Learn 3 Common Legal Mistakes Small Business Owners Make

    Today’s topic isn’t something we talk about much, but it’s vital if you, or someone you know, is starting or running their own business.

    As someone who’s built a business from the ground up — no investors, no MBA, nothing but passion, drive and a lot of hard work — this is a lesson I wish I had when I first started.

    With most complex and often fear-inducing topics – like how to get legally set up for success – a bit of initial education goes a long way.

    It empowers you with a framework to ask intelligent questions and take smart actions to protect yourself, your clients and your future.

    Learn 3 common legal mistakes small business owners make, and how to fix them.

    1. How To Choose The Right Business Structure: Sole Props, LLCs, S-Corps

    When deciding on what the right structure is for your business it’s important to seek the advice of an attorney and a tax professional. Things to consider:

    1. Your personal tax circumstances – examples: Are you married? Have children? Own property?

    2. The filing costs – If you’re having a cash flow concern this could be a determining factor when choosing a business entity. Some are entities are relatively inexpensive to file while others can be more costly. Have your attorney review the potential costs for any entity recommendation.

    3. Ease – Some entities will require yearly maintenance and filing, while others do not. If you’re a person that prefers not to deal with the hefty paperwork you may want to discuss with your attorney an entity option that requires less paper pushing.

    4. Tax benefit vs EVERYTHING else – Speak with your tax professional about the tax percentage benefits versus all the other factors (like those listed above) when choosing the right entity. It may be significant enough, it may not. Once you know the benefits, weigh them against the liabilities so you can make an informed decision.

    Here’s a quick list to weigh the pros and cons of the entities primarly used by online business owners (note: this is not a comprehensive list of all the available business entities).

    • Sole Prop
      Advantages – Little to no paperwork. Low maintenance. Affordable.
      Disadvantages – No legal protection for your assets. No tax benefits. No opportunities for growth or expansion.

    • S-Corp
      Advantages – Protection for your personal assets. No double taxation. Tax benefit. Heightened credibility with customers, clients and vendors. Opportunities for growth via shareholders.
      Disadvantages – Formation and ongoing fees can get costly. May be heavy on paperwork. Higher IRS Scrutiny.

    • LLC
      Advantages – Protection for your personal assets. Easier filing and management requirements. No filing a separate business tax return.
      Disadvantages – No tax benefit (you’re taxed at your personal tax rate). However, some states and the IRS may let you get taxed as an S-Corp.

    2. Protecting your goods and services:

    When you’re selling goods and services without a written agreement you’re creating a contract without terms that you determine. It will then be left up to common contract law if you’re ever in a dispute. An better option is to create a written agreement (aka service agreement) with your clients and customers. This takes care of your business and your customers because you’re both clear of the obligations you have under agreement.

    Some of the sections you may include in your agreement:

    1. Names of the Parties

    2. Services being offered

    3. Price

    4. Method of payment and schedule of payments

    5. Refund Policy

    6. Protection for your intellectual property

    7. What triggering events will terminate the contract

    8. Venue – location where disputes will be settled

    9. Disclaimers, if any

    10. Confidentiality clause

    As every business is different, there may be other items you need. Speak to an attorney about your business to ensure all your bases are covered before securing any future clients/customers with an agreement.

    3. Business Relationships – Working with your team, contractors or vendors

    It’s important that you solidify your business relationships with the proper written terms to protect your business from tax liability and prevent your sensitive information from distribution to a third party.

    For your team – have each member of your team sign an independent contractor’s or employment agreement. Some of the sections you may include in this agreement are (this is not an exhaustive list):

    1. Their personal identifying formation

    2. Company name

    3. Job title

    4. Who’s their direct report

    5. Their job responsibilities

    6. Pay rate

    7. Their payment schedule

    8. Non-Disclosure clause – a clause that indicates all company information remains confidential and will not be distributed to a third party.

    9. Tax obligations of the hiree, if any.

    10. Company benefits (ex. health insurance, paid vacation, etc.), if any.

    Some pro tips when hiring a contractor or employee:

    1. Contact your tax professional to determine whether you should have employees or contractors and any tax liability you may incur with either choice.

    2. Get a signed agreement and their tax documentation before they start working with you. (Please note: If you live in the U.S. and you’ve hired a contractor and paid them over $600.00 in a tax year, you will have to issue them a 1099 form. Have them fill out a W-9 and keep it on file).

    3. Discuss all policies and procedures with your company and ensure they sign a document indicating you’ve had that discussion (and they have had the opportunity to ask questions and gain clarity) or they have received a copy of your company handbook that contains your policies and procedures.

    If you have more questions please post them in the comments below



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