By Staff Writer | 04/16/2025
There are three main reasons for the most common mistakes new business owners make. Often, entrepreneurs are short on time, have limited cash flow, or are simply unaware that their choices are less than ideal.
Making mistakes is also part of being human. However, learning from other entrepreneurs’ mistakes can help you avoid unnecessary aggravation and make the most of your financial resources.
What Are the Most Common Mistakes Made by Small Business Owners?
So, what are the most common mistakes made by entrepreneurs? They include:
- Launching a small business without writing a business plan
- Creating a business plan without conducting thorough research
- Ignoring customer feedback
- Failing to form a proper legal structure
- Choosing a brand or business name without doing research first
- Signing contracts without understanding them
- Hiring help without protecting your intellectual property
- Overlooking industry regulations
- Developing unlawful marketing strategies and advertising campaigns
- Infringing on others’ intellectual property
- Neglecting local, state, or federal tax obligations
- Failing to carry business insurance
- Failing to separate business and personal assets
Launching a Small Business Without Writing a Business Plan
One common startup mistake that many small business owners make is starting a company without a written business plan.
As a business owner, your plan is your blueprint for success. Writing it forces you to consider key details about how you will run – and grow – your organization.
Your business plan should describe everything from your marketing strategy to financial projections for the first five years of the business. Ultimately, it should provide clear, thorough information about how your products or services relate to customers’ needs. It should also outline your long-term strategy for gaining market share or increasing your customer base.
Think about who your ideal customers are and how your business model will serve them. Your plan will be an invaluable resource to help guide your strategy and inform managerial decisions. You may also need to show your completed plan to lenders if you apply for a small business loan.
Creating a Business Plan Without Conducting Thorough Research
There are many reasons why small businesses fail, and overlooking the importance of market research is certainly one of them.
One of the most common business mistakes entrepreneurs make is overestimating how much they know about potential customers. It can be tempting to focus all your energy on creating the “perfect” product or service to sell.
Still, products and services don’t sell themselves, and every business needs customers to be successful. Regardless of which industry you operate in, you need to conduct market research to understand your clientele.
Market research helps you identify your target audience as well as their unique needs and wants. Until you understand your customers, it will be virtually impossible to run a successful business.
Ignoring Customer Feedback
Brushing aside criticisms from customers may be a common startup mistake, but it’s a big mistake that can have costly repercussions. While it’s impossible to please everyone, business success often depends heavily on a company’s ability to satisfy its customers.
Use tools like surveys and online reviews to encourage continuous feedback from your clientele. Take note of their common frustrations and consider possible solutions.
Customer complaints can be disheartening, but they can also inspire new ideas to help your small business grow.
Failing to Form a Proper Legal Structure
Many entrepreneurs start selling products or services without forming legal business entities. In other words, they are sole proprietors. Legally, there is no distinction between these business owners and the companies they run.
Operating as a sole proprietor is one of the biggest mistakes you can make. Not only will you pay higher taxes, but you’ll also forego the personal liability protection a legal business entity provides.
Another pitfall of running a sole proprietorship is that creditors can seize your assets to cover business debts. If you want to launch a legitimate and sustainable small business, then researching legal structures is a must.
Choosing a Brand or Business Name Without Doing Research First
There are several legal considerations to keep in mind when naming your new business. Ignoring them is a common mistake that can have serious repercussions for a new business.
“My best piece of advice is to do your due diligence. From a legal perspective, it is critical you determine if the name is available for use in your industry,” says Dr. Susie Pryor, an adjunct professor of entrepreneurship and marketing at American Military University (AMU).
“I once hoped to open a dog care business called Barkology. I discovered that Barkology was already in use by a stationary company, a pet toy company, a t-shirt company, and a luggage company. The dissimilarities made it likely I could use the name, but I had to think about this decision carefully,” she says. As Dr. Pryor points out, lawsuits can be expensive, even if you win.
Still, there’s another reason to do your homework before choosing a business name. When you form a company, you’ll need to obtain an employer identification number (EIN) from the Internal Revenue Service (IRS).
An EIN is like a business’s Social Security Number; you’ll include it on all your tax documents. You’ll need your EIN to open a business bank account and hire employees as well.
The IRS may also reject an EIN application if your organization's name is too similar to the name of an existing company, which is another common mistake that some entrepreneurs make.
“If the IRS rejects your EIN application, you will receive what is called a ‘reference number 101 error code’ and will be back to square one. This situation can be a significant problem if you have been operating for several years and are forced to find a new name. It was one risk that I ran with Barkology,” observes Dr. Pryor.
Signing Contracts Without Understanding Them
Most entrepreneurs are afraid to burn through cash too quickly. As a result, many business owners run their small businesses without proper legal counsel. However, contracts are legally binding, whether signatories understand their terms or not.
“One of the first contracts a new business owner is likely to enter into is a lease,” says Dr. Pryor. “Commercial leases are often lengthy documents and encumber the business for five to 10 years.” As she explains, they may contain language, such as a “triple net lease,” a term that small business owners may not know.
“I once worked with a client who was excited about a lease,” Dr. Pryor recalls. “The rent was so low; it seemed too good to be true.” Upon closer review of the agreement, however, it became clear that rent was only one of several major expenses.
“The true cost was nearly twice the rent,” Dr. Pryor adds. “It included contributions to taxes and insurance as well as the costs associated with a common area the business was not going to use.” The lease also placed responsibility for plumbing, electrical, and HVAC upkeep on the tenant.
Had the client signed the agreement without thoroughly understanding its terms, those additional expenses could have quickly diminished profits.
