There are a lot of decisions you’ll be right with when you’re starting a new business, but a number of things you’ll invariably be wrong. Every entrepreneur ends up learning certain things the hard way, but you can steer clear of many issues by listening and learning from other entrepreneurs’ experiences and mistakes. Follow these at all costs, or it could cost you your business.
Get the right documentation
In the early days of a new business, your funding is limited and you’re searching for ways to cut costs as much as possible. You may think that using cheap corporate documents you find online, but that’d be a mistake.
If you have various shareholders, it’s necessary to hire a real lawyer. Ideally, each shareholder will have their own legal counsel.
If your business is a partnership, when everything’s going smoothly at the beginning to assume that things will continue that way, but that’d be fairly short-sighted. For example, drafting an official written agreement with your co-founder can be hard. But that is also the best time to do it. That way you’re on the same page from day one.
Truth is, you can either do your due diligence and hire a lawyer early on to get everything in writing, or you can risk facing higher costs and disagreements later on if things don’t pan out as well or people get greedy. ZenBusiness is an all-in-one platform and team of experts that can quickly and accurately help you form your LLC.
Apply for the right permits
Every city has regulations regarding where businesses can be placed and how they can be run. To make sure you stay compliant when setting up your business—especially if it’s a business with a storefront—you should research the necessary permits.
Don’t confuse low rent for a sure thing without first completing the necessary zoning and building permits. They could cost you a pretty penny.
Choose your name carefully
You’ve likely already found out that selecting the best name for your business is hard. You want it to be relevant to what you do, sound nice, have a domain name available, and be memorable—all of which is difficult enough. But there are legal ramifications you should consider. Do the proper research to ensure you’re not infringing on any other brand with the same or too similar of a name.
Obtain liability insurance
Many small business owners fail to consider the possibility of being sued by a personal injury lawyer for a slip on company property, negligent security, or other types of premises liability cases. However, a lawsuit over something that seems unimportant to you could put you out of business if you’re not properly covered.
You can also protect yourself by buying cyber liability insurance, especially if you’re obtaining data from customers, or selling goods on an e-commerce website. This will help cover you with future lawsuits on account of a data breach or cyber attack, if you’re unfortunate enough to get any. After all, it doesn’t matter if large businesses are bigger and richer targets than you are, that doesn’t mean you should be unaware of cybersecurity issues.
Use the optimal legal structure
A lot of businesses go for the most simple business structure when getting started: an LLC. However, they later confront the same issue eventually; an LLC doesn’t work if you want to obtain capital from outside investors. Make this mistake, and it could cost you a lot of money in legal fees.
Keeping personal and business separate
This advice is particularly important for sole proprietorships. If you mix your personal funds with those of the business, you run a risk on the limited liability characteristics of your company structure. This then means your personal assets could be seized by creditors in the event of a bankruptcy.
Remember that just by being a business with only a single owner, you also have a higher chance of being audited. Since your SMB profit/loss is reported on your personal tax return, it is usually subject to more scrutiny than a business tax return.
If you can, form a partnership with someone else because it—even if it’s only a 1% stake—can reduce your risk a lot.
Understanding copyright laws
There are two common ways this hurts businesses. The first is that they are unable to secure the copyright of work that they outsource to independent contractors to make.
If you use a third party (such as a freelancer from Fiverr) to create this content for you, it probably is not protected by copyright. Just paying for it is not enough to consider it a “work made for hire” under US Copyright laws.
The other area where copyright is important is with the pictures you use on your website and on social media. If you find an image on Google image search and it does not have a copyright notice on it, it is still not okay to use in any of your business’ content.
The original owner can enforce copyright even if they don’t register it. So don’t risk being sued for using unoriginal images or images you don’t own.
Check your employment contract
If you’re leaving a job to start your entrepreneurial journey, you have to be careful. If your new business offers similar goods or services to the company you’re thinking of quitting, you could be in a lot of legal trouble.
Employment contracts generally contain non-competes, which means that they can tell you how and when you can open your business and the ways in which you can compete with your former company. Most businesses will make sure you get a pretty stern letter before taking you to court, which can be costly and can be embarrassing for all parties involved. Regardless, small business owners confront this risk, and if they do get mailed one of these letters, should hire a lawyer at considerable cost to aid and consult them in their initial response.
You should review your employment contract before you make the decision to leave and discuss your options with your lawyer to ensure you start your business in compliance with all the regulations set on you.
Keep your records organized
Keeping records of personal financial matters is necessary, but keeping reliable and updated records as a small business owner is even more important. If you are unable to keep organized books, you could easily forget about key expenses and also fail to utilize valuable business tax deductions.
On top of that, if you unfortunately get that IRS tax audit notice in your mailbox, you won’t be as stressed if your accounting records are solid. Remember, the IRS requires taxpayers to send them the proper documentation to perform an audit.
Categorize your income and expenses appropriately
It’s essential to have a grasp on how profitable your business is every month in order to better understand your financial standing. This is another way that well-done bookkeeping can help you. You should track all income and expenditures in certain categories to help you understand the profitability of your business. Being aware of how every one of these categories is impacted by taxes can reduce your bill from the IRS. If you can’t properly measure this information, you could very well end up bleeding money without your knowledge.
Report sales taxes
Another mistake many small businesses make is failing to account for sales tax. If you make sure you stay on top of your sales tax requirements, you can avoid making this mistake.
You have to know what your sales tax duties are and how the types of products or services you sell and where you conduct business affect these. Usually there are local (state and county sometimes) and federal sales taxes to think about. It is your responsibility to collect and then to report your sales tax payments. You could end up having to pay a lot in penalties if you don’t do this, and your monthly sales figures could be incorrectly skewed due to this, leaving you with incorrect records.
Track any reimbursable expenses
Many small business owners pay for some business expenses with money in their own bank account. It’s pretty easy for these to go unnoticed. Next thing you know, you lost money and missed out on tax write-offs that could reduce your tax bill.
You should set up a system to track all the expenses you pay for through your self-employment work.
Protect your data
In the modern digital age, technology can do wondrous things. But it’s not totally reliable all the time, and mistakes can come to light at the worst times. So, don’t make the error of not backing up and securing your company’s sensitive data. There are tons of affordable cloud-based solutions to help you securely keep your bookkeeping records.
Enter data carefully
When looking something up or emailing a coworker, how often do you press the wrong key or misspell something? It’s okay, we all do it. A few websites indicate when you’ve incorrectly input a letter, but this isn’t there to help you when you’re bookkeeping.
This is one of the main reasons why you should ensure your numbers are being entered into the correct categories. Our advice is to only work on your books if you can give them your undivided attention!
