The 5 Greatest Mistakes Small Business Owners Make — As Told By An Attorney
Last Updated: August 9th, 2019
In our time running our photography business, we have made many mistakes, and have had plenty of triumphs. It’s always interesting to get a consensus to see how others fair when setting up their own businesses.
In the general pursuit of knowledge, we came across a great post on Reddit where a practicing lawyer weighed in with some thoughts. The whole AMA (Ask Me Anything) post is filled with a lot of great insights. We wanted to take some of the feedback given and share with you, and throw in some of our own experiences with these 5 great mistakes small business owners make.
Note: If it’s not clear, let us be straight up — we are not lawyers and don’t claim to be. These are specifically items highlighted by a lawyer, but we have no personal connection. We do, however, agree with all the points being made based on our experience as working professional photographers!!
Not paying taxes properly.
You may fly under the radar of the tax authorities for a good long while. However, eventually, they’ll catch up with you. While certain types of income taxes can sometimes “go away” with the right legal assistance, another category of taxes, which we call “custodial taxes” are much harder to make go away. These taxes are those that you are to withhold from a client for service tax/sales tax or the type that you withhold from employees for payroll tax. Those taxes must be turned over as the taxing authorities view those funds as having never been your money — you were merely holding it for them.
Our thoughts: This is definitely something we’ve seen as an issue many photographers have. Early on in our business, we made sure to get everything setup correctly and began paying taxes on our earnings.
Incorporating creates, essentially, free insurance. Let’s say that you shoot a wedding. Something goes incredibly wrong and, worse case scenario, someone gets hurt. (I don’t know how this could happen to a photographer, but maybe a camera gets dropped on someone’s head or something.) If a person is a sole proprietor (not working for a business), that person can be sued. If a person is sued, all of their personal assets are at risk. However, if the client hired a business, then only the business can be sued. If the client wins, their recovery is limited to the assets of the business. This can be the same if you royally screw up a wedding and accidentally take pictures of your feet the entire time.
Our thoughts: This is hugely important, and many photographers make the mistake of not doing this. The reasons why people don’t do this tend to boil down to some laziness, not wanting to pay to incorporate, and so on. If you’re only shooting a session or two a year, you can probably get by, but if you are planning to do a lot of work or be taken seriously as a business at all — it will become essential. As an LLC, we have certain rights as a business that are essential to having some peace of mind. Not to mention…writing off purchases during tax season is critical.
Creating a proper business but then running it like the business bank account is the personal banking account.
Money is liquid. Once you mix funds, it’s really hard to tell where the funds came from and where they went. When people buy food for their household, pay their personal cell phone bill, buy gifts for grandma, etc., with their business accounts, it’s like the business does not exist. In reference to my #2 point, if a business does not exist (essentially), a lawsuit against the business can become a lawsuit against a person (this is called “piercing the corporate veil”) and the business owner loses the protection that having the business provided. Additionally, commingling funds (mixing your money) can create problems with the IRS and even just with your accountant trying to properly file your taxes. Keep your funds separate. Even if you don’t have a business, have 2 bank accounts. Take a payment from the business account on a monthly (weekly) basis to pay yourself, but make sure that sort of withdrawal is properly noted.
Our thoughts: Along with incorporating, setting up a unique business entity on a financial level is very important. All business purchases were handled through our business bank account and business credit card. We log everything in a detail accounting spreadsheet. The government won’t take your business seriously if one day your purchasing milk and paying your rent, and the next is payments for business insurance, new camera lenses, and so on.
Not keeping proper records.
So much is able to be written off by small business owners, if only they kept proper records. Equipment, meals when you travel, travel expenses, educational expenses, etc.
Our thoughts: We have saved a lot of money as a result of writing off our expenses. Because pro photography equipment is so expensive, we’ve ended up spending upwards of $50,000+ in the past 2 years just on this type of gear. Add to this other services and products we use like Honeybook (or, read our comprehensive review!) for invoicing/contracts, Pixieset (or, read our review!) for online galleries, Microsoft 365 for Outlook, Excel, and Word; and so on — you can see where things really add up. In addition, with the amount of driving we do for our business, MileIQ (or, read our review!) is a great app to track your mileage. All of this ends up deductible, and can save you from having to pay the government more in taxes, and sometimes can even lead to the government having to refund money back to you.
Not hiring professional help.
None of you would recommend that a couple just “wing it” on their photography. They need to hire a professional! The same applies to legal questions and accounting. Sure, you can use TurboTax and LegalZoom, but that’s tantamount to a bride & groom giving guests disposable cameras and hoping for the best. They might get some great pictures or they might end up with regrets.
Our thoughts: While there are many things you can learn about and do yourself, some things need to be done by people who are trained and experienced. For example, we can handle photographing people and marketing ourselves quite easily, but when it comes to filing our taxes — we rely on our Certified Public Accountant (CPA) for this. Not to mention, this saves us time and stress. Even though there is some cost involved, it’s pretty minimal in the scheme of things, to be honest.
We hope these little observations help you to see some of the things small business owners get wrong, and hopefully they can inspire you to take the correct steps to get these right from the start of your photography business!
Read more of our small business tips at our article entitled 50 Small Business Tips for Success!