7) Not Knowing How to Collect Bills
One of biggest problems new small businesses face is collecting bills. You should be aware that some clients may not pay their invoices on time. So plan to spend some time collecting what is owed to you -- you might need to re-bill clients or to contact them personally when they are late in paying you. (For more advice on getting paid, read Nolo's article Business Debt Collection.)
8) Not Planning for Cash Flow Problems
There may be times when your business runs low on cash, either because business is slow or because your clients or customers are late in paying you. You should either apply for a credit line with a bank or develop some other emergency plan for how you are going to pay your bills when you don't have enough cash to do so.
9) Not Planning to Protect Personal Assets
You don't want your business debts to endanger your personal assets, such as your home or your savings account. Some options for protecting your personal assets include purchasing liability insurance for your business, and structuring your business as a corporation or an LLC. (To learn how to protect your personal assets from business debt, read Nolo's article When You Can't Pay Your Business Debts: Personal Liability and Bankruptcy Options.)
10) Choosing the Wrong Ownership Structure
Choosing an ownership structure is one of the most important decisions you'll make for your new business.
Consider your specific needs. The following factors can help in making your decision:
- What are the potential risks and liabilities of your business? (For instance, building houses, making edible goods, fixing cars, and selling alcohol carry inherent risks.)
- How willing are you to spend the money it takes to set up and maintain the records for a separate business structure (such as an LLC or a corporation)?
- What are your expected profits or losses in the first couple of years? Unincorporated business structures let you deduct business losses from your other income, but corporations do not.
- What are your plans for seeking investors? Sophisticated investors often prefer the stock structure of a corporation.
(For an in-depth discussion of these factors, read Nolo's article Choosing the Best Ownership Structure for Your Business.)
Consider your potential liability. Here is a summary of the amount of liability you may face depending on how you structure your business:
- Sole proprietors. Because sole proprietors are personally liable for all business debts, you could potentially lose everything you own if your business debts are not paid. (For more information, see Nolo's Sole Proprietor area.)
- Partnerships. Because your partners can make commitments that bind the entire business, your liability may be even greater than in a sole proprietorship. Make sure you can trust your partners to protect your interests. (For more information, see Nolo's Partnership area.)
- Limited Liability Companies (LLCs). LLCs are often subject to annual taxes or annual reporting fees. The amounts vary by state, but can be as high as $500-$800 per year, whether or not you turn a profit. (For more information, see Nolo's Limited Liability Company (LLC) area.)
- Corporations. Corporations are required to keep many different records, including recording every major decision and holding annual formal meetings. If you fail to do so and are sued, a judge can find that the corporation was a sham (this is often called "piercing the corporate veil"). Investors can also sue you if they think you're not operating the business in their best interests. (For more information, see Nolo's Corporation area.)
Consider what most people do. For most people starting a one-person business, operating as a sole proprietor at the outset makes sense. But, if your business is especially likely to be sued, is funded by outside investors, or might be profitable right from the start, consider forming an LLC instead.
For most people starting a business with more than one owner, an LLC is preferable to a partnership -- you get limited liability but need to do less record-keeping than a corporation, and the same taxation as a partnership.
To steer clear of mistakes that can sink your business, get The Small Business Start-Up Kit: A Step-by-Step Legal Guide, by Peri H. Pakroo (Nolo).
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