As a small business owner, you must wear several hats trying to operate your business daily. It can be difficult to be good at every aspect of your business including marketing, sales, human resources, accounting, and the list goes on. There are some mistakes I see business owners make on a regular basis that can be avoided. These mistakes may not seem major, but they could result in significant financial consequences if not implemented or corrected sooner rather than later.
- 1. Not Using a CPA or Accountant
One of the many functions small business owners assume is keeping up with the finances of the business. This can be payroll, bookkeeping, and tracking your expenses, not to mention trying to keep up with reports. Often times I see business owners trying to tackle all of these tasks themselves without the help of an accounting professional. Sometimes I think business owners think they can’t afford the services and other times, it’s just not knowing where to turn. For most small businesses, it is much easier to hire an accounting firm or professional to assist you with these tasks. If you were to calculate how much it costs to hire an accountant to do payroll and book keeping versus how much time it is taking you to keep up with, you would find out very quickly your time would be better spent on improving your business. Additionally, if you are a small business owner and you think you can prepare your own taxes, you could be missing out on significant tax benefits that you may not be aware are available. Not to mention, if you were ever audited, not having an accounting professional to help you through the audit could be unbearably stressful. There could also be a higher likelihood of being audited if you don’t use an accounting professional as well. If you’re not sure who to choose, try asking other business owners for references or just start contacting some local accounting professionals and ask for a meeting to see if they would be a good fit for your business needs.
- 2. Not setting up the right insurance policies
Another major mistake I see small business owners make is not setting up the proper insurance policies. I think the reason many fail to do this properly is two fold. They are trying to keep costs down for their business and they don’t have the right insurance professional to help them make these decisions. One of the biggest misunderstandings I think business owners have regarding insurance is the cost of not having the right coverages. It could only take one instance that could completely shutdown your business and bankrupt it if you don’t have the right insurance coverages in place. As a business owner you should have several coverages in place to protect your business. You should have a policy with liability coverage to protect your business if someone sues you, property coverage for your building and/or contents of the building for your business in case of major losses, commercial auto coverage for your business vehicles, and workers compensation coverage for your employees if they were to get hurt while working for you. These are just some of the general coverages that you would need, but depending on your business, there may be additional coverages more specific to your business that also may be needed, such as Professional Liability if you’re a doctor, lawyer, insurance agent, etc. It’s important that you choose the right insurance professional to help you purchase the right insurance. Not all insurance companies offer business insurance and not all insurance companies will even offer all the different types of insurance coverages that you may need. It’s important to find a local independent insurance agent that has access to multiple insurance companies that can offer you the coverages you need. This may have to be someone completely different than the person you have your home and auto insurance through. When choosing your insurance professional, do some research online, check their reviews on google, and ask them so questions specifically about your business to make sure they know understand what you do and that they can offer you everything you need to cover your business.
- 3. Not Owning Your Building in a Separate LLC
This one may not pertain to everyone that has a business because several people have to rent their location. For those that do own or are looking to purchase a location for their business, it could be more beneficial to own that property or building in a separate LLC apart from the business that is going to be in the building. Some of you may think that doesn’t make sense. Why wouldn’t you own it in the same name as your business? There are a few reasons to set this up separate from the business, one being protection and another being financial benefits. By setting up the building in a separate LLC, you are adding an additional layer of protection to yourself and your business. You will likely need a separate insurance policy for the building apart from your business, as well. Let’s say someone comes into your store front, falls, gets hurt, then sues you. Who are they going to sue? If they try to sue the business, you have liability insurance for that business to protect you. If they try to sue the building owner, you have a separate liability policy as the building owner, plus the building is owned in an LLC separate from you personally and your business. This further limits the assets the person suing can try to attack you. Another reason to set up the ownership of the building this way is it could help you out with the taxes of your business. As the building owner, you should be charging your business rent for using the space. When you pay rent from your business, it is then an expense to that business. If you had planned on taking this money as payroll for yourself, instead pay your property company rent, you could be saving some self employment taxes. The rent would need to be reasonable and could not be something unusually high or it would look suspicious. Again, the purpose of setting up the building in an LLC has multiple benefits. It’s important to discuss this with your accounting professional and legal professional to make sure it is set up properly for your situation.
- 4. Not setting up your health plan as a section 125 cafeteria plan
As, a small business owner, if you have at least one full-time employee other than yourself, you can qualify for a health plan for your business. This can be beneficial to you as the business owner because the company can pay for at least 50% of the cost and it can be an expense to your business. If you were paying for this out of your own pocket on an individual plan, you would likely not get any kind of tax benefits. Keep in mind if you set up the plan, you must offer it to all your employees and you must pay the same percentage for them as you do for yourself if they opt into the plan. Something that many small business owners may not know is that if you were set the health insurance plan up as a section 125 cafeteria plan, then you can actually have your health insurance premiums come out of your paycheck before taxes which should reduce your tax liability come tax time. In order to set up your plan as a section 125 cafeteria plan, you have to utilize a third-party administrator that provides you with a plan document and makes sure your plan abides by the proper rules to make sure the plan meets the criteria to be characterized as a 125 cafeteria plan. You can ask you health insurance provider or agent to point you in the right direction on who to use for this service. It shouldn’t cost much at all to set it up.
- 5. Not setting up an Employer Sponsored Retirement plan
This may be the biggest mistake of all that I see small business owners make regularly. When you have a small business, you may qualify for a variety of different types of retirement plans for your business. Depending on the number of employees you have in your business and the costs you are able to absorb for your employees, you can set up a SEP IRA, SIMPLE IRA, or a 401k plan for your business. Each one of these plans specifically benefits businesses based on the number of employees and the amount they want to match for their employees. By having a small business, you are able to establish a retirement plan that allows you to contribute a significant amount more of your earnings than a typical IRA plan. These plans will have a tax deferral benefit for the employee as well as a deduction for the business for the match you contribute to your employees. Additionally, an employer sponsored retirement plan also helps attract and retain employees because it is a widely sought after benefit. Be establishing these plans for you business, you are helping yourself and your employees save for retirement and you should be able to hire and keep a better quality of employee as well. If you are contemplating setting up an employer sponsored plan, you should talk to a financial advisor who works with these types of plans who can help you choose the right plan for your business. You should also consult with your accounting professional to make sure the plan would be of the best benefit to your business tax wise as well. If you are looking for some more information specifically about the different types of plans, you can read “How can Business Owners Save More for Retirement?”
Please be advised that Cambridge does not provide tax or legal advice.