It often happens. Life throws you a curve ball without warning even though you think nothing can go wrong in your life or business. You are immediately faced with a lawsuit, or even a personal disaster such as your home totally lost by fired.
But, in your business, you can be proactive in protecting yourself from the most common causes of failure, fines, or lawsuits. In the last several years, I've noticed a common thread among clients and the reasons which have caused them to hire me.
My clients each had a lot in common, and almost all of their problems could have been avoided if they had just put some simple processes in place to grow and protect their businesses.
So, today I would like to share with you some of the most important strategies so that you don't make the same mistakes as my clients.
1. Set Up a Company With Limited Liability Protection
Prior to running out to start a new business, you first want to have vetted your ideas and concepts to verify they are worth pursuing. Assuming you have already don't this and your business is worth pursuing, it is always good to operate the business under some type of limited liability shield so you can shield your personal assets.
Examples of business forms that provide limited liability protection are LLC's and corporations.
No matter what you do, you should consider long and hard before you ever operate as a sole proprietor, since that opens you up to unlimited personal liability. In essence, if you operate as a sole proprietor and your business ever gets into trouble or gets sued, a creditor could go after your personal house, savings, vehicle, or other personal assets.
If for example you operate your business under a limited liability shield, such as a corporation or LLC, then the only assets the creditor could attach to are the assets of the business.
Normally, when you elect to file a new corporation or LLC, you submit the proper formation documents with the Secretary of State in the state where you want that company formed. A lot of Secretary of State web sites have online forms that you simply download and then submit interactively.
2. Select The Right Name For Your Business and Products
It is always a good idea to do some initial research before you incorporate. Specifically, when picking a name you want to make sure someone else is not already using to sell similar goods and services as you. In essence, you do not want to kick off your new business with a name that could cause you to be sued for trademark infringement because you chose a name that someone else already owns. You may want to think of this as "having all your ducks in a row".
Laws, such as trademark law, are designed to safeguard consumers from confusion between different companies. In general, trademarks identify the source of that product or name.
Basically, this means that any time you pick a company name, product name, or slogan, it is critical that you do some basic research to make sure that someone else is not already using that name or a very similar variation of it in a way that would cause confusion among consumers between your two companies.
It is usually not a problem for companies in two totally different industries to have the same name, because most people would not get them confused (unless it is a famous trademark, where that company retains rights across all industries). But if you use a product or company name that is confusingly the same or similar to another company who has a superior interest in that name, they could initiate a lawsuit for trademark infringement and possibly obtain money damages.
You can research is the Internet search engines to see if another person is already using your preferred name or a similar name in a similar industry. However, the best place to begin your research is to search the United States Patent and Trademark Office trademark database.
Then, as you proceed forward with your business, you will want to remember to mark your trademarks with (TM) (the TM sign) to signify that you are claiming an interest in the brand/name. You can start using (R) (the circle R designation) after you obtain the actual federal trademark registration.
3. Secure and Obtain the Necessary Licenses
Another step you should consider in setting up your new business is whether you need to secure and obtain any special licenses in order to operate.
Some types of businesses require a special license to operate, i.e., a daycare, insurance agency, law firm, or doctor's office. If your business is like these, than a special license may be required. More than likely you became aware of that as you went through the licensing process in order to obtain that specialty. It is still important though to spend some extra time researching to make sure that your type of business doesn't require any additional licenses.
Usually the most overlooked license is a sales tax license. If your business is going to sell products, then you will probably be required to collect sales tax for any products that you sell to consumers in your state. In many states, you are not required to collect sales tax on services. However, you should check with your state's Department of Revenue in order to determine what exactly you have to collect sales taxes on, if anything.
4. Utilize The Proper Written Agreements with Contractors and Employees
The absolute most important practice you should put implement for your business is to use the proper written agreements with the employees and contractors who you work with.
If you disregard this step, you may not even acquire ownership/title to the very thing you paid someone else to create for you, and you may even end up owing that person royalties later. Or worse case yet, you could end up in a disagreement with the other party because of unclear terms.
The agreements do not need to be complicated because there are tons of products that you can purchase that have simple agreement templates you can utilize with employees and contractors, such as our BizShield product.
The reason you should always get a written agreement with contractors and employees is because of the way the intellectual property laws are. It's a bit complex, but the simple version is the contractor/creator owns the copyright in the work that you pay them to produce, unless they transfer that copyright over to you in a written agreement.
So in plain English, this means that a web developer or graphic designer or other type of contractor who you engage shall keep the copyright ownership in the work you compensate them to produce, unless you get a signature from them in an agreement transferring those rights over to you. This may sound backwards, but that is the way the copyright laws are.
With your employees, you do automatically own the copyright interests in the work you pay them for. But, you do not automatically obtain their patentable ideas. Thus, you should always get a written agreement with your employees.
Here are the most essential terms that you should include in your contracts with employees and contractors.
