A quick mind isn’t the only thing you need to run a company successfully. Establishing some financial foundations for your business will help it thrive in the long run. But, not everyone knows how to manage their business’s finances effectively. Luckily, you can learn more from our guide below and learn from common mistakes small business owners make.
Having a Business Plan
Entrepreneurs are a special breed. They break free from the traditional 9-to-5 grind and generate revenue unconventionally. All the while, they strive to solve problems and offer innovative solutions for their clients.
While entrepreneurs are often creative and hardworking, they often fail to establish an adequate business plan for their company. Although digital marketing is important to small business success, having operations in order can certainly help. Below, we’ll discuss the most common mistakes small business owners make when their business begins growing (from a financial standpoint). But, we’ll offer our advice on actionable steps you can take to lead your company’s growth.
One of the most common mistakes new business owners make is failing to select the proper business organization. If you don’t select the right model for your particular company, your finances will suffer.
Before you start thinking about which business model to take on, you must consider several factors:
- The number of desired owners
- Tax perks and drawbacks
- Liability issues
- Record keeping strategies
- Advice from a professional business attorney or accountant
Every business owner’s situation will look different. For example, you may wish to receive personal asset protection under an LLC (limited liability corporation), but you’ll have to deal with the serious tax implications.
Below, you can check out the different business organization models for your company and how they can put you in a good financial position:
As you could probably infer, a sole proprietorship is meant for a sole business owner. It’s the simplest type of company to create and offers you complete control of your company. Anyone who conducts business activities but doesn’t register as any other business type belongs under a sole proprietorship.
Sole proprietors do not produce a distinct entity. Instead, there is no distinction between their business and personal liabilities and assets.
This model is excellent for those who want to get into entrepreneurship but don’t want to commit to a more formal, costly business.
However, one of the biggest startup mistakes that an entrepreneur can make is starting a sole proprietorship without the proper capital. Sole proprietors can’t sell stock to potential investors and often have difficulty obtaining money from wary banks.
A partnership is similar to a sole proprietorship but involves more people. Essentially, a partnership is the most basic business structure for two or more people who want to own a company together.
If you want to start a partnership, you must consider the two types:
An LP only has one owner with unrestricted liability, and all the other partners possess limited liability. These latter partners also have less control over the company, which all parties document in an agreement beforehand. Most partners receive profits via personal tax returns, and the partner without limited liability must pay self-employment taxes.
Note: One of the most common mistakes business owners make is creating an LP without establishing the proper power dynamics, creating conflict down the line.
Limited Liability Partnership
An LLP offers limited liability to every owner. You’ll receive protection from the actions of partners in case they make irresponsible decisions.
Limited Liability Company
A limited liability company (LLC) is a middle ground between the partnership and corporation company structures.
As the owner of an LLC, your assets like your house and vehicle won’t be jeopardized if your business faces lawsuits or bankruptcy.
Losses and profits will count toward your personal income, and you won’t have to pay hefty corporate taxes. However, you’ll still need to pay self-employment taxes for Social Security and Medicare.
If you’re wondering, “What is a common mistake that small business owners make when their businesses begin growing?”, be aware of starting an LLC. You must stay on top of renewal requirements in your state. Falling behind can delay your business’s operations and lower your profit margins.
A corporation (sometimes called a C corp) is a legal entity that can generate profits, pay taxes, and hold legal liability. It’s separate from its owners and offers its owners strong protection from personal liability. However, this protection comes at a cost. C corps must adhere to strict operational processes, record-keeping, and reporting.
One of the biggest small business mistakes a company can make is transitioning to a corporation too quickly. Without the proper resources to handle the responsibility of corporation status, a company can quickly fall under and experience a difficult recovery.
An S corp is similar to a C corp, but it’s designed to circumvent the double taxation that regular C corps have to endure.
If you transition your once small business to an S corp, you can pass profits (and some losses) to owners’ personal income and avoid corporate tax rates.
However, some of the biggest business mistakes you can make under an S corp are neglecting to follow corporate formalities and creating a single stock class that doesn’t appeal to shareholders.
Nonprofit corporations exist to conduct scientific, literary, religious, educational, or humanitarian work. Their work benefits the greater public, so it can receive exemptions from federal and state income taxes on any profits it generates.
Without proper support and backing, nonprofit corporations often fail. They succumb to power uncertainties, insufficient capital, poor organizational development, and empty promises.
However, you shouldn’t reinvest everything you have into your business. It’s essential to ensure you have enough money to fund your retirement once the time comes. Building a personal savings fund and investing it properly will ensure your business can survive trying times and fund your lifestyle during your post-working years.
One of the most common mistakes new business owners make is neglecting to build capital. They shouldn’t throw all of their extra money to contribute to the next great innovation.
Instead, they need to place extra capital into a rainy day fund with high liquidity. While having too much cash around is never a bad thing, your money won’t be working for your company. Instead, it’ll be collecting dust in a savings account that can’t even keep up with the inflation rate.
Every company will manage its capital differently based on how stable its income stream is. For example, an energy business that bills monthly will have greater flexibility than a company that generates revenue on a per-project basis. A company that has more sporadic income will have to have a larger security blanket in case financial hardship hits.
Even though financial planning isn’t the most exciting part of growing your small business, it’s nonetheless important. When you make the right choices for your business, you’ll watch it grow and develop right before your eyes.