Seven Mistakes DIY Companies Make
As a start-up and entrepreneur myself, I am interested in being cost efficient. I am also interested in doing it right the first time and not making rookie mistakes. For these reasons, I have expert help where I need it. Many small businesses don’t know what they don’t know, and one place they often skimp is in hiring an attorney to set up their entity. What they don’t know can cost them down the road.
Here are the top 7 mistakes I see from DIY (do-it-yourself) businesses:
1. Selecting the wrong entity. The first decision is usually C-corp, S-corp or LLC? Business owners often don’t understand what these are, how they differ and why you should pick one over the others. This initial choice can be paralyzing to an entrepreneur, and they often ask their friends and relatives for advice, instead of seeking professional input from an attorney and CPA.
2. Failing to complete all steps of formation. This often means that a corporation has not held an organizational meeting to elect directors and officers, has not issued stock, has not adopted bylaws. While operating agreements are not mandatory for LLCs, having one can make it easier when things go wrong and can allow you to customize how your company runs, without being subject to the boilerplate provisions in the LLC Act. Not having completed formation can leave an entity without limited liability, and can result in personal liability of the owners.
3. EIN issues. Many companies do not timely obtain an EIN, get one when they don’t need it or accidentally get two. It is seemingly easy to apply online for an EIN, yet will you need a new one? What happens if the online process doesn’t go through? What happens if you accidentally obtained two numbers? And what is a “responsible party” anyway?
4. Picking a corporate name that violates a third-party’s trademark. Just because the Secretary of State lets you file a company name does not mean you can use this name to advertise your goods or services. Think about all the time and money you will have wasted in promotional materials, signage, car wraps, and branding if you find out downstream that your business name violates another person’s trademark. You also need to protect your company’s intellectual property (business name, trademarks, copyrights, inventions, trade secrets).
5. Not addressing and minimizing other risks (appropriate insurance, good form contracts, good business practices, proper use and treatment of assets, etc.). Should your first worker be a contractor or employee? With the third employee, including an owner employee, an employer is required to have Workers’ Compensation insurance, but what happens if your first employee is injured on the job before you have this insurance?
6. Failing to have buy-out agreements. If you do not have an appropriate operating agreement, or shareholders agreement, you’re saying that you’re perfectly comfortable knowing that one morning you might wake up and find that your new partner is the pothead/slacker son of your old partner.
7. Not holding annual meetings. Corporations must hold annual meetings of shareholders and directors to name directors, approve major decisions such as bonuses, benefits, leases, name changes, changes to the capital structure, etc. If you’re audited, one of the first things the IRS asks for is the Corporate Minute Book.
In addition to being able to help you select the proper entity and place of filing (Nevada, Wyoming, Florida, Delaware or the Old North State), good business attorneys will connect you to other reputable professional service providers — bankers, accountants, insurance agents, financial planners and web designers. We know where to send you for free or low-cost business services to make sure your business plan is sound, or to get assistance with Quick Books, marketing, sales or hiring employees. We will make sure your ongoing filings with the Secretary of State are current and that the corporation is holding requisite annual meetings. In short, we take an ongoing professional interest in your success.
I am really interested in the local experiences, good and bad, with attorneys and DIY formations.