06-17-2016 Special Guest Post by Rachael Everly. Being your own boss seems to be the hottest job nowadays. It comes as no surprise that a number of people are now starting their own businesses as sole proprietors to make ends meet and achieve their personal goals. Unfortunately, there are a handful of mistakes that a number of these sole proprietors end up making, owing largely due to a lack of proper guidance, or maybe their own unwillingness to seek council. Here are some of the most common mistakes made by sole proprietors when running their businesses.
Not having a proper business vision and mission
So let’s start with the basics. The fundamental mistake that a number of sole proprietors make is not being able to clearly define the business’s vision and mission. In fact, when asked about it, the most common answer that you’ll get from a sole proprietor is “To make money.” Well naturally, they’re doing it alone because they don’t want to share the financial benefits with anyone else. A number of young entrepreneurs venture into small businesses as sole proprietors simply to repay outstanding or defaulted student loan payments. To be honest, those aren’t the best of motives. With priorities in the wrong box from scratch, it’s no surprise that people running their business solo end up suffering. How about really focusing on increasing customer value for a change?
Mixing up personal and business
Another common mistake made by sole proprietors in their early days is that they fail to keep personal and business finances separate from one another. Well, that’s largely because business owners often end up investing so much of their time and money in the business that they are unable to make a clear difference between personal income and business finance. This obviously leads to another set of problems and more mistakes that sole proprietors end up making especially when it comes to taxes and various forms of legalities. Keep reading.
Skipping quarterly taxes
During the first year, small businesses generally get a ‘free pass,’ and in some cases there are even more exceptions depending on how much money the sole proprietor makes. But what a number of sole proprietors end up doing is skipping their tax payments altogether. True, you may not necessarily be required by the IRS to make quarterly payments, but they’re a lot less of a financial burden if they’re paid out on a quarterly basis. Shouldn’t be too hard to set out some money from your earnings every four months, right? Getting advice on taxation and how to go about it isn’t too hard either.
Not keeping a track of all expenses
Given that sole proprietors are their own bosses and are probably usually running small setups with a limited number of human resource, losing track of their total expenses is another common mistake made by the men (and women) under discussion because… they might not have someone to do the job for them! From the very second you start your startup, you are able to deduct all mundane and compulsory business expenses varying from office tea to stationery to corporate dinners to even the fuel burnt to meet up with a client. The question; how many sole proprietors actually do that and collect a receipt for every single business related transaction made throughout the entire year? Probably not many. There are two very simple rules in this case; first; if you can document it, you deduct it, and second; forgetting to record means you’re leaving money on the table.
Mixing up supplies and equipment
Alright… so supplies include things that are used at work throughout the year like printer paper, pens, pencils, erasers, and other stuff in the likes. Equipment on the other hand is capital expenditure that is of higher value and lasts longer than a year such as chairs, computers, and other machines used by the business to generate revenue. Now how hard is it to decide whether something bought by the company is actually a supply or a piece equipment? Apparently it is! Sole proprietors may not really realize the gravity of the failure to allocate expenses to the proper accounting ledger until they have to begin filing taxes and returns. Yes, unlike supplies, equipment can and should be written off – it’s called depreciation!
Underreporting business income
Probably in a vain attempt to avoid paying too much taxes, sole proprietors also end up underreporting their business income for the entire year. Well, there are obviously some moral and ethical issues associated with this practice, but those are highly subjective. However, this malpractice can actually become a bit of a problem when filing for tax returns as businesses are still required to state their income for the relevant period when filing for returns. Not only does underreporting business income imply poorer tax returns, but it also holds the threat of legal issues with the IRS. The practice is kind of like hitting a hammer on your own foot… ouch!
Not starting the business as a corporation or LLC
Sole proprietors often get so caught up with the idea of self-ownership that they also overlook more important legal issues related to the business. For instance, they often ignore the very important question of what legal form their business should take. The lack of proper legal consultation is evident and as a result the owners end up suffering from higher taxes and become subject to significant liabilities that could have been avoided if the business was started as a corporation or as a limited liability company (LLC).
So what mistakes have you made as a sole proprietor?
Legal Disclaimer: Some articles on The Guinn Consultancy Group, Inc. website are written by guest authors. This article was written by Rachael Everly, who is responsible for the content and imagery related thereto. The Guinn Consultancy Group, Inc. received no compensation for publication of this article.