Five Common Mistakes Made by Business Owners

Over my 20+ years of practicing law I have seen some common mistakes made by business owners.  The following is a list of five 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.  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.  You should 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 best time is not after a lawsuit has been filed.  If there are terms you don’t understand or if the contract is too long for you to read, that would be a very good time for you 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 the consequences are before the contract is signed – not after. 

Unclear/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 (e.g. if you own a retail store your customers probably don’t sign a contract) but most businesses can and should have a written agreement.  This 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 payment is expected to be made.  

When I receive a call from a potential client asking if they can charge a customer interest on an overdue invoice, dead silence on the other end of the phone when I ask what the terms of their written agreement says with respect to interest usually means that there is no written agreement in place.  Having a well drafted customer agreement is 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.
This mistake is common when two or more people are starting a business.  I tell my clients that starting a business is like the time when you fall in love:  everything seems to be perfect.  Unfortunately, 50% of all marriages end in divorce and the success rate for new businesses can be even lower.  When you want to start a business and are doing so with someone else, it is critical to ask the hard questions up front and get the 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 in the summer to golf?  What if the business needs another infusion of cash?  Are each of you willing to mortgage your home 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 owners spouse or children?  These are just a few of the questions that you should be asking before you start a business with someone else.   
Payroll mistakes.

If you have a business it is critical that you get your payroll done correctly.  Unless you are very comfortable with all of the various reporting requirements and payment deadlines, it is money very well spent to hire a good payroll company.  Payroll taxes are treated very differently from income taxes and there is personally liability for the responsible party even if the payroll is for a corporation or LLC.  Also, any liability for unpaid  payroll taxes is never dischargeable in bankruptcy.  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 there are a number of legal issues that you need to navigate.  Take the time to think about the common mistakes I have set forth above, schedule an appointment with your own business lawyer or schedule a free consultation with me and try to avoid the above mistakes. 



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