Business owners are the life blood of this country. Being a business can make you the hero to your family, or it can result in absolute tragedy. As an attorney who has represented clients in estate and wealth preservation, as well as business planning, I have had the opportunity to see how proper planning can ensure absolute protection of your wealth and assets. However, I have also seen how improper planning, or no planning at all, can result in absolute tragedy.
Listed below are the six mistakes that can destroy your business.
- Failure to Incorporate
I have heard the same thing many different times from several business owners. “Dan, the business is just me and I am just starting out. I just don’t need to incorporate at this time.” Well, this couldn’t be further from the truth. I have seen business owners lose everything they own because of debts and lawsuits affecting their business. If you fail to incorporate, that means you are a sole proprietor. This means that if you are sued in the operation of your business, then all of your personal assets are at risk to loss. This means your home, your real estate, your cars, your personal property, your bank accounts, your investment accounts, your life savings, and any other property that you have in your name!
- Choosing the Wrong Type of Legal Entity
The only thing worse than failing to incorporate is choosing the wrong type of legal entity for your business. Depending upon your type of business, a LLC may be more appropriate than a corporation and vice-versa. In addition, I have also seen business owners check the wrong box on the Articles of Incorporation when filing their corporate documents. Also, I have seen only one corporate entity established, when it is more appropriate to establish two or perhaps three for the utmost asset protection of the owners and business.
- Failure to Follow Corporate Formalities
Just because you incorporate doesn’t mean you are in the clear. You can still be held personally liable if you are not careful! The most common way that we have seen business owners held personally liable is what is called “failure to follow corporate formalities”. What this means is ensuring that you maintain proper books and records for the corporation including (1) annual minutes and an annual report, (2) holding an annual meeting of the directors and officers, (3) recording a corporate resolution each time a decision is made requiring a vote of the officers and directors, and (4) having a valid and enforceable operating agreement for an LLC or Bylaws for a Corporation, just to name a few. Failure to have these corporate books and records, and failure to keep them up to date can result in a court ignoring the corporate entity of your business and holding you personally liable
- Comingling Business Assets and Personal Assets
Using personal assets and comingling them with business assets is another major mistake that can destroy your business. One of the more common ways is using personal funds to purchase property to be used in your business and keeping it titled in your own personal name. Actions like this, especially if the action have not been formally authorized and approved in the form of a corporate resolution, can have the result of the business owner being held personally liable.
- Blurring the Lines Between Employees and Independent Contractors
Another major mistake that can destroy your business is not realizing when you have employees and when you have independent contractors. This is an important distinction as there are different obligations and legal rights between the two distinctions.
- Making the Improper Tax Election
Depending upon the profitability of your business, making the improper tax election can result in paying too much in taxes and eating into your cash reserves. For instance, having an LLC it may be appropriate to tax the LLC as a corporation. However, for other reasons, it may not make any sense to tax the LLC as a corporation.
If you have started your own business recently, thinking about starting your own business, or have been operating your own business for several years and never formally incorporated, it is important to have the correct legal counsel. If you have questions, please reach out to us to schedule your 60 Minute Business Strategy Session by calling us at 615-472-2482. We look forward to hearing from you.