We have established that starting a new business is tough and in addition to the economic and operational risks that every business faces, there are a number of legal and general mistakes made by small businesses which can and do have significant effects on their success or failure.
Mixing personal and business expenses
Money and time are the biggest investments in a startup, and often business and personal expenses become indistinguishable. This can be one of the major sources of confusion when taxes are filed and, in some cases, can lead to income authorities cancelling various deductions on an ad hoc basis and, as a result, higher tax expenditures are levied. Therefore, startups must have a financial account from the beginning and separate records as well.
Not registering your name
If you intend to be a sole proprietor or a corporation, you must ensure that no one else is using the name you have selected for your firm. Make sure the name is available before making a logo, designing a web app, or printing business cards.
Not having a nondisclosure agreement
While exploring how to start your business, you are most probably talking to many people in the industry you wish to operate in—talking to professionals and sharing a lot of information about your business idea while trying to hire people, get advice, get estimates and retain professionals. A confidentiality agreement, or non-disclosure agreement, will help ensure that the information you share with others remains private. Also, stipulate consequences for violation of rights stated therein.
Accepting handshake deals
Never, ever work without a written contract. Too often, entrepreneurs value speed over accuracy when it comes to detailing relationships with partners, vendors, customers and even employees. They might accept “handshake deals” or verbal agreements. In theory, an oral contract may be enforceable in court if it’s a short-term contract. In practice, however, you’re going to end up in he said/she said fight and there’s no guarantee you’ll get a good outcome. A written contract, on the other hand, forces both parties to consider every aspect of the deal and helps make sure everyone understands what they’re signing on for. A clear contract can help you avoid the kind of disputes that turn into legal troubles in the first place. And if you do end up in court, a clear contract will help make sure that the deal is enforced.
[READ MORE: Common legal and general mistakes made by new businesses (Part 1))
Unfortunately, there are more than a few horror stories of novice entrepreneurs believing verbal agreements are set in stone. No matter the case, put it in writing. Contracts should be well-defined and signed by all parties involved—whether that means outlining roles and ownership with a co-founder, making an offer to an employee or drafting business points with a vendor.
Engaging professionals only after a problem arises
A good accountant or lawyer will be able to advise you of the best way to structure your business to achieve your business goals. It may initially cost some money to get this right, but it is one of the best insurance policies you will take. Understanding the pros and cons of being a sole trader, company, trading trust, limited liability partnership is vital to know at the beginning of a business’s life. By far the biggest mistake of all is becoming an “emergency entrepreneur” — someone who puts off all legal issues until he or she is being sued.
The time to engage with a legal professional is not when threatened with a lawsuit. Healthy people see the doctor or dentist for preventative care; healthy businesses should take the same approach, and establish a relationship with a good lawyer early on in a business’s lifecycle. Knowing more about the legal pitfalls and landmines out there will help keep any business entity on a solid foundation. This way, entrepreneurs can focus on the reason they started the business in the first place.
Expanding too soon
Expanding your business before it has the key resources (cash, access to equity, access to credit) or key structure in place can lead to disaster. Don’t underestimate organic growth. It may appear slow at first, but it is solid growth.
Failing to adapt to change
Multi-generational companies (i.e., companies that were handed down from father to son, or grandfather to son to grandson), with the newer generation failing to adapt to the changes in their industry. Instead, they adopted the thinking of the previous generation which is: “that is how we always did things.” Now with the rise of the digital age, businesses that fail to embrace technology or to see how to exploit it in their businesses are falling behind.
Reliance on one key customer
This can be deadly, especially if that one key client is the government. This is because a change of government or government policy can mean the end of your business. Outside of government, if your one key customer fails in their business dealings, it almost inevitably means that you too will fail. Not to mention that business analysts see reliance on one key customer as ‘high risk’.
[READ ALSO: What to do when interest rates are low in 2020)
Failure to manage cash flow
Cash flow is vital for all business operations. Cash can be likened to blood within our bodies. When you run out of blood, you die. It is all very good to appear profitable in your accounts, but it is not good if those profits don’t convert to cash in your bank account.
Let’s wrap up
Starting a new business is pretty exciting and challenging, and your business has a plethora of growth potential, but there is also the possibility of making quite costly mistakes as you start. If you learn to avoid the most common mistakes made by startups, your startup can run smoothly from the beginning and your business is better prepared to be successful and profitable in the long term.
