Written By Scott F. Gibson
Running a successful business is hard work in any economic environment. Competition is fierce. Technological developments come at you at an increasingly faster pace. Your products and services require constant development and improvement. Staffing issues, bookkeeping, marketing, scheduling, planning, and managing. Whew! You have more to do than reasonably can be accomplished in a busy work week.
To succeed, you must focus and prioritize. The challenge is that your priorities often are sitting quietly on the sideline, waiting patiently for you to give them the attention they need, while relatively unimportant distractions clamor for your undivided attention. Unless you make time for the important but not urgent aspects of your business, they will remain quietly on the sideline until it is too late, leading to disastrous consequences for your business.
Avoid the ten fatal mistakes that business owners often make when they fail to focus on the things that can help them achieve long-term growth and prosperity. Each of these mistakes can be deadly for a business; each of the mistakes is preventable with proper planning and preparation.
- Failure to Set Up a Proper Business Entity.
- Failure to Maintain Corporate Formalities.
- Failure to Segregate Business Enterprises into Distinct Entities.
- Failure to Use a Qualified Statutory Agent.
- Failure to Establish a Buy-Sell Agreement.
- Failure to Fund the Buy-Sell Agreement.
- Failure to Create and Regularly Update an Estate Plan.
- Failure to Follow Stateand Federal Employment Laws.
- Failure to Set Up Reasonable Restrictive Covenants.
- Failure to Protect the Intangible Assets of the Business.
The following example illustrate how easily the Ten Fatal Mistakes can arise in any business.
Mistake No. 2: Failure to Maintain Corporate Formalities.
The second deadly mistake is a variation of the first. Business owners who make the effort to set up a formal business entity often fail to treat the company separate from their personal affairs. If you do not separate your business and personal interests, a court may find that you are personally liable for the obligations of the company.
Roy was excited to begin his new business. Anxious to protect his personal assets, he submitted the appropriate paperwork for his company.
The business grew at a steady pace. When money was scarce at home, it was nice to have the business pay his mortgage or his son’s college tuition. Roy and his wife, Jean, enjoyed taking the neighbors out to dinner courtesy of the business credit card. The business bought season tickets to the Suns and Cardinals for Roy, and season tickets to the theater for Jean. After a few years, the business bought a cabin in the mountains where Roy and Jean could relax on the weekends.
As the business continued to grow, Roy began to spin off related companies. From time-to-time, one of the related companies was short on funds, so Roy’s Racers, Inc., the strongest of the companies, would cover a payroll or pay a vendor. It was easy for Jean to transfer funds back and forth between the entities using online banking.
Business took a turn for the worse. Roy cut expenses, but it wasn’t enough to keep current on company bills. Creditors began filing lawsuits against the companies. The attorneys for his creditors kept poking and prodding at company finances, ultimately asserting that were “alter egos” for Roy and Jean. Roy was stunned when he learned that because he had not maintained proper corporate formalities, the court could disregard the corporate entities – “pierce the corporate veil” is how the attorney described it – and enter judgment against Roy and Jean personally.
How to Avoid Mistake No. 2: If you have gone to the effort to formalize your business through a corporation or limited liability company, be sure to treat the business like a real business. Keep business and personal finances separate. Open separate bank accounts for each entity. Hold regular meetings of the shareholders, officers, and directors. Update corporate minutes each year. Corporations should file annual reports with the Arizona Corporation Commission. Update the contact information on file with the Arizona Corporation Commission as needed.
Treat your business like a real business. Maintain the formalities that will allow you to protect yourself from personal liability.