Tuesday, November 20, 2018

Small Business Law Blog: Top 5 Mistakes Small Businesses Make

This is the legal edition of the top 5 mistakes that our firm has seen small businesses make.

5. Relying on your accountant for legal advice

We love accountants, don’t get us wrong. Lawyers and accountants go together like turkey and stuffing. (Can you tell Thanksgiving is on our minds?) But to be candid, we have also seen many businesses rely on the advice of their accountants to their detriment.

Remember that accountants and lawyers are not interchangeable. Your accountant cannot help you maintain the limited liability shield in your company. Accountants cannot draft operating agreements, bylaws, corporate resolutions, conversion plans, etc. If you’re able to, use both.

4. Using online formation services or DIY

Sometimes it costs more to use an online formation service like LegalZoom or to do-it-yourself than it is to hire an attorney to help you make the right decision to be an LLC or a corporation. The wrong decision could lead to increased tax liabilities and administrative costs. Our firm encounters a lot of businesses that have made the wrong decision. They end up having to either dissolve their business and form a new one or go through the painful process of a merger or a conversion.

The advent of automation and the ease with which we can now file new entities with the State is great, but it can come with its drawbacks. The biggest drawback is that you cannot undo or amend a filing without paying extra fees. Believe us, we’ve tried to talk to the State to see if they will reverse a filing. They won’t.

If you are registering a new business, a foreign business (meaning an out-of-state business), a DBA (or trade/fictitious name), or any other document with the State, consider hiring an attorney. It could save you time and money in the long-run.

3. Giving it all away

Startup founders seeking outside investors should be keenly aware that they should hold onto as much equity as possible. This problem, however, isn't only relevant to Silicon Valley tech companies. Small business owners, especially women-owned businesses and first-time business owners also encounter this problem as much as the startup. They want to partner with someone who will grow their business, and the founder is willing to give away a certain percentage of her company.

As lawyers, we often see founders who don't recognize their company's worth and even the founder's own self-worth. Sometimes the decision to give away a portion of the company is clouded by a misunderstanding of the company's value. Ultimately, the business should make the decision that is the best for it, irrespective of their lawyer’s advice. By it's best to go in knowing that you bring a lot of value to the table.

2. Not treating your business like a business

When you have poured out your heart and soul into your business, it’s difficult to extract yourself from it and realize that the business is growing up and that it was a separate entity from you all along. The business may be your baby, but don’t forget that it is a legally distinct entity from you. It needs its own bank account, and it may need to file its own tax returns. Don’t make the mistake of operating the business as an “alter ego” of yourself. Always sign your documents as the authorized representative of your business.

1. Relying on a handshake and a promise

People are fallible. As much as you believe in them and trust them, people change. Their plans, dreams, and ambitions can change with a move, a marriage, a birth, a death, an accident, anything! When you go into business with someone, remember that they will not be the same person five years from now. Remember that you will not be the same person five years from now either.

Have written agreements that will cover most of the possible contingencies that can occur.

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| Phone: (202) 630-6546

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