Mistakes to avoid when starting a business

The San Francisco Chronicle has a good article here which details what they consider to be the top 5 “expensive new business mistakes” that entrepreneurs fall into regularly.  They are:

1) Not registering your business with the state

2) Moonlighting without telling your boss

3) Not charging taxes (e.g. sales tax)

4) Not using a unique (i.e. not trademarked) business name

5) Not being insured

I would add to this list one other major item for all small businesses: 1) Not having standard written contracts.  Most small business owners operate their business on the strength of their good name and mutual trust between themselves and their vendors or clients.  However, while those attributes are laudable, the truth is that every business owner will face a contract dispute at one point or another.  Many small businesses do not use standard written contracts with their vendors, and this ends up hurting them dearly when a dispute arises.   Without a written contract, it is simply your word against theirs, and there are no written rules for how to handle the situation.  Such a situation can lead to a long legal battle, costing thousands of dollars in legal fees.  While having a standard written contract you use in most situations won’t totally prevent litigation, it can greatly reduce the likelihood you or your company will lose a lawsuit because of ambiguity.

All of the items on this list are important, so make sure to talk to a small business attorney before starting your business so that you can avoid these mistakes.

Pros and cons of buying a franchise

For many entrepreneurs thinking of going out on their own, the choice comes down to whether to start up one’s own business from scratch, or to buy a franchise and use a model that has worked for others.  There are many benefits to buying a franchise, including:

1) Marketing/Brand Recognition - A franchisor will typically provide a great deal of marketing acumen to the franchisee, whether in the form of a national advertising campaign run by the franchisor, or in giving the franchisee marketing materials and training so that the franchisee can effectively market their product/service in their local community.  Likewise, one of the main benefits a franchisor can provide to its franchisees is brand recognition on a national scale.

2) Legal Compliance – Franchisors typically have a legal team devoted to ensuring that all franchisees comply with legal regulations and best practices–everything from having standard form contracts with vendors to having an employee handbook.  This can save the franchisee thousands of dollars in legal fees, and prevent miscues along the way.

3) Systems & Efficiency - Another major advantages for franchisees is that they can utilize the processes and systems created by the franchisor which will allow them to effectively run the business without having to re-invent the wheel each time a new issue comes up.  Take, for example, McDonald’s.  They teach their franchisees exactly how a burger should be prepared, sell them the cartons, cups, and napkins necessary to run the business, and provide continuing guidance on issues of safety, food preparation, employee relations, and many other issues. 

However, many entrepreneurs may feel too restricted by franchises, or may want to chart their own path.  This story about KFC franchisees who are suing the KFC parent company illustrates how those franchise restrictions can sometimes cause havoc.  In this case, the KFC franchisees are upset that the KFC parent company is pushing a new, healthier line of food rather than marketing towards what the company has always done well–making “finger licking good” fried chicken.  This lawsuit highlights the fact that, many times, franchisees are caught between a rock and a hard place when they don’t agree with major decisions made by the franchisor.  While there are many benefits to buying a franchise, this restriction on freedom can be stifling for some entrepreneurs.  Thus, it is a good idea for any entrepreneur to carefully think through the pros and cons of buying a franchise in their intended field.  Nothing is ever perfect, but it is important to find a good balance for you personally between the freedom to run your business as you want, and having the many benefits of a franchise model.

What’s in a Name?…Choosing a business name that is catchy AND legal

For many owners of start-up businesses, choosing a name for their business can be a daunting task.  Here are some things to consider when choosing a name:

1) Does it convey the right message?  If you’re starting a CPA Firm, naming the business after the partners may convey the right feel of expertise and refinement, but if you’re starting a local bakery, such a stodgy name may not help promote your image as well–you may need to try something a little more catchy.

2) Does it adequately describe my business?  For many small businesses on a tight marketing budget, having a name that describes what you do can be a huge boon.  Not only does it help customers quickly identify if they need your product or service, but it also helps draw traffic to any websites or web postings you may have when people search for the specific product or service you offer.

3) Is it legal?  Before naming your company, you will always want to consult your attorney on issues regarding the rights to your proposed name.  A business attorney can help you understand whether you must include any special designations (e.g. Inc.), whether it is advisable to trademark your name/logo, and how you should register your name with your state.

In addition to these tips, see this article which provides some helpful ideas for naming your business.

New 1099 Reporting Requirements on the Horizon?

Under the proposed new regulations set forth by the IRS (to take effect in 2012), it appears that small business owners will be hit with a huge increase in 1099 reporting requirements, as each business owner who pays a vendor more than $600 in a given year would have to issue a 1099 for that vendor each and every year.  For many small business owners, this could pose a huge burden.  Let’s hope that the IRS listens to taxpayers during the commenting period and finds a way to make these regulations less burdensome and more clear-cut in meeting their stated objectives.

Find out more about the proposed regulations and their potential impact in this article from CNN.

Remember to always check your new employee’s immigration status…

In our highly-regulated society, it is hard for the business owner to keep track of all the laws that apply to them.  For this reason, I wanted to point out a law which is many times overlooked by small business owners, but can create huge problems for businesses.

I am talking about the requirement that all business owners verify that their employees have an immigration status that legally allows them to work.  Generally this means that employees who were not born in the U.S. must provide proof of one of the following types of employment authorization: 1) Certificate of Naturalization (showing they have gained citizenship); 2) a Legal Permanent Resident Card, commonly known as a “Green Card” (which shows that they have gained legal permanent resident status, a rung below full citizenship); 3) an EAD (Employment Authorization Document); or 4) an OPT Card (for students who are utilizing the opportunity to work one year with only a few strings attached after they graduate from an American University).  The instructions for the I-9 (see link below) give a detailed list of which documents are required, and in what combination. 

It is extremely important that small business owners get copies of these documents and fill out an I-9 Form (found here) within 3 days of the beginning of employment.  Employers must keep these I-9′s on file for many years in case they are ever audited.  There can be STIFF penalties for failing to do so, and for willful violators, there can even be criminal sanctions.  The requirements for employers and an explanation of the system are found here.

One last thing to note.  The government just changed the look and feel of the “Green Cards.”  While these cards have not been green for a long time (causing a great deal of confusion), the United States Customs and Immigration Service has now redesigned them to not only be more counterfeit-proof, but also, logically, green.

Have a Question about Small Business Law?

If you have a question about some aspect of Small Business Law, simply send an email to davidcooklaw@gmail.com with the subject line of “Blog Question.”  Our resident Small Business Lawyer, David Cook, will try to answer as many of your questions as possible on the blog, so send in your questions.

The New Credit Card Accountability Responsibility & Disclosure Act

While the new Credit Card Accountability Responsibility & Disclosure Act significantly helps consumers in this down economy, it’s effect on small business owners who have business credit cards is not as far reaching.  As this article from the Kansas City Star notes, small business owners need to be careful when trying to utilize the provisions of this new law.

The New Health Care Law

Many of us who are involved in small business law have been interested to see how the new health care bill that was passed earlier this year will affect small businesses in the future.   While I was initially quite worried about the impact this law would have on small businesses, I do not think it will have such a big impact on that segment of society as it will on mid-sized businesses.  Regardless of the size of your business, you need to know what will be expected of you in the future.   Here’s a link to an excellent article from Entrepreneur.com titled “The Entrepreneur’s Guide to Health Care Reform.“

Lots of Issues to Consider

Because small business owners face a myriad of legal issues when running their business, this blog was created to help them navigate those murky waters.