Starting a business can be an overwhelming and daunting process, especially if you’ve never done it before. An overlooked to-do item may, in fact, be an essential task with a big impact on your future operations. During the start-up phase, it’s genuinely tough to discern what’s insignificant and what might turn into an expensive problem down the road. That said, here are two crucial areas that new business owners often neglect during and after the start-up phase.
Investing in a Competent Professional Services Team to Aid in the Setup Process
Out of the gate, determining which legal structure (i.e., LLC, Corporation, Partnership, etc.) is most appropriate for your business is critical. Each vary in how they affect the personal liability of the owners as well as their taxes. While many folks try to do this on their own, they often wind up making costly mistakes. It happens more than you would think. Making the smart decision to find a competent, business-savvy attorney and a reputable CPA to guide you in your company's formation will help you avoid potential legal and tax problems.
Many times a new client comes to me thinking that they were operating as one type of legal entity and it turned out that they had not filed the correct paperwork and thus were not operating under the optimal legal or tax structure. This mistake not only causes a severe headache come tax filing time, but it can be a costly problem in the event legal issues arise between owners, with customers or with vendors. It will cost you more to have a CPA or attorney fix your mistakes than it would have cost for them complete the paperwork correctly the first time.
Don’t get me wrong—many entrepreneurs, by themselves, are capable of filing much of the paperwork that is needed. But to avoid missing important filings, deadlines and misunderstandings of the legal and tax implications of the different business structures available, it pays to have a competent professional on your side.
Not Keeping a Full Set of Books
No matter how small your business, you need to keep track of the inflows and outflows of your business transactions. Not only is this essential for accurate and timely preparation of federal, state and local tax filings, it will also reduce your accounting fees at tax time and is necessary for proper business management. How can you assess the results of operations of your new venture or accurately project your tax liability if you have no idea what your bottom line is? The answer is simple: you can’t. Cash in the bank does not always equal profitability nor does it indicate taxability.
Business owners will neglect this task for a variety of reasons. They don’t “like” accounting. They “aren’t numbers people.” And the most common reason: they’re afraid of what might be lurking and keeping things out of sight keeps them out of mind—but eventually this task must be faced. If a business owner is not willing to budget in the cost of keeping a full set of books for their business, they simply should not be in business. This vital management function must be done from day one and continue until the business ceases to exist.
Unfortunately, there are many entrepreneurs who discount the value that the two areas above add to their strategic advantage. Simply put, if these are areas that a business owner omits from their start-up budget, they will be the one who struggles to make it. I have seen this time and again. While there is nothing wrong with operating frugally and starting lean, these are two areas where it never pays to cut corners.
Jennifer L. Todd, CPA, CGMA, is an accountant, small business owner and educator who specializes in accounting information systems, taxation and strategic consulting. Read her blog or follow her on Twitter @GenXerJen. You can also connect with Jennifer on LinkedIn.