Thousands of young businessmen and women start new businesses in the United States each year. Most won't last. However, whether you decide to start a limited liability company or go out on your own, you can increase the chances that your business will be one of the few to succeed. Success isn't a matter of good genes or dumb luck; it's usually just a case of being on the safe side. Avoid these nine common financial mistakes of young entrepreneurs.
SummaryNot Separating Personal and Business AssetsBuilding Personal Credit on Business ExpensesNot Preparing for Unforeseen CircumstancesWaiving InsuranceNot Planning for TaxesNot Paying YourselfNot Hiring/Talking to an AccountantExpanding Too RapidlyInsufficient CapitalYou should always separate your personal and business assets. Not only does this help you streamline your business operations, but it also allows you to take advantage of tax deductions, such as cancellation of business expenses.
One way is to set up a limited liability company (LLC). There are many benefits to forming an LLC, including the ability to protect your personal assets if your business loses money or in the event of a lawsuit.
If you're using the same credit card for your movie tickets as you do for ordering brand name stationery, you need to stop. Do not mix your personal and professional expenses. Business credit card issuers stipulate that you can only use these cards for business purposes anyway, so it's best to avoid such practices.
Another key reason to separate your personal and business expenses is that putting both expenses on the same credit card jeopardizes the protections a limited liability company gives you. Most business expenses are tax deductible, so separating personal and business expenses makes life easier during tax time.
When you're young, it's hard to imagine difficult situations like death and divorce. However, it is important to plan for unforeseen circumstances to protect your loved ones and your business. Having a buy-sell agreement in place outlines what will happen with your shares in a company if the worst happens.
You can use a revocable living trust to decide who gets your property when you die. This can be changed as your wishes and circumstances change, but the most appealing aspect of a living trust is that it allows you to avoid probate. Probate is the legal process of managing an estate, and it can be expensive and complex.
It might not be very romantic, but if you have your own business, it's also a good idea to sign a prenup before you get married. This legally binding contract outlines who owns what assets and how those assets would be divided in the event of a divorce.
Insurance is a legal requirement if you have employees, but even if you are a sole proprietorship, insurance protects you if someone makes a claim against your business. Business owners insurance provides income if your business is temporarily unavailable due to a disaster and covers expenses such as rent and utilities that you would have incurred during this time.
You may be strapped for cash when you first start out, but not getting insurance could become a very costly false economy.
When you're first starting your business, it can be tempting to focus all of your energy on generating revenue. But have you thought about taxes?
How LLCs are taxed depends on how many members it has and whether you decide to treat your LLC as a different business form for tax purposes.
This IRS checklist will help you ensure that your new business complies with federal tax requirements. Each state also has its own tax rules. However, it's not all bad news:you can also take advantage of tax incentives related to energy consumption and other aspects of your business.
It is very common for young entrepreneurs to deny themselves an income. However, you should always pay yourself the market rate for the work you do as soon as the company can afford to do so. When you're not compensating yourself, it can be difficult to determine if your business model is profitable.
When you're just starting out, it can be tempting to try and do it all yourself. This is understandable, given that your funds are likely limited and your enthusiasm is unbridled. However, thinking that you can be your own accountant can end up saving you money initially, but costing you more over time. Unless you have a financial background, it is better to hire a professional. It can help you build a solid foundation for your business and save you money in the long run.
Although it may seem hard to believe, sometimes growing too fast can be just as bad as not growing at all. This is largely because rapid expansion can put too much pressure on your fledgling business, and you don't have the infrastructure or experience to handle it.
The result can be customer dissatisfaction due to your inability to handle an influx of orders, employee burnout from working too long a day, and even cash flow issues because you may be spending inventory while customers are waiting for you. owe money.
Probably the biggest mistake young entrepreneurs make is not having enough money to properly fund their business. Either you, your partners and/or your shareholders must invest enough capital in the business to ensure its success.
If your business is primarily focused on providing services (for example, writing or web design), you may not need a lot of capital. However, it should be remembered that the main cause of failure for all businesses is the lack of money.
See also:Make your business work with these business financing solutions
