Starting out on your own in a new small business can be exciting and, hopefully, very profitable. Not taking the time to research and prepare for the unexpected, however, could cost you a bundle down the road in legal fees, missed sales or bad publicity. Before you engage in your first business transaction, be sure you're not at risk for any of these five costly newbie mistakes. (For more tips, see Starting A Small Business In Tough Economic Times.)
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- Not Registering Your Business
Since every state and local jurisdiction is different in what kind of businesses are required to have a business registration, your best bet for getting this one right is to check directly with the government agency that handles it in your area. The requirements can range from needing to register for any kind of business to simply needing one if you hire employees, lease tangible personal property, or charge sales tax. Not abiding by local and state ordinances can subject you to heavy fines, legal action or your business being shut down until it has met the requirements.
In addition to the registration of your business, be certain that all professional registrations and licenses are maintained, as well. If you worked for a company that handled the renewals of a professional registration (an investment advisor, for example), don't assume that everything is current when you start your own freelance planning business. Serious personal fines and lawsuits could arise from practicing without it - regardless of whether you assumed it was handled. (Get more background info, in In Small Business, Success Is Spelled With 5 "C"s.)
- Not Informing Your Day Job
Moonlighting, or the practice of starting out on your own while still working for your employer, is a popular and more increasingly acceptable practice for many professionals. In most situations, letting your boss know that you do some graphic design on the side after hours at your marketing agency, for example, isn't a major issue. Some companies, however, will not find it acceptable, and pursuing a side business in the same niche as your day profession could land you in legal trouble.
How do you know if it's ok to do some side work after hours? Just ask! Although your manager may not know the complete terms of your employment contract, the human resources or legal department will. Err on the side of caution, and get the details of any non-compete language before you start your own business.
- Not Charging Taxes
Sales tax is an area of business that will vary from location to location. Since all but five states (Alaska, Delaware, New Hampshire, Montana and Oregon) charge sales tax on any number of goods and services, however, chances are good that you'll be presented with the decision of if, and how, you will collect it in your online or brick-and-mortar business.
If you find yourself offering a product or service subject to taxation, be sure that you offer an easy way for it to be added on to the price of your wares. While it is ultimately the consumer's responsibility to pay sales tax, the store or business will most likely be on the hook for uncollected amounts, so be certain to consult your attorney for any questions on how to go about doing it right – or you could face the scrutiny and penalties of the IRS. (Find out more, in Surviving The IRS Audit.)
- Not Using a Unique Business Name
Thought you could get by with using a business name that is similar to a competitor's? Think again. Copyright and trademark laws are vague at times, but one thing should be very clear when choosing a business name for your new endeavor: your business should not be named so that it causes confusion to customers as to what business they are buying from. In addition to complicated lawsuits that cost time and money to resolve, there is that matter of possibly being forced to change your business name to something ore distinctive. It is best to start out on the right foot, with a name that no one else is using.
- Not Being Insured
Depending on the exact nature of your business, your insurance needs will vary. To avoid the possibility of litigation bankrupting you, however, it is always best to look into the types of insurance that leaders in your field recommend. Some types of insurance will be unnecessary to purchase, and depend more on the size and scope of your business than the niche. Other kinds of insurance can be obtained simply by increasing the limits of insurance you already have (automobile or home owners, for example). A reputable business insurance agent will have the information you need to prevent expensive liability claims from harming your business.
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The Bottom Line
Of these five expensive mistakes that many small business owners make, all of them are preventable. By taking the time to set up your business correctly from the start, you can greatly reduce the chances of expensive errors eating into your bottom line. (To learn more, see How To Attract Investors For Your Small Business.)
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