The Dos and Don’ts of Starting up a Business
A very necessary by-product of the faltering U.S. economy has been an increase in business start-ups. Many of the long-time unemployed or underemployed have taken themselves out of the competition and decided to strike out on their own. According to the Small Business Administration, small businesses are the creators of most of the new jobs in this economy. Becoming your own boss has a number of advantages, but also some pitfalls. Here are some of the business basics that any new or existing business owner should be mindful of.
1. Do Establish Goals for Yourself and Your Partners. Whether you are a sole owner, a two-man shop, or have multiple partners, you should have a clear vision of why you are setting up the business and where you are headed. At a minimum, goals should be set for revenues, marketing, human resources and finances. Goal setting will require that you identify the goal, give yourself a deadline for achieving it, and identify the people, resources, skills and steps you will need. Time spent early on planning can save a lot of time that would be needed later to change gears.
2. Do Put it in Writing. Although everything that you have agreed to with a third party does not need to be written down, the most important terms certainly should be. Many disputes can be avoided if the agreements are written down in advance and clearly. A common mistake is to believe that you do not need an agreement with family members or friends. Lawsuits among family members and best friends are an everyday occurrence. One area that frequently results in problems is that of partnerships set up without a written agreement. Most state laws require that certain contracts must be in writing. Typically these are sales of real estate, agreements for services that last more than a year, and commitments to lend money. Although verbal contracts can be and are enforced, it is harder to prove the terms. Even with the best of intentions, there can be miscommunications and misunderstandings. There are many resources that can be used to obtain form agreements including government agencies such as the Secretary of State and Department of Labor, pay-as-you-go websites or your local business lawyer.
3. Do Separate Yourself From Your Business. A frequent problem among first-time business owners is failing to separate themselves from their business entities. The main reason for creating a separation is to make sure that the debts and obligations of a business cannot be applied to your personal assets. The first step is to make sure that the business is separately organized by establishing a corporation or a limited liability company and then operating that entity separate and apart from your personal assets and liabilities. This prevents a third party from “piercing the corporate veil.” Closely held businesses are the most susceptible to mixing the business and personal. Some basics:
(a) Don’t commingle your personal assets with those of the corporation. Examples of transactions that involve commingling: a car that is leased by the company being used primarily for personal use; or a company bank account being used to buy groceries or pay the home mortgage.
(b) Don’t divert corporate assets for your personal use, such as paying a non-working family member’s salary out of the company account.
(c) Don’t engage in activities with the intent to defraud creditors. An example would be to remove all funds from an operating business into another company or into a majority shareholder’s account, leaving the company without funds to pay its bills.
(d) Don’t conduct transactions with officers, directors, and shareholders that are not arm’s length, such as loaning funds or allowing use of company property without payment or documentation.There are multiple risks associated with starting your own business, but at least a few of the common ones can be avoided by being aware of the basics outlined above.
[Business Insights is hosted by the Law Firm of Kumar, Prabhu, Patel & Banerjee, LLC (KPPB). Sonjui L. Kumar is a founding member and partner of the firm. Her areas of practice include general corporate law, complex commercial transactions, and trust and estate planning. Naeem I. Ramatally is currently a third-year law student and a law clerk at KPPB.]
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