Costly Mistakes Made With Your Business Entity
Investing in a powerful tool and not using the tool properly does not make a lot of sense. I know when it comes to running a business it requires multiple hats to wear and very often you are off and running on 10 different projects, calls, appointments, presentations… and perhaps the very foundation of your business may be in jeopardy. Here are the top costly mistakes I have seen made over the past 15 years:
Not completing the transition from a sole proprietorship to a separate legal entity. If you started a business in your own name for a few months before you formed an entity odds are part of what you did you completed as an individual and you need to connect the dots to the new entity. If you filed a DBA (doing business as) with yourself as the applicant that needs to be cancelled and re-linked to the entity. That means your entity needs to be the applicant, not you! If you don’t do this you still are exposed to unlimited liability and filing a schedule C with a higher audit potential. Next, point is to open a bank account in the name of the business, not just keep the account in your personal name. Use a business credit card in the name of the entity, not just your personal credit card and keep track of expenses. You will want to minimize the amount of debt that shows up in your personal name. Update all affiliate programs, vendors with your new entity information so any income is going to your business entity, not to your name personally. Update your websites, business cards, letterhead with the new name of your business. Another important tip make sure your website is in compliance, most are not.
Funding concerns. 95% of businesses fail within 5 years and undercapitalization is the #1 reason. The pattern I have seen is that small business owners are mostly hoping for revenue to come in as the primary source of money to grow their business. What happens if your revenues are off or don’t come in at all? You may be working on that great new product and all your emails go out and no one converts. That is a real problem. The key is to model success. Almost all successful companies do not use only their own money to grow. I know you know the concept, “OPM”, other people’s money, yet are you doing that? Are you only self funding your business on your own personal credit? Did you know that once the entity was filed the business credit bureaus will start creating a file. They scan the Secretary of State’s records to create a file with any new filings. They look for the name of the business, the start date, and name of the officers/managers the address… If you are not paying attention on how you fill out forms with the business address, business license, state forms you can create disconnects in the database. In one business credit bureau, NCP is spelled four different ways. The NCP part is the same, but one way has “Inc.”, one has “,Inc.” other has “, Inc” and the last one is “Inc”. Did you notice the differences with the comma and period? That created four different files! Don’t make that same mistake. Unlike the personal credit bureaus, the business credit bureaus are very difficult to fix any mistakes. They have their own set of rules and are not set up for changes after mistakes happen. This creates a problem when it comes to developing credit for your entity because you basically have one shot at the apple to get it right the first time. Banks and vendors are very interested in your financial strength of your company. Now joint venture partners can check you out for free to determine who stable is your operation. You may be losing business and not knowing it. It is really a must to be financially solid in your business and your developing business credit is a must for your long term success.