5 Costly and Avoidable Business Mistakes
View PDF | Print View
by: MattCBA
Total views: 35
Word Count: 1284
Starting your own business is hard enough; don’t compound the difficulty by making costly mistakes in the set up of your business. While there are many places for a new business owner to misstep, by avoiding the following you will be ahead of the game. Even if it costs a little upfront money in legal advice, anyone who has had to deal with the fallout of one of these mistakes will tell you that the upfront fee is nothing compared to the ultimate price of the mistake.
1. Choosing The Wrong Ownership Structure. This is your most important first decision when starting a business. The decision you make will impact whether or not you’ll be able to accept investors, how many and what types of investors, whether you’ll easily be able to sell your company, what your personal legal liability will be, what your tax liability and benefits will be, and many other significant issues.
Why This Is A Problem: If you’re going to look for outside investment, you want to create an ownership structure that’s friendly to those investors. For example, most outside investors prefer the stock structure of a corporation (or limited liability company) as opposed to a partnership. Additionally, selecting the wrong ownership structure might expose you to unlimited personal liability for your company’s debts. Keep in mind that you should create your ownership structure BEFORE you enter into any agreements/contracts.
Avoid This Problem: Consider the following when deciding on what type of entity to start: What are the potential liabilities/risks? What are the anticipated tax benefits from being taxed as a partnership as opposed to a corporation? Do you intend to have outside investors? Do you anticipate selling your company in the future? Are you pursuing a risky business where you might be sued?
If you’re a sole proprietor, you are personally liable for your business debts. While this is generally the simplest form of ownership, it is also risky.
In a partnership, the partners can be personally liable for the debts of the business. One benefit of both sole proprietorship and partnership is that the income/loss from the business flows directly to you (the corporation doesn’t pay a separate corporate tax).
To insulate yourself from legal risk, you can form a corporation. Corporations have the most demanding record-keeping requirements and are subject to a separate corporate tax (in additional to your personal liability for your share of the money distribute by the corporation). As long as you follow all corporate formalities (hold periodic meetings, keep good corporate records, etc.) you’ll generally insulate yourself from personal liability for the debts of your company. Because of the expense involved in maintaining corporate records, many small businesses don’t use the corporate ownership structure (although many startups do - because that structure often makes it easier to ultimately sell the company).
You can get the tax benefits of a partnership and the legal protection benefits of a corporation by organizing as a limited liability company (LLC). LLCs are subject to annual taxes or reporting fees (typically, hundreds of dollars) but have far fewer corporate records requirements than do corporations.
2. Poor Corporate Records. More often than not, founders of startups and small businesses know very little about keeping good corporate records (including general corporate, tax, employment, human resources, etc.).
Why This Is A Problem: If your corporate records are a mess, you may face personal liability for the debts of the company. You also could create problems for any acquisition because anyone conducting due diligence to determine whether your assets/liabilities are as you say they are, will have difficulty understanding whether you’ve properly protected your rights if appropriate legal documents required of corporations, for example, don’t exist.
Avoid This Problem: Familiarize yourself with the types of documents you have to create and maintain based on the organization structure you pick. For example, there are very specific requirements for the documents that must be maintained by a corporation. Create a list of these requirements, create a file and keep a careful and complete set of all corporate documents. Make sure you pay all annual taxes/file annual reports with your state (or you risk having your corporation or LLC dissolved).
3. Weak or Non-Existent Employment/Options Agreements. Many startups and small businesses fail to create appropriate employment agreements for their employees. This is a huge mistake and can only result in trouble.
Why This Is A Problem: If you don’t protect your rights with an appropriate employment agreement, you risk having your employee leave to compete with you and you risk not acquiring intellectual property rights to your employees’ inventions (related to your business). You also create the potential for disputes because your employees’ and your company’s respective rights and responsibilities will not be clearly defined in writing.
Avoid This Problem: From day one, create a form employment agreement to use with every employee. You’ll end up using nearly the same agreement for everyone, so if you incur some legal expenses for that first agreement, know that it’ll come in handy over and over again. Do the same for a form independent contractor agreement. Have your attorney create appropriate form agreements, and then consult your attorney when you need to vary the terms.
4. Weak Or Non-Existent Vendor/Client Written Agreements. Another common mistake many small businesses make involves vendor and/or client contracts. Small businesses often believe that a handshake is sufficient. It is not.
Why This Is A Problem: It is very difficult to uphold a verbal agreement in court. A properly written agreement can protect your interests and rights. A properly written agreement will also typically save you a lot of aggravation and legal expense of having to enforce your rights.
Avoid This Problem: If you are able to seek legal counsel, do that. A good attorney should be able to quickly review a written agreement and provide feedback/suggested revisions. For those deals where the legal expense would be prohibitive (most small business agreements fall into this category), ask your attorney whether they recommend any form agreements.
5. Failing To Get Legal Advice When Appropriate. Many small businesses and startups try to save legal costs by simply avoiding hiring an attorney. Some try to get by on their own by cutting and pasting from legal documents found online. This is very dangerous. You don’t know whether the sources are credible or whether the documents that you’ve put together are appropriate and/or complete.
