As a business owner, I’ve seen so many people make basic mistakes when starting out. These mistakes could easily be avoided, saving a lot of trouble down the road if they just start the right way from the beginning. So today, I’m going to show you how to avoid making those mistakes.
Choosing the Wrong Business Structure
Choosing the wrong business structure is probably one of the top mistakes. It often happens when you start doing some side work that suddenly grows. At the end of the year, you file a Schedule C, but no one ever takes a step back to really plan and think, “Am I going to grow this business? Is this going somewhere?” Planning your business structure a little bit, especially at the beginning, is a really good idea. You can take it lightly if it’s just one job, but if you’re going to take on more work, the business structure becomes important.
For the first year, a Schedule C might be fine, but remember that it’s subject to both self-employment and federal taxes. You also need to consider liability. Should you form an LLC instead? Or, if you anticipate making a lot of money, should you consider an S corporation through your LLC?
These are all important questions to address in the planning phase. If you’re only doing a little bit of work, it may not be as crucial, but as you grow, choosing the right business structure will make a big difference in how you’re taxed.
Not Keeping Accurate Records
I see this a lot when people first start their businesses; they don’t even realize how much money they’re making or losing. I call it “running their business out of their pocket.” Literally, if they make $100 and spend it, do they even know what they spent it on? Do they really know if they’re making any money? Come tax time, they’ll owe money without any documented expenses, leaving them with no understanding of how much they actually profited.
First and foremost, carry a notepad if you’re dealing with cash. If you’re receiving credit card payments, make sure you’re keeping a log of how you’re receiving this money.
Co-mingling Personal and Business Funds
This brings me to the next mistake: not opening a separate bank account for your business. It doesn’t matter if it’s a personal account at first; the point is to have a dedicated place to track your business income and expenses. This is the best and easiest way to keep everything organized. At the end of the month or year, you can clearly see how much money your business is actually making and whether you’re going to have tax issues. Are you making money or losing it? Following this is imperative.
Try to review your finances every month. Put it on a spreadsheet; it’s easier that way. If you wait six months or until the end of the year, it becomes overwhelming. Many people just give up and resort to making wild estimates that make no sense because they’ve forgotten what happened back in January or February. It’s nearly impossible to remember those details in December (the end of the year). This is where a separate bank account is so valuable because it keeps a record for you. Doing this monthly is best, or at least quarterly, depending on how small your business is.
We all start small, but if you’re serious about growing your business, starting with good habits like this will make things easier as you go.
Misclassifying Workers
The next issue is understanding the difference between employees and subcontractors. I understand that payroll taxes can be expensive, but if you’re growing and can afford to hire someone, it’s very important to know the distinction.
I can’t get into all the reasons right now, but here are some basics. An employee is someone under your control. They work on a schedule, use your equipment (like a computer or car), and operate on your timeline. A subcontractor, on the other hand, works independently. They come and go as they please, use their own equipment, and largely set their own terms and timing. To make it really clear, a lawn maintenance company is a subcontractor, even if it’s just one person. However, someone who sits in your office or whom you direct to do a paint job on a specific timeframe, driving them to the job and specifying the hours, is an employee.
If you don’t categorize workers correctly, you could end up in trouble with the state. While there are cost differences between employees and contractors, there can also be serious repercussions for misclassification. An employee could get injured and seek state assistance, which could come back to you. A contractor has their own licensing and operates on their own. That’s probably the biggest difference to keep in mind. You don’t want to start your business by misclassifying workers. Maybe nothing will ever happen, but if something does, it’s important to understand the distinctions. Not to mention, the federal and state governments are cracking down on businesses that misclassify workers.
Failing to Budget for Taxes
So, your little business is making money, you get excited, and you go on a spending spree. You buy all these little things you don’t need because you’re happy your business is doing great. What you didn’t do, however, was budget for taxes.
As simple as it sounds, you can manage this by following all the steps we’ve discussed. If you choose the right business structure, you’ll see how it benefits your taxes, and that will help you budget. You’ll keep accurate records by using a dedicated bank account. When you look at those bank statements every month (or at least every quarter), you’ll be able to see where you’re headed, how much you’re making, and whether you need to set money aside for taxes. This might also prompt you to reconsider your business structure.
Finally, understanding the employee versus subcontractor distinction helps with budgeting. Subcontractors are cheaper since you don’t pay payroll taxes, but employees offer different benefits. If you can maintain a good budget for employees, you’re definitely doing well, and this will also help with tax planning.
Final Thoughts
Remember, these five things are just a few of the many you need to know when running a small business, but they’re a good place to start. It’s about building a solid foundation. Get help. Look up rules and laws. Talk to people and consider a consultation with a professional to get the information you need.
Slowly but surely, all these things and many others will come into play and determine how successful your new venture will be. I know from personal experience that a business is like a baby to us. It’s an amazing thing to look back on and say, “These are the things we did right, and these are the things we need to improve on.” That’s an ongoing process, forever.