Hiring Help Without Protecting Your Intellectual Property
Non-disclosure agreements (NDAs) help prevent employees, contractors, and vendors from stealing intellectual property (IP). As the name suggests, a non-disclosure agreement bars its signatories from sharing confidential details with outsiders.
Small business owners may also wish to use non-compete agreements, says Dr. Pryor. “Laws restrict the extent to which businesses can limit employees from working in competitive areas, but they do provide some protection. It is not uncommon for key employees to leave service businesses, taking clients with them,” she adds.
Overlooking Industry Regulations
Small business owners must be cognizant of federal, state, and local regulations that govern their industries. Operating without proper business licenses and permits – or failing to comply with regulations – could quickly spell trouble.
“Always check with state, city, and county departments to make sure you have satisfied the regulations,” Dr. Pryor urges. “In my own businesses, I needed to comply with zoning, building permits, and signage. I also had to comply with ADA accessibility regulations and obtain liquor licenses.”
As she notes, some regulations can even impose limits on a small business, depending on its proximity to certain types of organizations. Certain locations will simply be better suited to your small business than others, she says
“One business I owned was too close to a church to serve wine by the glass. That business also sold cheese and meat, which I bought in bulk and repackaged.
“The state required costly annual inspections of my scales. The loss of a key source of income and the introduction of a new cost were aspects I hadn’t accounted for in my original projections.”
Researching regulations for a given industry and location should be part of the business planning process,” Dr. Pryor advises. “Some industries, such as childcare, food service, and alcohol and tobacco sales are heavily regulated.
“Information about these regulations is not always readily available online. If business owners believe regulations are probable, they should be persistent and reach out to area agencies for help.”
Still, she acknowledges that laws and regulations can vary widely from one region to another.
“I owned a series of pet care facilities in the Midwest and found that rules for dog boarding, doggy day care, and grooming differed significantly between states.”
Developing Unlawful Marketing Strategies and Advertising Campaigns
Depending on how a company promotes its products and services, there are myriad legal problems that can arise. The Federal Trade Commission (FTC) provides basic guidance for marketing and advertising, but there are other factors that also come into play.
For example, certain industries must comply with federal, state, and even local regulations. In addition, each state has its own consumer protection laws to deter unfair and deceptive practices.
Even well-meaning small business owners can find themselves in trouble if they do not understand the legal aspects of marketing and especially digital marketing. Building a solid marketing plan requires meticulous legal research or consulting with a licensed attorney for legal advice.
Infringing on Others’ Intellectual Property
Another common mistake many business owners make is integrating protected intellectual property into their products and marketing. For example, a small business that sells T-shirts with Disney® characters and does not have licensing agreements with the trademark owners can be sued.
Similarly, a business that uses copyrighted music without the proper permissions can also find itself fighting an expensive legal battle. In fact, Sony® Music recently filed a lawsuit against the University of Southern California for using copyrighted music on social media, according to Reuters.
Neglecting Local, State, or Federal Tax Obligations
“Small businesses can easily run afoul of tax laws,” says Dr. Pryor. “Sometimes, money is tight.” She cites two common reasons why businesses often struggle to pay federal and state taxes on time.
“Small businesses use money to cover payroll and are sometimes left empty-handed when it is time to pay taxes. Ignoring tax responsibilities is a serious – but not uncommon – error,” she counsels.
“The second key issue is liability for business debts. It is easy to sign leases and vendor agreements without fully appreciating the responsibility you bear for satisfying the debt in total,” Dr. Pryor explains.
Failing to Carry Business Insurance
Business insurance plans help to protect companies from being sued. As the U.S. Small Business Administration (SBA) states, there are four steps for buying business insurance:
- Assess your risks
- Find a reputable licensed agent
- Shop around
- Re-assess your insurance needs every year
“Risks vary by venture,” says Dr. Pryor. “I personally always carry property insurance, liability insurance, and an umbrella policy, which extends beyond other types of insurance.”
Failing to Separate Business and Personal Assets
People form corporations and limited liability companies (LLCs) because these business structures provide their owners with personal liability protection. The key to preserving that protection, however, is maintaining a clear distinction between business assets and personal assets.
Owners who fail to separate business assets from personal assets can jeopardize their personal liability protection. For example, a company owner who uses a business bank account to pay for a personal expense, like a mortgage, is “piercing the corporate veil.” As a result, this owner’s personal assets can be seized to cover business debts and obligations.
“Even business owners with LLCs and S-corps can be held liable if they fail to separate business and personal assets or don’t clearly indicate their business structure in their communications,” Dr. Pryor explains.
Entrepreneurship Degrees at American Military University
“Starting and running a small business can be a transformative experience and a true joy. It may feel unnatural to think in terms of legal responsibilities and potential lawsuits,” says Dr. Pryor. “In fact, it may seem overwhelming initially. However, with a little forethought and expert advice, it can provide long-term peace of mind.”
To help aspiring entrepreneurs understand and avoid the most common mistakes that small business owners make, AMU offers several degrees:
Courses in these programs provide guidance on generating new business ideas, managing cash flow, and creating a marketing plan. Students also learn how to set smart goals and save valuable time running their own small businesses.
Both degrees have received specialty accreditation from the Accreditation Council for Business Schools and Programs (ACBSP®). This accreditation demonstrates that both degree programs have been carefully examined to ensure high academic quality,
For more details, visit AMU’s business administration and management program page.
Disney is a registered trademark of Disney Enterprises, Inc.
Sony is a registered trademark of the Sony Corporation.
ACBSP is a registered trademark of the Accreditation Council for Business Schools and Programs.