STARTING AND GROWING A BUSINESS draws on practically all your resources. If your background hasn’t exposed you to entrepreneurial thinking, you’ll have lots to learn. One piece of advice comes out again and again when you ask entrepreneurs for some of their favorite tips: Know what you don’t know. And as you’ll see below, if you are short on that wisdom, you may make serious mistakes with the best of intentions. So here are six common mistakes you can avoid just by knowing about them!
Not consulting with a lawyer for key issues or important business document review. This mistake comes first because the consequences are potentially huge. All business start the same way: as ideas and paperwork. If you’re going to invest your life, time and money in a business, don’t you think it’s worth starting it out the right way and ensuring that paperwork experts get a chance to look at it? It won’t cost that much, because they are efficient. After all, they study business paperwork for a living. Their highly trained eyes and years of thinking about the best interests of their clients will always catch something that would take you hours or days to catch, if you catch it at all. Putting it a different way, if you hesitate because of costs, consider the costs of do-it-yourself lawyering if you get things wrong.
Not incorporating, or choosing the wrong corporate structure. You attorney can guide you based on your vision and plans. The easiest way to start a small business is with a sole proprietorship. The taxes are easily manageable and there is very little paperwork. Unfortunately, if someone accidentally injures themselves using your product, they could end up owning your house, all your stuff, and all your money via a lawsuit. Incorporation means protection for the business owner(s). Protect yourself and your immediate family by incorporating. If you plan never to eventually take your company public, a limited liability company (LLC) is likely your best bet, due to the ease of incorporation and lower taxes than with full incorporation. Not limiting your liability by forming an LLC or corporation is asking for trouble.
Failing to patent, trademark, or copyright material. Earlier we discussed the hand-made jewelry designer who found out the hard way that she wasn’t the only one with a creative eye and a great idea. This can happen with slogans, songs, images, logos, icons, products, procedures, or a million other things related to building a business and brand. Don’t try to do the research yourself; I guarantee that you won’t know all the places to look. There are corporate attorneys who specialize in patenting, trademarking and copyrighting. In fact, in many cases, that’s all they do. Think of it like this: do you really want to build an entire business around something, only to find out the hard way that you’re not the first to do it, and the person who was first did protect themselves and their idea with a patent, trademark or copyright? That, my friends, is a bad day to be a business owner.
Not having a formal agreement between owners. Owner agreements don’t have to be long. In fact, I think our company’s is only a couple pages. Expert Business Advice CEO, Mike O’Keefe, was my college roommate and the best man at my wedding, but despite our history, when we started Expert Business Advice, LLC together, even we had a formal ownership agreement. It basically just puts in writing who the owners are, how much we each own, what our responsibilities are, what happens if one of us dies or elects to leave the company, how major business decisions will be handled, etc. Also, we are not 50/50 (equal) owners. This can sometimes cause issues for a group of friends who all want to own equal shares, but you must find some way to make it unequal, or you’ll suffer death by stalemate. If two people own a business together and want to be as equal as possible, I recommend a 51/49 per cent ownership split. The money is practically equal, but when decisions must be made, they always will be. If you cannot decide who will be the majority owner, use the oldest tipping mechanism in the book—flip a coin!
Starting a business with a large loan, but not understanding the terms of the loan or how to manage it. Just because you get a hefty business loan doesn’t mean you can start throwing money around. As we have seen, you really need to read the fine print to ensure you don’t have to start paying that loan back right away. And if you do get a huge loan, don’t start hiring all your friends to work at your business. It takes careful analysis to determine how many employees a business requires to run optimally. You friends may think you are wicked awesome for hiring them, but the test of your friendship might come when your loan is spent. I hope for your sake at least one of them has a comfortable sofa.
Working on your new business idea at your old job. Say you design and build widgets. You’ve worked at your job for ten years and just love it. Now you’ve developed a completely revolutionary widget design on your own, in spare moments at work. It will transform the widget industry. You don’t have a non-compete agreement with your employer, so you decide to start your own widget business based on your new design. On your last day at your old job, you print out the designs for your new widget and take the schematics home.
Unfortunately, some time later, you get a letter from your old company’s attorney, claiming that they own your new widget design! I hate to be the bearer of bad news, but I’m afraid most courts would find that your old company does own your new widget. Here’s why: you created your new widget on their time, using their equipment, while they were paying you to design and build widgets for them. You even printed off the schematics on their printer. Oh yeah, they own your widget.
If this scenario rings any bells in your head, meet with an experienced business lawyer and check out your situation. It would be better to figure out how to develop prototypes of your new company’s product under conditions that guarantee the new products are yours, than to have them swept up in costly lawsuits and heartbreak.
Scott L. Girard, Jr. is Editor-in-Chief of Expert Business Advice, LLC and co-author of Crash Course for Entrepreneurs: Business Law Basics.