By Trishan Arul October 28, 2009
This is Part 2 of my post on Top 11 Mistakes that Ruin Entrepreneurs. Part 1 covered the first five items. “Ruin” may be overly dramatic but even businesses with solid underlying fundamentals can be ruined if you make enough of these mistakes.
6. Creating the wrong business structure – One of the first things you should do is to determine what business structure you need. Common choices are: sole proprietorship, partnership, LLC, and Corporation (both S-corp and C-corp). Take into consideration compliance work, cost, legal liability, employee issues, and taxation. There is no right form of business for every startup. In most cases you can switch forms down the road but the hassle and costs can be significant. I’ve spoken with many entrepreneurs who have spent thousands of scarce dollars to form a corporation which they didn’t need. This is a huge topic which I will address in the future but some resources can be found at my colleague Richard Greenberg’s Seedport website – he does that stuff for a living so if you want help, I recommend him!
- Image by emdot via Flickr
7. Having employees without realizing it – Despite what some people say, there is no black & white line between being an employee and a contractor. The IRS provides some general information and even has Publication 1779 devoted to the topic. In general, the more control the business exerts over the work and finances of the person, the more likely they are to be classified as an employee. Penalties for incorrectly classifying an employee as a contractor are severe: the employer has to pay all of the payroll taxes (employer & employee portions), all of the income taxes that should have been withheld, and penalties. That can add up to 50% or more of what you paid the person. While classifying someone as a contractor may seem easy, it could cost you dearly down the road. Payroll is a huge headache which most people try to avoid but there are many inexpensive payroll solutions which can make it painless. 
So, no more excuses not to do it right.
8. Not opening business accounts – This ties in with #5 in Part 1 about Mixing Personal & Business Funds. At a minimum, you should have a separate bank account and credit card for your business. Most likely, you will have to personally guarantee the credit card but that shouldn’t prevent you from opening the account. Not only does it help you to separate business from personal transactions, it also allows your business to build a credit history. That will be important as you try to open accounts with various vendors for office supplies, cell phone service, computers, etc. Whenever you have the option, open an account under the name of the business so that when you need credit it will be available.
9. Funding the business with credit cards – Even after Congress acted to ban the most blatant abuses of the credit card industry, they are still a double edged sword. Credit cards are useful and often necessary to make many regular purchases, especially online but they also offer very expensive credit which is all too easy to abuse. If someone offer to lend you money at 20% interest, you’d probably consider that loan shark rates and immediately turn them down. Yet many small business owners pay more than that to their credit card companies without even thinking about it. Usually it starts out with small balances carried over so that you can meet payroll or conserve cash. But very quickly people end up reaching their limit, unable to pay off the balance, rolling it over month after month, and transferring balances to other cards. And when you depend on the credit card, it can really hurt if it gets cut off as many entrepreneurs have recently discovered.
10. Accounting without a shoebox – Handling your business finances with a shoebox isn’t recommended either! But many entrepreneurs don’t even bother to collect receipts, bills, statements, etc. in one place. They just ignore the accounting and money side of the business because its a hassle and there are so many other things to get done. Plus most people don’t like accounting so they avoid it as much as possible. Aside from never really knowing where your business stands financially, you will eventually have to figure it out. And when you finally try, it will be the nightmare you were dreading – we routinely spend months with new clients just trying to sort out their historical finances. If you’re separating your finances (Item #5) and keeping separate accounts (Item #8), then accounting doesn’t have to be difficult. Sign up for some of the free online services to make your life easier. Some websites that I recommend are Outright (which is designed with businesses in mind and can even sort expenditures by tax line) and Mint (which is geared to individuals but the importing and classifying features are great). And if your business is large enough, then consider hiring a professional to handle the accounting – a good accountant will not only keep your books in order but they will become a financial partner and trusted advisor helping with many other business matters.
Image via Wikipedia
11. Not paying your taxes - I had a tax professor in university who used to say that you always have to pay your business partner… the government! Unfortunately, its true. This may seem simple but there are many layers of taxes that need to be paid: local property taxes, local payroll taxes, withholding taxes, FICA, income tax, etc. Its not uncommon to find businesses operating on a shoestring who decide not to pay some or all of them. This can lead to significant penalties down the road. One popular misconception is that you only have to pay income tax when you file your tax return. In reality, everyone has to pay income taxes throughout the year – employees get taxes withheld from paychecks but businesses need to make quarterly estimated tax payments. If you fail to pay the lesser of 90% of the taxes due or 100% of the prior year taxes by December 31, then you can be assessed penalties. And if you handle your own payroll, not remitting payroll taxes (employee withholding) is a serious crime with penalties to the INDIVIDUALS responsible (yes, even if it was a corporation) of up to 100%. Like credit cards, many businesses fall behind and think they will make it up later. If your business can’t afford to pay its taxes when due, you need to take drastic action now.
