10 common mistakes new business owners made and how to avoid them

1. Underestimating taxes and recordkeeping

Taxes came up more than any other topic. Respondents agreed that business taxes are more complicated, take more time, and cost more than most new owners expect.

Several owners said they waited too long to hire an accountant, didn't keep good records, or were surprised by requirements they didn't know about. One owner described how they learned this lesson: "Recordkeeping. I was horrible at it. I did not realize what record I needed to keep until my first tax filing when my accountant almost fired me as a client. I had no records beyond copies of my bank accounts. No reconciliation, no details, nothing."

Another was unaware of state tax requirements: "I did not realize that I also needed to submit a tax filing to my state." And one owner assumed that no income meant there was no need to file a federal return: "Not filing federal taxes because I didn't have any income." Whether that's true depends on how the business is structured and other factors, so it's worth confirming with a tax professional.

Recordkeeping for tax purposes is a bigger job than many owners expect. Income, expenses, deductions, and quarterly obligations all need to be tracked throughout the year, not pieced together at tax time. Mixing personal and business expenses is another common mistake. It makes deductions harder to claim and can cause bigger issues if you're ever audited. Mixing personal and business assets also puts your limited liability at risk if you are ever sued by your company’s creditors.

State taxes add another layer. Most states tax business income in some way. Many also charge franchise fees or privilege taxes to LLCs and corporations based on their existing as a domestic LLC or corporation, whether or not they earned income in the state or even conducted any business there. What you owe depends on your entity type and state, so the rules for one business may not apply to another.

2. Not knowing the ongoing compliance requirements

A number of owners didn't realize that there were other ongoing state filings after the business is formed, and so they didn't plan for the time and cost involved.

Once an LLC or corporation is formed, it needs to keep up with state compliance obligations such as filing annual reports, paying franchise taxes, and maintaining a registered agent. These requirements are easy to miss, but they apply whether or not an owner knows about them. As one owner put it, their mistake was "Not making a formal list of annual compliance and action items that I did not realize existed."

Falling behind on these requirements can cost a business its good standing with the state. Restoring good standing generally requires a reinstatement process so that the business can legally operate. One owner said, "Biggest issue has been with trying to get reinstated after a lapse with the state."

There are also compliance requirements when expanding into other states. A corporation or LLC needs to register in any state where it meets that state's definition of "doing business" (not just the state where it was formed), and keep up with ongoing compliance requirements in those additional states. One owner admitted to "Not understanding fully the requirements to do business in other states other than the listed corporate state."

3. Marketing was harder than expected

Marketing was one of the most common issues owners raised. Many owners summed up their mistake in a single word: "Marketing." Others were more specific, pointing to poor marketing, a bad logo, not hiring a professional website designer, or "underbudgeting for marketing." One owner captured the challenge well: "Marketing and business development are extremely important and extremely difficult."

Marketing is easy to underfund in the early days. Formation costs, equipment, and other startup expenses feel more urgent, so marketing often gets whatever is left over. Owners will frequently include a marketing strategy in their business plan but not set aside enough money for it in their financial forecast. Marketing also takes time to work. It can take several months of testing and adjusting before a strategy starts bringing in steady leads.

It also helps to think of marketing as more than advertising. Branding, a logo, a professional website, and market research all came up in owners' responses. Research before launch can show you what customers want, what competitors are doing, and where your industry is headed. But understanding the market is different from knowing how to reach customers once you're open.

Other common mistakes include marketing to everyone instead of a clear target customer, jumping into tactics without an overall strategy, failing to stay consistent, and not tracking the results. Marketing isn't a one-time task. It's most effective when owners treat it as an integral part of running the business.

4. Underestimating costs

Many owners didn't plan for ongoing operating costs. Others found that expenses grew faster than expected, or said they didn't pay enough attention to cash flow. Their answers were short but telling: "Underestimating costs," "Not thinking about ongoing costs," and "Didn't focus on cash flow enough."

Some costs are easy to overlook because they build up gradually. One owner learned that professional fees can add up quickly: "Legal teams are paid by the hour, even when that means replying to emails. So, I shouldn't have sent too many emails." Another pointed to the cost of attracting good people, saying they needed "enough of a financial cushion to get the 'right' employees to join the company."

Growth can bring its own surprises. As a business expands, it often needs more equipment, technology, space, or staff than originally planned. One owner described how fast growth led to costs they hadn't budgeted for: "We required extensive use of computers and did not anticipate how quickly we would grow and as a result ended up with a bank of computers."

