Mistake No. 1: Failure to Set Up a Proper Business Entity
Starting a new business is a rush of adrenalin. Everything is new and exciting.
Unless you set a proper foundation, however, your business is likely to collapse.
Susan was thrilled to start her own business. For more than twenty years, she had worked for other people, followed their instructions, and enriched their bank accounts. Susan's husband, Bob, brough the technical knowledge to the business; Susan would handle the financial affairs of the business.
Six months after they had opened their doors for business, a customer approached Bob with an incredible opportunity. The job would take them out of their comfort zone, but it offered the promise of an incredible pay day. Bob jumped into the job head first, working late nights and weekends to meet the customer's tight deadlines. The customer was very demanding, but Bob ultimately was able to satisfy his concerns.
Six months after the job was completed, Susan received a demand letter from a lawyer who represented the customer. The lawyer claimed that Bob had been negligent in his work, and threatened to file suit against Bob and Susan unless they paid $100,000 for damages the customer claimed he suffered.
Bob and Susan immediately sought advice from a lawyer, concerned about whether their business could survive a law suit. Their concern turned to distress, however, when their lawyer told them hat their personal assets were at risk because they had not operated the business as a corporation or limited liability company.
How to Avoid Mistake #1:
When properly set up and maintained, both a corporation and a limited liability company protect you from liability arising from owning and operating a business. The law recognizes a corporation or limited liability company as a separate "person" with separate finances, assets, and liabilities. Any company obligations remain at the company level, and your personal assets are protected.
Setting up a formal business entity provides you with numerous other advantages. Formal business entities create wealth because the owners have something concrete (stock or membership interests) that they can sell. A formal business enterpise also enables the owners to bring in other owners by selling part of the business.
If you have not set up your business as a corporation or a limited liability company, you are waiting for problems that inevitably will come.