I’ve seen these mistakes made countless times by generally smart individuals. Avoiding these mistakes won’t necessarily make you successful but it will create a solid financial foundation for your business. Now, if you do end up making any of these mistakes, just don’t tell people you read our blog! 
By Trishan Arul October 21, 2009
Image by Observe The Banana via Flickr
This post started out as a Top 5 list, but quickly grew from there as I thought about my experiences over the years. It wasn’t very hard to find 10 mistakes but since everyone does Top 10 lists, I decided to up the ante with 11! That’s 10% more useful, right? This is part of 1 of 2, the remainder will be in my next post. The list is intended to help first time entrepreneurs ensure that their business is on sound financial footing – its in the order that a typical entrepreneur would encounter each problem. If you’ve already made a mistake or two, I’d recommend fixing the problem before it becomes a real issue for your business.
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Computing financial viability – Most people don’t even know what this means but its not as complex as it sounds. You need to figure out if your nascent idea can be turned into a viable business. How much will customers pay (Revenue/Customer)? How many will you have (Qty) based on the market size? What do you need to run your business – product manufacturing cost or purchase price, servers, bandwidth, people, advertising, shipping, etc (Cost)? Is (Revenue/Customer * Quantity) – Cost > 0 ? If not, the idea is not financially viable and needs to be reworked. This is a simple “back of the envelope” calculation that everyone should do at the very beginning.
- Not making a business plan – You may have heard the saying “those who fail to plan, plan to fail”… its true. I’m not saying you need to spend three months creating a 102 page business plan document with footnotes, appendices, and pie charts – though I am a fan of colored graphics . What you should do is think through all the basics – Customer Problem, Target Market, Product/Service Solution, Delivery Method, Employees, etc. On the financial side, that means creating a projection and budget for a few years (typically 3-5) with at least the first year in detail by month. This budget will be valuable to determine if you have enough money to survive, what big costs need to be paid, where you may be able to save money, how much investment you need, and so forth. Without a budget and plan, you’re just hoping that things work out.
- Being overly optimistic with your budget –
For financial matters, its usually better to take the conservative “glass half empty” approach. No one minds being surprised with extra money, but suddenly finding out you don’t have enough money is a bad thing. Assume it will take longer to make each sale, assume customers won’t pay right away, assume vendors will demand payment up front, if you’re doing development assume it will take 50% longer and cost twice as much… you get the idea. Unexpected things always crop up, planning on everything going perfectly is the same as expecting to receive boxes filled with money – it won’t happen. And when reality is worse than your plan, you may find yourself out of money and time to complete the product, meet payroll, or other critical business needs.
- Ignoring personal expenses – Most entrepreneurs have to save money and can do so very creatively. But you can’t live rent free holed up in your parents’ basement dining on Kraft Macaroni & Cheese and PBR while working 18 hours a day. Plan to spend a reasonable amount on your living expenses, including going out once in a while. Starting a business is stressful enough without turning yourself into a hermit. After making a business budget, make a personal budget to ensure that you have adequate money for both.
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Image by marsi via Flickr
Mixing your personal & business funds – Keep your business money separate from your personal money and keep good records! The pain of sorting it out after the fact will make you wonder why you didn’t take the extra few seconds each time to do it right. You WILL need to sort it out for tax purposes, financial reporting, bringing on other investors, and budgeting purposes. Its also easy to do, open a separate bank account, use one credit card just for business expenses (even if its in your name), minimize cash transactions, and always ask for a receipt. Its not easier to mix everything up and sort it out later since you’re creating a bigger headache down the road.
Next week I’ll finish the list but you can start fixing, or avoiding, these mistakes right now.
By Trishan Arul May 28, 2009
When I first entered the working world, having a business meant that your company had an office in a big building with furniture, a receptionist & other employees, a fax machine, a phone system, lots of filing cabinets, fancy stationery, you get the picture: a business = physical location. That was then.
In 2009, its possible to have a thriving and successful business without a substantive physical presence. 
We now have the technological tools that enable us to work from anywhere, but even more importantly, people are willing to accept a “virtual business” as a service provider, partner, or customer. With a good website and competent outsourcing partners, its very possible to have a one person company that has the capabilities and appearance of a much larger company. Even in traditional heavy manufacturing industries, new competitors like Fisker Automotive are moving towards a decentralized, virtual business model.
