Common Mistakes Made by Business Owners
February 9, 2018 - Posted by: admin - In category:
“Only a fool learns from his own mistakes. The wise man learns from the mistakes of others.” ― Otto von Bismarck
During my time working as a business law attorney, I have marveled at the wisdom, creativity, and brilliance of many of my business owner clients. There have also been occasions when I have witnessed the surprising, sometimes shocking, mistakes made by business owners (some clients, some not). Here are a few recurring themes from the “mistakes” category.
No business entity or the wrong one:
Perhaps the most extreme example of this was a married couple I visited with a few years ago who owned and operated a multi-million-dollar apartment rental business using their personal checking account and owned all of the rental units (almost 100 units) in their own names. They had been very successful for many years and made far more money than I made (and they knew it), so they were not interested in taking my recommendation to reorganize their business operations through the use of various LLC entities and business bank accounts, etc. To my knowledge, they have continued to be “lucky,” and no major liability or other event has yet rained on their parade. Even so, it seems to be only a matter of time before such unwise and risky method of operations will come back to bite them.
A related and often recurring mistake is for business owners to do a little internet research, hear about an LLC, an S-Corp, a C-Corp or a partnership, learn that they can form one of those business entities on the relevant state corporate office website and then to do just that—form their own business entity. Far too often, such individuals make the wrong choice of business entity or commit one or several critical errors in the self-help business formation process. Believe it or not, an LLC taxed as a pass-through entity is not the right choice for every person or every business. A corporation taxed as an S-Corp is right for certain situations and very wrong in other circumstances. This is one of the many instances where consulting with an experienced accountant and business law attorney before forming a business entity will pay dividends in both the short and long terms.
Using borrowed legal documents:
I once received a phone call from a civil engineer who was interested in doing his own legal work. Given his education and profession, he thought he was more than qualified for this task and was calling “just to run a few things by me.” He explained that he had borrowed some legal forms from his in-laws, read them carefully and was of the opinion that he should just change the names, sign and adopt as his own. After a few minutes of this phone conversation, it was clear to me that while this gentleman may very well have been a skilled engineer, qualified to design bridges, roads and the like, he had no idea what he was doing with legal, accountant and business matters. He tried to apply legal terms and concepts to the world of engineering and, frankly, he could not have been more mistaken and mislead (by himself). I was not able to convey these realities to this man on the phone, though I tried very earnestly to do so. I am confident that he went forward with his plan to use legal papers borrowed from his family members and perhaps things worked out ok in the end…perhaps.
We seem to intuitively recognize that it is a bad idea to use prescription drugs meant for another person. Most of us understand that custom clothes measured and made for another person are not going to work well for us. Heck, we do not even want to share water bottles with family members in most instances. And yet, when it comes to “borrowing” or adopting as our own a legal document which was written and customized for another person, in another time, too many of us fail to realize just how foolish this can be.
Back to the discussion above about choosing the wrong business entity, using a legal document obtained online or elsewhere orbits the important truth that far too often business owners simply don’t know what they do not know. It seems too easy and appealing, in many instances, to see a document that contains some legal words and phrases (many of which are Latin) and think “well, that looks ‘legal’ to me, so it should work.” That is akin to feeling sick, finding a medicine cabinet full of bottles of pills and assuming that any of those pills should do the trick. While this medicine example may seem a little ridiculous, it is more on-point when it comes to people borrowing legal forms than you might think.
Not using an accountant and an attorney:
I commonly meet business owners who have invested tens and hundreds of thousands of dollars of their own money into their business enterprise, but who, at the same time, didn’t want to “spend the money” for a good accountant or attorney. Really? To me, that seems somewhat like someone who goes about building their “dream home” and puts their life savings into the costs and expenses associated with the same, but at the same time wants to “save money” by not consulting with an architect or engineer. Both examples seem quite foolish from any objective perspective.
I often say that preventative law is better than clean-up-the-mess law (or variations of that idea). Money invested in competent professional help on the front-end of a business venture will most often pay for itself many times over. Such can help prevent problems down the road and permit a business owner to take advantage of options, methods, and structures which will give their business a competitive advantage. In short, you should view the fees charged by your business attorney and your accountant as investments in your business similar to how you view other business expenses. If you are working with an accountant or business attorney who does not provide professional assistance that equates to an ROI (return on investment) over time, then you probably should find a different professional advisor. For better or worse, we know that there is no shortage of such professionals in the marketplace. As with any profession, some are very good, some not-so-much.
Back to where we began—it is wise to learn from the mistakes of others.
Ryan L. Jensen
Pharos Law Group, PLLC
Salt Lake and Logan, Utah
855-239-8015 | pharoslaw.com