The process of starting a small business can be an arduous one; there are numerous steps that need to be taken — and often in a precise order — to legally establish a business. As a result, the process can be overwhelming. Unfortunately, it’s also easy to overlook some important details and steps along the way. By being aware of a few of the most common legal and compliance mistakes made by small business owners when starting out, you can be better prepared for future success.
1️⃣ Misclassifying Employees as Independent Contractors
Regulators are coming down hard on misclassifications. The IRS estimates that this problem includes millions of workers. It is best to talk this through with an expert, but you can get some background on the guidelines at the United States Department of Labor website.
2️⃣ Choosing the Wrong Business Structure
One of the first major decisions you’ll need to make is the type of business structure you will select. This can range from a basic sole proprietorship (which doesn’t require any special forms or paperwork) to a more complex structure, such as a corporation or LLC. Different types of business structures offer different tax benefits and other protections, so it’s important to thoroughly explore your options and select the structure that’s best for your unique needs. Establishing your business under your desired structure may require help from a legal or accounting professional.
3️⃣ Failing to Apply for an Employer Identification Number
Unless you plan on operating your business strictly as a sole proprietorship (in which case, you will use your personal Social Security number when filing taxes), you’ll need to apply for a unique Employer Identification Number (EIN). This number will be specifically associated with your business, and it’s helpful to think of it as a business Social Security number; it’s used to file your business taxes, open business bank accounts, and more.
4️⃣ Overlooking Important Permits and Licenses
Depending on the specific industry in which your business will be operating and your location, you may also be required to obtain specialized licenses and/or permits in order to legally operate. Otherwise, you’ll run the risk of being shut down or finding yourself in serious legal trouble down the road. Take some time to research the specific types of permits or licenses that you may need to obtain, as well as the steps you’ll need to take in order to acquire them. Sometimes, this process can be time-consuming and even costly, so it’s not something you’ll want to put off until the last minute.
5️⃣ Not Knowing When to Speak to a Professional
When starting up a small business, it’s not uncommon to run a one-man (or woman) operation. After all, you may not have the cash flow or even the need to hire outside help in the early stages. Still, when it comes to making sure your business is squared away from a legal/compliance standpoint, it can certainly be worth the money to consult with tax and accounting professionals early in the game. You don’t necessarily need to onboard these experts full-time, but being able to turn to them for advice and guidance when you need it will help you avoid serious legal issues later on.
6️⃣ Putting Off Domain Name Registration
As soon as you have your business name picked out and registered, it’s also in your best interest to go ahead and register your website domain as soon as possible. Even if you don’t plan on setting up and launching your website any time soon, domain names are cheap, and having yours registered now will help you avoid a situation where the domain name you want is taken by somebody else later on.
7️⃣ Lack of a Comprehensive Business Plan
One of the biggest mistakes small business owners make when first starting out is that not having a well-thought-out and articulated business plan. A business plan is an important document that outlines in detail what your goals for your business are and how you will achieve them. This document is important not just for you and other members of your immediate team, but for potential investors as well. Should you seek financing for your company at any point, an investor is going to want to see and scrutinize your business plan — and it will likely have a major impact on the final decision.
8️⃣ Not Having Finances Squared Away
Another common mistake new business owners make is poor financial planning, which can lead to a lack of funding to get you through your first months successfully. Ideally, your business plan will account for all company-related expenses during the first year of operation, as well as personal expenses. Many small business owners overlook or miscalculate these with disastrous results. The easiest way to avoid this mistake is to consult with a small business accountant during the early stages of drafting your business plan.
9️⃣ Failing to File Patents on Products or Ideas
It’s (hopefully) no surprise that you’ll want to be proactive about filing for patents for any unique products, prototypes, or designs you may have. However, many small business owners don’t realize that they’ll also want to file patents on ideas, such as intellectual property, that could otherwise be stolen or copied and used by other entrepreneurs. Intellectual property can be just as valuable as a product prototype, so you’ll want to protect these ideas accordingly. Be careful to avoid waiting too long to file for relevant patents; the process can be long and drawn out, so getting started early will be in your best interest.
🔟 Being Blind to Important Compliance Requirements
Last, but not least, make sure you’re aware of all compliance requirements that may apply to your business based on its structure, location, industry, or other factors. For example, even if you’re operating as a sole proprietorship, you’re required to file and pay quarterly estimated taxes. Failing to meet compliance and other requirements can result in serious legal trouble, including fines and penalties. Keeping a calendar of important dates is a good idea so you don’t forget anything. This is yet another situation where having a compliance expert, such as a tax or accounting professional, can be invaluable. They can assist with annual compliance reviews, reminders on impending deadlines, and more.
Ready to take the next step in your business journey?
From selecting a name and business structure to making sure your small business remains in compliance at all times, there are a lot of opportunities to make mistakes as a new business owner. By keeping this information in mind and working alongside the right professionals as you prepare to launch your new business, you’ll be able to avoid these issues. From there, you can maximize your chances for success in the first year of operation and beyond.
Contact us today for personalized advice on setting up your small business and choosing the right business structure. We’re here to help you get off to a flying start!