Starting a business is never easy. However, owning a business gives you control over your career and the freedom to enjoy both your work and your personal life.
Some of the obstacles that you may encounter in starting a business may be expected. For example, most entrepreneurs are aware that they may need to forego the whole home remodeling project they had planned until their businesses produce the cash flow needed to become self-sustaining.
Other obstacles may be unexpected. For example, many first-time business owners are unaware that, under New York law, they are required to carry unemployment insurance, workers’ compensation insurance, and disability benefits insurance when they hire employees.
Here are some other obstacles you may encounter when starting a business along with some ideas for how to overcome them:
Forming a Business Entity
Choosing an entity for your business can require some foresight into what you need from the business entity in the future. A sole proprietorship (one owner) or general partnership (multiple owners) is the default form. If you do not file anything with the state before you open your business, it will probably be treated like a sole proprietorship or general partnership if there are ever any legal disputes involving the business entity.
The problem with these business forms is that they provide almost no legal protection. If a sole proprietorship is sued, the owner’s personal assets are at risk along with the business’s assets. Similarly, if a general partnership is sued, each partner’s personal assets would be at risk.
Limited liability business entities were created to reduce the chilling effect this imposes on people starting a business. For example, if you started a summer arts fair and you were at risk of losing your home if a guest slipped and fell at your event, you would rightfully be reluctant to organize the summer arts event.
If you first formed a corporation, limited liability company (LLC), or limited partnership, however, your liability would be limited to your investment in the company. That is, if you invest $1,000 in a corporation and that business is sued, you can only lose your $1,000 investment (with a few narrow exceptions). Your home and other personal assets would be protected from loss.
Thus, one of the first steps for people starting a business is to form a business entity to protect their personal assets in the event that the business is sued or fails.
Business Taxes
The type of business entity that you choose when starting a business will determine how the business’s taxes will be handled. To briefly summarize:
- C corporation: A C corporation (or C corp) is considered an separate taxable entity. As such, a C corp will pay taxes on its income before it pays your salary or dividend. After it pays you, you will pay taxes again on the income. As a result, C corps are often said to suffer from “double taxation.” However, C corps are structured so that investors can easily buy and sell shares. Huge, publicly traded corporations are C corps.
- S corporation and LLC: LLCs and S corporations (or S corps) are considered pass-through tax entities. As such, the business is not taxed separately and your share of an LLC or S corp is only taxed as part of your personal income. There are trade-offs with this pass-through treatment, however. Your share is taxable on your personal taxes regardless of whether you actually receive the profit. For example, if your fishing tour company makes a profit by placing the business’s used boat for sale, you will be taxed on that profit even if you are planning to use it to buy a new tour boat in the future.
The best way to overcome this obstacle is to meet with a tax accountant or tax lawyer before when you are starting a new business. A tax professional will be able to recommend a business entity based on the line of business. Moreover, after your business is up and running, periodically consult your tax provider for advice on when and how to conduct your business activities to maintain compliance with tax laws while minimizing your tax liability.
Cash Flow
Almost every small business will experience some cash flow issues. If you have professional help with financial planning so you can fund your business and pay for your personal expenses until you can draw a salary, you may be able to weather the initial few months. If not, you will likely need some infusion of capital early in your business’s lifetime to keep things moving until you can develop the customer base needed to cover all of your business’s expenses.
There are two primary paths to raising capital.
- Debt: Taking out a business loan or applying for a rotating line of credit can help a business expand by providing capital to pay bills, build facilities, or acquire employees and equipment. However, debt must be repaid, often with interest. Moreover, being approved for debt financing will often depend on the business’s credit history and the business owner’s credit history. Similarly, debt often requires collateral. As result, a bank might place a security interest against a business’s machinery, inventory, or even its patents and trademarks so it can sell them if the business defaults on the loan.
- Investment: Selling shares of the business can provide the business with an infusion of capital for ordinary business expenses or expansion. However, shareholders are co-owners and, as such, have a right to information about how the business is run and a say in the business’s operations. A plumber who takes on investors into a plumbing business will potentially have non-plumbers telling the plumber how to install (or, at least, sell) piping systems.
There is no one-size-fits-all recipe for raising capital. Most businesses use a combination of debt and investment. However, some businesses, like doctors, lawyers, accountants, and other service providers, may lean more heavily on debt while other businesses, like retailers and manufacturers of goods, may be more amenable to investment.
Health Insurance
One of the greatest obstacles to starting a business is finding and paying for health insurance coverage. Most Americans receive their health insurance through their employer. However, those who are self-employed face obstacles to buying health insurance policies.
Small businesses with very few employees do not create a sufficiently large pool to distribute risk. That is, health insurance premiums are based on the theory that everyone in a pool pays premiums but only a few in the pool will require health provider services. As a result, the risk and cost can be spread out across an entire company, keeping premiums low.
However, a business with only two owners and one employee can only spread the risk of a health problem across three people. This small business might be priced out of buying health insurance by high premiums.
