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The big mistake many entrepreneurs make when starting a business

On Behalf of | Nov 3, 2022 | Business Law |

An entrepreneur hoping to start their own business has to consider many risk factors. Will they have a source of income if the business struggles to generate revenue? Do they have enough money set aside to cover operating expenses for the first year or so until the company becomes solvent? Even the number of direct competitors in the local market can influence the plans you make for your new business.

It is common for entrepreneurs to start their small businesses somewhat casually. They may conduct a few sales at local craft shows or put a few listings up on a website to see how much interest there is in their product line. During those early stages when the business is not yet financially independent, there’s one mistake that many entrepreneurs make that could come back to haunt them later.

They don’t separate the business’s finances

Whether you buy supplies for the products you produce or pay for a domain name to start building your own website, you will need to make some purchases on behalf of your business before it starts operating in earnest. The common mistake that people make during the startup stage is the use of their own checking accounts or credit cards for such transactions.

Starting a separate business bank account as soon as possible is a crucial form of legal and financial separation from your assets and the assets of the business. During those initial stages when you may not yet have a registered business name or a bank account, you may need to set aside a certain amount of cash to use as company resources instead of using your personal financial resources.

What is at risk if you use your own account?

If you start a limited liability corporation (LLC) or another formal business entity intended to shield you from legal and financial liability, commingling your assets with business resources during the startup stage could limit how much protection you actually have. If you face a lawsuit or the business fails, plaintiffs and creditors could try to make a claim against your personal assets if there isn’t a clear separation between your resources and company assets.

Learning about and avoiding common entrepreneurial mistakes will help those starting a business do so with minimal personal risk.