Don’t be another failed business idea
According to the U.S. Bureau of Labor Statistics (BLS), approximately 20% of new businesses fail during the first two years of being open, 45% during the first five years, and 65% during the first ten years. Only 25% of new businesses make it to 15 years or more.1
How you start your business venture will determine your future. Getting the best small business insurance and abiding by small business legal requirements is super important, but they might not be as high on your priority list as making money. That’s why we compiled a list of the biggest startup mistakes to avoid. With the proper planning, funding, and flexibility, you can significantly improve your chances of success.
One. Failing to plan out your business venture
A business plan is the foundation of any new business venture. Planning out your roadmap to success makes you think about a lot of things such as a timeline, realistic goals, potential roadblocks, solutions and much more.
However, it is equally important to be flexible with any plan you create. A startup is constantly evolving which is why you should approach a business plan as more of a guideline and not a rule book. It is a great way to test out new strategies and cross off ones that don’t end up serving their purpose. Don’t forget, starting a new business venture is a continuous process. Whatever plan you create, just know you’ll be constantly reviewing, revising, and recalibrating.
Two. Ignoring small business legal requirements
Small business legal requirements are a large part of any business. If you don’t abide by small business legal requirements from day one, you put yourself and your business venture at risk of fines, lawsuits, and other penalties. The best thing you can do for your business venture is to speak with legal counsel that specializes in startups. For now, we have outlined a few small business legal requirements you definitely should know about.2
Designate the proper business entity
Possible structures include sole proprietorship, general and limited partnership, C-corporation, S-corporation, and limited liability company.
- Sole proprietorship is a type of enterprise owned and run by one person and in which there is no legal distinction between the owner and the business entity.3
- General partnership is an owner of the partnership; whereas, a limited partnership is a silent partner in the business.4
- C-corporation is a legal structure for a corporation in which the owners, or shareholders, are taxed separately from the entity.5
- An S-corporation is a legal structure that elects to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on the corporate income.6
- A limited liability company, more commonly known as an LLC, is a separate and distinct legal entity. This means that an LLC can get a tax identification number, open a bank account and do business, all under its own name.7
Pay proper business taxes
You are legally required to pay taxes. This includes income tax, self-employment taxes, and for some businesses, sales tax. When in doubt, hire an accountant. Taxes are not something you want to mess up.
Nothing but stellar bookkeeping will do.
Once again, when in doubt, hire an accountant.
Get your employer identification number (EIN)
You need an EIN to open a business bank account and adequately file your business tax returns. You can quickly request one online for free from the IRS by clicking here.
Open a business banking account
Once you have your EIN, it’s time to open up a business bank account. This is a small business legal requirement you shouldn’t even have to question. Business accounts help you protect your finances and identity, simplify business taxes, and make cash flow in and out of your company more efficient. Woligo offers two different types of business banking accounts to give you flexibility as a business owner.
Classify your workers properly
It’s important to correctly classify workers as independent contractors or employees for legal and tax reasons.
Create a company handbook
It is vital to make sure all employees are aware of and understand your company’s legal liabilities. As a business owner, you could be liable for anything your employees do while representing your business venture. That’s why you need to find the very best small business insurance to make sure you are covered.
Hire competent legal counsel
You really can’t put a price on having the right attorneys on your side.
Three. Lack of funds
If you run out of funds at the beginning of your business venture, it may mean your business never gets off the ground. This is another reason why a business plan is so important. Sufficient startup capital is necessary until the company becomes stable on its own. In order to make sure you don’t run out of funds; you should know and understand your burn rate and zero cash date.
The burn rate is typically used to describe the rate at which a new company is spending its venture capital to finance overhead before generating positive cash flow from operations. It is a measure of negative cash flow. The burn rate is usually quoted in terms of cash spent per month.8 And then your zero cash date is the most likely date, at your current spend/burn, that you will run out of cash.9
A financial plan is one of the most, if not the most important part, of your business plan. But again, this is something that will also need to be flexible and could even change day to day. How much is it going to cost you to run your business every month? You need to know exactly from the first month how much you need to get started. Then look at your revenue, cash out date and burn rate. Is it going to take you six months to get to a point where you’re at break-even, or is it going to take you a year or two years? Learn to pay attention to your finances and keep careful records of the cash going in and out.10
Four. Not knowing your target audience
You might have the perfect product or service, but if you don’t get it in front of the right audience, then it won’t sell. Understanding who your target audience is means you can deliver the right message most effectively.
