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There are a Variety of Reasons Why New Businesses Fail

On behalf of Brian Chenoweth

According to a recent New Yorker magazine article, we live “in the age of the startup.” Thanks to crowdfunding and angel investing, it has never been easier for startups, whether in Oregon or elsewhere, to raise initial capital. Once you decide what form of business entity to establish-whether an LLC, a partnership or a corporation-getting the startup off the ground is relatively easy. Unfortunately, making it a success is not assured. As noted in the article, competition is fierce and profits are often scarce. Although those involved in startups recognize that starting a business is risky, most have the confidence to think that they have the skills necessary that will make the startup one of America’s business success stories.

Fox Business News reports that the reality is that the majority of startup businesses will fail within the first several years of their creation. Some “flop right away” while others enjoy their brief moment of success before closing their doors. The cold hard fact is that “any new venture is more likely to sink than swim.” The reason why so many new companies fail is varied. Some business failures are caused by reasons beyond business owners’ control such as the recent economic calamity often referred to as the Great Recession.

Forbes magazine observes that far too many new businesses fail due to what amounts to self-inflicted wounds. The following are offered as examples of self-inflicted business wounds. First, the business does not pay sufficient attention to understanding what potential customers are really interested in having in regard to goods or services. Second, the businesses may not be offering a product or service of unique value which is sufficiently differentiated from similar products or services. Third, the business has a good product or service but fails to adequately communicate the value of the product or service in clear and compelling fashion. Fourth, businesses’ management may fail to make and execute good business decisions. Finally, many businesses simply fail to come up with a profitable business model with proven revenue streams.

Protecting yourself

Many people who go into business do so in conjunction with other individuals whether by setting up a corporation, an LLC or a partnership. There are ways to protect yourself financially if you are going into business with other individuals. For example, the Small Business Administration advises that business partners sign a partnership agreement detailing how the business is to be operated and providing methods for resolving disputes among partners. Similarly, LLC members should sign a detailed operating agreement which sets forth how the business is to be operated and memorializes any verbal agreements reached between the members.

Many people acquire minority interests in a corporation. Unfortunately, minority shareholders may be frozen out of decision making. The Society of Actuaries advises that, before you invest time and money in a minority stake in a business, you may want to consult an attorney to make sure that your financial interests will be properly protected and your expectations fulfilled.

Seek legal assistance

Going into business is always a risky proposition. Those who are contemplating going into business with other people should consult with an Oregon attorney experienced in handling business and commercial law. An attorney can advise you on how to best protect your financial stake in the proposed business enterprise. In addition, an attorney can review any proposed partnership agreement or LLC operating agreement in order to determine whether the agreement adequately protects your interests.

Practice Areas

Chenoweth Law Group