Essex Richards Law firm attorneys North Carolina Heather Culp

Thinking of starting your own business? Learn from others’ mistakes 

Originally Published by The Charlotte Business Journal on January 27, 2017.

By Heather Culp

The survival statistics for small businesses are discouraging. The Small Business Administration’s Office of Advocacy reports that for American small businesses (defined as fewer than 500 employees) that started anytime from 1994 to 2013, only 48.2% operated for five years, and 33.5% for ten years.

I’m a Charlotte bankruptcy attorney, and my work includes advising and representing local entrepreneurs saddled with personal debt from a failed or failing business venture. What can you learn from them?

1. Do your homework. If you are thinking about buying a franchise, contact franchisees (not just the ones the franchisor suggests) and find out everything you can about the experience, including actual franchisor support, and franchise income and expenses. Avoid a business in which you have no background or experience.

2. Figure out how you will support yourself. Many small business owners are unable to pay themselves for months or years from business income after paying other operating expenses. Do you have savings, or other income, to pay your personal obligations? For how long?

3. Consult professionals. An attorney can review long-term or big-dollar contracts before you sign them, and point out risks, areas for negotiation, and potential deal breakers. The expense may save you heartache and money later on. A good CPA or tax advisor and preparer is a must. Consider a commercial insurance agent for insurance coverage to protect you and your business assets.

4. Follow corporate formalities. For example, if you form a North Carolina corporation, be sure that the company files its annual reports unless it is exempt. Failure to do so may result in the dissolution of the company, placing personal assets at risk.

5. Pay taxes and file tax returns. A company’s failure to pay sales and use, payroll or withholding taxes on time, and failure to timely file the quarterly reports for these taxes, are big mistakes. The owner or manager can be held personally responsible for the tax debt. A payroll service can be a huge help. The self-employed often pay quarterly estimated personal income taxes, rather than having taxes withheld from a paycheck. It takes knowledge and discipline to set aside these funds and remit them.

6. Don’t commingle personal and business finances. This can lead to tax problems and makes it hard to track cash flow.

7. Avoid overexpansion. Too much of a good thing can be a bad thing.

8. Think hard before involving family. Defaulting on business loans from family can be unpleasant. Spouses may want to diversify income streams, rather than both being dependent on the same business.

9. When relying on employees and independent contractors, trust but verify. Professionals, in particular, are prone to turning all bookkeeping and accounting over to one person, with little to no oversight or basic fraud controls, only to find fairly late in the game that there has been significant business loss due to embezzlement, theft, or simple incompetence.

10. Sometimes bad things happen to good people. You may do everything right but still close and be left with debt. Divorce, illness, natural disasters like Hurricane Matthew, unfair competition, litigation — these are just a few of the unexpected bumps that can cause a business to close its doors. Know that you can change only what is in front of you, and that there can be a path forward.

Heather Culp is a bankruptcy attorney and president-elect of the Mecklenburg County Bar.