Esq., CPA, LL.M.
For your benefit and the benefit of the people you know that already run or are contemplating starting their own businesses, please review this article carefully, wherein I share with you some of my discoveries while providing legal and tax advice and counsel to over two hundred small business owners over the past several years. I have assisted my clients in preventing and redressing many of the common mistakes made by small business owners. Interestingly, their mistakes were the same or very similar regardless of what business or industry they were in or the product or service that they sold.
Use this article as an educational opportunity and perhaps even as a checklist to guide you either to prevent you from making mistakes or to correct some mistakes you’ve already made. This list is not exhaustive. But, I’ve listed those mistakes that I’ve determined based upon my experience to be the most common. Since each of the items is equally compelling, the order is not necessarily significant.
The top 10 mistakes are as follows:
1. Failure to hire and regularly use a qualified attorney and qualified CPA. Many small business owners think that they don’t need a qualified attorney or Certified Public Accountant (“CPA”) until they are in trouble. The trouble, however, can begin by not obtaining the necessary advice at all times of the business, especially the start-up period. Don’t be “penny wise and dollar foolish.”
2. Failure to maintain insurance. For those business owners without adequate insurance, be prepared to start from scratch all over again because that is where you may find yourself. Make sure your coverage is adequate and read the policy and the exclusions carefully. There is an unwritten law called Murphy’s Law, which provides that “anything that can go wrong will go wrong.” Business owners without adequate insurance have the greatest risk of testing the application of Murphy’s Law. Lack of, or inadequate, insurance can put many business owners out of business and also cause personal liability in certain cases.
3. Failure to set up and maintain a limited liability entity. If you don’t set up a limited liability entity, you are personally liable for everything. If you set up and appropriately maintain a limited liability company (LLC) or corporation, you’re generally not personally liable, except when there is: (a) personal guaranty, (b) professional liability that is not covered by insurance, (c) fraud, (d) theft, (e) crime and (f) gross undercapitalization of the entity.
4. Failure to have a written and signed detailed contract with parties. Having a detailed contract makes certain that the parties deliberately identify and agree on material terms and conditions of their business arrangement, from inception to termination and thereafter. Also, having a detailed signed contract helps avoid many evidence issues. Oral testimony is most times insufficient evidence because unscrupulous people will lie under oath; unfortunately, it happens too often. It can be very costly to attempt to discredit a witness in court.
5. Failure to have a qualified attorney negotiate and draft the contract. Unless a qualified attorney drafts the contract, parties make costly mistakes that prove to be dangerous, if not fatal. During the process of negotiating, drafting and reviewing a contract, a qualified attorney will be able to provide his/her client with advice for avoiding traps that the client would not have otherwise known that may prevent the client from making a colossal mistake. The negotiation and drafting process also weeds out the differences between you and your proposed partner.
6. Failure to adequately capitalize the business. All too often, business owners start a business on a “shoestring” and bootstrap their launch, meaning that they are using too little cash to fund the early operations with hopes of surviving long enough to make it. Before the string snaps, quickly replace it with a strong secure rope or steel cable. Inadequate capitalization causes business owners to (a) hire the wrong people, (b) not pay insurance, (c) not pay themselves, (d) pay creditors late, (e) ruin personal credit scores, (f) develop poor reputations in industry, and (g) fail to satisfy customer demand.
7. Go into business with the wrong partner. If your prospective business partner does not share the same vision for the growth of your business, is or was recently involved in criminal activity, has a history of breaching contracts, suffers from alcoholism or golf addiction, the odds are against you being successful together in your business. Find someone who complements you and has strengths you don’t possess. Someone with more experience than you can prove to be invaluable. And, find an honest partner.
8. Failure to file tax returns or pay taxes on a timely basis. This is actually a common problem for business owners that are simply too busy for their own good. They have not taken the time to do this because, in their own minds, they don’t have the time. They are focused on a multitude of what seems to them to be more important things. As the old saying goes, “where there is smoke, there is fire.” Tax audits are very time-consuming and costly matters to resolve. Even a successful audit can be a severe distraction from business. Set up a system where taxes are deposited on a regular basis. Hire a competent and reliable bookkeeper. Do whatever you need to do to file the tax returns and pay taxes on a timely basis. The penalties and interest on delinquent taxes are very expensive and can actually exceed the tax liability in certain cases.
The government is like a silent partner that remains silent as long as it is paid the tax. Once the tax is not paid, the government may get very noisy. Upon hiring your CPA, ask him/her the following questions: For what kind of taxes is my business and myself as an individual liable? What is the best way for me to legally structure my business and affairs to pay the least amount of taxes legally? Give all of your information to your attorney and CPA so they can properly advise you. Beware especially of sales tax and employment tax.
9. Failure to stop the bleeding. Many business owners invest substantial time and money or obtain a high amount of financing for a business model that is simply not profitable enough, if at all. They do not carefully plan how to manage the bottom line (their profitability) before they jump into a venture. The more money that has already been invested or financed, the more quickly the business and its owners will cannibalize themselves to survive, which often results in either litigation or grounds for it, i.e., theft, fraud or dissolution. Keep a close eye on how the business is doing. If it is losing money beyond what you’ve anticipated, stop the bleeding, make the necessary changes. If the business does not respond sufficiently well enough to the changes you’ve implemented, consider shutting it down before you lose any more money or put yourself personally at risk.
10. Failure to understand how to manage a business. Most business owners are very good at what they do, which is usually providing the underlying product or services. Yet they may fail to possess the selling and management skills necessary to successfully run their business. They fail to manage their people, accurately report their books and records, file their tax returns accurately and timely, pay their people fairly and timely, etc. They may also fail to possess the skills for developing business, making sales, keeping abreast of changes in technology, changes in the marketplace, setting budgets and setting goals. Outsource your weaknesses and job functions that do not generate revenues.
Darren M. Baldo focuses primarily on small business owners and individuals with increasing net worth that have needs involving business planning, contracts, corporations, LLCs, taxation, wills, trusts and estate planning and administration. He is an attorney, a CPA and has a Masters Degree in Taxation.
Darren M. Baldo, Esq., CPA, LL.M. Attorney at Law, LLC. 4093 Quakerbridge Road, Princeton Jct., NJ 08550 609-799-0090. Fax: 609-799-0095 firstname.lastname@example.org www.dbaldolaw.com. “Protecting the Growth and Success of Your Business.” Copyright 2006. All rights reserved.