The Top 5 Mistakes Business Owners Make & How to Avoid Them
In the course of serving business owners for the past 15 years, I've noticed that many of them make the same mistakes, which is frustrating to witness. These mistakes have huge consequences but could have been easily avoided, so let me share them with you.
Mistake #1: Doing Business as a Sole Proprietorship or DBAOne incident or lawsuit against your business could wipe out your business assets, expose your home, bank accounts and other personal assets, because a sole proprietorship is not really a separate business entity. Your simple solution: always have a robust commercial general liability insurance policy (and maybe other types of insurance applicable to your business) in place, but also consider converting your business into a separate legal entity, such as a corporation or LLC. Depending on your current and potential business income and tax liability, you should seriously consider converting to some type of limited liability entity that separates your business from your personal assets, and protects your home from what happens at the business.
Mistake #2: Doing business on a "handshake" OR You have a contract you haven't read2A) When you make business deals without writing down any terms about what each party gives and takes, when, why and under what circumstances the agreement can be terminated, what kind of penalties there will be for nonperformance or breach, then when something goes WRONG, there is no protection for what the parties have already invested into the deal, and no clear remedies for the party that performed.
2B) Similarly, when you have a contract that you haven't read, you don't realize what kinds of obligations and responsibilities you have bound yourself to, because you signed a contract without reading all of its terms. The most common of these is a commercial lease agreement - just because tenants think they cannot change or negotiate the terms, they fail to read the terms and understand who is responsible for repairing and maintaining which parts of the building (!)
2A) The simple solution is to put your agreement in writing, and if you are the business owner, then include the terms that YOU want, forcing the other party to negotiate any changes. At a very minimum, you want to include the effective date of the contract, the names and addresses of the parties, the terms of the agreement (who is paying what and for which products or services), payment terms, grounds for termination, etc.
2B) Also, take the time to read the contract before you sign it, and no matter how urgent the transaction is, don't ever agree to sign something without knowing what it says. This is America, the most litigious and regulated nation in the world (and California is the most litigious state in America), and ignorance is NOT an excuse when you sign a document. Even if you have already signed a contract, it is still worth it to READ the contract terms now, to determine your rights and obligations under it, so that you know what to expect and how to conduct yourself moving forward before certain situations arise. This will enable you to plan ahead & protect yourself.
If you don't know what a particular clause means, ask your friendly local business lawyer for help with interpretation, and ask them to explain the implications of those confusing clauses with realistic examples of what could happen and the implications for you specifically.
Mistake #3: Not protecting your publicly-displayed intellectual property (ex. company names, logos)If you put a creative name or idea out into the public domain, without ensuring that you did everything you could to claim property rights in that idea/ name/ logo, then you may not be able to sue for damages or infringement if someone else tries to claim it for their own (steal it from you). Or even if you sue them, you may not win. This issue impacts not only for-profit businesses but nonprofit organizations as well.
The simplest solution is to use the "TM" designation for any name or mark that you are claiming ownership in for trademarks or service marks, and use the (C) for all written materials that you are claiming a copyright in, such as song lyrics, articles, blogs, handbooks, etc. Also, consider registering your trademark with the US Patent & Trademark Office or registering your copyright with the US Copyright Office, because sometimes your logo/ brand name is one of your most valuable assets since it's associated with your company's reputation in your particular industry.
Mistake #4: Run Your Business Without InsuranceIf you are a classic entrepreneur personality type, you most likely love taking risks! But sometimes you end up taking unnecessary risks, like running a business without insurance. If you don't have the right kind of insurance in place to protect your business from those "what if" scenarios, you will pay a lot more later out-of-pocket than you would have paid on premiums for those protective policies!
At a minimum, get a commercial general liability insurance policy with reasonable limits, which will protect you in those unexpected "trip & fall" cases where you're held responsible for members of the public who come to your business from off the streets. If you have even one (1) part-time employee, you are legally required to have workers' compensation insurance in place. I would recommend that you meet with a business insurance broker at least once a year, familiarize yourself with the types of insurance that are available to cover the risks you are most vulnerable to, specific to your industry. If you need recommendations for trustworthy business insurance professionals, just ask!
Mistake #5: Becoming the "jack-of-all-trades", trying to do everything instead of delegatingWhy is this a mistake, for those of us who are DIY entrepreneurs? Because I would NOT try to fix my own car instead of going to a licensed mechanic, nor would I try to crack my own back instead of going to a chiropractor, so why would you try to incorporate yourself using legal document forms (rather than going to a business attorney) or file your own taxes instead of consulting with a CPA?
Don't be "penny-wise and pound-foolish". Use a business attorney to form your corporation or LLC and help you set up your business for success; use a strategic CPA for tax planning advice and an investment advisor to help you invest your money. Build relationships with key business advisors for the success of you business: they can help you to SAVE time and money in the end, by allowing you to focus on what you do best - running your business and selling products/ services for a profit.
ConclusionA wise person once said, "an ounce of prevention is worth a pound of cure." As I mentioned above, these are mistakes that are easily avoided, and yet most business owners make them without realizing there's a better way. For more information on these topics, take the advice under the 5th bullet point and consult a professional - legal, tax, insurance, etc. for your specific questions. Our goal is to equip you to operate your business successfully for the long-term, and those who are smart enough to trust the experts around them are the ones whose businesses will last.