Despite expertise in the field of endeavor, new small business owners make mistakes. It’s a learning process most of the time, and hopefully the mistakes are small, recoverable and not costly. However, because most business owners aren’t able to recover from basic mistakes in procedures, approaches or operating philosophy, many businesses don’t reach even the one-year benchmark. Avoid these three common mistake areas and boost your chances of business survival.
Underestimating Start-Up Financing
Whether through unexpected financial obligations that pop up despite the best of planning or intentions, or through inexperienced and incomplete planning, underestimating how much it will cost to launch your business and operate it for its initial period often starts a business off on the very-wrong foot.
Make sure you compose a comprehensive business plan that includes known and projected expenses before you launch. Make sure your financing, whether through savings or grants or loans, cover that minimum amount—then add 10 percent or reasonably more for unexpected expenses.
Licenses and Permits
Regardless of the type of business you run, your first expense as a business that actually qualifies your enterprise as a business and not a hobby is a business license. You can make tons of money in your endeavor, but unless you are clearly identified as a business entity in the quarter in which you make that money, you are not granted any tax deductions. All income is taxable under personal income, not business income, and expenses are personal expenses, not business expenses.
You as a person are liable for all expenses and faulty service or product. Even as a sole proprietor of a business, it is you as a business that is liable, not you as a person. Business assets can be attached to pay outstanding debt, but unless you offer a personal asset as collateral in a loan, that personal asset may remain your own when assets are liquidated for debt satisfaction. Consult a business attorney for more information on business liability and business formation.
Check with local and state agencies to ensure you obtain any and all permits you must have to operate your type of business in the environment you’ve chosen. The fees for the permits are tax deductible if you apply for them as a business entity.
Know what your tax ratio is for income received. Don’t take the word or your best friend offering friendly advice: Consult a tax advisor or the IRS directly.
Be wary of free advice from a friend or a professional: A fee-only advisor has more invested in providing current, accurate and accurate information and advice than a free advisor. Any fee you pay to get that professional advice is a business expense and, therefore, tax deductible.
Be sure to note the two tax identification numbers you are issued: One should be an employer number, even if you’re the only “employee,” and the other is a sales tax identification number. You may owe taxes under each number. Consult a licensed, professional business tax expert for information.
Remember that the federal tax table notes tax due from the first funds you earn. The first tax bracket begins with $0, not $600 as most people believe. It matters not whether you are a business or an individual, you pay taxes on every penny you earn. Tax on that first $600 can be deferred for individuals until the annual tax time, but taxes on that first $600 will be accounted for then in either the amount the individual pays or is refunded.
Know whether you must pay self-employment tax in addition to any business income and personal income tax. Know when your business taxes must be paid, most often quarterly, but there are exceptions. Always consult licensed professionals regarding tax advice, and never be afraid to seek a second or third opinion from other licensed professionals. Remember: If you pay fees as a business, those fees are tax deductible as a business expense that relates to your business.
The author of this article is Sara Woods from Coupon Croc, where small business owners can save on all of their office equipment and electronics when they use Littlewoods discount codes.