Top Five Mistakes New Business Owners Make: A Lawyer's Perspective

Posted almost 2 years ago. 2 helpful votes

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This brief article lists the top five mistakes individuals make when starting a new business, from my perspective. These are mistakes that I have seen lead to costly legal issues that could have been avoided with proper planning and advice.

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1. Not Creating a Business Plan.

When starting a new business you want to have a clearly defined business plan or model. This plan will guide you through the creation process, initial startup and growth of the business. As the business grows the business model can be modified and should be if appropriate. You do not want to deviate too much from this plan as it can result in you taking on projects outside of your expertise and may affect other planning you have put in place (legal, accounting, tax etc.) and lead to potential liability. If your business is going to do a major deviation from the existing plan, then you want to approach it anew and follow the same steps to protect yourself that you did in setting up your initial business.

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2. Skimping on the Professional Advice

Many people who start a new business have very limited funds to do so and try to limit what they consider unnecessary expenses. Unfortunately, one of the expenses they deem unnecessary are professional services. Rather than hire a professional they do research on their own through the internet, advice of friends, and through calling official offices that they believe will be able to answer a variety of planning questions from taxes to insurance. Unfortunately, much of what you find on the internet can be outdated or incorrect, and many of the people you speak with (including those at the government offices) are not fully informed and may lead you down the wrong path. Spending a little now to ensure you are in compliance with all laws and regulations related to your business and doing business will save you a lot by avoiding legal hassles in the future.

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3. Co-Mingling Funds

Many times a new business owner will co-mingle the funds for the business with their personal accounts and/or pay for personal things from their business accounts. While their intentions are not to take more than they should from the business, this can create significant legal issues on several fronts. For example, if you have partners, this could be seen as embezzlement; If you are sued, this could result in a piercing of the corporate veil and allow personal liability against you; It can also create significant tax consequences if not properly reported to the IRS. The best way to handle your finances is to keep a solid line between your business and personal finances. Consultation with an accountant will help you determine the best way to do this.

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4. Not Obtaining Proper Insurance

Insurance can be expensive. And just as with professional services, many new employers do not want to spend the money for an insurance policy they may never use. However, depending on the type of business you have, and how many employees you have, there are some types of insurance you are required to hold by law. Failure to obtain the required coverage can not only lead to bankruptcy of your company if a legal issues arises, but can also lead to civil and potentially criminal fines. When developing your business plan you need to determine what types of insurance you are required to have and what types you should have for protection. By having proper insurance in place, if something occurs that is covered by the policy, that insurance company will pay for your legal fees and up to the policy limits for damages. Otherwise you are on your own and litigation is very expensive.

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5. Ignoring Problems When They Arise

Many new business owners fail to realize just how serious potential threats from lawyers or government agencies can be. For that matter they also fail to deal with other legal problems that arise hoping or believing they will go away. Unfortunately, I have seen numerous clients ignore demand letters and issues that could lead to litigation assuming it would either go away, or that if they make the "fix" all is well. However, they never follow up with the individual or agency that sent them notice. In many cases, the problems do not go away and ignoring it merely makes the matter worse. It could also void your ability to claim benefits under an applicable insurance policy. If the issue is covered by an insurance policy you have to report it timely to the insurance company or benefits can be denied. If you have an issue come up, you are better off talking to a professional in that field immediately to limit the potential damages that may result.

Additional Resources

If you are interested in setting up a business or already have one but find you have made one of these mistakes, I would recommend you contact an accountant, attorney, insurance agent and/or business consultant in your area for some professional guidance in these areas. Your local Chamber of Commerce can also provide some helpful information.

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