Our culture has experienced a massive shift.
In the past, most people worked one job their entire career and reaped the benefits of pensions, loyalty perks, and a stable life.
Nowadays, with the digital revolution and global connection, people are thinking more entrepreneurially.
In my financial planning practice, I work with many high-income professionals who are starting a business on the side or switching to self-employment completely.
For many, it’s a scary leap, and rightfully so. There’s so much more to think about when you’re on your own.
Here are 9 common mistakes I see people making when they take the entrepreneurial plunge:
1. Not Thinking Through Financial Details Beforehand
I’ve seen countless clients excited about their business idea but completely unprepared for the financial reality.
Before making the leap, you need to answer critical questions:
- What will your monthly expenses be?
- What revenue (if any) will you have immediately?
- How quickly do you need to grow to replace your current income?
- What’s your pricing strategy?
One client, “Mike,” left his $180,000 job to start a consulting business without mapping out these details. Six months in, he was dipping heavily into savings because his revenue projections were overly optimistic, and he hadn’t accounted for the slow payment cycles in his industry.
→ Idea: Create a detailed 12-month cash flow projection with conservative revenue estimates and generous expense estimates. Then add 25% to your expense projections as a buffer.
2. Not Having Enough Runway
It almost always takes longer than expected to get your business off the ground.
I’ve seen too many self-employed people start with just 2-3 months of expenses saved up, putting immense pressure on themselves to generate income immediately.
This financial pressure can lead to:
- Taking on less-than-ideal clients
- Undercharging for services
- Making poor strategic decisions
- Constant stress affecting your performance
→ Idea: Build a runway of 6-12 months of living expenses before going full-time self-employed. Also have a clear fallback plan: Could you take on part-time work? Do you have another income stream? Is there a safety net if things don’t go as planned?
3. Forgetting About Protection
When you leave an employer, you leave behind all those benefits you likely took for granted:
- Health insurance
- Disability income insurance
- Life insurance
- Dental and vision coverage
- Retirement plan matching
Plus, as a business owner, you now need to consider:
- Professional liability insurance
- Business liability coverage
- Cybersecurity insurance
- Property insurance
“Sarah,” a graphic designer who went independent, suffered a health emergency six months after launching her business. Her COBRA coverage had just expired, and she hadn’t secured an individual policy yet. The resulting medical bills nearly bankrupted her new venture.
→ Idea: Start researching insurance options at least 3 months before leaving your job. Consider joining professional associations that offer group rates on insurance products.
4. Not Thinking About Cybersecurity
This is extremely important nowadays and one of the biggest risks for businesses in the digital age.
Even small businesses are targets for:
- Ransomware attacks
- Data breaches
- Phishing scams
- Email compromise
Example: A small accounting firm lost $15,000 and several clients after a data breach compromised client information. The financial loss was substantial, but the reputation damage was even worse.
→ Idea: Invest in proper cybersecurity from day one. This includes secure password managers, two-factor authentication on all accounts, proper data backup systems, and potentially cybersecurity insurance.
5. Not Doing Due Diligence on Banking Options
Where you bank matters significantly more than some new business owners realize.
The banking landscape has transformed, offering more options than ever:
- Traditional brick-and-mortar banks
- Online-only fintech banking platforms
- Credit unions
- Small business-focused banking services
Each has different fee structures, transaction limits, minimum balances, and services that might be crucial for your specific business model.
→ Idea: Research at least 3-5 banking options before deciding. Consider: How quickly do they process deposits? What are their fee structures? Do they offer lines of credit to new businesses? What’s their mobile app like? How’s their customer service? Do they integrate with your accounting software?
6. Not Understanding Business Structures
Too many new entrepreneurs default to a sole proprietorship without exploring their options, or they form an LLC without understanding the implications.
Your business structure affects:
- Personal liability protection
- Tax treatment
- Funding options
- Operational complexity
- Future sale opportunities
I worked with a client who formed an LLC but didn’t realize he needed to elect S-Corp taxation to save on self-employment taxes. The S-Corp structure was a better fit for his situation and it cost him an extra $12,000 in taxes by not knowing earlier.
→ Idea: Consult with both an attorney and a tax professional before deciding on your business structure. This isn’t a DIY decision—the few hundred dollars in consultation fees could save you thousands later.
7. Not Having a Grasp on Taxes
The tax landscape for self-employed individuals is dramatically different from being an employee.
Key tax considerations include:
- Self-employment taxes (15.3% covering both employer and employee portions of Social Security and Medicare*)
- Quarterly estimated tax payments
- Business expense tracking and deductions
- Home office deductions
- Vehicle use deductions
- Potential tax advantages of different entity types
Example: “Jason,” was shocked when he owed over $25,000 in taxes and penalties after his first year of self-employment because he hadn’t been making quarterly estimated payments and hadn’t set aside enough for his tax bill.
→ Idea: Work with a tax professional experienced with self-employed individuals in your industry. Consider setting up a separate savings account where you automatically deposit 25-30% of all income for taxes.
8. Not Tracking Properly From Day One
Proper financial tracking should begin before you even officially open for business.
Many self-employed people miss out on valuable tax deductions because they didn’t track:
- Startup costs (deductible up to $5,000**)
- Business equipment purchases
- Pre-launch marketing expenses
- Research and development costs
- Initial inventory purchases
→ Idea: Set up a proper accounting system from day one (even before official launch). Consider using accounting software like QuickBooks, Xero, or FreshBooks that allows you to categorize expenses easily. Hiring a bookkeeper for a few hours each month can help you keep your records clean.
9. Not Having the Right Business Documents and Tough Conversations
If you’re starting a business with partners, you need proper documentation and difficult conversations about what happens in worst-case scenarios.
Critical documents include:
- Operating agreements
- Buy-sell agreements
- Partnership agreements
- Contingency plans
- Succession planning
In my practice, I’ve seen several partnerships dissolve painfully because these conversations were avoided early on. One healthcare startup with three co-founders imploded when one wanted to leave after 18 months—there was no agreement on how to value his share of the business or handle the transition.
→ Idea: Work with a business attorney to draft proper agreements before you start. Have explicit conversations about: What happens if one partner wants out? What happens if one can no longer work? How are disputes resolved? How are profits distributed?
Final Thoughts
Going self-employed can be one of the most rewarding career moves you can make, but it requires careful planning and consideration. By avoiding these nine common mistakes, you can set yourself up for a much smoother entrepreneurial journey.
The most successful self-employed people I work with share one common trait: they build a team of trusted advisors (financial planner, tax professional, attorney, bookkeeper) from the beginning. This upfront investment can pay dividends by helping to reduce stress, improve decision-making, and ultimately, creating a more profitable business.
*For 2025, 15.3% includes 12.4% for Social Security (on net earnings up to $168,600) and 2.9% for Medicare (on all net earnings). If income exceeds certain thresholds there’s an extra 0.9% Medicare surtax.
**In 2025 IRS allows deduction of up to $5,000 in business startup costs in your first year of operation provided total startup costs do not exceed $50,000. If startup costs exceed $50,000, the deduction is reduced dollar-for-dollar.
Examples include fictitious names and are for illustrative purposes only.
The information provided in this article is for educational purposes only and should not be construed as tax, legal, or investment advice. Please consult with qualified tax and financial professionals before implementing any strategy. Any examples shown are for illustrative purposes only; your results will vary based on your personal situation.
CRN202710-8791342
