5 Biggest Mistakes New Businesses Make (and How to Avoid Them)
Starting a new business? Beyond the thrill and excitement of taking your ideas and turning them into something reality, there is a minefield of compliance, accounting, and legal pitfalls ready to trip you up. At Torino Accounting Group, we’ve seen it all. The success. The failures. And the costly mistakes that turn a business owner’s dream into a nightmare. We have CPA’s that specialize in small business tax & accounting and will help you avoid these common missteps to make sure you are set you up for success.
So, what are these mistakes you should be worrying about as a business owner? Here are the top 5 that should be avoided:
Co-Mingling Business and Personal Funds.
Not Filing 1099s for Contractors
Not Tracking Profitability (This Can Lead to a Large IRS Tax Bill)
Selecting the Wrong Business Structure (LLC vs. C Corp vs. S Corp)
Incorporating in a State You Don’t Need To
1. Co-Mingling Business and Personal Funds
You’re juggling a lot and it’s easy to think, “It’s all my money anyway, right? I’ll just use my personal card for this business expense. No problem.” Think again. The moment you start blurring the lines between your personal and business finances, you’re setting yourself up for failure. It might seem convenient now, but it can be a painful and costly mistake down the road.
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Why It’s a Problem:
Legal and Tax Implications: The IRS doesn’t care about convenience. They care about clarity. When your finances are all tangled up, then there’s no clarity. If you get audited—and believe me, it happens—you’ll be scrambling to separate what’s what. Penalties. Interest. Stress. But that’s not all. Co-mingling funds can pierce the corporate veil. Think you’re protected? Think again. Your personal assets could be on the line. Your house. Your savings. Everything. This is one misstep you want to avoid.
Financial Confusion: When your personal and business finances are mixed, tracking profitability becomes very difficult. Are you making money? Are you losing money? Without clear, separate records, you’re basically flying blind. That is a recipe for disaster and no way to run a successful business.
How to Avoid It:
Open a Separate Bank Account: This is non-negotiable. Your business needs its own bank account. Period. Every transaction, every expense, every penny—keep it separate.
Get a Business Credit Card: If you’re using credit, make sure it’s a business credit card. Build your business credit. Keep your personal and business expenses untangled. But what about my airline miles? Great news – business credit cards have airline miles too!
2. Not Filing 1099s for Contractors
Tip: Collect a copy of your contractor’s W-9 before you pay their invoice. Check out our article on the 3 Best 1099 software options for small business owners to make annual 1099 filings a breeze.
Contractors can be a lifesaver. They give you flexibility, expertise, and none of the headaches and costs that come with full-time employees. But there’s a catch – you’ve got to file Form 1099-NEC for any contractor you pay $600 or more during the year by January 31 of the subsequent year (so January 31, 2025, for 2024)/ Sounds simple, right? Yet, so many businesses miss this. And the consequences? They’re anything but simple.
Why It’s a Problem:
IRS Penalties: The IRS isn’t messing around. Miss a 1099 deadline, and the penalties start stacking up—$50 per form, escalating quickly to $270. And if they think you’re deliberately ignoring the rules? The penalties can go higher. You don’t want to end up on the IRS’s radar.
Audit Risk: Not filing those 1099s doesn’t just cost you money in penalties. It’s like waving a red flag in front of a bull. The IRS uses these forms to match income reported by contractors. Fail to file, and you’re practically inviting an audit. Trust us, an audit is the last thing you need.
How to Avoid It:
Track Contractor Payments: Use accounting software. Meticulous records mean no scrambling at the last minute. When it’s time to file those 1099s, you’ll be ready.
Request W-9 Forms: Before you pay a contractor, get a completed W-9 form. This gives you the information you need to file a 1099 later. It’s a simple process that you don’t want to skip.
3. Not Tracking Profitability can Lead to a Large and Unexpected IRS Tax Bill
Sales are booming and revenue is flowing. You’re on top of the world. But is your business actually making money? It’s easy to get caught up in the excitement of revenue growth and forget about profitability. But ignoring profitability? That’s a ticking time bomb.
Why It’s a Problem:
Unexpected Tax Liabilities: Revenue is great. Profit is better. But if you’re not tracking profitability, you might not be setting aside enough for taxes. And if an IRS bill arrives — it’s a gut punch. A tax bill you can’t pay? That can be a business killer.
Business Strain: Profitability isn’t just about taxes. It’s about survival. If you’re not profitable, you’re not just treading water—you’re sinking. Cash flow problems start creeping in. Paying vendors becomes a challenge. Reinvesting in your business? Forget it. Taking a salary? Dream on. It’s a downward spiral, and it’s hard to pull out. The last you want is a $100,000 IRS tax bill you weren’t expecting and can’t pay.
