By Judith Wright
As the economy improves, more people are taking the leap to start their own businesses. The U.S. government reports nearly half a million small businesses are started each month, but only half of entrepreneurial start-ups survive to a five-year mark. One reason businesses fold is the inability to successfully navigate the maze of laws and regulations.
When starting a business, most entrepreneurs are confident they have good ideas for a product or service that will sell to a well-researched target customer. Most have a solid handle on the financials, including the cost to offer their products and an understanding of competitive pricing to earn a fair profit. But often, they fail to inform themselves about regulations that impose requirements on the business, and they don’t take into account the cost of complying with those regulations.
Start-up costs to comply with regulations are projected to be in excess of $80,000. And such costs are ongoing. A 2017 study by the U.S. Chamber of Commerce found small businesses pay on average $11,700 per year per employee in regulatory costs.
When it comes to regulation, running a business is like driving a car. When an individual gets behind the wheel of a car, the law imposes on the driver a duty to follow all the rules of the road. If the driver fails to follow those rules, an officer can pull the driver over and issue a ticket. The same applies to running a business. The owner is expected to know all the rules for operating the business, and if he or she fails to comply, authorities can cite the business for violations.
A simple example is trash disposal, an area of law with rules that vary widely. For example, more than half of U.S. states regulate disposal of grass and yard waste. These regulations makes sense from an environmental standpoint because grass often contains fertilizers, insecticides and weed killers. But for the entrepreneur who starts a small lawn care service, special disposal requirements can be an area of surprise costs.
As with driving, ignorance of the rules is not a justification for avoiding fines. The cost of non-compliance is estimated to be two to three times the cost of compliance. Fines can mount over time for each act that violates a regulation. While the costs are of concern, spending time resolving regulatory violations greatly distracts from the main focus of making sales and tending to customers. Depending on the severity of the issues, regulatory problems can result in temporary business suspension while problems get addressed. Citations by the government are matters of public record and often result in negative publicity. Competitors frequently fan the flames of such publicity and make sure customers hear about it.
Smart business owners learn the rules and take steps to build compliance into their business plans and processes. The Small Business Administration offers a wealth of knowledge to business owners through its website, publications, education programs and technical assistance initiatives.
It’s also wise to spend some time with an attorney to make sure proper permits have been secured and other start-up essentials have been put in place. A small investment up front can help the entrepreneur avoid serious, unexpected problems down the road. Ask other business owners for a referral to find a knowledgeable attorney.
Trade associations, made up of member businesses in a given industry, also offer means to stay on top of changing regulations. Associations typically offer industry support through newsletters, education programs, webinars, market research and networking events.
Managing ongoing compliance can be a continuous concern. But building compliance steps into standard practices provides comfort that the business is regularly meeting requirements. When work is done right every time, the uncertainty of regulatory risk is greatly minimized.
Understanding the regulatory environment for an industry gives the entrepreneur confidence to invest in the business, add new hires and expand to meet customer needs.
Judith Wright, clinical assistant professor of business law, Indiana University Kelley School of Business at IUPUI.