Starting a Small Business: 5 Common Mistakes to Avoid Making

Launching a startup is an exciting time for an entrepreneur. This is the moment where they are able to start a small business that they are passionate about and run a successful company that allows them to be their own boss.

It is just as important that entrepreneurs do not cut corners when starting a small business. Certain actions, from deciding not to conduct a trademark name search to drafting a business plan that lacks necessary details, may feel like they are necessary to save a bit of time. However, these actions are actually big mistakes that can hurt the business in the long run. If you’re starting a small business, be sure you avoid making these five common mistakes.

Mistake #1: Choosing Not to Incorporate

It is not a requirement that a small business incorporates or forms an LLC. However, if a business owner decides not to incorporate their business, they may face more of an uphill battle than businesses that choose to incorporate.

Small businesses that decide not to incorporate open themselves up to the following issues:

• No limited liability protection. Unincorporated businesses do not receive limited liability protection. This ensures that the business becomes a separate entity from the owner and their personal assets.
• Difficulty establishing credibility. How do you feel about doing business with businesses that have an “LLC” or “Inc” at the end of their business name? You likely feel pretty good about it. These businesses have incorporated under business structures. As such, they have been able to establish a professional identity that makes customers feel comfortable about doing business with them. Unincorporated businesses may struggle to build this kind of credibility with consumers.
• Struggle to build business credit. Unincorporated businesses often struggle to build business credit than businesses that are incorporated. Let’s use the example of a sole proprietor. You decided to form a sole proprietorship. This entity differs significantly from business formations like LLCs and partnerships. It does not provide liability protection to small business owners. As a sole proprietor, the business owner exercises full control of the business. They are responsible for all aspects of the company. In the event that your business wants to build or increase a line of business credit, the personal credit history of the business owner will be examined. Why is the owner’s credit examined instead of the credit history of the business? This is because the business has not built its own credit history.

Mistake #2: Forgoing a Trademark Search

It is not uncommon for a business to forgo a name search for their trademark. This trademark — which may be a name, design, logo, or slogan — is so unique there is no way another business has thought of it. Right?

Not quite. Even if you think your business name or logo design is pretty unique, it is possible that a similar, or exact, trademark exists and has filed for federal registration. (See the recent example of Apple suing startup Prepear for using a logo that bears similarity to their iconic design.)

The best way to avoid any possible infringement issues is to conduct a trademark search before filing to register a trademark. This search will review if your trademark is available to use and is truly unique. If it turns out that the mark is already in use, you may need to return to the drawing board and brainstorm some new ideas for business names or logos. However, if it turns out that the trademark is not in use register it at the federal level. This provides the owner with exclusive rights to the mark and ensures that your trademark is unique and original.

Mistake #3: Skipping Out on Written Agreements

If you have formed an LLC or corporation for your business, it is a good idea that you also draft a written agreement. This is typically an operating agreement for LLCs and bylaws for corporations.

Some businesses choose not to draft a written agreement because not all states legally require this paperwork. Instead, small businesses may decide to use an oral agreement. In the event that the state begins to question the validity of your small business, however, it’s a good idea to draft a written agreement and update it on an annual basis. Some details you’ll need to cover in both an LLC operating agreement and corporate bylaws include ownership information, rights and responsibilities of members, and rules for joining or leaving the company.

Mistake #4: Not Filing for an Employer Identification Number (EIN)

Many entrepreneurs see obtaining an EIN as a necessity only if they decide to hire employees. Until then, they may choose to cut corners to quickly launch their business — and avoid filing for an EIN.

While it is true that an EIN is required in order to hire employees, businesses need this federal tax ID for a variety of additional uses. An employer identification number (EIN) is issued from the IRS. It identifies and tracks employer tax accounts. You may also use an EIN to open a business bank account and to build business credit.

Mistake #5: Skimping Out on a Business Plan

Technically, there are two acceptable formats for business plans. This includes traditional business plans, which are typically 40 pages long, and lean business plans, which may be up to two pages in length. It’s perfectly fine to draft a lean business plan. Depending on the needs of your business, however, you may find that a traditional format is a bit more suitable.

Your business plan is the blueprint for the future of your company. It takes an objective look at your small business and its feasibility, detailing goals and milestones you plan to reach and the timeline, as well as steps, for how you will get there. If you seek funding from investors — or would like to pique investor interest in your startup! — they will want to review your business plan to learn more about the business. The easiest way to avoid making this mistake is to draft a traditional business plan from the start.