July 6th, 2015
I enjoy helping great people do great business. This includes putting the proper protections in place to avoid unnecessary heartache. Why have legal snafus or avoidable misunderstandings at the cost of your business (or more), if proper language and documentation can help all parties involved?
Of course there is no way to protect your business 100% of the time. But what good is the protection offered by a formal business structure when you accidentally sign a business contract in your capacity as an individual? It may seem obvious, but mistakes like these are made all of the time in business. Here are a few simple tips below to help you on your way to avoiding some of the costliest mistakes that entrepreneurs and small businesses make (thereby massively increasing their personal liability):
- Of course, if you have read my report, “5 Legal Basics You Need as an Online Entrepreneur,” then you know that the first step to protecting yourself in business is a formal business structure (no more sole proprietorship if you want to avoid personal liability);
- Somewhere near the start of your business, I strongly advise that you consult at minimum with a CPA/accountant or business attorney who is qualified in strategic business planning to help you understand your projected tax obligations, assist you in deciding whether to outsource your bookkeeping based on your unique business and goals, and who can also help you decide upon your business structure if you need assistance in that area;
- Set up business bank accounts & apply for business line of credit or business credit card. (This will require a FEIN or Federal Employer Identification Number). Do NOT finance your business out of your personal checking, bank accounts and credit cards and expect the IRS to treat your business as a business. To avoid personal liability (i.e. piercing the corporate veil and defeating the purpose of your formal business structure), you have to treat your business like a business. Properly pay for and track your business expenses on a business credit card or directly from a business account, and do NOT co-mingle your personal and business funds. If you need to make a loan to your business, document it (and confer with your accountant and bookkeeper regarding the proper way to track this);
- Once you have your business structure in place, you also need to have standard contracts prepared to manage the affairs of your business (you can visit my website or contact me if you’d like to explore what is applicable to your specific business). These can include everything from Standard Terms and Conditions for your Website which is essentially an Agreement entered into by users of your Website when visiting you online, to Standard Client Agreements that govern the services provided to your clients, to Independent Contractor and Non-Disclosure Agreements that govern your relationships with other third parties, including those that may have access to some of your critical and proprietary business information;
- And once you have your standard contracts in place, make sure that your contracts identify & refer to your business entity by name, and not to you individually as the signer;
- Next, be sure that when acting on behalf of your business you always sign your name only on behalf of your business and NOT in your individual capacity. This means ALWAYS making sure that your business is identified as the signing party, and you are the representative signing for your business. ***Clue: If only your personal name is listed, then you are signing in your individual capacity and not on behalf of your business.
- Examine your website, your service offerings, and your business systems or procedures from the perspective of a potential client, and seek early feedback and as much clarity as possible in the information you present, either written or verbally;
- Pay attention to any red flags with clients or in your business practices. Often times we have a little heads-up before an issue arises – not always, but usually in looking back we can identify a hesitation we had as the business owner or operator where we second-guessed our own instincts or judgment, or we spot certain communications or key questions raised by a client before they signed on for services, etc. that may alert us to certain issues in our business. Address these proactively by either modifying your business practices to provide clarification, or seeking the help of a qualified attorney if a legal snafu does arise;
- Finally, keep lines of communication open in a potential dispute. For more information on dispute resolution and techniques for resolving issues, please see my upcoming Dispute Resolution Guide Sheet on how to handle difficult conversations and deflate conflict quickly.
For more information on selecting a business structure (the first step in avoiding personal liability associated with doing business), you may enjoy this post here.
For more information on avoiding liability associated with piercing the corporate veil, visit this post here.
For more information on how to properly sign business contracts, review this brief summary here.
For more articles on Business Planning, visit these other blog posts…..
DISCLAIMER: THE INFORMATION PROVIDED IN THIS POST MAY CONTAIN LEGAL INFORMATION, BUT DOES NOT CONSTITUTE LEGAL ADVICE. NO RELATIONSHIP, INCLUDING ATTORNEY-CLIENT RELATIONSHIP, HAS BEEN FORMED AS A RESULT OF THIS POST. YOU ARE ADVISED TO SEEK THE ADVICE OF AN ATTORNEY LICENSED IN YOUR STATE IF YOU HAVE ANY QUESTIONS.