6 Financial Mistakes Commonly Made During Business Formation
6 Common Business Formation Financial Mistakes
Few things can ruin your momentum during business formation like a significant financial misstep. As entrepreneurs ourselves, we know just how much thought, effort, and resources go into launching a business. We also know how frustrating it is to feel like any of that has gone to waste, especially when you’re talking about money. Here are some of the more common financial mistakes that entrepreneurs make during business formation.
1. Mixing Up Business and Personal Assets
One of the worst financial mistakes a new business owner can make during formation is failing to separate their personal and business assets. This is dangerous if you rely on your business entity to shield you from potential liability. For example, using one bank account for both yourself and your business can cause your corporate veil to be pierced and result in harsh tax penalties. Separating your finances also gives you a more accurate picture of how well your business is doing, too, and protects your credit score from tanking if your business goes under.
2. Incorporating with a Non-Attorney Formation Service
As a firm that has put a lot of work into streamlining our business formation services so that they can be accessible to everyone, few things frustrate us more than “reduced-cost” non-attorney business formation services that claim to be a cheaper alternative to lawyers. These services usually just charge you a fee to file paperwork that you could easily take care of yourself. They can’t give you any legal advice and are likely to charge extra for documents that a firm like our own includes in service packages. Sometimes, depending on the revisions that need to be made, you might end up spending more than if you had hired an attorney in the first place.
3. Making Major Purchases Early On
While everyone knows that starting a business requires capital, that’s not permission to spend without restraint. Making money might require spending money but going after big-ticket items before you’ve established a reliable stream of income can send your business into debt fast. Consider making do with low-cost alternatives instead of splurging on premium services and equipment. This will give your business more room to grow even if it runs into trouble down the line.
4. Not Preparing for Hard Times
Your business needs to prepare for the worst. Even if it has a high profit margin and an enthusiastic customer base after formation, you never know when a natural disaster or other outside circumstances, such as an economic recession, might impact your business financially. For instance, just think of how quickly a hurricane can change course and force your business to suspend operations for a few days, or longer if it makes a direct hit. This is why smart business owners save their company credit cards for emergencies only. It’s also advisable to have enough in your savings to cover at least three months’ worth of business expenses on top of your own personal savings account.
5. Neglecting Future Tax Obligations
All for-profit businesses in Florida pay taxes. However, your company’s specific tax obligations depend on what type of business entity it is. As an employee, your employer was responsible for tax deductions and providing your W2 Form. Now, however, you’re on your own. This can get complicated if you don’t have the help of a CPA or another trusted financial advisor. Corporations and self-employed individuals are also required to make quarterly estimated tax payments to the IRS. Mistakes can result in a massive tax bill, so consider reaching out to an accountant or business lawyer for guidance.
6. Improper Budgeting
New business owners have a lot on their plate. Because of this, they might not have a strictly defined budget when first starting out. Still, it’s imperative they implement a financial plan for their business as early as possible. After all, the math will only get harder to do in your head as your business grows. Track your expenses with a healthy margin in place for emergencies and other unexpected costs. Only by planning now can you work to ensure your business’s future success.
Founded with a focus on business formation, FL Patel Law PLLC has helped launch hundreds of businesses in the state of Florida. Visit our formation page or call (727) 279-5037 for more on how our firm works to give your business the foundation it needs to grow and succeed, financially and otherwise.
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