Entrepreneurs preparing to start a small business often focus on their dream of success. They envision the business thriving and growing rapidly. While that can occur, it is also possible for new small businesses to fail.
Entrepreneurs may overestimate the demand for the goods and services they intend to offer. They may underestimate operating costs. Even when people plan carefully for new business endeavors, the market can shift in an instant due to new technology or the success of a competitor.
Business owners can sometimes face legal issues and financial claims after their companies fail. It is often important for entrepreneurs to start their business with a carefully developed plan and to take steps to limit their exposure if the company eventually fails. How likely is it for a new small business to fail?
Failure rates are relatively high
When looking at the big picture, more than half of small businesses eventually fail. Contrary to what many people assume, not all of them fail immediately.
The Bureau of Labor Statistics provides illuminating data about the frequency with which new companies fail. Roughly 20% or one in five new small businesses fail within their first year. When looking at the first five years of operations, that failure rate shoots up to five years. After a decade of operations, the failure rate sits at approximately 65%.
The first year is a very vulnerable time for a small business, as are the next four years after that. However, once the company has operated for a decade or longer, the risk of sudden failure decreases. Should the company fail, there could be risk for the entrepreneur unless they properly protect themselves.
The creation of separate financial accounts can limit personal exposure when a company fails. Entrepreneurs may also need the separation that comes from a formal business entity, such as a limited liability company (LLC), to limit their risk of lawsuits and personal financial responsibility for business debts.
Entrepreneurs who plan for the possibility of business failure may limit the hardship they face if the worst comes to pass. Partnering with the right legal support may make a major difference for those in the early stages of business development.