First Two Years of a Business Are Critical
By now, it is more or less common knowledge that more businesses fail within the first two years of launching than at any other period in the company’s existence. There are good reasons for this dramatic failure rate.
Why is the new business failure rate so high? Typically, the business owners make one or more of the top legal mistakes, while trying to save money and aggravation during their startup period. When business owners look back on these errors in judgment, they usually regret these decisions. Owners of failed companies could have avoided these problems by simply getting the advice of a competent lawyer before they launched their business.
Most new business owners are not knowledgeable every law and regulation that can affect their ability to create a successful company, nor should they be expected to understand the potential impact these laws may make. This is the time to consult an experienced attorney to prevent legal mistakes (most of them simple) that may “doom” a new business.
We have researched this issue for you and identified the five most common legal mistakes startup business owners make in the “real world.” Please note there are numerous other errors, like not retaining a competent accountant to help your ongoing operations, new business owners sometimes make that threaten the future of their companies.
Five Common Legal Mistakes
It’s important that you understand the local state’s laws that might negatively impact your new business. A competent local lawyer can help you avoid these mistakes. This plan of action should not be too expensive, as compared to the potential impact of making these errors.
- You do not register your new company with the Secretary of State (or other responsible state agency).
For example, in the state of Washington, business owners must register with the Secretary of State to commence operations if they sell goods or services to their customers. Always call your local Secretary of State office to learn the requirements for registering your business.
Secretary of State employees will tell you if you must register with their office or the appropriate agency for your state. You don’t need to speak with the current Secretary of State, as most employees will know which agency handles business registrations if it is not their responsibility. You may also visit their website to find the answer you need.
- Not knowing the legal difference between using independent contractors versus hiring true employees.
For payroll tax reasons, there is a huge difference between the two. Business owners must pay around 1.25 to 1.4 times for your legal employees for unemployment, Social Security, Medicare and, possibly, other local state taxes. This responsibility does not exist with true independent contractors.
Therefore, many business owners like having independent contractors perform duties and responsibilities for their company. A word of warning: The Internal Revenue Service (IRS) doesn’t allow you to treat independent contractors as if they were employees. You could face tax problems if you do. The IRS could find that you were circumventing the law and judge them to be employees. In this instance, you might face delinquent taxes due, plus interest and penalties.
- Not being careful when using contracts you find online.
You can find many online sample contracts that business owners can use for “low risk” consequences. However, you must be careful with most of these. The money you save, by not having an attorney draw up some contracts, could pale in comparison to the cash you might have to pay out because of violating these contracts could be much more than you save.
Don’t believe you are an expert on contract law. Unfortunately, unless you are a practicing contract lawyer, you are not. The ‘Net has a way of making you feel invincible in this area. If you are involved in a court case involving contract law, the only thing with legal standing are the written, signed agreements you can produce for the court.
The “he said, she said” defense usually has little standing in a court of law. You must learn that a seasoned lawyer will advise you that a formal, written, executed contract is useful only in the event of a dispute; otherwise, it cannot be harmful if it sits in your desk drawer. But, disputes are all-too-common – and sometimes very expensive to settle.
Remember the rule, “you get what you pay for.” If courts never overruled written contracts, you may not need attorney protection. Unfortunately, judges have overturned said contracts, particularly, if the other party has the right to “assign” the contract for fulfilling the specified duties and responsibilities stated therein. It should not be expensive for your lawyer to write an enforceable contract.
- Not properly documenting any non-US resident employees.
When you employ four or more people, you cannot discriminate toward non-citizens, if they have the legal right to work in the US. Take the time to verify your employees can be paid compensation to work in the US.
This is the purpose of the I-9 IRS form. This form is required. You need to confirm that the employee has the right to work in the US. You need not become a detective who is an expert in identifying false or doctored ID cards. You will submit copies of the I-9 form to the IRS to prove you have the required documentation.
If you have four or more employees, and your business is involved in manufacturing or assembling products, you should be particularly careful. Why? There are multiple “horror stories” of employees who offer Social Security cards, which are real, but belong to deceased people. The cards may be real, but the numbers belong to people who are not alive any longer.
- Signing agreements or contracts without reading them.
Beware anyone who says, “sign here” and advises you that you don’t need to read the words. Have you done this in the past? If your answer is “Yes,” you’re not alone. Many people don’t spend the time to read their agreements before signing them.
It should become a habit that you let your lawyer review any contract you contemplate signing BEFORE you sign. This is a must if the agreement is not written in simple English, but has lots of “legalese.” Your attorney probably will have comments and advice to sign or not sign the contract as is or recommend changes in wording or clauses that are risky. This is money well spent for the protection it offers.
US Small Business Administration (SBA) Can Help
It is always a good personal rule to visit the SBA website or call them before you start a new business. If you are going to conduct e-business visit the Service Corps of Retired Executives (SCORE) website that helps small business owners to setup and engage in ecommerce to increase revenue.
If you also need financing to launch your business, it behooves you to learn about their multiple loan products. While the SBA makes few direct loans themselves, they approve banks and credit unions to make loans for them, offering the financial institutions up to 85% guarantees for the loan balances.
Although the SBA formerly took a dreadfully long time to approve their guarantees, they have “cleaned up their act,” the guarantee decisions come quickly now. They typically approve and reject loan applications in less than a week for most business borrowers.
Avoid these common legal mistakes before and after you launch your new business. These mistakes may cost you much more than the reasonable fees you will pay for the legal protection you will receive from a competent lawyer.
Take the time to read even the most innocuous document or agreement you are asked to sign. If you have the slightest confusion with the language (can you say, “typical insurance policy”), ask an attorney to “translate” the document into simple English.
Whether simple (registering your business with the appropriate state agency) or complex (contracts for raw materials and components for your products), the “ounce of protection you’ll receive from your legal representative is more than worth the pound of cure” for the money or time for court appearances you may have to spend to defend your company or yourself.
Tim Moynahan founded and heads the Moynahan Law Firm, a personal injury law firm in Waterbury, Connecticut, and is “of counsel” to the Jin Law Group at 200 Park Avenue in New York. He is a sought-after and successful trial lawyer, earning the Super Lawyer of New England and Connecticut awards from 2009 to 2012 and Best Criminal Defense Attorney accolade in 2013.
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