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 FollowState and Federal Employment Laws.
- Failure to Set Up Reasonable Restrictive Covenants.
- Failure to Protect the Intangible Assets of the Business.
The following examples illustrate how easily the Ten Fatal Mistakes can arise in any business.
Failure to Set Up a Proper Business Entity
Starting a new business is a rush of adrenalin. Everything is new and exciting. Unless you set a proper foundation, however, your business is likely to collapse.
Susan was thrilled to start her own business. For more than twenty years, she had worked for other people, followed their instructions, and enriched their bank accounts. Susan’s husband, Bob, brought the technical knowledge to the business; Susan would handle the financial affairs of the business.
Six months after they had opened their doors for business, a customer approached Bob with an incredible opportunity. The job would take them out of their comfort zone, but it offered the promise of an incredible pay day. Bob jumped into the job head first, working late nights and weekends to meet the customer’s tight deadlines. The customer was very demanding, but Bob ultimately was able to satisfy his concerns.
Six months after the job was completed, Susan received a demand letter from a lawyer who represented the customer. The lawyer claimed that Bob had been negligent in his work, and threatened to file suit against Bob and Susan unless they paid $100,000 for damages the customer claimed he had suffered.
Bob and Susan immediately sought advice from a lawyer, concerned about whether their business could survive a law suit. Their concern turned to distress, however, when their lawyer told them that their personal assets were at risk because they had not operated the business as a corporation or limited liability company.
How to Avoid Mistake #1
When properly set up and maintained, both a corporation and a limited liability company protect you from liability arising from owning and operating a business. The law recognizes a corporation or limited liability company as a separate “person” with separate finances, assets, and liabilities. Any company obligations remain at the company level, and your personal assets are protected.
Setting up a formal business entity provides you with numerous other advantages. Formal business entities create wealth because the owners have something concrete (stock or membership interests) that they can sell. A formal business enterprise also enables the owners to bring in other owners by selling part of the business.
If you have not set up your business as a corporation or a limited liability company, you are waiting for problems that inevitably will come.
If you have further business related questions, please call our office at 480-733-6800 and ask to speak with Scott Gibson. Scott, an AV rated attorney, handles employment law, trade secrets and restrictive covenants, commercial litigation and intellectual property. He brings with him 27 years of experience and a unique combination of compassion, patience, intelligence, listening ability and commitment.