately, that’s simply not the case. I encourage you to have a healthy dose of skepticism about those you trust to involve in your business. Hiring a professional might be necessary for certain tasks, but do your research, take time to interview them and talk to other clients so you know what to expect. Even with accountants, their individual risk tolerance and communication style will influence your experience, so it’s important you see eye-to-eye on expectations. And just because someone markets themself as an “expert” or “specialist” in your specific industry does not mean they are the right fit for your company.
Selecting an improper entity structure. Whether to establish your business as a single-member LLC, partnership, S or C corporation is an important decision. It affects everything from accounting and record keeping requirements to liability, taxation and fringe benefits for owners. (More on that here.) Talk to your accountant before you decide, but it’s not set in stone if you need to change it later.
Intermingling funds. For liability protection purposes, I recommend business owners maintain a checking account for business expenses separate from their personal account. If you intermingle funds (i.e., pay for personal expenses out of the business account) and your business happens to get sued, it puts your personal assets at risk, too. Keep things separate or you’ll be “piercing the corporate veil.”
Overcomplicating things. So often, I see people create too many accounts to classify expenses. My advice is always to keep it as simple as possible while providing enough information to be helpful. The less time it takes for you to complete administrative tasks like coding (if you choose to prepare your own financial statements), the better. It will help keep your financial information easy to read.
Misunderstanding your financial position. Although you don’t need to be the expert in all things, you must know enough to identify when things don’t add up. This philosophy applies to all aspects of your business but none more important than your financial position. While you don’t have to prepare financial statements personally, you must be able to read them and understand your company’s debt, income and expenses. Armed with this information, you can more effectively prioritize where you spend money so it has the greatest impact on your business.
Insufficient record keeping. It’s tedious, I know, but record keeping is for your own protection. It requires more than simply maintaining receipts. You also need to maintain notes that can support the business purpose of an expense. After a lunch meeting, for example, jot down on your receipt who you were with and the topic of discussion. Although these brief notes may not always stand up against an IRS audit, the additional justification helps when a business expense is in question.
Payroll. When business is going well and you foresee continued growth, you might enthusiastically start searching for that first employee. But wait. This is a critical step for your business. Whether someone qualifies as a contractor or employee is an important distinction and could be a whole separate blog (and probably will be soon). If hired as an employee, payroll taxes must be paid, and they can be somewhat complicated. Hear me loud and clear: the Internal Revenue Service does not mess around when it comes to payroll taxes. So, if payroll set up is necessary I suggest you hire a professional to prevent costly mistakes down the road.
Isolation. It can be liberating to work for yourself, but it can also be lonely. We’re all accountable to someone (usually our clients), and there will be hiccups and tough days in any business. Find a community of people who support you, inspire you and provide loving yet honest feedback. We all have something to learn from each other, and collaboration can produce not only some great ideas but also some great friendships.
You can do this! And we’re here if you need help.
Blog by Amanda Brooks, Accounting Manager.
Category: Tax and Accounting Team