Five legal mistakes a business owner should avoid
by Samuel Hernandez
Starting a business is a rewarding and demanding undertaking. Amidst all the moving parts, it’s easy to forget that there are avoidable mistakes that can hurt your business. Here are some common mistakes that a business owner should avoid.
1. Improper Business Entity Selection:
An entrepreneur needs to understand the different kind of business entities available (e.g., Corporation, Limited Liability Company, Sole proprietorship and Partnership), in order to select the best type of entity for his or her business. Selecting an improper business entity may lead to personal liability, such as when a business owner is running his/her business under only an Assumed Business Name (ABN) or as a Sole Proprietor. It may also lead to paying more taxes, such as when running a business as a Corporation and not understanding that it ordinarily pays double taxes – once when the business earns the money and again when the company pays it out as salary or dividends.
2. Not Registering with the Secretary of State’s Office or With the County or City:
In Oregon, entrepreneurs must register their business with the Secretary of State’s office and renew the registration annually. Further, most counties and cities require your business to be registered and to attain appropriate business licenses and permits. Not following proper city, county and state requirements may lead to paying additional fees or having your business administratively closed.
3. Not Having an Exit Strategy:
Getting a business started requires the investment of a lot of work, time and focus. Often, little thought is given to the back end of the business. An entrepreneur needs to plan for:
Selling the business;Closing the business;If more than one owner, what would happen in case one owner decides to no longer be involved; andHow the assets of the business would be distributed.
Planning for those types of contingencies should be part of the overall business plan.
4. Not Reading or Understanding Contracts and other Agreements:
As an attorney, I try to tell everybody that will listen to read contracts before they sign them, and if they don’t understand a section to get help. There are too many stories of people getting into contracts and later finding out that what was in the contract is not what they thought or that pursuant to the contract they lost or owe money. Here are some things to look for when dealing with contracts:
What are the different sections of the contract and do you understand each one?If money is given, will there be a refund and, if so, are there any limitations?If you have to go to court to enforce the contract, who will pay for attorney fees and costs?Is everything that was said during negotiations properly reflected in the written contract?What happens if you have to cancel the contract?
That list is only a starting point, but helps to point out that often those important terms are not adequately considered. If I may say it again, read contracts and make sure you understand the sections.
5. Not Putting a Verbal Agreement in Writing:
The business world is full of handshakes and verbal agreements. However, if the agreement is placing some obligation on you or somebody else it should be in writing. That way there is no ambiguity of what was agreed to if later it becomes a question. Let me give a true example:
Two business partners started a small restaurant. The startup cost was roughly $100,000.00. Partner 1 put in $80,000.00 and Partner 2 put in $20,000.00. They verbally agreed that Partner 1 would own 80% and Partner 2 would own 20% of the business; however, that understanding was never put into writing. Several years later, Partner 2 wanted out of the business. Partner 1 offered to buy Partner 2’s 20% ownership interest. However, Partner 2 argued that he owned 50% of the business and that he would take no less and half of what the business was worth. Because ownership interest was never put into writing, and there was no other way to show their verbal agreement, Partner 1 ended up paying Partner 2 half of what the business was worth, losing money and being frustrated and angry over the situation.
That situation could have been avoided had there been a written representation of their verbal agreement. If it’s important it should be in writing.
As a final word of advice, there are two types of people that an entrepreneur should always have in his corner: an Attorney he trusts and an Accountant.
About The Author Samuel Hernandez
Mr. Hernandez is a Portland based business attorney. Before starting his practice, Mr. Hernandez served as judicial clerk to Chief Justice Paul J. De Muniz on the Oregon Supreme Court. In that role, he reviewed, researched complex legal issues and drafted judicial opinions. Mr. Hernandez has also served as an associate attorney with the Oregon Military Department. He attended Portland State University and received this law degree from Lewis & Clark Law School.