So You Have An Idea for a New Business - Learning from the Entrepreneurs Common Business Formation Mistakes

After working with small to mid-size businesses for nearly 17 years, I am always struck by how successful new and existing business owners are when they have the right team of professionals advising them. Unfortunately, many young entrepreneurs eager to get their new business started often fail to make sure they have the right team aligned because of expense and a general sense that they can figure it out later. The problem is that there are often critical missteps that happen when you rush into a new business without making sure it is structured properly. Indeed, the Bureau of Labor Statistics indicates that approximately 20% of new businesses fail in the first year, with 50% failing by the fifth year. Remember, Rome was not built in a day and your business likely cannot and, more importantly, should not be.

The key to a successful business is having the right people, financial know-how, effective processes for streamline the business, and, ideally, a well-researched business plan. Forming and running a business is difficult whether the business provides services to its customers or sells products. As a business owner, you are likely to make mistakes, but you can learn from them. Familiarizing yourself with common business formation mistakes may help you avoid them and increase your chances of building a successful and lasting business.

1. Failure to plan. Spend the time and money necessary to create a well-thought-out business plan. This requires research which is then used to create and synthesize a business plan and a budget. Carefully consider your expectations for the business as a startup, as well as one, five, and ten years down the road. Be sure to write down your goals. If you can afford to, consider consulting a business coach who can help you formulate the plan.
2. Failure to research. You should thoroughly vet the market for your intended product or service. How much demand is there? Who are your intended customers? Consider engaging a market research company to survey your ideal prospective customers. Talk to others in the same industry. Gather as much information as you can so you can identify traps others have fallen victim to or have been able to avoid. Do not limit your research to friends and family who are not likely to be objective. Seek advice from objective customers or other business leaders. Of course, make sure you have the proper safeguards in place, however, before you share your ideas to the world. A confidentiality, non-disclosure agreement is critical in the researching stages when you are working with others.
3. Failure to form a legal entity or forming the wrong type. Some new business owners try the do-it-yourself approach to business formation. This can be a critical mistake because business owners do not always have the knowledge base and the understanding of tax and corporate laws to make this determination. While there are online services that purport to help you form a corporation or limited liability company, these online services do not provide legal advice (indeed, legal advice is specifically disclaimed in their terms and conditions). Thus, it is prudent to invest in the advice of legal counsel who can guide you on why your particular business model is the best business structure for your business. But that is not all, it is also important to consult your tax professional who can advise you about the federal and state filings and taxes applicable to the different structures. With the advice of a lawyer and a tax professional, you will choose a structure that is best for you and your business. Because the tax and legal ramifications of this structure can haunt you for years to come, or cost 1000s to fix in the future, this is a critical first step.
4. You can’t do it all. While you may initially be able to create your own website, talk to your customers, answer your phones, pay your taxes, handle your books, design new products, and manage the affairs of your business at the very beginning, as your business grows this is not something you can likely sustain. Do not wait too long to delegate some of this work to professionals who can make you more efficient. Remember efficiency can drive additional sales and increase profitability. You never want to have customers turn away because your product or service is subpar—which can easily occur if you are doing too much and do not delegating as much as you can. Consider hiring a virtual receptionist to answer and return calls and make appointments. Hire a graphic designer to create your logo, branding, and website. Do not wait too long to hire your first employee. Before hiring, thoroughly vet the candidates to ensure you find the right fit for your business. Spend sufficient time training your new employee to ensure the employee understands your goals and your brand and will properly convey your company’s image to your customers. Do not underestimate the value that can be added to the business by having others help you.
5. No website or marketing. Do not underestimate the importance of your online presence. The internet is here to stay and the first place potential customers will look for you is online. While many new businesses will create social media pages, it is not uncommon for business owners to withhold building a website or effectively market their businesses. Being able to find your business and developing brand awareness is critical to the longevity of your business. A marketing team or strategist can help you build and effectively market your brand which will generate buzz and leads for your business. There are many review forums, such as the Better Business Bureau, Facebook, Yelp, and Google. You can easily link your website to these review forums, which will accomplish two important goals: (1) driving customers to your business and (2) allowing your customers to leave reviews for your business. You also need to take time to address negative reviews and, obviously, to the extent possible, avoid them altogether by having top notch service and products. This obviously comes with proper planning.
6. Setting the wrong price. Make sure you are not offering your product or service at a price that is too low or too high. Research your competition: what prices have they set for their products or services? If you set a price that is too low, your business may fail because your prices are not high enough to generate a sufficient profit. Look at the market for your product or service and determine your desired profit margin based on your financial projections and your own sales.
7. Improper bookkeeping. This is probably one of the biggest issues we see but businesses commonly fail to implement good bookkeeping practices. Discuss good bookkeeping practices and strategies with your tax professional. Proper bookkeeping will help ensure the separation of personal and business expenses (which is critical to protecting your limited liability if you are a corporation or LLC), assist you in staying on top of your bills (and especially insurance and taxes), and help you understand your financials and your business’s health. It can also play a critical role in squabbling partners who think there is misuse of business monies.
8. Not having written contracts. This may be one of the biggest issues I see with my corporate clients. Often people have become accustomed to a handshake deal – especially for the delivery of goods and services. The problem with that is it puts no formal conditions or obligations on the counterparty. Every single agreement with a client, vendor, or employee should be in writing and should specify the agreed-upon terms of the business relationship or transaction. They should have certain boilerplate terms, like attorneys’ fees provisions if there is a dispute under the contract. If you sell products or services online or have other important content on your website, you should also have written terms and conditions on your website and, if you operate in California and obtain information from your customers online, you must have a privacy policy. We can help create well-drafted agreements for you to use with your clients, employees, or vendors. You can also ask us to review contracts given to you by your vendors. Without properly drafted written agreements, disputes and lawsuits frequently arise.

You should not feel discouraged if you have made or are continuing to make some of the foregoing mistakes. As long as you learn from them so you do not repeat them, your business can be not only successful but sustainable. Successful business owners take the time to research and plan before launching their new business and it is never too late to get organized in this fashion. In addition, do not be afraid to seek advice from an experienced attorney who can help you navigate these common pitfalls.