Although the web might provide a home to many lists for entrepreneurs starting a business, a paucity of information exists regarding the legal mistakes to avoid during the business formation process. Because business owners often fail to consider these issues carefully, they tend to fall into traps for the unwary. Careful planning and analysis of relevant legal issues provide the best way to avoid costly litigation and liability for judgments and settlements. Frequently, business owners encounter problems early in the lifecycle of their enterprise because they rely on sloppily drafted “cookie cutter” documents. This blog article provides a list of some of the most frequent mistakes made when forming a business. Visit our business law services page for more information about the business law services Dawes Legal provides to.
Relying on Friends and Family for Formation Selection Advice
While input from friends and loved ones can be helpful, their lack of legal acumen can steer you off course. Many laypersons recommend the limited liability company (LLC) form of business to anyone creating a new business plavix medication. In the right situation, LLCs offer significant benefits, which include the limits on personal liability associated with a corporation combined with the tax benefits of a partnership. However, smooth operation of an LLC requires a comprehensive operating agreement. This agreement must be carefully tailored to your company and address relevant ownership issues among the LLC members. Because of these requirements, an LLC can be a more complex and costly choice than other alternatives. Further, members unfamiliar with the LLC form can unwittingly incur personal liability by making withdrawals from business accounts without proper authorization. Further, courts often have less experience handling litigation between LLC members than shareholders of a corporation. In other words, an LLC can be a great entity for conducting business, but this does not mean it is the best choice for everyone.
Deciding Incorporation Is Not Necessary
Some small business owners decide not to incorporate to avoid the costs associated with operating as a corporation. While avoiding the incorporation process can save money in the short-term, the long-term exposure can be significant. A primary benefit of forming a corporation includes shielding the personal assets of shareholders from liability in case of business failure or lawsuits. The savings in taxes and fees associated with forming and operating a corporation might be well-worth a barrier to personal liability, but this is a decision best made with sound legal advice after careful consideration.
Saving Money with DIY Business Formation Kits
While many companies market DIY business formation kits for creating a limited liability company or corporation, this type of “business in a box” approach comes with many risks. Frequently, companies that sell these kits hype the “hundreds of dollars in savings” that come from not using an attorney to set up your business. While DIY solutions might be fine for putting a coy pond in the backyard or installing a back porch cover, the issues that business owners must consider and the complexity of forming a business entity require specific considerations tailored to your company, market, competition, legal requirements, financial status, and many other considerations. A one-size-fits-all approach guarantees that your solution will not fit your specific needs and circumstances. Further, these DIY kits often fail to address differences in legal requirements between jurisdictions and recent changes in the law.
Failing to Draft an Effective Business Plan
Without an effective business plan, business owners often struggle because insufficient analysis and planning derail the efforts of management, staff, and ownership. A solid business plan must account for factors that include but are not limited to market analysis regarding demand for a product or service, profitability and costs, capital needs, and potential cash flow.
Our Columbus small business attorneys at Dawes Legal, LLC can offer legal advice and ad hoc solutions to problems or function as an informal general counsel to small business owners. We invite you to call us today 614-733-9999.