How to Avoid It:
Regular Financial Reviews: Don’t wait until tax season to see where you stand. Review your profit and loss statement, balance sheet, and cash flow every month. This isn’t just about numbers—it’s about keeping your business alive. And make sure you are remitted any required quarterly payments.
Work with a CPA: A CPA isn’t just someone who files your taxes. They’re your partner. They help you track profitability, plan for taxes, and find opportunities for savings. They’re the difference between a business that survives and one that thrives.
4. Selecting the Wrong Business Structure (LLC vs. C Corp vs. S Corp)
Your business structure isn’t just checking a box. It’s the launchpad of your entire operation. Choose poorly, and you could be setting yourself up for unnecessary taxes, legal liabilities, and operational headaches that could sideline your business before it even gets off the ground.
Why It’s a Problem:
Tax Consequences: LLC, C Corp, S Corp—each entity structure has its own set of tax rules. Pick the wrong one, and you could end up with a tax bill that’s much higher than it needs to be. Worse, you might find yourself entangled in complex tax filings that drain your time, energy, and resources—resources better spent growing your business.
Legal Risks: The structure you choose also dictates your level of personal liability. If you’re a sole proprietor, for example, there’s no legal separation between you and your business. That means if your business gets sued, your personal assets are on the line. On the other hand, an LLC or corporation can offer protection, but only if you’ve chosen correctly and are maintaining that separation effectively. Choose the wrong structure, and you could be exposing yourself to risks you didn’t anticipate. Partnerships – think twice before you go down this road because your partner’s liability is your liability.
Operational Challenges: Let’s not forget the operational side. Some business structures demand more in terms of paperwork and governance. For instance, a corporation requires annual meetings, documented minutes, and a formal board structure. If your business isn’t ready for that level of complexity, you could be setting yourself up for failure before you’ve even really begun.
How to Avoid It:
Consult with a Professional: Don’t make this decision lightly or alone. Sit down with a CPA or a business attorney who can help you weigh the pros and cons of each structure. Their expertise will guide you toward a decision that aligns with your business goals both now and in the future.
Consider Future Growth: Think beyond today. The structure that fits your needs at startup might not be the best choice as your business scales. You need a structure that’s not only appropriate now but flexible enough to adapt as your business grows.
5. Incorporating in a State You Don’t Need To
Delaware. Nevada. The supposed havens of incorporation. You’ve heard the pitch—favorable tax laws, business-friendly courts. But here’s the reality: if your business operates primarily in another state, incorporating in these so-called havens will cost you more money and save you zero in taxes.
Why It’s a Problem:
Unnecessary Complexity: Incorporating in a state where you don’t actually do business can lead to a web of red tape. You’ll have to register as a foreign entity in your home state, which means double the paperwork and double the compliance headaches. It’s like setting up shop with one hand tied behind your back. Keep it simple and don’t overcomplicate things.
Double Filing Fees and Taxes: The financial impact can be painful. You might think you’re saving money by incorporating in Delaware or Nevada, but the reality often paints a different picture. You’ll face filing fees and taxes in both your home state and the state of incorporation, effectively doubling your costs. What looks like a financial advantage can quickly turn into a costly mistake.
No Real Benefit: For most small businesses, the benefits of incorporating in Delaware or Nevada are negligible. These advantages—like streamlined dispute resolutions and certain tax benefits—are typically designed for large corporations with complex legal needs, not for small or even medium-sized businesses.
How to Avoid It:
Incorporate Where You Do Business: The simplest, most straightforward approach is often the best. Incorporate in the state where your business operates. This minimizes complexity, reduces fees, and keeps your focus on growing your business—not on navigating a legal maze.
Avoid Scams: Be wary of advisors who push you toward out-of-state incorporation without understanding your business’s specific needs. They may be more interested in their commission than in providing you with sound, tailored advice. Keep your guard up.
Conclusion
Launching a new business is exciting, but also full of compliance headaches and pitfalls. The mistakes we’ve discussed here—co-mingling funds, neglecting 1099s, ignoring profitability, choosing the wrong business structure, and incorporating in the wrong state—are among the most common and costly. But they’re also very, very avoidable.
Success isn’t just about working hard; it’s about working smart. It’s about knowing when to seek expert advice when to take a step back and review your choices, and when to adapt to changing circumstances. By steering clear of these pitfalls, you’re not just protecting your business—you’re setting it up for long-term success.
At Torino Accounting Group, we’re here to help you navigate these challenges, providing the expertise and support you need to avoid these pitfalls and create a successful business.