COMMON MISTAKES IN STARTING A NEW BUSINESS

Insufficient Capital.  Many small businesses have little chance to succeed because they do not have sufficient capital to sustain the business during its initial stages or during economic downturns.  Even if you have a good business plan, it may take several months or years for your cash flow to stabilize so that you can meet your business’s obligations.  Take a realistic look at how long it will take you to get your business off the ground and be sure that you have enough capital to survive in the meantime.

Lack of Documentation.   It is surprising how many businesses fail to create proper documentation from the beginning of the business and throughout the business’s life.  Corporate Bylaws, LLC Operating Agreements, Buy/Sell Agreements, Employment Contracts and Promissory Notes are just some of the documents that should be properly executed and kept in a safe place by a new business.  In the event that questions are raised by State or Federal Governments regarding taxes or other issues, you will have proof of your legal status and documentation of your transactions.

No Planning for Succession.  Although you may be starting a business with a close friend or family member, it is not unusual for disagreements to arise between business owners over how the business is being managed.  To keep such disagreements from degenerating into expensive litigation we recommend that your business have buy/sell agreements (also known as shareholder agreements) properly drafted by the business lawyers of Cannon Law, P.C.  These agreements provide for an orderly transfer of ownership interest and fair compensation for investors.

50/50 Ownership.  While equal ownership may seem like a good idea when two people begin a business, it can create a deadlock and harm the business when the two owners cannot agree on important decisions.  We recommend that, in most cases, one person own more than 50% of the business where there are only two owners.

Choosing the Wrong Entity.  LLC(s), Subchapter S Corporations, C Corporations, Limited Partnerships and Limited Liability Partnerships all have advantages and disadvantages when used in particular circumstances.  Choosing the wrong entity can result in serious tax consequences and make operation of the business more difficult.  In some cases it can even increase potential personal liability of the business owners.  If you are considering forming a new business, talk to the business attorneys at Cannon Law, P.C. to discuss the right type of entity for you.

Failing to File Annual Reports with the Secretary of State.  Filing annual reports is quite simple in North Carolina and is required to be done by business corporations every year.  If you do not file your annual reports, you run the risk of having your business legal status suspended by the North Carolina Secretary of State.

Failing to Treat your Business as a Separate Entity.  Although some businesses operate quite well as a sole proprietorship, many other businesses are operated as corporations, LLC(s) or some other form of a separate legal entity.  However, if the business owners do not treat the business as a completely separate entity, they can lose the protection of a corporation or LLC and face personal liability and exposure.

Employment Issues.  When a small business begins, it is easy to fall into the trap of thinking that you do not need to have policies and procedures for employer/employee relations.  However, even small businesses can have claims presented when they fail to follow state and federal employment laws, have written policies and procedures in place and fail to properly document independent contractor relationships.  If you need assistance in answering questions you may have about your policies and procedures or in preparing simple contracts to document independent contractor status, call the attorneys at Cannon Law, P.C.

Bill Cannon About Bill Cannon

Bill Cannon is a native of Leesburg, Georgia and has been practicing law for more than 35 years. He focuses his practice in the area of civil litigation and has extensive experience in complex litigation. He has a keen interest in professionalism and has been a speaker for orientations on professionalism at law schools. Bill is an author of a variety of professional articles and has made many presentations on professionalism in the practice of law and the importance of the justice system.