1. Not forming the proper entity to limit your risks and liabilities. As a business owner, you should think about forming a business entity to minimize your individual liability for debts and obligations of your business. A separate business entity will allow you to separate your personal assets from the assets of the business and therefore protect your personal assets from most claims against your business. The two common business entities that provide liability protection are the limited liability company (LLC) and the corporation. Deciding which one to choose will depend on the ownership structure, management and governance of the business, the tax treatment you’d like, the strategy planned for seeking outside investors, and the compensation for employees and staff. Choosing the best entity for your business involves many considerations and is best done in conjunction with the help of a legal professional.
2. Not having properly prepared legal documents and contracts. It’s incredibly important to have your business entity documents in order so owners and management understand and are clear on how the business will be governed and managed and how profits and losses will be shared, among other considerations. An LLC is governed by an operating agreement, and a corporation is governed by its bylaws. These business documents can help resolve internal issues and disputes by providing clarification on how certain matters are to be addressed. Equally important is having written contracts when you’re doing business with clients and customers. You're going to want agreements to protect your business, maximize your ability to get paid, and specify what will occur if and when your clients and customers breach their obligations under those agreements. Formalizing your business documents and having strong contracts in place will help clarify the parties’ obligations and, more importantly, reduce costly and time-consuming disputes.
3. Not having policies and procedures in place. By stating what your company policies are, you have provided a roadmap of your company’s vision and how its day-to-day operations will be handled. The ultimate goal of the procedures is to offer the person reading them a clear understanding of how the company will carry out or implement its policies. These policies and procedures provide employees with information that allows them freedom to carry out their job and make decisions within defined boundaries, thus reducing a manager’s need to micro-manage. Policies and procedures provide clarity to the reader when dealing with accountability issues or activities that are of critical importance to the company, such as health & safety, legal liabilities, regulatory requirements, or other issues that have serious consequences. By writing clear policies and procedures that even an outsider would understand, you increase your legal protection in the event they were challenged in court.
4. Not knowing whether to hire an employee versus an independent contractor. Hiring an assistant can free you up to do more important things. When you hire someone, you need to know whether you should hire the individual as an employee or independent contractor – they are not the same. Each has different implications on your business depending on the type of entity selection you’ve made. Your first hiring decision will impact your labor costs, liability, flexibility to hire and fire, exposure to lawsuits, and taxes. Misclassification of an individual working for you can also have costly legal consequences such as back taxes and penalties for taxes, insurance and benefits, to name a few. A careful assessment of your business needs and the classification of hired individuals is critical to avoid these traps.
5. Not knowing when to hire because you’re too busy working “in” the business. If you think that working “in” the business will ensure that everything’s done right, you’ll spread yourself too thin and set yourself up for failure. When that happens, you end up spending way too much time on every part of the business, which can be draining. Running yourself ragged can cause you to not pay attention to details resulting in missed deadlines, overpromising and under delivering and then you won’t be able to focus on protecting your business. Don’t expose yourself to liability by trying to do it all. Being sued for breach of contract or negligence isn’t fun and can be extremely expensive. Delegate work to others by hiring an assistant, a tax professional, a business attorney, and a bookkeeper to free up your valuable time – working “on” the business instead of in it will enable you to maximize your company’s productivity, profits and protection.
For more information on ways to protect your business, schedule an introductory strategy session online at graceleelaw.com or call us at (703) 319-7868.