Starting a Small Business: How to Avoid a Common Yet Deadly Mistake
Most entrepreneurs give little thought to the legal structure of their business, especially in the early days. But not knowing the risks of just “winging it” can come back to take a painful bite out of your bottom line. Even worse, it could put you at very real risk of losing more than your business, without warning.
Why your business structure is worth your attention
Usually the biggest reason to go into business is to turn a profit. And a lot of hard work is involved in building a profitable business, without a guarantee for success.
The difference between wasting your time and getting into big debt, or financial freedom and prosperity, has much to do with building on a solid foundation. Your choice of business structure is a key component when it comes to your business stability – now and for the long term.
What effect does choice of business entity have on your finances and business operations?
Fact is, your profits will be taxed based on your business structure. And, of course, navigating the applicable tax laws is no easy task. The government knows this, so most new businesses are, by default, the type of entity that generally pays the most in taxes – a sole proprietorship or partnership. Thank you Uncle Sam.
In reality, besides employees, taxes will often be your largest business expense, especially for service-based companies. So educating yourself about which business entity and it’s tax advantages are best for your situation can significantly affect how much of your profits you get to keep and how much you are forced to hand over to the government.
Your choice of business structure can also have a big impact on how you need to run your business. There are legal requirements that must be followed, depending on your choice of business entity. When these are ignored (and they often), serious consequences can raise their ugly head, some of which can put you out of business instantly.
Most often, business owners who pick some sort of corporate structure (with or without the advice of qualified professionals) don’t know what the requirements are, leave themselves without any liability protection. That’s a very scary, but extremely common scenario.
How can the risks be minimized sensibly?
The best way to avoid falling into these costly traps is education. Admittedly, understanding the different business entity choices (and there are many of them) is not an easy path to navigate for most of us. But who said starting and running a solid, profitable business was going to be simple? It doesn’t, however, need to be difficult. All it takes is some research to get the needed facts before making a smart choice.
How to make smart choices about business entity
Here’s my four-step action plan for getting the information you need to make a smart choice about the best business structure for your business sooner rather than later (or too late):
1. Know where your business is going. You should have at least a basic business plan laid out that describes what your ultimate goals are, how you’re going to get there, and include an exit strategy. Block out a full day or two on your calendar to either review or map out where you want your business to be in 3-5 years, and what it will look like when you’re “done” with it.
2. Educate yourself first about the different business structures available to you. This should be your own research via books, the Internet or any other means available for credible, unbiased information. Define your priorities (based on your business plan) and identify the basic advantages and disadvantages of each entity choice. Identify the business structure that appears to be best for your goals.
3. Engage a qualified professional. AFTER you’ve done your research, consult with either an attorney or accountant who specializes in small business and discuss your plans. Your objective is to start moving toward a definite decision based on what’s going to give you the best overall protection and tax savings (as well as other key considerations) for your unique business situation.
4. Make it happen. Lay out what needs to happen next to implement your plan to build or maintain a solid foundation for your business success. Then put it on your calendar and do it!
Take-Action Resource
Straight Talk About Business Entities – multi-media training that investigates the different entity types, their tax advantages and disadvantages for making an informed choice based on your own unique business situation and priorities
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Gabrielle Fontaine, PB is a freelance Professional Bookkeeper and Advanced Certified QuickBooks ProAdvisor. She specializes in assisting Internet-savvy entrepreneurs get control of their books and maximize profits. Gabrielle also publishes the business-boosting online ezine, Smart Money Choices. Get more information at http://www.BookkeepingDirect.com
October 16th, 2009 at 4:16 pm
Thanks, Gabrielle.
I can really identify with what you said about winging it. I’ve found that many business owners, especially new one, subscribe to the winging-it mentality. But I’ve seen even a lot of veteran business owners who still try to run their businesses off the top of their heads.
I’m not sure what it is — the adrenaline rush of making every decision on the spur of the moment, or a fear that the time it takes to formulate a viable plan will take time away from making money — but winging it is a common shortcoming in many businesses.
I like what you say about educating oneself about business entities and actually planning where you want to go instead of merely putting one’s business out there and hoping to hop along for the ride.
Great stuff again, Gabrielle!