When you’re running a small business, it’s common to look for cost cutting opportunities, but there are some circumstances where spending money upfront to ensure that you’re not committing even costlier errors down the road is worth the investment. Here are four common and potentially costly errors small business make.
When you’re running a small business, it’s common to look for cost-cutting opportunities, but there are some circumstances where spending money upfront to ensure that you’re not committing even costlier errors down the road is worth the investment. Here are four common and potentially costly errors small business make.
1. Misunderstanding Tax Laws.
Attorney Christopher Dziak says that despite their complexity, business owners must all understand the taxes they will be responsible for (including sales and payroll), particularly if you’ve hired additional help. Likewise, if you have done or plan to do business any independent contractors, subcontractors, and/or professional services providers (including lawyers and accountants) whom you’ll pay more than $600 to in one tax year, ensure you have signed W-9 forms on file, and that you’re prepared to issue the required 1099-MISC forms to them at tax time. (Due by the end of January in 2014). Likewise, if your own salary has increased significantly in the last year, you have until January 15, 2014 to make your final estimated 2013 tax payment. Confirm that you have in fact paid the correct amount of estimated tax for the year; increase it if needed to avoid underpayment penalties.
2. Choosing the Wrong Business Structure (Or None At All).
Nellie Ascot, small business expert and founder of CorpNet says entrepreneurs commonly wait too long to incorporate, assuming that they are “too small” to have the need. Another common error? Choosing the wrong business structure when they do form a legal business entity. “Some of the most popular business structures include the LLC, S Corporation and C Corporation—but they all have very distinctive features. Picking the right option is important,” says Ascot. In the case of partners who share ownership in a business, for example, she says that they may assume an S Corporation is the best choice--only to later realize they must share in the income and direct proportion to their ownership when it comes to tax reporting. In this case, forming an LLC would give the partners more flexibility in dividing the profits. Not sure if you’ve chosen the right business structure, or how to go about forming a legal business entity in the first place? Check out CorpNet’s Business Structure Wizard tool for guidance.
3. Not Carrying Sufficient Insurance
Whether you operate your business out of a storefront or online, make sure you carry proper insurance coverage. Las Vegas-based attorney Jason Lieber says that at minimum, all business owners should have liability insurance to protect against claims for damages (in both legitimate cases and frivolous lawsuits). “Protection against claims is important because lawsuits with no merit are very common. An insurance carrier will hire and pay for an attorney to defend the claim, saving the policyholder thousands of dollars” says Lieber.
4. Using Someone Else's Creation Without Permission.
You might be tempted to supplement your own marketing and content strategy by leveraging the work of others when you’re a small business on a budget, but as small business advisor Linda Pophal explains, this common practice is in direct violation of copyright laws, and can result in hefty fees, and possibly, costly legal action. “This might include creating a radio (or video spot) that incorporates music you do not have the rights to, using images on your web site or in email marketing that you do not have the rights to use, posting information on your web site and/or including content in a blog post or other form of communication that you did not get permission to republish.” Ignorance is not a defense in the case of creative permissions and usage rights. Always obtain written permission by the creator and/or copyright holder first. If you can’t get it—don’t publish!