One way for small businesses to access the health insurance market without paying extraordinarily high premiums would be to buy through a group plan. For example, professional organizations and chambers of commerce may buy a plan for member businesses that allows an insurance company to spread risk across all the member businesses rather than each individual member business. This would help keep health insurance premiums down.
Employees
Hiring employees can be an exciting step when starting a business. However, you should be prepared for the difficulties that arise when managing employees.
Employees are human resources. They provide your business with labor, but are also the face of the company. When a customer or client deals with your business, it is often an employee who works to keep the customer or client satisfied. If your employees are dissatisfied with their jobs or fail to work together as a unit, your customers and clients will be unhappy and your business may fail.
On the other hand, cohesion among your employees has many benefits:
- Workers with social connections with other employees are less likely to quit or be fired.
- Socially connected workers are less prone to require time off for emotional problems.
- Workers who are socially connected are more likely to collaborate on projects or offer help to each other.
Social cohesion can come from social events, like office parties or business retreats. A particularly effective technique to building social cohesion and collaboration is to use team building events. These events often require teamwork to solve a problem or overcome a challenge. The goal might not even relate to the company’s business.
For example, a river rafting trip might be an effective team building event because navigating a raft safely requires teamwork and communication. In this way, you can build a team while simultaneously having fun.
Lawsuits
No business wants to face a lawsuit. However, lawsuits can come from many different directions and few business owners can anticipate them all, particularly when starting a business.
For example, businesses have legal exposure to:
- Customers and clients
- Taxing authorities
- Regulatory authorities, such as workplace safety and business licensing agencies
- Business competitors for unfair trade practices
- Business partners and investors
One way to address this obstacle is to carry business liability insurance. Business liability policies usually cover the basics of legal liability like slip-and-falls that occur on your business premises.
Another practice to minimize the risk of lawsuits is to keep meticulous records. Often an attorney can head off a lawsuit by documenting your side of the story to the other party’s lawyer by providing copies of your business records and communications.
Legal Compliance
However, one of the easiest ways to avoid lawsuits is to avoid the behaviors that risk legal action. The process or making sure your business is always on the right side of the law is called legal compliance.
Legal compliance is established by consulting with a lawyer before problems occur to establish policies and rules to avoid or minimize the risk of legal problems. For example, a restaurant and bar might establish rules for bartenders to follow so that customers who have been drinking cannot claim the business was responsible for their subsequent car crash. These rules might include cutting off visibly intoxicated customers and offering to call a taxi or ride share for customers unable to drive.
The principle of legal compliance is that an ounce of prevention is worth a pound of cure. Legal compliance, then, is often about:
- Brainstorming to identify all of your business’s sources of legal risk
- Consulting a lawyer to determine the legal rules governing that risk
- Developing policies to reduce or eliminate the risk
Marketing
Businesses often handle marketing in exactly the opposite way that it should. When business is slow, they cut marketing to save costs and when business is good, they expand marketing. This leads to a cycle in which businesses often fail to reach their customers and recognize their customers’ needs.
Instead of cutting marketing when business is slow, businesses should invest in market research to determine why the business’s marketing is not resonating with customers. This research may yield not only new marketing techniques, but may provide insight into why the company’s goods and services that are fail to meet customer expectations. Nearly 90% of businesses say their markets have become more competitive over the past three years. This means that a business that loses market share has a high risk of being unable to regain it.
Similarly, when business is good, increases in marketing budgets begin to yield diminishing returns. Rather than dumping more money into marketing, a business might find it more profitable to expand production capacity to meet demand or even develop new products to sell to the ready, and willing, market.
Overhead Costs
There is no easy way for someone starting a business to contain overhead costs. However, there are a few ways to avoid going overboard and wasting money.
- Be realistic about growth: If you rent a 10,000 square foot building expecting to hire 300 employees during your first year in business, you will likely be disappointed and overspend on rent and utilities.
- Shop around: There are many sources of equipment and labor. If your business line is amenable to outsourcing, consider having outside vendors provide specialized services, like network security, rather than hiring an in-house employee.
- Hire professionals: Professionals might be more expensive on a per-hour basis, but might be quicker and make fewer mistakes that have to be corrected. For example, a when starting a business, hiring a good CPA to set up the accounting system rather than a bookkeeper might be more efficient, cheaper, and less likely to create problems down the road.
Work/Life Balance
Starting a business does not mean finishing life. While many small business owners spend a lot of time running their businesses, they do not need to spend all their time running their businesses. Some suggestions for maintaining a balance include:
- Use technology, like video calling, to stay connected with your business without actually having to be there.
- Hire good employees. There is no reason you need to pass up the annual summer in the arts festival when your employees can run the business without you for a few hours or even a few days.
- Be firm with customers and clients about business hours. Except during true emergencies, no customer or client will suffer for waiting until the next morning for a returned call.
Starting a business can be an exciting time. With a little bit of foresight and planning, most obstacles to starting a business can be overcome.
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