Should you run a virtual business? The answer will depend on the type of business, the talent that is needed, and a host of other factors. Some of the benefits of going virtual include:
- Lower overhead costs: offices, utilities, furniture, etc are all expensive. For most service businesses, facilities is the biggest expense after payroll so being able to minimize or eliminate it this expense a big boost to the bottom line or if you’re just starting out, it will reduce your startup expenses.
- Flexibility: without a physical office, your team is free to work from anywhere, to collaborate as & when needed. You are also not tied down to a physical location which could constrain your growth.
- Environmental: no commuting and no wasted office space (empty at night & weekends) are just the start of the reduction in your carbon footprint.
- Productivity: eliminating commuting time, unnecessary meetings, physical distractions at the office, and other wasted time could result in more time for productive work vs. just putting in face time at the office.
- People: eliminating physical constraints allows you to hire from a much broader pool of qualified individuals and many people will consider it a huge benefit to be able to work remotely on their own schedule.
There are of course downsides, the most common being:
- Perception: despite changing attitudes, some people still expect to do business with companies in tall downtown office buildings. One entrepreneur told me that his office address in San Francisco’s financial district helped him close a deal with a large East Coast company that wouldn’t have done business with a smaller startup. He was in executive office space but we won’t tell anyone that.
- People: Some people just work better and need to collaborate in a physical setting. Others need the discipline of a 9 to 5 office location to keep them productive. Some end up spending all their time (including nights and weekends) working while others spend all their time on personal chores, Facebook, and Twitter. Its critical to find the right people to make a virtual company successful.
I would say that the benefits for a typical service or Web 2.0 business still outweigh the drawbacks. Some tips to increase your chances of succeeding:
- Set expectations up front about working hours, deadlines, work load, etc.
- Be very selective when hiring people, you have to trust them to do their work unsupervised, to motivate themselves, and to be very technically literate.
- Have daily communication with your staff or outsourced service providers, between phone, email, and IM, there’s really no excuse not to check in regularly.
- Physically get together on a routine basis for meetings, happy hours, celebratory lunches, and so forth to create that human connection. We aren’t robots and most people do work better remotely when they have a face to put to a name.
- Invest in technology: from your website, to computers, to cellphones, to systems, make sure that you invest in the best tools to create a seamless work environment that offers the productivity of a traditional office.
If you decide to take the leap and create a virtual company or convert your current business into a virtual business model, drop us a line and let us know how it went!
By Trishan Arul May 11, 2009
Richard Greenberg of Seedport, Inc. and myself will be hosting a free seminar tomorrow evening for people considering starting their own business. We’ll cover the basics that you need to deal with and will have plenty of time for Q&A. This is an offshoot of our successful sessions at various LaidOffCamp events. If it goes well, we plan on doing these quarterly at various locations around the Bay Area. If you would like to attend or know someone else who would, please RSVP at the Event Webpage at:
http://event.pingg.com/StartupBasics
This first one will be in a conference room so there is a limited amount of space. If you’re interested in attending but can’t make it to this one, feel free to send us an email and we’ll invite you to a future event.
By Trishan Arul March 11, 2009
Given the companies and people whom I work with, it should be no surprise that I strongly support entrepreneurship. The sad thing about the current economic problems is that small businesses have been hit harder than big corporate giants yet NOT A SINGLE POLITICIAN has bothered to help in any meaningful way. Yes, the economic stimulus package allows for bonus depreciation but that is useless if your business doesn’t have money to buy new equipment and, despite Republicans’ fanatical belief in tax cuts, its a very poor incentive to induce spending. A number of columnists and writers such as Thomas Friedman have advocated common sense changes to foster innovation.
Some things that will help are:
- making it easier via tax incentives for people to invest in early stage companies
- providing operating companies with loans to weather through the downturn
On the first point, Sramana Mitra (whom I have plugged before) wrote a good article on Forbes.com advocating for President Obama to add entrepreneurs to his circle of advisors. Among the changes she advocates and I support is policy that would allow:
An aspiring entrepreneur ought to be allowed to create a tax-free pool of income for use as personal venture capital. Such a pool of capital would go a long way to help kick-start new ventures.
This is just the first step in many policy changes that the government can make to help foster new businesses.
On the second point, an innovative idea related to providing financing to existing businesses was written about by Andrew Field, an entrepreneur himself, in a comment article. He advocates small business loans for every employee hired by a company. The alternative for most is to cut payroll, something that will just make the recession worse since small businesses employ most of the people in this country.
Let’s hope someone in Washington DC is listening. Or better yet, write your congressional representative and US senators and tell them how they should be allocating the trillions of our tax dollars being spent on fixing the economy! I already have.
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