Six Legal Mistakes That Small Business Owners Make
Starting a business is a big decision. Once the decision is made, it will trigger a number of decisions points, which will shape your business. And some of these decisions can lead your business down the wrong path. It is tempting for a business owner who is just starting out to cut corners. However, working with a business lawyer can help a business owner to avoid costly mistakes. Here are six mistakes often made by small business owners: (1) Failing to protect personal assets; (2) Failing to implement and observe operating formalities; (3) Failing to protect intellectual property and trade secrets; (4) Failing to adopt an employee handbook; (5) Failing to meet tax, permit, and licensing requirements; and (6) Failing to meet industry requirements.
Fail to Protect Personal Assets
An owner that operates a business as a sole proprietor or a partnership does not protect his or her wealth, including investments, real property and personal property. If a vendor, employee or creditor sues a business owner due to a business-related incident, then the owner's assets are exposed to a judgment, claim or business debt. To protect personal assets, a business owner should form a business entity, such as a corporation or a limited liability company. Even a limited liability partnership can protect a business owner's personal assets, if it is set up properly.
Fail to Implement and Observe Operating Formalities
A small business owner who has decided to protect his or her personal assets through entity formation can still head down the wrong path if he or she fails to implement and observe operating formalities. Operating formalities are the actions that a business entity's owners and managers should take to maintain the separate identity of the owner from the business entity. These actions include:
maintaining separate personal and business bank accounts;
adopting a company/operating agreement and bylaws;
holding an organizational meeting;
holding regular and special meetings to vote on the actions of shareholders and the Board of Directors;
keeping company records, such as governing documents, key agreements, resolutions, and meeting minutes;
keeping company matters confidential; and
signing all contracts as a company officer.
The failure to implement and observe operating formalities undermines the whole purpose of forming an entity by blurring the lines between the owner's identity and that of the business entity. A business owner who does not implement and observe operating formalities risks favorable tax treatment if the Internal Revenue Service challenges the tax treatment of the business by arguing that the organization was not truly operating as a business entity. Similarly, a business owner who disregards operating formalities provides potential creditors with a reason to go after the owner's personal assets to satisfy unpaid business debts. Finally, a business owner who fails to implement and observe operating formalities exposes himself or herself to personal liability in the event of a business lawsuit.
Fail to Protect Intellectual Property and Trade Secrets
State and federal trademark laws protect intellectual property, such as a name, phrase or logo. A trademark is any word, name, phrase, image or device used to sell or promote goods or services if it is intended to differentiate such goods or services. A business owner can trademark a word, phrase, logo, color, sound or smell to distinguish its good or services. Trade secrets are a formula, practice, process, design, instrument, pattern, commercial method, or compilation of information that is not generally known to the public or reasonably decipherable by others by which a business can obtain an economic advantage over others. Examples of trade secrets include recipes, formulas, algorithms, and customer lists. Protecting trade secrets through confidentiality and non-disclosure agreements maintains value to the trade secret itself, which, in turn, brings value to the company that owns the trade secret. A business that fails to protect intellectual property and trade secrets is not maximizing its assets by protecting its ownership rights.
Fail to Adopt an Employee Handbook
Key steps that a business employer can take to avoiding a lawsuit are to adopt an employee handbook and workplace policies. While an employee handbook includes useful information, such as dress code, benefits, and holiday observance, a handbook also helps an owner to establish the company's work culture, mission, and values. In addition, an employee handbook helps to ensure that employees are treated uniformly by ensuring that all supervisors and employees must comply with the same workplace expectations, disciplinary policy, and termination policy. Finally, an employee handbook sets forth important workplace policies that address discrimination, sexual harassment and other forms of illegal workplace behavior. Some of these policies are required by state and federal law, while others are a best practice in the event of a workplace dispute or lawsuit.
Fail to Meet Tax, Permit, and Licensing Requirements
It is imperative that small businesses comply with local, state and federal tax requirements. Goods that are subject to sales tax in Texas include physical property, like furniture, home appliances, and motor vehicles. Some services are also subject to sales tax. If a business owner must charge sales tax on some or all of the goods and services it sells, it must register with the Texas Comptroller for a sellers permit. This permit allows a business to collect sales tax on behalf of local and state governments. A business must also be informed of its property and franchise tax obligations. The Texas Secretary of State can forfeit a business entity if it fails to file a franchise tax report or pay franchise taxes. In Texas, a business entity must meet all tax requirements before it can reinstate, terminate, merge or convert a business. Local taxing units, such as cities, counties, and school districts, can pursue a lien to collect delinquent taxes.
It is also important for business owners to meet local, state or federal permit and license requirements. Without the proper business license, an owner cannot legally operate. State agencies, such as the Texas Department of Licensing and Regulation, regulate numerous types of business activities. In fact, there are over 250 types of professional, occupational and facility licenses in Texas.
Texas does not have uniform local permit requirements. That is, cities and counties regulate permit requirements, so each locality will have unique permit requirements. It is important, therefore, that business owners consult locals laws regarding matters, such as alarm permits, building permits, business licenses, tax permits, health permits, occupational permits, signage permits, and zoning permits.
Fail to Meet Industry Requirements
There are certain industries that are highly regulated by the federal and state governments. For instance, health providers, financial services providers, insurance providers, and investment advisors must comply with federal and state regulations that are intended to protect consumers. Many of these industries impose requirements in addition to permits and licenses, such as requiring specific policies and procedures and self-reporting in the event of a violation of law. Small business owners that operate in highly regulated industries should remain informed of requirements imposed on the business entity due to specific business activities.
These are a few mistakes that a small business owner can avoid if he or she works with an experienced business attorney. If you are seeking tools and resources to get your business back on track - a business lawyer can help.
Disclaimer: My firm provides business formation and related services for businesses across Texas, including Fort Worth, North Richland Hills, Euless, Bedford, Southlake, Arlington, Irving, Dallas, Plano, Houston, Austin, San Antonio, Corpus Christi, and Beaumont. This web site is designed for general information only. The information presented should not be construed to be formal legal advice nor to form an attorney-client relationship.
About Lisa: Lisa D. Mares is an attorney at the Mares Law Firm, PLLC. She is a member of the Northeast Tarrant Chamber of Commerce. She loves sharing stories about the trials and triumphs of raising three daughters with her husband, as well as about her experience as a Camp Fire Fort Worth volunteer. Contact Lisa at firstname.lastname@example.org or learn more about her law firm at www.MaresLawFirm.com.