Embarking on a new business venture often brings a sense of excitement. In recent years, the United States has seen a consistent rise in the number of applications to form new businesses. According to the US Chamber of Commerce, a record-breaking 5.5 million new businesses were filed in 2023. This is a 0.5 million increase from 2022.

However, the excitement often comes with a steep learning curve. One area that catches many new entrepreneurs off guard is compliance. From legal paperwork to financial records, minor oversights in your first year can lead to fines, delays, or loss of credibility.

Compliance isn’t something that can be handled once and forgotten. It starts the moment you register your business and continues as you grow. Many entrepreneurs are, unfortunately, unaware of the sheer number of contact points and obligations they face. This lack of awareness usually causes uncertainty and failure to meet required timelines.

In this article, we will look at some common compliance mistakes small businesses make in their first year.

Misunderstanding Legal Entity Requirements

Many early compliance issues stem from a misunderstanding of how business entities work. Registering a company is not just about picking a name and filing some forms.

Consider the example of Delaware. The state does not have a sales tax, and its corporate income tax is as low as 8.7%. This makes it a tax-friendly state for businesses, which is why many Fortune 500 companies have their headquarters there. However, despite its business-friendly laws, you’ll still need to meet basic documentation and address requirements.

If you don’t have a physical address here, it’s best to opt for a virtual Delaware-verified business address instead of using your residential address. The thing is that giving your residential address will not look professional. Moreover, it will make your personal information public, as all businesses need to share their address publicly.

On the other hand, a virtual business address will make your company look more professional. As stated by The Farm Soho, it will serve as your mailing address. The virtual mailing address provider will receive all the mail on your behalf and forward it to you when required. This address functions as more than merely a place to receive mail. It’s frequently the official liaison between your business and state authorities.

Falling Behind on Tax Registration

Another common oversight is failing to register for the appropriate taxes. Many small businesses delay registering for state or federal taxes until they have a customer or start making money. But in many cases, registration is required before any of that happens.

For instance, obtaining an Employer Identification Number (EIN) is an early requirement for businesses planning to hire workers. It is also known as a federal tax identification number for corporations. 

According to the IRS, government agencies use it to identify business entities. Therefore, all companies should obtain an EIN as soon as possible. Even estates and trusts that have an income that’s supposed to be reported on Form 1041 need to have an EIN.

Some states even require a sales tax license or use a tax account before you make your first sale. Moreover, each state has a different fee structure for applying for a sales tax permit. 

For instance, Alabama, California, Florida, and a few others don’t have any charges for applying for a sales tax permit. On the other hand, Arizona charges $1 to $50, Colorado charges $4 to $16, Connecticut charges $100, etc.

These registrations are not just formalities. They’re often prerequisites for other actions like opening a business bank account or applying for permits. If you try to move forward without completing these steps, you may find yourself stuck. Worse yet, missing tax registration deadlines can result in interest charges, backdated taxes, and unnecessary stress.

Do I need to register for taxes if I’m not making money yet?

Yes, you may still need to register even if your business hasn’t made a profit yet. Some states require sales tax or employer registrations based on your business type or location, not on revenue. Staying proactive helps you avoid penalties once you start earning income.

Not Separating Personal and Business Finances

Many new entrepreneurs underestimate the importance of financial separation. Using a personal bank account to manage business income and expenses may seem convenient, but it can create long-term issues.

A Forbes article states that not separating personal and business finances can have financial and legal risks. For instance, entrepreneurs might want to deduct some expenses when filing taxes. However, if you use your personal account, the IRS might frown upon some deductions. Additionally, companies can get better legal protections with a business account rather than a personal savings account.

Using the same account not only makes bookkeeping harder but also blurs the line between your personal and business liabilities. If your company faces legal action, the lack of clear separation could make you personally responsible.

Opening a dedicated business bank account is one of the most straightforward steps to take, but it requires proper documentation. These documents can include proof of registration, tax ID, and your official business address. That’s why having your compliance basics in place is essential from the start. If you wait until after you’ve started operations, you may find yourself scrambling to fix issues that could have been prevented.

Is using a payment app like PayPal or Venmo acceptable for business transactions?

While convenient, using personal PayPal or Venmo accounts for business can complicate your records and potentially trigger tax reporting issues. It’s better to create a dedicated business account on these platforms to keep transactions clean, traceable, and separate from personal use.

Ignoring Ongoing Reporting Obligations

Business owners think the most challenging part is getting started, but staying compliant requires ongoing attention.

Most states require an annual report or renewal to keep your business in good standing. This report documents your company’s operational and financial performance. Although private businesses don’t need to file an annual report with the government, it is helpful to do so. Missing these reports can lead to fees or suspension of your business license in some scenarios.

In some cases, businesses that fail to file updates for several years are involuntarily dissolved by the state. That’s a problem you don’t want to face, especially if you’re gaining momentum or attracting investment. Setting calendar reminders, working with a registered agent, or using compliance software can help you stay ahead of these deadlines.

What should I do if I miss a filing deadline for my business?

If you miss a filing deadline, act quickly. Although a grace period is often permitted by various states, a late fee is commonly assessed for submissions after the due date. Failure to provide a timely response can potentially result in the state imposing an administrative suspension on the business. Contact your state’s business division and file the required documents as soon as possible to restore good standing.

Your first year in business sets the tone for everything that comes after. Mistakes in this early phase are common, but they don’t have to be damaging. With a little attention to detail, you can avoid the most common compliance pitfalls and give your business a strong foundation for growth. 

Taking care of your legal address, tax registration, and financial separation early can save you time and trouble later. This will leave you free to focus on growth, customers, and innovation.