Starting a business can be one of the most exhilarating events in your life. To put your dreams of financial and career independence on the road to fruition is nothing short of thrilling. But, done recklessly or without careful planning or investment, it can be chilling. An unexpected event against which you are uninsured or unprotected can ruin your business. Also, in this litigious age, all it takes is a customer or employee with a gripe and a lawyer to undo everything you ever worked for. Here are ten common legal, business and personal pitfalls that you can help guard against to help protect your dream of business ownership.
1. Not Getting Insurance
Having to incur what seem like unending business costs (no matter how “necessitous”) can be irritating and demoralizing. However, there are certain costs which you may neglect to pay at your own risk. One of them is insurance. You can probably live without the luxurious office or expensive office supplies. But insurance is a “sine que non” of running a business. Without insurance, you are potentially putting your personal assets on the line in the event of a crippling lawsuit. This can include everything you have worked for. Do not be stingy when it comes to insurance. Get it.
You might be asking, “I formed a corporation. Isn’t that enough to protect me from safeguarding my personal assets from a judgment?” Not necessarily. A plaintiff can seek to “pierce the corporate veil,” and, if the court determines that certain factors militate against your business being treated as a corporation (with all it’s safeguards), your personal assets can be at stake.
While this is certainly not an exhaustive list, some of the factors courts look at to make this determination include:
Lack of corporate records
Inaccuracy of corporate records
Misrepresentation or concealment of members
Intermingled assets (between shareholder(s) and the corporation)
Undercapitalization of the business entity
Failure to observe certain corporate formalities.
Certainly, forming a corporation, in appropriate circumstances, can help you avoid personal civil liability. But the perils of the court not treating your entity as corporation for purposes of a lawsuit can be dreadful and impoverishing. Business insurance may help offer an additional layer of protection.
2. Disobeying the Labor Laws
California labor laws are among the most stringent and punishing (for non-compliant employers) in the nation. Here are some of the mistakes for which employers can suffer financially-crippling lawsuits:
Failing to timely pay their employees the minimum wage
Failing to timely pay “non-exempt” employees overtime compensation
Failing to provide wage statements that delineate certain key elements
Failing to reasonably accommodate physically disabled employees
Failing to engage in the “interactive process” with employees with a known or perceived medical condition
Failing to provide bereavement leave
Discrimination against an employee who falls under a protected status (under the Fair Employment Housing Act) FEHA
Failing to place wage orders in a conspicuous fashion at the work site
Failing to carry workers compensation insurance
The list of requirements for employees is lengthy and somewhat tedious. And these are only a few of the requirements with which California employers must abide or face civil penalties. All it takes is one successful labor lawsuit to destroy your business. Don’t be cheap or lazy. If you are a small business owner, our employment law attorneys at the Coimbra Law Firm can provide you with the necessary guidance to help you avoid exposure to litigation. We can review your records and conduct an “audit” of your policies to help ensure compliance so that you can sleep at night and not have to worry about a lawsuit that could threaten your business.
3. Not Respecting The Law Of Balance (Taking on Too Much Work)
One thing that most successful entrepreneurs have in common is that they are workaholics. Many or most derive pleasure from investing their own creative efforts and energy in growing their business and building something about which they can be proud. Certainly, it is a commendable trait...to an extent. Investing an inordinate amount of personal time can have the opposite effect by exhausting you mentally and physically, such that you are ultimately unable to carry on, especially when the “going gets tough.” Breathe. Relax. Plan a vacation, if at all possible. Even if it is not to your remote fantasy island, a vacation that allows you to take personal time and unwind can do wonders for your psyche and physique. When you are through with your vacation, you will be that much more invigorated and ready to take on the daily challenges of running your business.
4. Not Preparing for the Lean Times
“Beginner’s luck” can be both a blessing and a curse. While it is a source of great encouragement to have the good fortune of being able to attract lots of clientele early on in your business, don’t count on it lasting forever. No matter how appealing your goods or services, or no matter how clever and effective a salesman or saleswoman you are, you are bound to face the vicissitudes of the business cycle. For either microeconomic or macroeconomic reasons, or a sheer reversal of fortune, we are all susceptible to financially lean times at one point or another. It is, therefore, indispensable to have some financial cushion on which you can rely for personal or business expenses. Don’t get too cocky and start blowing your initial profits on profligate spending. Save for a rainy day.
