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Top Money Mistake Startup Businesses Make

Top Money Mistake Startup Businesses Make

About 50 percent of new U.S. companies fail in their first five years. According to the Small Business Administration (SBA), 34 percent close before their second year in business. Some of the worst performing companies are in the fields of transportation, communications/utilities, retail, construction and manufacturing. Starting a business in one of these industries is definitely an uphill battle. But it’s certainly a battle that can be won.

So what is the top mistake failed startup businesses make? The simple answer: They ran out of money.  

For many failed businesses, the problem starts at the beginning, with too little seed money. Bootstrapping a business (starting without outside capital) can sound romantic, but a fairy tale ending is extremely rare. A recent CB Insights survey found that about one-third of failed startups simply ran out of money. Can a business weather those odds? Absolutely. But if bootstrapping prevents you from spending the money needed to start making money or to provide enough cushion to get through the lean times.  It may not be your wisest option.

 The complication of taking on partners and/or investors soon follows. The biggest mistake is usually   choosing and utilizing a business structure. Many startups get lured into jumping into an inappropriate entity structure (Corporations [both C and S], Limited Partnerships, or other unsuitable entities) because they have their eye on the prize and are concerned with protecting the money they hope to make. However, there may be better choices for new businesses.

An LLC may be a better choice. It can offer the flexibility of a waterfall system to pay stakeholders. With a waterfall, you could choose at first to focus on paying creditors and then investors. Following those payments, the next allocation would be to reward those who’ve invested sweat equity (like co-founders).

It’s important to work with a professional to decide on the best structure for your business at each stage. Contact us if you need helping weighing your options. 

Image Copyright: 123RF Stock Photo

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