December 18, 2014

Starting A Small Business: 7 Deadly Sins

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A small business owner’s life can be a real roller coaster. There’s no road map, and pitfalls lurk around every corner. While making mistakes may be a great way to learn, it’s a lot better to avoid them in the first place.

Having started a few businesses in my career, and having helped thousands of small businesses launch across the country, I thought it would be useful to highlight some of the hard-won experience I’ve learned throughout the process.  Below are 7 deadly sins for starting a small business:

1. Don’t Underestimate a Business Plan

If you’re launching a small business and aren’t planning on pitching investors, it’s tempting to skip the step of writing a formal business plan. However, taking the time to write out your business plan, forecasts, and marketing strategy can be a particularly effective way to hone your vision.

Your planning should center around a few essential questions:

  • How is my business serving a particular need or pain point?
  • Does this represent a major market opportunity?
  • How much will it cost to ramp up the business?
  • When can my projected revenues support the spending?

In addition, don’t overlook your exit strategy at the beginning. Do you want your children to take over the company? Do you want to sell it? It’s critical to think about these questions from the start, as the building blocks of your company (such as legal structure) should vary depending on your preferred final outcome.

2. Don’t Incorporate as the Wrong Business Entity

Your business’ legal structure affects the amount of taxes you pay, the employee benefits you can offer, the amount of paperwork you deal with, and more. In the U.S., the three most common business structures are:

  • LLC (Limited Liability Company)
  • S Corporation
  • C Corporation

All three entities protect the personal assets of the owners from the liability of the company, yet differ when it comes to tax treatment and more.

Here are some common mistakes made by small business owners. You may want to consult a tax advisor or CPA on what structure would be best for your particular situation:

  • A small business owner creates a C Corp for her business, then discovers what ‘double taxation’ means when she has to file taxes for both her business and personal taxes. Her CPA advises her to elect for pass-through S Corp treatment to avoid this next year.
  • Two friends form an S Corporation for their new business. However, they’re stuck paying taxes in direct proportion to their ownership, even though they’ve actually arranged to allocate the profits 75-25 the first year since one was responsible for significantly more work. Instead of the S Corp, they should have formed an LLC where they can have more flexibility when it comes to dividing the profits and their taxes.

Of course, the biggest mistake a small business owner can make is failing to create a legal business entity at all.

3. Don’t Pick Delaware or Nevada for the State of Incorporation if you Don’t Live There 

Many business owners think they should choose among Delaware, Wyoming, or Nevada when incorporating or forming an LLC. And yes, these are popular states for incorporation in the U.S. because of low filing fees and pro-business statutes.

However, these two states aren’t necessarily the best choices for every business. For the small business (defined here as one with less than five shareholders), it’s better to incorporate in the state where there’s a physical presence, meaning where you live or have an office. Otherwise, there can be too many hassles associated with operating ‘out of state.’ These include:

  • Difficulties opening a business bank account
  • Having to appoint a registered agent
  • Fees for operating as a ‘foreign entity’ in your own state

4. Don’t Underestimate the Importance of a Business Name

A business begins with a name. It’s the cornerstone of company identity and shapes all that follows. Think about what’s important to you and your business. What’s the first thing you want a customer to think about with regard to your business?

For example, a young company breaking into the financial advising field may be more concerned about credibility and thus forgo the edgy, attention-grabbing name.

It’s smart to check that a business name is available to use before you order your business cards, as you don’t want to be on the wrong end of a trademark dispute. In most cases, you don’t need an attorney to check if your name is available; you can perform these easy steps on your own:

  • Perform a free search online that looks at business names registered with the secretary of state in the state where you’re located
  • Then take your search to the next level and conduct a free trademark search to make sure your name is available in all 50 states

5. Don’t Fall Into a Discount Trap

At the beginning, too many young companies feel the pressure to heavily discount their prices in order to win business. While customer acquisition is important, attracting customers at unsustainable price levels will just result in a race to the bottom. I’ve learned that you’re better off in the long run focusing on how to bring more value to customers, rather than simply slashing your prices.

6. Don’t Go Against Your Intuition

Intuition is a critical part of the decision making process, and it’s just as important in business as it is in other areas of your life. Business deals depend on relationships, whether it’s with partners, employees, vendors, or clients. You need to get a read on other people you’re involved with – and then trust your gut (even if the numbers are telling you otherwise).

7. Don’t Be Afraid to Fail

Lastly, if you’re scared of failing, you’re probably playing it too safe as a business owner. Failure is practically a rite of passage for successful entrepreneurs. Valuable lessons can be learned through the experience…lessons which you would never learn from a business class.

Soccer coach Sven-Goran Eriksson once said:

“The greatest barrier to success is the fear of failure.”

If you find yourself nervous about what might happen, think about all the opportunities and possibilities you leave behind by not ever trying. Trying (no matter what the outcome is) is your first step toward success.

Seven Photo via Shutterstock

9 Comments ▼

Nellie Akalp


Nellie Akalp Nellie Akalp is CEO of CorpNet, her second incorporation filing service based on her strong passion to assist small business owners and entrepreneurs in starting their business. Free guides, advice and videos on small business legal topics are available at her Small Biz Corner.

9 Reactions

  1. Great list of tips. I think it’s really important to have a detailed business plan for how you want to expand and scale up. That’s what I think a lot of small businesses lack. Weather your business is offline or online, you have to have a solid business plan so you can clearly see where you’re going. Thanks for sharing your insights.

    Ti

  2. Great piece all around. Last piece of advice would be to minimize as many non-essential personal expenses as possible before starting a business…and whatever it is that you start…make sure that you are passionate about it.

  3. Can I add ignore your strengths and passions, don’t ignore market research… Generally, your first step should be to know your business personality, your strengths and passions, and then see how to monetize those based on the market available to you.

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