5. Not Being Sufficiently Wary of Business Schemes
If you have watched enough episodes of CNBC’s “American Greed” and the seemingly-never ending parade of financial sociopaths featured on that program, you will be mindful of the hucksters and spinsters preying on vulnerable people, including business startups like you. Many entrepreneurs are anxious to get a financial boost to supercharge their launching. Financial predators are well aware of the ambition and, unfortunately, naïveté, of many novice businesspeople. Be extremely wary and suspect of people promising the proverbial “moon and stars” with shady investment schemes or promises of quick wealth in exchange for even nominal amounts of money. The old adage, “if it seems to good to be true, it is” cannot be repeated often enough.
6. Being Too Afraid of Risk
Failure in business is a fact of life. A significant number of small businesses go belly-up in their first year. But don’t let this paralyze you with fear. If, indeed, you earnestly believe that your business idea, product or service can meet a particular demand, and you can earn wealth for yourself and your loved ones as a result, don’t be afraid to pursue your dreams. It has been said enough times to sound trite and banal, but this concept carries a great degree of truth. In fact, failure can often be a good stepping stone to long-lasting success once any weaknesses in your business plan are identified and rectified in favor of tenable and sound business ideas.
7. Being Too Risky (The Importance of Calculated Risk)
Many people will wax poetic about taking risks to pursue a personal business dream or passion, even at the abandon of reality and reason. But there are reasonable limits to everything, including the notion of starting your own business. While fear of failure can handicap you and prevent you from “reaching for the stars,” a certain amount of fear can be healthy. It will impel you to “do your homework” and do the necessary research to see whether, in fact, it is wise to pursue your business. In other words, risk should be “calculated” by the circumstances. Do you have some semblance of a plan for your business? Do you have the capital to make the necessary investments and incur the needed start-up costs? Do you feel there is a demand for your product or service? These are not questions meant to dishearten you. While being intrepid in the face of market adversities is commendable, it’s equally important not to be foolhardy. There is a healthy balance: risk tempered with planning and caution.
8. Killing Yourself With Overhead
I spoke earlier about the importance of incurring certain business costs, such as insurance. But it is equally important to measure your costs. An expensive website, a luxury office and fancy office furniture are all examples of costs you should consider refraining from making. You don’t want to turn your relationship with your business into a “marriage of convenience” where you are “stuck” because you are overwrought with financial obligations. You want your work to be as “digestible” and enjoyable as possible. So take it easy with the business credit card and use it wisely.
9. Taking Shortcuts to Make Ends Meet
Running a business can be mentally and physically draining and exhausting, especially in the beginning while you are trying to lay the groundwork for a permanent and prosperous operation. Sometimes it can be tempting to avoid having to fulfill certain requirements, like getting the necessary permits or licenses to run your business. While the temporary convenience is alluring, the benefits are, in fact, “temporary.” It’s only a matter of time before the appropriate city and/or state officials discover that you don’t have a business license or that you don't have the appropriate infrastructure for a place of public accommodation. For example, many businesses neglect to comply with the Americans with Disabilities Act (ADA) which requires that, if your premises are for “public accommodation,” your building or location have the necessary features to make it accessible to disabled persons. While you may initially be saving potentially thousands of dollars in repairs or modifications by refraining from doing this, you may be subjecting yourself to extremely costly litigation (that can far exceed any cost of repairs) if you are sued for non-compliance. Don’t be stingy: take the necessary measures to ensure you minimize exposure to legal liability of any kind.
10. Not Knowing a Good Lawyer
Many of us feel invincible because we have the intelligence and initiative to start our own business. So it’s easy to get a bit cocky and think we can personally handle whatever comes our way, including legal matters. However, California’s laws, rules, regulations pertaining to businesses are legion. And they are extremely intricate, detailed and complex. Get to know a good business lawyer who can help you “navigate the waters.” Many entrepreneurs even have a lawyer on “retainer” whom they can consult on an ongoing basis to answer important legal questions they are forced to confront as business-owners.
Having the courage to abandon a 9-to-5 in favor of your own business is laudatory and admirable. It can be the source of great financial prosperity as well as the personal satisfaction that you embarked on your own path to career independence. Just make sure to avoid pitfalls that can undermine your business. Be sure you take the proper steps to ensure long-term, headache-free business and financial success. In this regard, the Coimbra Law Firm offers small businesses a review of their policies and procedures. If your business is currently facing a lawsuit or a criminal charge or investigation, our business law firm may be able to help you. Our firm has the experience and knowledge to help defend you. If you have a question or would like a consultation, feel free to reach us at our toll free hotline, 1-855-325-5245 or via e-mail at Esquire@CoimbraLaw.com
Disclaimer: Nothing in this article or anywhere on this blog constitutes legal advice of any kind. Pictures above are featured for illustrative purposes only and are no reflection on the person depicted whatsoever. Attorney licensed in the State of California and, therefore, accepts California cases only.
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