Three Common Errors Often Made by New Businesses
Updated: Feb 7, 2022
Well, you are almost there! You have a business idea, required expertise and infinite drive to succeed. You are ready to embark on a new business endeavor and you head to your lawyer. By now you may have a pretty good idea of what type of a legal entity your business needs to be, and you need assistance with having proper documents drafted. Right? Well, it depends.
I am fortunate enough to have worked with an excellent business lawyer Alan Foster (https://www.linkedin.com/in/alan-foster-4497381/) who mentioned once to me that he routinely asks his clients to consider tax ramifications before choosing a particular legal structure and only then proceed with formation.
Indeed, not all legal entities are created equally and their types vary even among industries with, for example, tech industry leaning more toward C corporations and real estate one toward LLCs. Careful consideration should be given not only to immediate short-term goals such as taxation of profits, but also to long-term goals such as exit strategy and succession planning that may impact your company’s initial legal structure.
Switching from one structure to another may be easier for some or may involve some taxation up front without careful planning from the beginning.
Another common error often made by new businesses is not actively managing cash flow. Expenses tend to run amok in the beginning, but not all may turn to be deductible and may even create an unwanted taxable result. Also, although some operational expenses may be absolute must to run the business, others may need to wait until sufficient funds are first allocated to income, payroll and other state and local taxes. Having a system in place that makes it a must to review financial statements on a regular basis to determine cash position and ability to meet most important financial obligations can prevent a lot of problems down the road. This leads us to the third common error.
Leaving accounting out of the picture or fully outsourcing it without staying engaged is the third common error. Well, as a member of the accounting profession, I get it. I know the stereotype: accounting is boring, it is for those who enjoy mundane tasks, and it has little to do with daily operational needs of a company. However, properly done accounting can become your important ally in determining a budget for a year, figuring company’s financial position on a timely basis, adjusting profit margins, determining whether the pricing is right and even whether your product can withstand a competition.
To summarize, it takes a village to raise a child and to build a successful business. Surround yourself with trusted legal and accounting advisors and work as a team to promote your company’s interests.