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The Hidden Pitfalls of Forming a Company and How to Avoid Them

Starting a business gives you the freedom to be your boss and an opportunity to build wealth. However, the start-up journey is full of challenges that often result in closure. Statistics shared on Exploding Topics reveal that 21% of start-ups fail within the first year.

If you’re planning to launch a company, you’ve probably researched the common mistakes to avoid when launching your business. But have you considered the hidden traps that could lead to business failure? Too often, entrepreneurs prioritise funding and marketing and neglect obstacles that hide in plain sight. Let’s explore the hidden pitfalls of forming a company and how to avoid them.

Not Communicating Clearly With Co-founders

Having co-founders means less stress and better decision-making. Co-founders share their knowledge, skills, and expertise to help develop and grow a successful company. Unfortunately, good relationships among company founders don’t always last because of poor communication.

Not discussing your business relationship with co-founders beforehand can result in serious legal issues. The Zuckerberg and Winklevoss twins Facebook litigation is a perfect example of how a lack of co-founder agreement can cause problems for your business.

How to Avoid this Pitfall

Creating a founder agreement is the first step to establishing a good relationship with founders. This legal document outlines how founders agree to handle certain issues. For example, if the business fails, co-founders can agree to close the company or start again by implementing a new idea.

A detailed founder agreement helps prevent disputes between co-founders by outlining how the percentage of company ownership is determined. Founders will also have clear guidance on splitting equity among themselves, their responsibilities, and how much money each member should invest in the company.

Failure to Incorporate

Choosing a business structure or legal entity is the first decision entrepreneurs make when forming a company. In most cases, aspiring business owners wait too long to incorporate because they want to be certain their business will succeed. Not hiring a legal professional when starting a business is another reason entrepreneurs fail to incorporate. It’s worth noting companies that don’t have a legal structure incur high taxes and become subject to lawsuits and other liabilities.

To avoid this pitfall, take time to learn the types of business structures that are available for startups in your region. Depending on your business goals, budget, and number of founders, you can incorporate your company as a general partnership, corporation, or limited liability company.

Forming a general partnership is ideal if you have multiple partners, while corporations are perfect for companies that want access to capital, business continuity, and easy transfer of ownership. An LLC is a hybrid form of corporations and partnerships.

When you start an LLC, you enjoy limited liability, pass-through taxation, free transfer of financial interest, and flexible management. Plus, forming an LLC is easy. You only need to choose an LLC name, file an Article of Organisation, get an EIN (employer identification number), open a bank account, and sign your operating agreement.

Planning for the future also involves knowing how to exit the business when the time comes. For those looking to maximize their returns, understanding how to sell a business privately can be a valuable strategy.

Overlooking the Importance of Legal Advice

As a startup, it’s easy to ignore the importance of hiring legal counsel. While you may avoid legal services to save money, you risk getting into legal problems that might cost your business a fortune.

Avoiding this Mistake

You and your co-founders should have a budget for legal counsel and search for lawyers or law firms with expertise in business law. Hiring a legal expert for your business has several perks, such as free consultation, better negotiation, and strong legal presentation in court.

An experienced lawyer will also guide you through the formation, governance, and dissolution of business. They’ll ensure you obtain the right business permits and explain tax laws to ensure you pay taxes on time to avoid fines and penalties.

Unprofessionalism

Making a good first impression is important for startups, as it lays the foundation for establishing future client engagements. It is, therefore, crucial to present yourself in the most professional way possible or risk losing potential customers and investors to your competitors.

Reasons your company might appear unprofessional without your knowledge are:

Poorly Designed Website

In this digital age, your target customers search for your brand online before buying a product or service. If your website design has inconsistent fonts, lacks color contrast, and is hard to navigate, it will leave a bad impression on visitors.

Remember, it takes seven seconds to make a first impression. So, ensure your company website is easy to navigate, has your brand logo, colours, and font, and contains all the information potential customers might be searching for.

Lack of Clear Brand Identity

If your brand doesn’t convey your business’s values, potential customers will see you as an amateur. Note that your logo isn’t the only thing that represents your brand. Your website design, marketing materials, and how you interact with customers define your business. To make a good impression, ensure your branding is clear and consistent.

Poor Quality Customer Service

Quality customer service is vital to satisfying customer needs and keeping them loyal. However, it’s one of the things entrepreneurs overlook when getting their businesses off the ground. Whether you plan on selling services or products, create a system for dealing with customer complaints. Ensure you have a professional team ready to promptly and courteously respond to customer inquiries.

When launching a business, entrepreneurs spend hours sourcing for startup funds and designing a suitable marketing campaign. In the process, they overlook the need for legal counsel, the benefits of incorporating, making positive first impressions, and founder agreements. While these aspects seem less important when starting a company, they can threaten your success. Therefore, consider every little detail of your venture during the planning phase to ensure you stay ahead of the competition.

Conclusion

Forming a company is a thrilling endeavour, but it comes with its fair share of challenges and hidden pitfalls. To avoid these pitfalls and increase your chances of success, invest time and effort into proper planning, market research, financial management, legal compliance, marketing, customer feedback, and sustainable growth. By navigating these obstacles with care, you can build a strong foundation for your company’s future and achieve your entrepreneurial goals.

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