10 Biggest Mistakes Made by Business Owners
The Small Business Administration estimates at least half of all new businesses fail within the first five years, and only about one third of new businesses last ten years. The major factors which play in to the high failure rate of small businesses include a variety of economic and operational risks which are faced to one degree or another by every business. In cases where those inherent risks of operating a small business are compounded with legal mistakes, the chances of business failure rises significantly. Below is a list of ten of the most common mistakes our firm sees when we consult with new businesses.
1. Doing business without a corporate entity.
In more instances than you would believe, small business owners start conducting business without first forming a business entity. Each case is different, some are afraid of the expense. Some think they can sidestep the tedious corporate formalities. Some don’t realize the purpose of creating a business entity and some people feel like corporate structure is only for “big” business. Like it or not, the reality is that EVERY business doing business in Florida (ie. domestic and foreign) needs to register a corporate entity with the Florida Division of Corporations, if for no other reason, than to protect your personal assets from your business liabilities.
2. Lack of a business plan.
Every business should have a business plan. Unfortunately, the vast majority of business plans are hardly worth the paper they're printed on. It is not uncommon to see plans that are sloppy, poorly written or incomplete. A good business plan presents an overview of the business in both the short and long term. It should explain how you will get from point A to point B. The plan should be a "roadmap" for your business. It should contain attainable milestones and targets and layout the steps you need to reach those goals.
3. Outside investors.
Many small business owners bring in outside investors when they are desperate for cash. Shortly thereafter, the investor gets impatient and begins clamoring for a return on his investment. This almost invariably leads into a dispute between the owner and investor as to how to operate the business, which ultimately ends up in a lawsuit. To a prudent business owner, the identity and character of the investor is as important as how much money they are willing to invest. The bottom line -- choose investors very, very carefully.
4. Failure to do a shareholder or buy/sell agreement.
Every small business with more than one owner needs a shareholder or buy/sell agreement. This type of document specifically lays out how the business will operate, how the owners will govern the business, management, voting rights, profit-sharing, new owners or investors, succession plans and perhaps most importantly, how dispute between owners will be resolved. It is more likely than not the ownership group of the business will expand or change and, much like a will that provides for an orderly disposition of assets upon death, having a well-considered agreement among the owners can head off or limit disputes down the road and promote harmony among the owners.
5. Treating Independent Contractors as Employees
Many startup businesses make use of independent contractors, and with good reason. They provide the ability to get tasks completed and don’t tie you to the requirements that come with having employees. Use caution in how you deal with independent contractors. The IRS provides detailed information and a multiple point test to determine whether the independent contractor you’ve hired is actually a W-2 employee in disguise. It is important to review that test and understand the legal risk and consequences of not complying with the rules related to independent contractors.
6. Using Online Contracts
Many business owners seek to skimp on legal services using contract templates they find online. For small things like maybe advancing an employee an extra week salary, online contracts can be fine. However, for anything which could have more drastic consequences down the line, contract templates are not a good idea at all. Worse yet are those business owners who believe they are sophisticated enough to cut and paste clauses from several different online contracts. In most instances, enforcing these types of contracts is a very difficult and expensive prospect. Online contracts are generic contracts. They do not take in to account the unique circumstances which exist in almost every contractual relationship, and such contracts almost always filled with legal loopholes. The sad part is those legal loopholes can be closed by an experienced attorney for a couple hundred dollars. Instead, the business owner winds up spending thousands of dollar litigating the meaning of ambiguous terms. In short, the internet can make you feel like you are an expert, but you aren’t. Find a local experienced attorney or eventually you will be reminded of the old adage, “you get what you pay for”.
7. Signing personal guarantees.
In almost any new business, access to credit is conditioned upon a business owners personal guarantee for the loan. The reason for this is simple, new businesses do not have the resources to repay a loan. Unfortunately, many business owners do comprehend the potential negative impact of guaranteeing their company’s debts, or personally guaranteeing other contractual obligations. If you are one of the 50% of all small businesses that fail within the first five years, you are on the hook for all the debt the company incurred. The potential hardships are obvious, and drive many people to bankruptcy.
8. Failure to avoid costly litigation.
As a business litigator, take it from me, litigation is expensive and causes a significant drain on the time and efforts of the business owner and any involved employees. I always council my clients that business litigation should only be considered as a last resort. Before getting involved in litigation, any small business should try to temper the emotions that are caused by a dispute and consider the costs and benefits of the litigation, just like they would any other business decision, and determine any collateral effects of the litigation as well.
9. Talking trash about their competition.
The temptation for small businesses to talk trash about their competitors publically or anonymously on the web is growing. Be careful not to libel them. What to do: Seek the advice of an attorney for what is libel and what is freedom of speech.
10. Failure to consult a lawyer.
A bit of self-serving advice, to be sure, but sensible nonetheless. Many business owners in general resist working with attorneys mainly due to the expense — they download contracts or incorporation documents, which is fine until there is a problem. One a problem erupts you can generally count on spending thousands of dollars to correct the problem which could have been averted by spending a few hundred dollars working with an attorney who has practical experience.
Keep in mind this list is by no means an all-inclusive list of all the possible legal mistakes business owners can make; just some of the most common. If you are a business owner or have the dream of opening your own business and would like some sound legal counsel from an experienced team of attorneys, the lawyers at Guy Yudin & Foster, LLP. are here to help! Feel free to contact our business lawyers here, or give us a call at (772) 286-7372.