Top Mistakes to Avoid When Creating a Company
Think you have the next big idea? Or maybe you’d just like to bring in some extra income to pay off debt. Either way, creating a company is one sure way to realize these dreams.
Running a successful business can be tough, though.
So tough that about 20% of small businesses fail in their first year, and only half of small businesses are around to see the five-year mark.
The best way to improve your odds of long-term survival is by avoiding common mistakes that newbie entrepreneurs make. Most of these mistakes occur because individuals don’t do enough contingency planning in the early stages; they act impulsively, without thinking what could go wrong.
In other words, it’s not enough to be a visionary. You need to have a solid grasp of the road ahead and be able to anticipate each curve and pothole.
Here are the most common mistakes you should avoid when creating your company.
Failure to Register Your Business as a Legal Entity
You need licenses to start operating your business. But if you’re focused just on that, you might overlook something even more important, the fact that the IRS needs you to register your business so that they know how to tax your company.
There are two main types of legal entities, limited liability companies (LLCs) and corporations.
- Limited liability corporations remain a pass-through entity for tax purposes. You file business profit and losses as part of your 1040. They also offer liability protection. With the exception of any personal assets you’ve used to fund the business, your personal property cannot be used to settle claims made against the business.
- Corporations are a separate entity, with their own tax identification number and a separate tax form. They exist in perpetuity and are owned by whomever has a majority of the shares you sell in order to fund the company.
The legal entity you choose isn’t set in stone. You can change the structure later on or opt for modifications — for instance, you can have your LLC taxed as an S-corporation — to the original structure. However, it pays to make a vision plan for your company in the early stages so that you can anticipate which legal entity works best for you as you expand operations.
Not Having Adequate Funding
The number one cause of business failure is a lack of adequate start up funds. Thus, knowing approximately how much capital you need to get your company up and running should be your top priority.
Operating expenses are just one part of the picture. You also need to factor in how much it costs to maintain the company in good standing, including the reporting fees to the state where you registered the business, the cost of having a website and phone line, bank account fees, and so on.
Successful businesses should have the ability to pay for two years’ maintenance cost without relying on revenues. That’s because it takes a start up company at least two years to start turning a profit. What revenue you do have coming in can then be used to pay operating costs.
Thinking You Can Be Your Own Registered Agent
When you start a business, you may develop a superman complex, thinking you can do it all. And yes, technically, you are allowed to act as your own registered agent.
Unless you operate a business that absolutely requires the physical presence of you or one of your principals during normal business hours, however, it’s better to delegate the registered agent role to a company that can provide the assurance you need that sensitive documents will be received and processed properly.
It needn’t be a big expense. Online companies provide this service at a reasonable annual cost, leaving you one less thing to worry about.
We offer registered agent services at Filenow, including the 1st year for free when you form a new company with us.
Treating Your Website as an Afterthought
Websites are today’s storefronts and office building lobbies. They introduce the customer to your company and its brand. You want to start thinking about web design and construction while you conduct market research and beta test your products and services.
Your website should be easy to navigate, optimized for mobile, and contain good headlines and call-to-action buttons to compel your visitors to purchase.
You will reach more potential customers, though, if you create relevant content for your site and update it regularly, a strategy called inbound marketing.
You also want to make sure you have the right domain name. When you choose a unique company name to register your business as a legal entity, you should register your domain name as well. That way you can ensure that your company name and website url are the same.
Of course, if you have significant traffic on an existing website — for instance, you were selling pies as a sole proprietor, but now you want to expand by registering your company as an LLC so that you can hire employees and brand yourself under a new company name — it could be more disruptive to existing customers if you change the domain name.
Lacking Due Diligence About the Market
You probably know your industry well, which is why you want to offer this particular product or service. But you won’t succeed as a business owner unless you conduct market research before expanding your product or service.
This can mean a number of different things:
- Checking to see what the competition offers.
- Seeing if there is a local need for your product or service.
- Beta testing a product to see if it sells before scaling up production.
- Following the latest industry trends.
- Anticipating your market’s needs by knowing how your buyers are.
You can have the greatest product ever manufactured within your industry, but if the time is wrong, or there’s no interest, your business is not going to be successful.
Not Thinking in Terms of Value Proposition
Similar to conducting research into your customer and competitors is determining a value proposition for your company. Your ability to get people to purchase your products or use your services depends on your developing a unique and customized way of reaching potential customers, something that allows you to stand out from all of the other companies in the same industry.
This is your value proposition.
In a way, value proposition is very similar to branding — a successful company’s brand echoes their value proposition. For instance, Apple’s brand embodies its founding ethos, which was the power of the people through technology. The apple represents the Biblical allegory of man’s choosing to defy God in the quest for knowledge. That story of self-reliance is embedded in the company’s brand.
Failure to create a strong and unique value proposition for your company will mean you have no clear way to stand out from your competitors, and you will lose customers to companies who do this well.
Going into Business with Friends
It’s tempting to start a company with someone you know well, particularly if you share industry knowledge. But most experts caution friends against going into business together, likening business partnership to a marriage.
According to Forbes, you need to consider whether you can trust this person to behave ethically and responsibly. You also want to make sure that they will exemplify your brand — i.e., will they behave in a way that reflects the core values of the company? Another consideration is whether your friend brings a valuable skill to the table, one that you don’t have.
If you can check off all these boxes, it might be a good idea to go into business with a friend. But you should never consider taking a step that could have a devastating impact or your finances with someone just because you have a good time with them or have known them forever.
Hiring Employees too Soon
Putting employees on the payroll is a huge responsibility for a business owner, and it adds considerable cost to your enterprise. An article from the Boston Business Journal details the main costs associated with hiring salaried employees, which include:
- The company’s share of payroll taxes.
- Space to house employees.
Benefits alone add 1.25 to 1.4 times to the base employee salary, meaning that an employee earning $50,000 will cost the company $62,000 to $70,000.
Start up companies can usually make do with independent contractors and hourly employees, some of whom they may be able to transition into full-time salaried positions once the business turns enough profit.
Doing It All Yourself
Entrepreneurs can be fiercely independent — after all, you’re starting a business because you don’t want to play by someone else’s rules. Unless you are willing to delegate, though, you put yourself in danger of making critical errors that might destroy your profit margin and put your enterprise at risk.
Therefore its good to have a team of people instead of going it alone— an attorney, contractors, bankers — on whose advice you can rely.
We Have You Covered
In order to succeed for the long haul, small businesses should be prepared for those small contingencies that can derail success. At the same time, you need to hone your vision for the company and make sure you are offering a value proposition that attracts potential customers.
While you work on the big stuff, Filenow can help with the details. We are a team of entrepreneurs, lawyers, business professionals, and tax experts with years of experience in in creating new companies.