Common Business Formation Mistakes


The key to a successful business is having the right people, financial knowledge, effective processes, and a well-researched business plan. According to the Bureau of Labor Statistics, approximately 20 percent of businesses fail in their first year, and 50 percent fail by their fifth year. Forming and running a business is hard regardless of whether the business provides products or services. As a business owner, you are likely to make mistakes, but you can learn from them. Awareness of the following common business formation mistakes may help you avoid them and increase your chances of building a successful and lasting business.


1. Failure to plan. Spend the time and money necessary to create a well-thought-out business plan. Do research and then create a business plan and a budget. Carefully consider your expectations for the business as a startup, as well as one, five, and ten years out. Write down your goals. Consider consulting a business coach who can help you formulate your plan.


2. Failure to research. You should thoroughly vet the market for your intended product or service. How much demand is there? Who are your intended customers? Consider engaging a market research company to survey your ideal prospective customers. Talk to others in the same industry. Gather as much information as you can so you can identify traps others have fallen victim to or have been able to avoid. Do not limit your research to friends and family who are not likely to be objective. Seek advice from objective customers or other business leaders.


3. Failure to form a legal entity or forming the wrong type. Some new business owners try the do-it-yourself approach to business formation. This is a major mistake. While there are tools online that purport to help you form a corporation or limited liability company, it is prudent to invest in the advice of legal counsel. Talk to a lawyer who knows the law in your state to help you determine which business structure is best for your business. It is also important to consult a tax advisor who can advise you about the federal and state filings and taxes applicable to the different structures. With the advice of a lawyer and tax advisor, you can choose the structure that is best for you and your business to set your business up properly from the beginning.


4. Doing it all. You might be able to create your own website, answer your phones, pay your taxes, handle your books, talk to your customers, design new products, and manage the affairs of your business at the very beginning, but do not wait too long to delegate some of this work. The worst thing for a business is to have customers turn away because your product or service is subpar—this could easily occur if you are doing too much and do not delegate tasks. Consider hiring a virtual receptionist to answer and return calls and make appointments. Hire a graphic designer to create your logo, branding, and website. Do not wait too long to hire your first employee. Before hiring, thoroughly vet the candidates to ensure you find the right fit for your business. Spend sufficient time training your new employee to ensure the employee understands your goals and your brand and will properly convey your company’s image to your customers.


5. No website or marketing. The first place potential customers will look for you is online. While many new businesses create Facebook pages, many do not build websites or effectively market their businesses. You want customers to find your business, and you want to create brand awareness. A marketing strategist can help you build and effectively market your brand. This will help generate leads for your business. There are many review forums, such as the Better Business Bureau, Facebook, Yelp, and Google. You can easily link your website to these review forums, which will accomplish two important goals: (1) driving customers to your business and (2) allowing your customers to leave reviews for your business.


6. Setting the wrong price. Make sure you are not offering your product or service at a price that is too low or too high. Research your competition: what prices have they set for their products or services? If you set a price that is too low, your business may fail because your prices are not high enough to generate a sufficient profit. Look at the market for your product or service and determine your desired profit margin based on your financial projections and your own sales.


7. Improper bookkeeping. Businesses commonly fail to implement good bookkeeping practices. When you talk to your tax advisor, ask about good bookkeeping practices and strategies. Proper bookkeeping will help ensure the separation of personal and business expenses, assist you in staying on top of insurance and tax payments, and help you understand your financials and your business’s health.


8. Not having written contracts. Every agreement with a client, vendor, or employee should be in writing. The written agreement should specify the agreed-upon terms of the business relationship or transaction. If you sell products or services online or have other important content on your website, you should also have written terms and conditions on your website. A business lawyer can help create well-drafted agreements for you to use with your clients, employees, or vendors. You can also ask your lawyer to review contracts given to you by your vendors. Without properly drafted written agreements, disputes and lawsuits frequently arise.


These are some of the most common mistakes experienced by new business owners, so do not feel discouraged if you make one. The key is to learn from your mistakes so you do not repeat them and to avoid others that are preventable. Successful business owners take the time to research and plan before launching their new business. In addition, they are not afraid to seek advice from others. Our team of attorneys is here to help you succeed. Please call us today to set up a consultation.


We also have a course called Legacy Planning for Entrepreneurs on Teachable. In this course, we walk you through everything from planning your business idea all the way through setting up you for success in reaching your business goals.



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Ayeshinaye and Alexia are licensed to practice law in the State of North Carolina. This website is for informational purposes only and should not be construed as formal legal advice. Contacting or providing information to Smith Dominguez PLLC through this website does not create an attorney-client relationship between you and Smith Dominguez PLLC. Please do not submit any confidential information to our office through this website or social media. 

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