Over my 25-plus years of practicing law I have seen some repetitive mistakes made by many different business owners. The following list represents five of the more common mistakes:
FAILING TO OPERATE AS AN ENTITY
If you go to the trouble and set up a corporation or a limited liability company (“LLC”), you need to make sure that you operate your business as an entity. What do I mean? All agreements should be between your company and the other party – not between you and the other party. Make sure you always list your company as the entity that is entering into the agreement.
In addition, when you sign an agreement be very careful in signing your name: always sign it as “John or Jane Doe, President” or “Managing Member.” It needs to be very clear that the contract is between the other party (e.g., customer or supplier) and your corporate entity. If you just sign your name – a question could arise later (e.g., at trial) as to whether the contract is with you as an individual — who happens to own property that could be used to satisfy any judgment — or with the legal entity that may not have as many assets.
NOT FULLY UNDERSTANDING THE TERMS of an AGREEMENT
The best time to have a complete understanding of the agreement is BEFORE you sign the agreement. The worst time is after a lawsuit has been filed. If there are terms you do not understand, or if the contract is too long for you to read, you should see that as a very good time to send the contract to your lawyer for it to be reviewed and explained to you. You may or may not be able to negotiate the terms of the contract; but it is always better to know what consequences could result before the contract is signed – not after.
UNCLEAR OR POOR CONTRACTS WITH CUSTOMERS
Do you have a written agreement with your customers? Is it a clear agreement? Depending on your business you may not have a contract with your customer – for example if you own a retail store, your customers probably don’t sign a contract. Most businesses can and should develop written agreements. Any agreement should clearly set forth the relationship between the parties and what you will provide, what you will be paid and the responsibilities of your customers. I have a fee agreement with my clients which sets forth my hourly rate, what I am being retained to do, how I bill for my services, and how I expect payment to be made.
At times I receive a call from a potential client asking if they can charge a customer interest on an overdue invoice. When I ask what the terms of their written agreement says with respect to interest, the often dead silence on the other end of the telephone usually means that the client had not put a written agreement in place. Creating and using a well drafted customer agreement constitutes one of the most important things you can do to protect your business and increase the chances that you will be paid.
LACK OF COMMUNICATION BETWEEN CO-OWNERS
When two or more people decide to start a business together, they often fail to face the difficult questions. I tell my clients that when starting a business you likely act like the time when you fell in love: everything seems to be perfect and you just want to enjoy the anticipated success. Unfortunately, 50 percent of all marriages end in divorce, and the success rate for new businesses can be even lower.
When you want to start a business with someone else, it is critical to ask the hard questions upfront and get the terms of agreement down in writing. Who will be in charge? How much will each of you be paid? What happens if one owner likes to leave every day at 3:00 in the summer to play golf? What if the business needs another infusion of cash? Are both of you willing to mortgage your homes to secure a line of credit for the business? What if you or the other business owner dies? Do you want to be in business with the other owner’s spouse or children? These are just a few of the questions that you should be asking before you start a business with someone else.
A critical requirement of your business centers on getting your payroll done correctly. Unless you are very capable with all of the various reporting requirements and payment deadlines, consider it money very well spent to hire a good payroll company. The government treats payroll taxes very differently from income taxes, and you have a personal liability as the responsible party — even if the payroll is for a corporation or LLC. Be aware that even bankruptcy will never discharge any liability for unpaid payroll taxes. The bottom line, making a mistake with your payroll is mistake you never want to make. Hire an expert and focus your energies on running your business.
Operating a business takes a great deal of time and you need to navigate a number of legal issues. Take the time to think about the common mistakes I have set forth above. Then schedule an appointment with your own business lawyer, or schedule a free consultation with me, to discuss these matters.
This column constitutes legal advertising, and is designed only as an information service. While every effort is made to ensure the accuracy of the information, it should not be relied upon as legal advice. Legal advice is only provided after a careful review of the specific facts provided by a client after formation of an attorney-client relationship.