What common mistakes should I avoid when starting a small business?

Many new small business owners go through the same process when starting out. They make mistakes because of time or money constraints, or because they didn’t realize that what they were doing was wrong until it was too late.

Luckily, other business owners have gone through those same problems and have learned from them.

If you’re just getting started, here are some of their biggest lessons to keep in mind.

• Not creating a written plan before starting the business
• Writing a business plan without doing research
• Ignoring feedback from customers
• Operating without a legal entity
• Using a business name that hasn’t been checked
• Signing contracts without understanding what you’re signing
• Hiring people without protecting your intellectual property
• Ignoring industry regulations
• Using illegal marketing
• Using other people’s intellectual property
• Ignoring taxes
• Not having insurance
• Mixing personal and business assets

Write a Business Plan

Every small business owner has heard the same advice: write a business plan. Yet, entrepreneurs still jump in without having anything in writing.

This document will serve as a roadmap for your business and will help you stay on track as you grow. If you don’t have a written business plan, you’re likely to miss a lot of important information about how your business is going to operate.

The plan can cover a lot. It includes a summary of how you’re going to market and sell your product, what sets you apart, a summary of projections for the next five years, and an explanation of your strategy for growing or maintaining your customer base.

It also keeps everything in one place and lets you know what your goals are and how you’re going to reach them.

Jumping into writing the plan without having the knowledge is just as bad as not writing it at all. Without research on your market and any possible competitors, you’re setting yourself up for failure.

A lot of first time business owners think they don’t need to research if they have good business knowledge or business experience already. That’s not always the case. You might be sitting there, thinking about getting started and trying to think about what the best, most high-quality goods you can offer for your business are.

Too many people start a business without actually knowing whether there’s enough business to make their effort profitable. Small business owners who jump in without having this information may find themselves jumping into businesses that no one wants.

Researching is an important part of building your business because it allows you to plan. This includes everything from who your customers will be, to what prices you can charge for your products or services. The one rule that every business owner is told is to know their audience. That is good advice.

When starting a business, it’s tempting to ignore negative customer feedback. You want to think people like you and what you’re doing, so you don’t pay attention to what they say. Then, you end up losing more customers than you gain. The whole point of owning a business is to make customers happy.

The best way to know your customers is to ask them questions. Whether they come from word of mouth or online reviews, they’re telling you what your business is doing right and wrong. It’s important to understand that one customer’s complaint is a customer’s complaint. But three customers complaining about the same problem? You have a problem.

This information can be the key to improving the way you do things.

Legal Entity

A lot of small business owners just skip the paperwork to form a legal entity. If you operate a business without formally forming it, that means that you’re operating as a sole proprietor. So, when you pay for things like inventory or equipment for your business, those things are yours, personally.

Your business might start as a sole proprietorship, but that doesn’t protect your personal assets from being at risk if you run into legal issues. If you choose the wrong entity, it could result in higher taxes.

Without an entity, your personal assets can be seized to pay business debts. An LLC or corporation protects your personal assets from business debts. Being an LLC or a corporation may be the most convenient for your business, but you should always research it beforehand.

Naming your business is easy. It can be harder than expected if you’re considering trademark laws. You would be out of your mind to jump into a name without seeing if you can even use it. If you don’t do your due diligence, you could end up in a legal mess.

Dr. Susie Pryor, adjunct entrepreneurship and marketing faculty at AMU, advises being cautious with names. Even if it seems a reasonable one for your products, make sure it’s not being used by someone else. As you do your due diligence, see what you can find out about others already using that name.

Pryor planned to start her own dog care business with the name “Barkology.” She discovered Barkology was already the name of a stationery business, a pet toy company, a t-shirt seller, and a maker of luggage. While none of these companies were dog walkers, the potential for confusion was real. No matter what your business is, Pryor points out, lawsuits are expensive, even if you win.

Whatever name you choose, and no matter what your business entity is, you’re required by the Internal Revenue Service to obtain an Employer Identification Number (EIN).

It’s equivalent to a social security number for an individual but for your business. The IRS uses your EIN to identify your business for tax purposes. You use it when you file taxes or open a business bank account. You must have an EIN before you can hire any employees.

In some cases, the IRS might reject your EIN application because they have another taxpayer with a similar name.

The reasons behind the rejection are detailed in an error code, reference number 101. You must start the process of requesting an EIN all over again.

You might think it’s not important enough to bring an attorney in for a contract. Or you might not have the resources to hire a lawyer right now. Many business owners think a contract looks too complicated or just speeds through it, not realizing they’re bound by what they’re signing.

If you need a commercial space for your business, a lease is an unavoidable reality. It’s among the first things you will sign, long before you even get your first customer. The lease agreement will need to include a term or length of time you’ll rent, often five to 10 years. You’ve probably been in a situation where you’re reading a contract and you think it doesn’t make any sense or read like English.

One of Pryor’s clients found one contract in particular that was too good to be true. The monthly rent was low. It could be the perfect spot at the perfect price, and you’re thinking you’ve found a diamond in the rough. But what she found when she read further was that rent wasn’t all the cost.

