1. Not Legally Organizing Your Business
There are 5 types of business entities that can be formed: sole proprietorships, partnerships, Limited Liability Companies, S-Corporations and C-Corporations. The most common structure for a closely held business is either an S-Corp or an LLC. The choice interplays between tax concerns and legal structure. LLCs and S-Corps provide limited liability for the owners and are taxed as a partnership, meaning all taxes pass through to the members as individual income, avoiding double taxation. Communication is key between owners when making the entity decision. Trouble occurs with incomplete or careless filing so make sure you take care of those formalities correctly.
2. Not Having an Exit Strategy
Begin with the end in mind. As time goes on, circumstances in the market and owners’ lives can change dramatically. Put a buy-sell agreement in place that determines what happens to the business when you’re gone. Succession planning should begin at least 5 years out and involve coordinating proper tax planning strategies, ensuring necessary agreements are in place, obtaining valuations over the years leading up to sale, and finding the right buyer. It is also important to include these plans in your personal estate planning documents.
3. Not Keeping Up With Formalities
Know your company and tax deadlines. Hold your annual review and file annual reports, typically due to the Secretary of State by or before April 15th of the current year. Complete meeting minutes or consents to action for company matters. It is important to stay in good standing with the Secretary of State and the IRS.
4. Not Formalizing Contractual Relationships
Hiring a good friend or family member can cause legal complications down the road. Formally defining the relationship and expectations of the parties is key. This issue commonly occurs when you have worked with someone for a long period of time with just a handshake deal. Make sure you have prepared and reviewed agreements with the other parties. Agreements that are commonly overlooked include vendor and supplier contracts, sales contracts, investor agreements, mergers and acquisitions.
5. Not Having an Employment Handbook or Manual
Clearly set forth policies and expectations for employees. Make sure all employees receive and understand the information. Policies are commonly overlooked so it is important that you enforce them. Other employer obligations by law include Fair Labor Standards Act, NC Wage and Hour Law, OSHA, and other non-discrimination laws.