Why This Is A Problem: If you make the wrong decisions or enter into legal agreements that don’t protect your interests, those actions might end up costing you MANY times more than what it would have cost you to seek legal counsel. In the long run, you threaten the existence of your business if you neglect to ask for legal advice when appropriate.
Avoid This Problem: Attorneys are expensive. Good attorneys are often (but not always) absurdly expensive. However, smart attorneys who regularly counsel small businesses understand that clients have limited budgets. Not all attorneys understand this, so always ask for references and talk to their clients (ideally, businesses like yours). Ask if they’re happy with the advice, their views about the costs of that advice, and whether they believe the money they spent on legal counsel is money well spent. Experienced attorneys can save you time, aggravation and money by providing the right advice at the right time - don’t compromise your business by failing to get legal advice when necessary.
Disclaimer: Legal information is not the same as legal advice. This post does not address all relevant business or legal issues that are unique to your situation. You should seek legal advice from a licensed attorney in your state (or country) to confirm that the information in this post and your interpretation of it is appropriate to your specific situation.
http://www.MySummitWealth.com
About the Author
About Mitch Levin: Mitch Levin, MD, CWPPtm, CAPPtm, CEO & Managing Director of Summit Wealth – Florida Division, a Registered Investment Advisory firm. Summit Wealth is dedicated to “empowering investors to build, protect, and preserve their prosperity through their own Financial Fortress.” He is an “A” rated Florida State Representative of the Asset Protection Society (www.apsociety.org), and is a member of the Wealth Preservation Institute (www.thewpi.org), the National Association of Professional College Advisors (www.napca.org) as well as the National Association of College Financial Advisors (www.nacfa.com), and the Financial Planning Association (www.fpa.org.) Author, speaker, trusted advisor: Dr. Mitch is the co-author on many articles, and several other books (The Lies My Broker Taught Me; and 101 Truths about Money and Investing; and Secrets if a Worry Free Retirement), and has been featured in several educational CD’s (The Seven Deadly Investor Traps, How the Really Smart Money Invests), and in the acclaimed documentary movie “Navigating the Fog of Investing” along side several Nobel Prize Laureates. He has appeared on ABC, NBC, and in USA Today. In addition, Mitch is certified in Florida to provide Continuing Professional Education credits to Certified Public Accountants. Some of his speaking engagements include, “The Myths of Investing,” “College Funding Solutions,” “This Time is (Never) Different,” “The Affluent Survival Guide,” “Why Mutual Funds Stink,” “Why Your Insurance Agent is Costing You Tens or Hundreds of Thousands of Dollars,” “How to Prosper in the Reign of Error,” and “Your Asset Protection is Inadequate.” His clients are nice, affluent people, who actually may be furious when they discover -- too late -- the poor outcomes, outrageous and hidden fees, and unnecessary taxes they have to pay. And the excessive risks they’re taking—that’s another conversation completely. They’re bombarded with mixed, or negative, or outright fear-mongering messages. They sometimes wake up in the middle of the night in a cold sweat. These people feel cheated Some are worried sick about the markets ups and downs… and their futures don’t look so rosy anymore. How to pay for college, retirement, eliminate their mortgage burden. They’re looking for new ideas and don’t know who to turn to. Still others are honest enough to admit they’re failing miserably in their investments, trying to pick stocks, or time the markets, or chase mutual fund track records. They would stop, but no one has the guts to provide a viable alternative, to tell them the truth, to tell them they’re wasting time while losing lots of money. They’d have a better chance at the roulette wheel, without the fun. Mitch and Summit Wealth’s mission is to “Improve the world, one investor at a time. Empowering investors to achieve Full Financial Health.” Summit Wealth delivers: Solid Growth. Safely Managed. Trusted Advice. Creating a Better Future. They help stop the financial malpractice and facilitate the cure for financial cancer. To progress from scarcity, losses, fear, and frustration to abundance and peace of mind, he provides a completely independent financial second opinion. While in medical school, Mitch was instrumental in setting up the first (and completely student financed) long-term endowment campaign through insurance and derivative products. He was recruited by then Orlando Regional Medical Center to open the first full time eye surgery practice at one of its facilities. The practices grew to several locations with dozens of employees, including several now prominent surgeons. He has lived with his family in Central Florida since 1986, and has been involved professionally in the financial world since 2005. A small business owner, Mitch has built, grown, bought and sold several other business entities. In addition, he is a successful commercial real estate investor. Dr. Mitch is a major donor to charitable organizations, and has served as an officer on several Boards of Trustees. The knowledge he gained through these experiences contributed to his personal financial success and the ability to pursue his passion of educating and assisting others in their quest for financial freedom. Contact: Mitch Levin at Summit Wealth – 866.977.2252 For more information about Mitch Levin please visit http://www.mysummitwealth.com
Rating: Not yet rated
Comments
No comments posted.Add Comment
You do not have permission to comment. If you log in, you may be able to comment.