Reading the fine print, she realized there was also a service charge attached: taxes, insurance and common area fees. The service charge was nearly as much as the rent. Unpacking that part of the contract, one line said you, the tenant, would be paying for all plumbing, electrical and HVAC maintenance.

So, before signing that agreement, make sure you read the fine print. Contracts have consequences.

With your first employee on board, you’ll want to make sure you’ve protected your intellectual property with an agreement. A non-disclosure agreement is a document that all freelancers or employees can sign when you hire them. The agreement ensures both the freelancer’s and the company’s proprietary information remains confidential.

Pryor recommends having employees sign non-compete agreements. This is something that is specific to each state, and limited by law. When employees go to a competitor’s company, they can take clients with them.

Owning a business means you need to understand the regulations in your industry. Ignoring them can lead to trouble, no matter what business you have or how new it is. Once you open your doors, you’re responsible for complying with all applicable federal, state, county and city regulations.

Every city and county is different, so check with your state, city and county offices. Pryor dealt with zoning and land-use ordinances, building permit and inspection requirements, signage, ADA accessibility and liquor licenses. Pryor says it’s up to the owner to keep up with all of these.

That includes making sure your location complies with the rules for the community where your business is located. Legal restrictions on commercial space vary between counties, and sometimes even between streets.

When Pryor opened her store, she found her location was close enough to a church, which meant she couldn’t sell wine by the glass. Replacing that income wasn’t part of her business plan; it wasn’t in her projections.

Pryor had to pay to have her scales for weighing cheese and meat inspected once a year, a costly state requirement.

Regulations, requirements and any other restrictions are key parts of any business. Make sure they’re included in any plan. To comply with the rules, you must research and identify the applicable laws and regulations. It can be complex and time consuming, but it’s necessary. Childcare, food service, alcohol and tobacco sales are all industries that are heavily regulated. Do the research into what you’re allowed to do, and what you’re not, before getting started.

Doing your research into regulations can be hard. And rules aren’t always posted on your state or local government’s website. If you can’t find it online, call the agency. You have to contact the right person in each different department or agency to understand the complex array of rules.

Things can be different across the country. What works in one state can be outright illegal in another.

Pryor learned this running her pet care businesses in the Midwest. Each state has different regulations you must comply with for dog boarding, day care and grooming.

Some companies get in trouble for running promotions or contests that look great on paper but are actually illegal. The Federal Trade Commission offers basic guidance. You also have to consider laws or rules that will affect your marketing. These regulations can be a minefield, and they’re not something you want to overlook.

Businesses in certain industries may find themselves regulated by several government bodies. There are federal, state and local laws on deceptive business practices.

Don’t risk getting in trouble because you didn’t do the proper marketing research first. Get your policies reviewed by a lawyer.

Anyone trying to run a business can see using other people’s intellectual property can be an easy mistake. You may have grown up with an animated figure you love, but that doesn’t mean you can use them for your business. That idea or logo you’ve been using that’s on your t-shirts? It might not be yours. No one wants to get sued by Disney.

It’s too easy to think you won’t have any problems using that old favorite song of yours as the theme music for your commercial. Unauthorized use of a copyrighted song can result in a lawsuit for copyright infringement. Fighting a lawsuit is not cheap, no matter who wins. Reuters reported that Sony Music sued USC over alleged copyright infringement in using copyrighted songs in its social media posts.

Ignoring Your Tax Obligations

It’s easy to ignore taxes until you find yourself way behind and owing way more than you thought. Ignoring your tax obligations will cost you.

As a new business owner with little cash flow, taxes can get put aside temporarily. Payroll is where money that should go to taxes can get misdirected, even unintentionally, Pryor says.

Pryor also notes that, with leases and vendor agreements, you could be held responsible for the whole debt. New small business owners may think: this is never going to be me. But this is a dangerous mindset to fall into, Pryor says.

Business owners without insurance can face massive financial losses in the event of accidents, natural disasters or lawsuits. The SBA offers specific steps for buying business insurance. These four steps can help:

• Figure out what kinds of coverage you need.
• Shop around for a reputable, licensed agent.
• Compare quotes and select the coverage that meets your needs.
• Review your policy every year and make changes as needed.

But business owners don’t all have the same worries, and your insurance needs will depend on your industry. Pryor has multiple insurance policies, including property and liability coverage. She also carries an umbrella insurance policy which covers more than other policies cover.

Your structure determines whether you have personal liability for debt. Pryor recommends keeping business assets separate from your own assets. If you operate an LLC or corporation, you’re not generally personally liable.

In business, there’s a practice called piercing the corporate veil. When a company doesn’t keep its assets separate from that of their owners, they’re considered to be one and the same. Using your business to pay off personal debt, such as a mortgage, pierces the veil. From there, other personal assets, like a car, can become subject to business liabilities.

Even for an LLC or S-corp, if you don’t observe all the rules about operating a business, such as keeping separate bank accounts and records, or stating your structure in communications, you might find yourself responsible for the company’s debts or losses. Pryor says this can be a huge mistake.

Owning a business is an exciting experience for anyone. Starting one can also be daunting. It can be exhausting and you can feel frustrated by all the details. It’s worth the investment of time and money to do the research before you start, so you won’t have to redo anything later on. The best place to begin is by talking to a lawyer or tax professional in your area.