Whether it’s an argument between owners over business decisions, a contract dispute with a disgruntled customer, or an icy entryway following a winter storm, legal troubles lurk around every corner. Some advanced planning, however, can go a long way in protecting your company from litigation and financial ruin.
Choosing the Wrong Entity Form
This is one of the most important decisions a business owner will make. Entity formation affects relationships with partners and customers, governs mandatory business procedures, determines whether members are shielded from personal liability, and sets tax liabilities, among a litany of other effects. You should choose your form and incorporate before entering into any business agreements because failing to do so may put you on the hook personally for those agreements. For pros and cons of each take a look at our previous blogs on choosing between a sole proprietorship, partnership and a corporation to help you decide the best entity for you.
Ignoring Operational Agreements
Among other things, operational agreements detail percentage of ownership interests, member authority and responsibilities, and business procedures, which are key to keeping the focus on the business when issues arise. Often businesses begin between friends and family and given the relationship between the parties, people don’t see the need or feel comfortable asking for written operational agreements. You shouldn’t feel awkward about putting it in writing. If one party is opposed, you should be skeptical about going into business with that person as it shows a lack of business awareness or questionable intentions.
Failing to Research Your Company Name
With the availability of the internet there is no excuse for this mistake. Your name is a marketing opportunity. Search your proposed company name to see if there are other entities and/or any history associated with that name. You should also visit the Wisconsin Department of Financial Institutions’ site or the Secretary of State’s site in Illinois and the U.S. Patent and Trademark Office to investigate naming and/or trademark issues. Conduct similar searches on domain names using Google and domain registration companies like GoDaddy.com.
Not Using Standard Contracts
People often believe a handshake is a bond, or that sales are final. In many instances, especially consumer transactions, that’s not true especially if someone begins to regret their side of the bargain. Use standard form contracts when dealing with customers/clients tailored in your favor and to your industry. These contracts are used to detail pricing and payment terms, negate warranties and/or implied representations, grant indemnification, and set the forum for resolution of disputes. Having something drafted at the forefront will serve as a great starting point for those negotiations.
Inadequate Website Disclosures
For most businesses, a company website is essential. If you have a website you should also create a terms of use agreement and privacy policy; especially if you are permitting the public to make purchases from your website. The terms of use agreement explains the conditions that people must follow when using your site. They are used to limit liability for owners, establish dispute procedures, obtain indemnification and waivers, explain policies on refunds and returns, and notify the public that your company’s website content and other proprietary property are protected by law.
The privacy policy informs the public what you will do with their private data and information. It should explain what information your company collects, how it is used and/or distributed to third parties, and how your company protects that data/information. Explaining your procedures can help alleviate public concern and offer protections from liability.
Failure to Account for Tax Liabilities
Understanding tax issues and liability at the inception will save you from sleepless nights come March and April. Seek out a tax professional in conjunction with the formation of your business to get an understanding of the different liabilities and accountings that are necessary during the on-going processes of your business. Proper planning and withholdings during the tax year, while tedious, are nothing compared to the distractions and costs associated with an audit and/or unexpected tax bill.
Not Seeking Professional Advice
As a business owner there are places you will want to cut costs, but seeking good advice should not be one of them. A good professional will not only help you get informed in their area of expertise, but also help you understand where you can cut costs responsibly. Failing to seek professional advice, or getting it secondhand, might just land you in one of the most expensive places to be, the courtroom.
Many companies have folded under the costs and time associated with these avoidable mistakes; don’t join them.
This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.
If you need assistance with a related matter, contact us.
