Top 10 Legal Mistakes Small Businesses Make That Prevents Them from Selling Their Business
In my extensive work with small businesses I have found a number of common legal issues that come up over and over again. This list describes the problems and options to avoid each.
- No formal incorporation
Too many entrepreneurs fail to establish the right legal structure for their company. At some point, this will hurt you. If you haven’t created the right legal structure you and your assets are open to personal liability when you are sued by a customer or employee. What to do: Consult with an attorney and find the best legal entity structure for you.
- No shareholder agreements
When it comes time to sell the company or a founder leaves, a shareholders’ agreement governs everyone’s options as well as actions. Chaos will ensue without such an agreement. What to do: Have an attorney draft a legal document for you that states how issues will be decided among shareholders and what happens if a shareholder departs, dies, divorces or other changes occur
- No formal human resource policies
Small companies get in trouble because they do not have employee manuals or human resource policies in place for their employees. You don’t want to be surprised by a personnel issue that at the very least distracts from your business goals and could potentially shut down your company. What to do: Seek the advice of a human resource professional (or at the very least, professional software) to formulate human resource policies that fit your company.
- Incorrect classification of employees vs. contractors
To save costs most small businesses hire independent contractors to perform work for the company. The rules that differentiate an employee from a contractor are very specific, and if you classify either incorrectly you will be liable for back pay, back taxes and penalties. What to do: Consult with an attorney on federal, state and IRS rules that determine the proper classification.
- Not protecting intellectual property – patent, copyright, trademark, etc.
Many small businesses fail to take the necessary steps to protect their intellectual property until another company steps in to take it. You may not be aware of everything you have that constitutes an asset of your company and how to prevent hijacking by someone else. What to do: Seek the advice of an attorney to do an inventory of the company’s intellectual property and to properly protect it.
- Not protecting customer and employee data
Small businesses are at high risk for having customer and employee data stolen. It could occur inside the company by employees, through online transactions, website hacking and other incursions. You have both legal and competitive issues with the possible loss of sensitive customer data. What to do: Explore online services to secure the site and the data before it happens as well as building internal policies and modifications to protect customer data. Also, consult with an attorney on the applicable privacy and disclosure laws that govern this data.
- Not addressing appropriate personal use of the Internet at work
It is now impossible for small businesses to prevent employees from using the Internet at work for personal reasons. What to do: Block inappropriate sites to protect the company and other employees. Frequently monitor web site usage of company computers for proper use. Also, consult either a human resource professional or attorney on how to prevent potential abuse of the site that could implicate you in a sexual harassment or creation of a hostile work environment. Both can produce lawsuits and financial penalties.
- Insufficient screening of outside investors
Many small business owners bring in outside investors to support cash flow. They then have disagreements with the investors on how to run the company. The investors then threaten legal action. What to do: consult an attorney prior to finalizing any such arrangements to document the appropriate role for any outside investor. And remember, the background and history of the investor is as important as how much money they bring to the company. Choose very carefully.
- Not remitting payroll tax (or sales tax) to government agencies
Small businesses must legally collect payroll and sales taxes. Not remitting these monies to government agencies will get you shut down with fines and penalties to follow. What to do: Use a payroll service to remit employer and employee taxes automatically. Set up a separate account for the collection of sales and use taxes and review quarterly.
- Not having an expert support team
All small businesses should have a team of experts who work together to protect the business and position it for the future. All small businesses should have a business attorney and a tax professional. What to do: Hire your expert support team as part of the earliest set up of your business. It’s better to spend your money now and protect your business than to loose your shirt later.
If you have any questions about these issues or other topics please feel free to give me a call. You know your business – we know the law.