“We all make mistakes.” Who isn’t familiar with that childhood “mom mantra” offered up in an effort to help take the sting out of our blunders?
Mom was right – whether it be in your personal or professional life, it’s inevitable that you will make a mistake, or two, at some point in time. With the inevitable in mind, some say that the most important thing is how you respond to or recover from a mistake. I propose, however, that it is just as, if not more, important to be aware of lazy or simple mistakes that you may make and then working to avoid them – especially when such mistakes concern an area of importance, like your small business.
Whether you are thinking about starting a new business venture, or you’ve been running your small business for several years, there are a number of common simple mistakes that many small business owners make, and which have the potential for unfortunate, possibly even disastrous, outcomes. Let’s take a look at some of these:
Common Mistake: Failing to actually form a legal business entity. Without a legal structure to your business, your personal assets (think: home, car, bank accounts, etc.) may be on the line should something go awry with your business. Solution: Follow state business formation requirements! No matter how small your business may be, it is imperative to follow through with the business registration and formation formalities mandated by your individual state.
Common Mistake: Not discussing and executing a buy-sell agreement or exit strategy. If you own your business yourself and you pass away, what will happen to the entity? If you have created your business with a partner, co-founder, or co-owner, what will happen if one of you wants out of the company, dies or becomes disabled, or even goes through a divorce? If you don’t have an exit strategy in place – a buy-sell agreement or otherwise – there’s no easy way to answer those questions. Solution: Discuss, and execute, an exit strategy during the beginning phases of starting your business. While it may feel awkward to discuss your exit strategy with the new co-owner that you just found, doing so from the start will help ensure an agreeable outcome if and when the situation changes.
Common Mistake: Not putting all of your agreements and “deals” in writing. While it would certainly be nice if we could all still operate on a handshake or verbal agreement, not only is that not the case these days, but it is also a risky business move to make. Yes, some oral agreements are upheld in court, but often only after a long and expensive legal battle over the terms of the alleged agreement has taken place. Solution: ALWAYS put it in writing. By putting everything into writing not only do you minimize the chances of a “he said she said” situation occurring down the line, but you also ensure that the concerned parties are able to read, analyze, and digest all the terms of the agreement before signing off on it!
Common Mistake: Mixing business and personal finances. You have avoided mistake number 1 by properly registering your business with the applicable authorities, so you’re off the hook personally for anything that goes wrong with the business, right? Not so fast! All too often small business owners don’t think twice about paying for their gym membership or gas for their personal car on a company credit card, or making various business purchases with their personal ATM card without reimbursement from the business. And, when you do that and therefore don’t treat yourself and your small business as separate entities, you run the very real risk of a court deciding not to treat you as separate entities as well. Solution: You must be sure to set up – and then actually utilize – separate bank accounts for your business and personal life.
Common Mistake: Thinking that you can do it all on your own. As I recently wrote in my post “Don’t Gamble With Your Small Business – Know When To Hire an Attorney” as the number of web-based businesses offering inexpensive (or free) online “legal” services grow, more and more small business owners tend to believe that they can venture out on their own and that they never need to consult with an attorney. There are many times, however, when that just isn’t the case, and when acting on your own without guidance and advice may just be setting yourself up for disaster. Solution: Read my article, become aware of those times where legal counsel is strongly advised, and go see a lawyer!
So, small business owner, have you been able to avoid these common legal mistakes? If you have made any of these mistakes, how did you deal with the result? Are there any other common legal mistakes that you see business owners make all too often?