From Wall Street to Main Street, the engine that drives America is small business. Every day, new small businesses are started. Most rightly fail, because they do not have unique services and products delivered in more efficient ways.
At Ciyou & Dixon, P.C., our Indiana business attorneys find that a significant number of the visionaries who do succeed, do so by dogged determination and rapidly adapting to the problems growth presents. Nevertheless, because legal needs are often hard to identify and the “what if” may not occur, they neglect their legal needs.
Ultimately, when the day of reckoning comes, it is difficult, expensive, and often too late to correct them. For instance, two (2) persons who set up shop and operate informally as a “partnership” may have an understanding that one (1) is a greater stakeholder, but may not see it that way later.
This fuels disputes and deflects from the focus necessary to its operation as a going concern. Obviously, there is a balance to be struck (too much legal focus versus too little), but the six (6) most common business mistakes Ciyou & Dixon, P.C. attorneys observe and handle are as follows:
- Business Structure/Operations: Failure to determine and properly establish the business structure at the outset, which has tax and ownership consequences: corporation, LLC, sole proprietorship, or partnership. In addition, even where determined, many such businesses do not have the proper corporate documents to properly reflect the business structure and typically only have documents relating to the legal formation, which is not sufficient. These missing documents typically include membership agreements and bylaws or meeting minutes.
- Key Contracts: Lack of contract review and attention with key vendors and clients is a frequent pitfall for new businesses. Related, policies and procedures necessary to govern employees and independent contractors are necessary.
- Insurance: Incomplete and insufficient insurance, ranging from a business owner’s policy, worker’s compensation, health insurance, disability insurance to cover other likely and/or foreseeable risks.
- Capitalization/Access to Capital: A lack of capitalization or access to capital is a key to future failure when accounts receivables and payables do not properly line up. Many, if not most, small businesses, rely on credit cards. However, these tools should be carefully used because of the high interest rates. The preferred plan is to have a secured or unsecured line of credit. In the current residential real estate market, home equity access is more limited, so multiple lines of credit are often important to consider.
- Intellectual Property/Confidentiality Agreement(s)/Trade Secrets: In addition, many small businesses that emerge in the marketplace are able to compete because of new approaches that need intellectual property protection, and be subject to confidentiality agreements or trade secret contracts. The failure to attend to these may cause a market edge or niche to be erased overnight.
- Payment of Payroll/Sales Taxes: A fundamental error found in many small businesses is neglecting the payment of payroll or sales taxes and directing of these funds to meet short-term capital needs. This is always a mistake. If the business fails, the principles will be personally liable for non-payment of these trust obligations. Thus, the failure may then be followed by years of governmental tax actions.
Starting a business is not for the faint of heart. It takes a good idea, right timing with the market influences, and rapid identification of and a proactive approach to legal needs. The six (6) noted matters in this post are often the recipe for success or failure of a business once it takes root.
Ciyou & Dixon, P.C. Indiana business attorneys frequently attend to these issues and work with clients on business issues, navigating and planning for these and other contingencies. The proper and successful small business will attend to its own legal needs as carefully as it does to its products and services.