Common Legal Mistakes Businesses Make – Series Part 1

Part 1 of a 2 part series

There are a number of legal issues small businesses need to address.  Not handling these issues can be very expensive to you!

1. Ownership Formation

Create an ownership structure before you enter into any agreements.  The type of entity you form enables you to clarify the ownership of the business and articulate the responsibilities of the owners.  Properly setting up a separate entity can provide you with personal liability protection so you are not responsible for company debts and obligations.  Your entity structure determines how you borrow money, how you will be taxed and how you structure the sale of your business.  When you start a business you need to be sure you have enough capital to pay the company’s foreseeable debts and expenses.  You also need to carry adequate insurance to protect you in case you are found personally negligent.

2. Organizational Documents

You must have solid organization documents for your business.  You must treat your business as a separate and professional entity.  If you do not, you risk being held personally liable for your business’s debts and obligations.  You also lose credibility with other parties with whom you do business, such as bankers or potential purchasers of your business.

3. Proper Records

Your business is required to create and maintain proper records.  These include maintaining your company books, adopting resolutions, paying payroll and taxes, maintaining your company’s bookkeeping, complying with federal and state labor, safety and wage requirements, and acquiring and maintaining licenses or permits.  It is imperative that you keep your business and personal finances separate.

4. Securities Laws

If investors in your business lose money, they can sue you for treble damages.  If you are looking for people or companies to invest in your business, you must comply with the appropriate disclosures required by securities laws.

5.  Buy Sell Agreements Among Owners

A buy-sell agreement provides for the orderly acquisition of an ownership interest in the event an owner leaves the business.  Common trigger events include death, disability, termination of employment, divorce, retirement, bankruptcy or the owners no longer get along and want to split up.  A buy-sell agreement addresses how the business will be valued when this event happens and how the payout will be structured.