5. Choosing a business structure without understanding the trade-offs

Some business owners who chose to form an LLC wished they had paid closer attention to operating agreements, how revenue would be split among partners, and the difference between manager-managed and member-managed LLCs.

An operating agreement spells out each owner's share of the business and financial rights, how the LLC is managed and how voting works, and what happens if an owner wants to leave or transfer their interest. Without one, the business falls back on the state's default rules, which may not suit the actual needs of the owners. Choosing between a member-managed LLC, where the owners run the business day to day, and a manager-managed LLC, where designated managers do, also shapes business operations. One owner shared this advice: "Don't move forward without an operating agreement. Understand what it means when you decide your LLC should be manager-managed or member-managed."

Other owners said they didn't understand the differences between entity types well enough before choosing one. Deciding whether to own a business in your own name – as a sole proprietorship or partnership – or form a business entity like an LLC or corporation to own it, has significant consequences. As does the choice of an LLC versus a corporation. As one owner put it, "Not understanding the differences between organization structures." Picking a business structure based mainly on cost or convenience, without weighing liability, taxes, and how the business will operate, can mean having to revisit that decision later.

6. Underestimating the challenges of hiring and managing employees

Hiring the right people is often harder than new business owners expect. One owner said, “I thought it would be easy to hire,” while another mistakenly assumed “that the employees would be as vested in the business as I am.”

The legal and administrative side of hiring comes with its own challenges. Mistakes with contractor agreements, worker classification, and payroll taxes can lead to penalties and other problems. One owner's mistake was "Not having a standard employment contract for freelance work." Another pointed to "Classifying staff improperly," which can result in back taxes and fines if employees are treated as contractors.

For many first-time owners, one of the hardest lessons is knowing when to let someone go. Trying to make a poor fit work often takes more time and energy than finding the right person. One owner put it this way: "It's necessary to have the right people in all the right positions. If an employee isn't working out, find a new one rather than spending an endless amount of time and effort trying to make that employee change."

7. Underestimating how much time everything takes

Running a business means being pulled in different directions at once. In the early days, owners often find themselves wearing many hats, balancing daily problems with the bigger-picture work that helps the business grow. Setting boundaries can help cut down on interruptions, but even then, the amount of work can be more than new owners expect.

Some owners said the timeline was longer than they planned for from the very start. One said they "Underestimated amount of time required to launch a business." Another put it more simply: "The amount of time everything takes."

Administrative work often took the biggest toll. Tasks like compliance and recordkeeping pulled owners away from the work they started the business to do. As one owner noted, they hadn't planned for the "time required for administrative tasks."

8. Finding and managing customers

For a number of owners, finding customers proved harder than expected. Their responses included "Difficulty of building book of clients" and "Lack of customers," and one owner admitted to "thinking customers would pound at my door/phone every day."

Once they had customers, managing those relationships brought its own challenges. One owner pointed to "Not realizing how difficult it can be to manage clients and their quirks." Another described it more broadly as "underestimating the ever-tenuous relationship between business and client."

9. Underestimating outside factors

Businesses don't operate in a vacuum, and survey respondents said outside forces had a bigger impact than they expected.

Some of these forces were impossible to predict. For several owners, it was the COVID-19 pandemic. One described it simply as "Covid and business going way down," while another pointed to the "Impact on business from government actions like shutdown from Covid-19."

Others are easier to anticipate. One owner's mistake was "Not anticipating how my competitors would react in the marketplace to counteract my entrance into the market."

10. Relying on others without staying involved

Getting professional help can save time and money and prevent costly mistakes. But some owners said they relied on others without fully understanding what was being done for them.

One owner commented, “Just allowing the CPA to handle all without a thorough understanding of all the filings (quarterly, etc.)." Even with a trusted professional in place, owners are still responsible for their business's filings, so a basic understanding of what's being filed and when can help avoid surprises.

Advice is also only as useful as what you do with it. One owner reflected on spending heavily on outside guidance: "I shelled out a lot of money on consultants and coaches when what I really needed to do was execute more of the ideas I had, see what worked and what didn't, learn from that, adapt, and repeat. It's not a bad idea to get advice from reliable sources, but you have to make sure you're executing and learning from that as well!"

The takeaway isn't to avoid outside help. It's to stay involved, ask questions, and make sure the advice you get turns into action.

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Related resources:

Small business survey reveals owners' biggest startup concerns

What I wish I knew before starting a business: 10 insights from small business owners