Tuesday, May 3, 2011

The costliest mistakes made by start-up businesses

Anyone who wants to start their own business needs to consider many options before starting their own business. Many of the options that need to be considered are directly related to the business operations. Many of these considerations are related to the products and/or services that the business will offer. Many of the considerations are less obvious, and can be the costliest options if not considered and thoroughly investigated.

If you believe you have what it takes to start your own business - you have the experience, training, and/or know-how to start a business, you might be able to start your business - and perhaps even run it successfully - as far as being able to provide the products or services your business provides to its customers.

Have you considered what type of business entity your business will be? What about the financial records? Have you considered what accounting software you will use? Do you know how to use the software? Do you know how to properly setup the software so that you can get good financial reports from the software that can help you run your business? Do you have employees? Are you familiar with your state's employment laws, and what types of insurance (and other benefits) must be provided for your employees?

Every state is different with regard to the types of benefits employees are entitled to receive. However, in almost every state, any business that hires employees (other than immediate family members for a sole proprietor) is required to have Worker's Compensation insurance. Some states require this insurance be purchased through the state. Other states allow this insurance to be purchased through an insurance company that is licensed and registered with the state to provide this type of insurance.

Every state requires employers to pay Unemployment Insurance (paid to the state's department of unemployment insurance). Unemployment insurance is paid for every single employee who receives a paycheck, up to whatever the state's annual limit is. The annual limit varies by state. The percentage paid to the state also varies by state, and will normally vary by employer as well. If your business has employees in multiple states, you must provide worker's compensation insurance in each state where you have workers, and you must also pay unemployment insurance in each state where you have workers. Your business will also have federal unemployment taxes to pay for each and every employee.

Employment taxes, both federal and state, must be withheld. Social Security and Medicare taxes must be withheld and matched by the employer. These taxes must be submitted to the IRS and to the State's Department of Revenue in each state where you have workers. Failure to remit the payroll taxes to the IRS or the State can result in penalties, fines, and interest. The business owner(s) can be held responsible for these taxes if they are not paid.

These are just a few of the many things that need to be considered when starting a business. But we are forgetting three very important things that must be considered when starting a business.

First, you need to consult with legal counsel that is familiar with business laws in your state (and perhaps in each state where you plan to have locations and/or workers). Proper legal counsel can help you navigate the various laws that apply to businesses within your state(s) and that apply specifically to your business. Legal counsel can also help you navigate federal laws that affect your specific business. Legal counsel can help you with contract laws - lease agreements, licenses required by the state, county, and/or city where you plan to open your business, etc. Without legal counsel, you might open your business without having all of the proper licenses, or without following the proper legal procedures required by your state, county, or city when opening your business.

Second, you need to meet with a competent accountant or a CPA. A competent accountant is cheaper than a CPA, and in most cases, should be able to help you with choosing the type of business entity for your business. The accountant should also be able to help you file the proper paperwork with the State, city, and/or county (such as incorporation papers, partnership papers, etc.). Your accountant might have to work with your legal counsel regarding filing certain types of forms to the state (such as LLC and Partnership papers). But these are minor things that the accountant will help you with.

The main reason you need to consult with an accountant is so the accountant can help you choose the right accounting software for your business, and then the accountant can properly setup your accounting software (i.e., the chart of accounts, payroll function, sales tax, items, etc.). If this information is not properly setup from the very beginning, you will find that you have to pay a lot more money to correct the problem(s) than you would have paid to have the information setup properly in the first place. For instance, you might have to pay an accountant perhaps $5,000 to properly setup your accounting software (from the very beginning). If you don't do this, you could end up paying $10,000 or more, to hire an accountant to "clean up" the mess, if it can even be cleaned up. I have seen situations where the original accounting records were so badly messed up that they were deleted - they could not be used at all - and a totally NEW accounting file is created (and everything is then re-entered into the new file).

Third, you need to see a banker in order to open a checking account in your business name. Depending on the type of business entity your business is, you might have to wait until you receive certain documents from various government agencies (such as your EIN certificate from the IRS, papers from the State that show your business is registered with the state, etc.). You need to establish a relationship with your banker so that your banker knows who you are. This will help later on when you need to obtain a business loan, or to open new accounts for your business (perhaps a second checking account to be used as a payroll account, or perhaps to open a savings account or a CD/money market account).

Outside of the legal counsel and a banker, you should also consider having a "board of directors" which is made up of business executives in various types of businesses that you can turn to for advice and help in guiding your business and helping both you and your business to be successful. Your legal counsel, your accountant, and your banker can be on this "board", as well as several other business owners or executives from successful businesses. I recommend that you have at least 7 people on your "board", not including yourself.

The costliest mistakes made by start-up businesses are not having good legal counsel (familiar with business law), an accountant, and a banker. Not having a good, diverse "board of directors" can also be costly, especially for the first couple of years that you are in business.

Some ideas on people you might want to have on your "board" include:

* a good marketing person;

* a good accountant;

* a good banker (not necessarily someone from the big national banks such as Bank of America or Citibank)

* a good HR (Human Resources) person;

* someone from a similar business to yours (not a competitor);

* someone from the same type of business as yours who is not a direct competitor (perhaps from another city in the same state, but who is close enough to come to meetings, or whom you can call if necessary). You might even be able to find someone in the same business as you, but who does not compete for the same "type" of customers or clients;

* someone from a totally non-related business (to bounce ideas off of, to learn from his or her mistakes, etc.).

For example, an accountant might look for an "advisor" to be on the "board" who is another accountant. Not all accountants work with the same type of clients. It would be easy to find another accountant who does not work with the same type of clients that you plan to work with (if you are an accountant). If you want to work with business clients that only have income less than $5M, you can easily find an accountant that works with clients that work with clients that only have income of more than $5M.

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