Common Mistakes Made By Small Business Owners
By : Anthony R . Jost , Attorney
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Most small business owners know how to provide their service or product in a timely , cost efficient manner . They are savvy entrepreneurs and have a great business sense when it comes to working with customers . However , providing a product or service is often the easiest part of running a business . The hardest part about being in business is usually tending to details that do not directly equate to sales but can most certainly result in a business ’ s ultimate demise .
Small businesses routinely make fatal mistakes that could cost tens if not hundreds of thousands of dollars to correct . Ultimately these are common mistakes that can most certainly be avoided by the business owner that pays attention to the details of his or her business and seeks the advice of competent legal counsel and business advisors as appropriate .
Most of these mistakes have a common theme — a failure or refusal to properly document . Common mistakes made by business owners include : ( 1 ) failure to maintain a proper legal form ; ( 2 ) improperly designating actual employees as independent contractors ; ( 3 ) lack of employee handbook and non-compete and confidentiality agreements ; ( 4 ) failure to properly document terms regarding attorneys ’ fees and costs of litigation ; and ( 5 ) refusal to timely pay earned wages .
Failure to Maintain Proper Legal Form
Owners will go to great lengths to organize their business as a limited liability company or corporation . The reasons for doing this are generally two-fold : ( 1 ) to defer liability from the individual and to the legal entity ; and ( 2 ) to transfer taxes to and through the legal entity . However , oftentimes business owners will file the basic paper work to set up the legal entity with the Secretary of State and do nothing else to maintain the corporate form . They do not maintain reports , set up separate accounts or use the proper legal name .
Conduct of the individual owner that can lead to personal liability include : ( 1 ) undercapitalization ; ( 2 ) absence of corporate records ; ( 3 ) fraudulent representation by corporation shareholders or directors ; ( 4 ) use of the corporation to promote fraud , injustice or illegal activities ; ( 5 ) payment by the corporation of individual obligations ; ( 6 ) commingling of assets and affairs ; ( 7 ) failure to observe required corporate formalities ; or ( 8 ) other shareholder acts or conduct ignoring , controlling , or manipulating the corporate form . Aronson v . Price , 644 N . E . 2d 864 ( Ind . 1994 ).
Improperly Designating Actual Employees as Independent Contractors
All too often businesses will designate their actual “ employees ” as “ independent contractors .” Businesses generally prefer that their workers are classified as independent contractors because it costs the business less in wages , benefits and taxes . If a business misclassifies an “ employee ” as an “ independent contractor ,” that business may be liable to pay unpaid overtime , minimum wages , back taxes and penalties for federal and state income taxes , Social Security , Medicare , unemployment and workers ’ compensation benefits . A misclassified “ employee ” may also be
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