Avoiding Basic Mistakes when Starting a Small Business

A small retail business
When a small business fails, it can be a SHTF moment for the owner and employees.

If you are wondering why I am writing about small businesses, it is because the failure of a small business can be a SHTF moment for a family. On the other hand, a small business can help you achieve many of the things preppers desire, including freedom and self-sufficiency. Also, if you are looking to leave the city for survival purposes and wonder how you will make money in a rural area, owning a small business, even as a side gig, is one possible answer.

Business Trouble

The owner of a store in our town owns the building in which the store is located. That sound like a smart idea, doesn’t it? Why pay rent to someone else when you can pay it to yourself?

Except he bought it with a loan that has an adjustable rate. His interest rate has soared to almost 10 percent, about three times what it was originally. He’s now paying far more for the building than he was two or three years ago, and those payments are threatening to drag him under. And because the company and the building are not owned by separate entities, if he defaults on the building loan, it will be the end of the store as well.

Far better to have bought the building as a company we’ll call “Smith Real Estate Holdings, LLC” and formed the store as a separate company called “Village Stores, LLC.” Village Stores could sign a lease with Smith Real Estate Holdings and pay rent. If the bank seizes the building for nonpayment, the bank will honor the lease to keep the income flowing and the business can stay open. The bank will also have difficulty voiding the lease, which is a binding legal document.

The Unseen Damage of Rising Interest Rates

We all know that rising rates have endangered banks and led to the failure of Silicon Valley Bank and First Republic Bank. Less visible to the public is the number of people like this individual who has been hurt by rising interest rates. He and his family are under a great deal of stress as they deal with their very own SHTF moment.

When the Biden administration insists the economy is fine, it is ignoring small businesses like this one and many others that are being driven into bankruptcy. Had any restaurants close in your area? We have. It’s harder to make money today than it was a few years ago. Business models that worked under good economic conditions are failing as inflation and interest rates rise.

Of course, rising interest rates also hurt large companies. They respond by cutting back on capital investments. When interest rates are high, manufacturers don’t build new plants, oil companies don’t drill new wells, and tech companies lay off employees. Many retailers close stores or go under, as Bed Bath and Beyond has done. The New York Times reports that 2023 will be the biggest year for bankruptcies since 2010. That means big companies are failing at a faster rate than they did during COVID, a statistic I find shocking.

Starting a Small Business

Many of you know that I recently started a small business. I formed an LLC, which protects me from liability and keeps anyone suing the company from pursuing my personal assets. I also opened bank accounts in the company’s name at a bank I don’t use for my personal banking. This keeps me from mingling my personal money with corporate money. I got a debit card on one of those accounts, and when the company needs to buy something, I use the debit card. I don’t charge things needed for the business on my personal card or vice versa.

Because of these common-sense precautions, I limit any potential losses in the company to the investments I have made in it. (Remember, LLC stands for Limited Liability Company.) I deposited less than $5,000 of my personal funds into the bank account of my new company. If the company collapses or declares bankruptcy at some point in the future, I’m out my initial investment, but no more. The LLC protects my house and retirement assets. Business creditors can’t touch the money in my personal bank accounts. I don’t have to worry about a debtor seizing my car or other belongings to settle a company debt.

That’s where my friend made his mistake. For what I estimate is less than $300, he could have formed two LLCs. One could declare bankruptcy and the other could remain in business.

Key Lessons

There are many benefits to owning a small business. Those benefits are enhanced when you protect yourself and the business by forming an LLC or corporation. Even if you have little to lose today, that may not always be the case; with any luck and some hard work, you and your business could be worth a million dollars in ten years. Take steps now to protect it.

In addition to forming an LLC, find an accountant and an attorney who deal with small businesses. It’s nice to be able to call your accountant and ask, “should I lease this piece of equipment or buy it?” or to have an attorney available when you get your first cease and desist letter.

If you already have a sole proprietorship, then roll it over into an LLC. Your accountant and lawyer can help.

In my opinion, the biggest mistake small business owners make is to rely on borrowing money. If your business cannot make enough money to sustain itself, borrowing money won’t help; it will just delay the inevitable and make the problem bigger and uglier. I do not plan to borrow money. I am starting small and building and will reinvest my profits into the business. (If you ignore this advice, don’t sign for any loans or guarantee any payments personally.)

Borrowing differs from using other people’s money, which is called OPM. If someone wants to invest in your business for a piece of ownership, that’s different from borrowing because they are sharing the risk. Call your lawyer and start negotiation, but never give up a controlling interest in the company until you are ready to get out.

Selling a Company

Every company dies eventually. Look at Sears Roebuck, once a powerful retailer now gone. I expect Amazon will be gone in 100 years.

My advice is to sell when you are doing well. If you think the company still has growth potential, then hold on to some equity and take your share of the profits, but get out and let someone else take over. Chances are, you worked hard to build the company. Take some time to enjoy the fruits of your labor. You can always start another.

Business Banking

I found out purely by chance that having a business bank account (at least at my local bank) allows me to withdraw and deposit far more cash with no questions asked than I can in my personal account. I can also get rolls of coins. If you are tired of getting questions when making cash withdrawals, form an LLC and open a business account at a small bank in your area. I found one that was delighted to have my business, even though I had yet to make my first dime.