Business owners often make costly mistakes while launching their businesses. It is easy to get so caught up in the excitement of starting your business that you make mistakes that could cost you a great deal of money. Here are five very common mistakes I have seen that could have been avoided with minimum cost.
Failure to Protect Personal Assets
There are several ways to protect your personal assets. The first is to select a legal entity such as a Limited Liability Company (LLC) or corporation that creates a legal firewall separating you from the company. However, this is not foolproof and will never protect you in case of personal negligence or fraud.
Next, make sure you sign your documents correctly. Don’t sign them personally but as an officer of the corporation or LLC with company name (Jane Doe, President ABC Corp). Whenever possible, do not personally guarantee anything. Instead, make the guarantee the company’s.
Maintain the formalities of the LLC or corporation so others can’t pierce the “corporate veil”. Maintain a separate bank account for the company, separate insurance policies and separate tax returns. Hold the required formal meetings and do the necessary paperwork to keep up your corporate records.
Sign a Bad Lease
Think of a lease as a long term loan. If you sign a five-year lease with a $1,000 per month rent payment, you have, in effect, committed yourself to a $60,000 note. So it is important to understand everything about your lease and negotiate terms that will lessen your exposure.
Try to get as short a lease as possible with options to renew for your desired period. For example, if you want a five-year lease, try to get a one-year lease with two two-year options to renew with specific rent rates.
If possible, make sure you can assign or sublet the space if needed. Your idea may not work or some major life change may necessitate you getting out of the business.
Know what you are responsible for such as replacing the air conditioner if it goes bad. Know who is responsible for the build out. In today’s market, landlords may be willing to front this expense, but get it in writing.
Always have an attorney review your lease to help clarify what you are responsible for and protect you from hidden costs.
Failure to Plan for “Murphy”
Everyone has heard of “Murphy’s Law”…. “anything that can go wrong, will go wrong”. I like to add “at the worst possible time”. I tell all new business owners to be prepared for Murphy to move in with them when they open their business.
The most common ways this happens are construction overruns in time and/or money, financing takes longer than anticipated, and permitting and zoning roadblocks. The important concept here is to realize things will not go exactly according to your business plan. As a new owner, you must expect the unexpected.
No HR Planning
Don’t forget to do your homework when hiring employees. The first thing you need to do is know whether they are employees versus independent contractors. Chances are they are employees. You should have written hiring procedures as well as job descriptions and evaluation procedures.
Always make sure you comply with employment laws and have written employment polices reviewed by an attorney that specializes in employment law. This is a case where an ounce of prevention is worth thousands of dollars of cure.
Lack of an Accounting System
It is critical to start off right with your accounting. I encourage new business owners to hire a CPA to help set up their accounting system. It is cheaper to do it right the first time.
You must make sure your system and software comply with all the payroll and sales tax laws. This is a very complicated area and mistakes here can pierce the corporate veil and become personal liabilities.
Don’t forget that you need accurate and timely financial statements to effectively manage your business.
A little planning can go a long way toward ensuring that your business is off to a good start and that you can handle Murphy’s visit.
Lynn Vos is area director of The University of Georgia Small Business Development Center. Contact her at 912-651-3200.
Vos, Lynn (2012, February 8). Five easy mistakes to new owners. Business in Savannah.