Statistics from the U.S. Small Business Administration estimates that, historically, 33% of all businesses fail within the first two years and almost 60% of businesses fail within the first four years. These daunting statistics would scare any potential business owner into thinking twice about venturing out on his or her own.
However, there is a caveat. Although these statistics have remained steady for a number of years, there are ways to better position your business for long-term sustainability.
As the old adage goes, “You don’t know what you don’t know.” So here are the top 3 missteps entrepreneurs make in the creation/operation of a business:
1. No Pre-Branding Trademark Search
Intro: All business owners understand that giving your brand an identity is crucial to differentiating yourself from the competition. These brand identifiers are a part of the intellectual property of that business. Specifically, these identifiers typically fit the definition of a trademark (i.e. name, logo, slogan etc.).
Issue: Many business owners don’t take the time to research the market to ensure that no one else is already using similar brand identifiers. So what happens when you create these brand identifiers and someone is already using them?
Well… more often than not, you receive a lovely worded Cease and Desist letter from the company who had already established a market presence with those specific/similar brand identifiers. At that point you are left with two options: spend a lot of time and money trying to establish your right to use the brand identifiers OR start from scratch re-branding your business/product.
Solution: Do the work on the front-end. If it is feasible, hire an attorney to do a trademark search for you. If that isn’t an option, visit and do a trademark search on your own. You can also do a few Google searches to see if there are similarly branded businesses out there in the market.
2. Wrong Business Entity Type/State of Registration
Intro: There are a lot of things to consider when starting a business. Two of the most important things to consider are: Where to register your business and what type of business entity should you be (i.e. Limited Liability Company [LLC], Corporation, S Corp, etc.).
Issue: There is a lot of confusion in the market as to where to register and what type of business entity you should register as. Rather than registering in the state where the business owner(s) lives, the running trend has been to register in Delaware, Nevada, or Wyoming. Internet articles and some “experts” express tax, privacy, protection, and other benefits associated with registering in any of these three states. However, for a large majority of businesses, and even larger majority of small businesses, these benefits may never be realized. Typically, a business registered in a state other than where the business owner(s) live will often fit the definition of “doing business” under the laws of the state where the owner(s) live. This means that the business will be required to file additional paperwork in that state. Depending on the nature of your business, this may result in the additional operational costs outweighing any benefit expected from registering in a foreign state.
Outside of where to register, another big consideration is what entity type your business should be? For most business ideas, the decision is between an LLC, C Corporation, and S Corporation; for socially charged business ideas (in some states), the decision is between a non-profit corporation and a Low-Profit Limited Liability Company (L3C). As with ‘where to register’, there are multiple Internet streams of conflicting information regarding the “best” entity type. While registering as the wrong entity type will probably not result in a deadly blow to your business, re-organizing or continuing to operate under the wrong entity type can be costly and cause your organization to miss out on certain market opportunities.
Solution: Both of these questions require a very meticulous discussion of your business operations, expectations, and goals. Many smaller businesses will benefit from the flexibility of an LLC and/or the tax benefits of an S Corporation. Socially conscious companies not looking to raise a lot of capital through individual donations may look into the newer L3C entity as a flexible way of creating social impact. However, this is a very complex topic that shouldn’t be taken lightly. Ideally, potential business owners should jointly consult an attorney and an accountant to figure out what the best place of registration and entity type would be for his/her specific venture.
3. Handshake Deals or Self-Drafted Contracts
Intro: Relationships are the backbone of the business world. Partnerships, joint ventures, collaborations, etc. are entered into every day in an effort to leverage the resources, talents, and expertise of third parties. These types of engagements are crucial to any businesses’ success.
Issue: Too many business owners either enter into handshake deals or attempt to self-draft and self-negotiate certain contracts.
The one thing that attorneys understand is that contracts are drafted with the worst-case scenario(s) in mind. Some business owners fail to enter into written agreements because they are overly optimistic that nothing will go wrong with the working relationship, while others don’t want to offend the other party to the relationship or slow down progress on the project/transaction. Any business owner operating with this mindset is playing Russian roulette. Not having the terms of a relationship written down and signed means that if/when the worst does happen, the parties are merely left with “he-said, she-said” details. This is the worst position to be in, especially if there is a significant amount of money and/or a business deal involving company secrets. Trying to bring a lawsuit against someone where there is no contract expressing the rights, obligations, and other terms of the relationship is not only a toss-up, it is extremely costly.
As a business owner you should not only have a written agreement in place, you should consult with a business attorney in the drafting/negotiating of that contract. The Internet has turned many business owners into pseudo-attorneys. As mentioned in my previous article, failing to engage an attorney could cost your company wasted time and thousands of dollars. While the business owner can negotiate the main terms of the contract, as he/she understands that industry, there are nuances with every relationship and peripheral issues that may not be readily identifiable through ordinary conversation or research.
Solution: Understand the importance of using properly, professionally drafted contracts. This not only goes for contracts with third parties, this also goes for internal documents as well (i.e. Partnership Agreements, Operating Agreements, By-Sell Agreements, Bylaws, etc.). Operating with a missing, incomplete, or faulty contract is a very dangerous undertaking and could lead to your company joining the 33% or 66% small business fail rate. Consult an attorney; spend the money up-front to save money, and possibly your business, on the back-end.
*This is a very high-level account of typical missteps entrepreneurs make. For more information please consult your/a business attorney to have a more in-depth discussion.