Start by interviewing one hundred potential customers before you spend any significant amount of money or formalize your strategy. These initial conversations can help disprove or reaffirm assumptions you might have about your target audience and save critical resources, so you don’t start off on the wrong path.
Five. Underestimating the competition
Customers can spend their money in a million different ways and on a million different things. A typical startup mistake is thinking your competition is non-threatening or even non-existent. As a small business owner, your job is to uncover, identify, and analyze companies that could easily leverage their resources to compete with you.
Six. Expanding too quickly
A successful business is great, but expanding too quickly could mean becoming a failed business idea. You have to treat every expansion like you’re starting from scratch because, in a lot of ways, you are. When a business expands too fast and doesn’t take the same care with research, strategy, and planning, the financial drain of the failing expansion can sink the entire business venture.
Seven. Thinking you can fix business mistakes without insurance
You are liable for the actions of your employees and your business venture, which is why insurance is your best friend. One lawsuit or disaster could be enough to wipe out a small business and instantly make you a failed business idea.
When you start a new business venture, it’s normal to want to save money, but one of the biggest startup mistakes you could make is trying to cut corners when it comes to insurance. Businesses have access to a wide range of insurances, and you should take full advantage of the extra security.
Professional Liability Insurance
A lot of business owners think that the best small business insurance is professional liability insurance. Also known as errors & omissions insurance (E&O), professional liability insurance is there for those “uh oh” moments. It protects your business venture by helping cover defense costs, settlement, or judgment if a client sues your business. Business mistakes happen, and those mistakes by you or your employees can lead to an angry customer who files a lawsuit for a negligent act, error, or omission. For this reason, you may hear this insurance referred to as errors and omissions insurance.
Even if you aren’t at fault, that doesn’t always stop an upset customer from filing a claim. It’s an inherent risk of owning a business, particularly if your profession can significantly impact your customer’s bottom line. In some occupations, professional liability insurance truly is a must. And some states require such insurance to operate.
Cyber insurance can help protect business ventures and independent contractors from technology-related risks, such as data breaches and hacking. It is meant to help protect the business if sensitive information that many companies deal with every day is hacked, whether that is customers’ personal medical records or credit card information.
There are two main types of cyber insurance — data breach insurance and cyber liability insurance. They can combine to help provide robust coverage.
Data breaches involve the exposure of personal information and can happen in a number of ways. It’s a business mistake that could happen outside of your control. Maybe a hacker breaks into your network, or perhaps an employee accidentally opens an email with a virus that exposes confidential information. Unfortunately, that’s the world we live in. Data breach insurance may help cover costs, such as notifying all customers, patients, or employees who have been affected by a breach. The coverage can also help with hiring a public relations firm to handle the situation and with offering credit monitoring services to data breach victims.
Business Owner’s Policy (BOP)
Business property insurance + business liability insurance = business owner’s policy (BOP) insurance. It is a comprehensive policy explicitly created for business owners. BOP insurance is designed to help cover losses and damages for your business due to disasters such as fires, theft, or even personal or advertising injury. The business property insurance side of it can help protect your business’ property, inventory, and furniture. The liability insurance side offers liability protection if someone claims your business is responsible for bodily injury or property damage.
There’s no one-size-fits-all cost for a business owner’s policy. Since a BOP blends commercial property insurance and liability insurance, your premium will rise or fall depending on your protection needs. Several factors come into play when calculating the premium for your BOP, such as:
- Your industry & occupation
- Number of business locations you have
- Where your business is located (state & zip code)
- Number of employees
- How long you’ve been in business
As a business owner, you have a ton of responsibilities as is. A business owner’s policy through Woligo will be there for you when a business mistake or disaster strikes so you can focus on the quick recovery of your business venture.
Eight. Not learning from others and their startup mistakes
Starting a business is hard—don’t let anyone tell you otherwise. But suppose you are careful about getting your business venture checklist in order, sticking to your business plan, and avoiding the common startup mistakes. In that case, you’ll save yourself from some severe headaches down the line.