This is a tactic that you do NOT want to ignore. It can shield you from a lot of common causes of lawsuits and damages later in your business.
5. Follow Established Accounting Principles To Keep Your Business In Good Standing
This accounting guideline is one that many never like to follow, but is just as important to highlight as the others discussed so far.
It is extremely important that you follow established accounting principles to maintain your business in good standing. Outlined below are some examples of what those established accounting procedures include:
1. Do not commingle your business records with your personal records.
2. Never pay personal bills from your business checking account. An example of this is making a house payment from your corporate checking account.
3. If you buy something personally that is for your business and pay for it with cash or on a personal credit card, then submit an expense report to your company, attaching the receipts, to get reimbursed.
4. If possible, use an electronic accounting system to type in your income and expenses throughout the year as you move forward. This will make preparation of your taxes less time consuming, in addition to it will be easier for you to put together financial statements for your bankers whenever you are requesting loans, etc.
Below are the most common consequences that can arise if this is not done correctly:
1. By mixing your personal and business funds together, you may lose the shield offered by your limited liability company (assuming you formed one).
2. If you fail to follow good accounting practices, it will take a lot more of your time to prepare your tax returns and financial statements for your bankers. With an electronic accounting system, it would take minutes versus possibly taking several days or even weeks.
Preferably, you should work with a bookkeeper or CPA to take care of the accounting tasks for you. It doesn't cost as much as you might think.
But some business owners elect to do the accounting internally, and that's OK too. Regardless, please just make sure you follow the proper accounting principles that are set forth above.
So that's it. Those are the 5 most critical steps you should take to set up a solid foundation for your new business. And if you put into practice these in your business, you will save yourself from some of the biggest pitfalls that could have caused you major problems.
But, in your business, you can be proactive in protecting yourself from the most common causes of failure, fines, or lawsuits. In the last several years, I've noticed a common thread among clients and the reasons which have caused them to hire me.
My clients each had a lot in common, and almost all of their problems could have been avoided if they had just put some simple processes in place to grow and protect their businesses.
So, today I would like to share with you some of the most important strategies so that you don't make the same mistakes as my clients.
1. Set Up a Company With Limited Liability Protection
Prior to running out to start a new business, you first want to have vetted your ideas and concepts to verify they are worth pursuing. Assuming you have already don't this and your business is worth pursuing, it is always good to operate the business under some type of limited liability shield so you can shield your personal assets.
Examples of business forms that provide limited liability protection are LLC's and corporations.
No matter what you do, you should consider long and hard before you ever operate as a sole proprietor, since that opens you up to unlimited personal liability. In essence, if you operate as a sole proprietor and your business ever gets into trouble or gets sued, a creditor could go after your personal house, savings, vehicle, or other personal assets.
If for example you operate your business under a limited liability shield, such as a corporation or LLC, then the only assets the creditor could attach to are the assets of the business.
Normally, when you elect to file a new corporation or LLC, you submit the proper formation documents with the Secretary of State in the state where you want that company formed. A lot of Secretary of State web sites have online forms that you simply download and then submit interactively.
2. Select The Right Name For Your Business and Products
It is always a good idea to do some initial research before you incorporate. Specifically, when picking a name you want to make sure someone else is not already using to sell similar goods and services as you. In essence, you do not want to kick off your new business with a name that could cause you to be sued for trademark infringement because you chose a name that someone else already owns. You may want to think of this as "having all your ducks in a row".
Laws, such as trademark law, are designed to safeguard consumers from confusion between different companies. In general, trademarks identify the source of that product or name.
Basically, this means that any time you pick a company name, product name, or slogan, it is critical that you do some basic research to make sure that someone else is not already using that name or a very similar variation of it in a way that would cause confusion among consumers between your two companies.
It is usually not a problem for companies in two totally different industries to have the same name, because most people would not get them confused (unless it is a famous trademark, where that company retains rights across all industries). But if you use a product or company name that is confusingly the same or similar to another company who has a superior interest in that name, they could initiate a lawsuit for trademark infringement and possibly obtain money damages.
You can research is the Internet search engines to see if another person is already using your preferred name or a similar name in a similar industry. However, the best place to begin your research is to search the United States Patent and Trademark Office trademark database.
Then, as you proceed forward with your business, you will want to remember to mark your trademarks with (TM) (the TM sign) to signify that you are claiming an interest in the brand/name. You can start using (R) (the circle R designation) after you obtain the actual federal trademark registration.
3. Secure and Obtain the Necessary Licenses
Another step you should consider in setting up your new business is whether you need to secure and obtain any special licenses in order to operate.
Some types of businesses require a special license to operate, i.e., a daycare, insurance agency, law firm, or doctor's office. If your business is like these, than a special license may be required. More than likely you became aware of that as you went through the licensing process in order to obtain that specialty. It is still important though to spend some extra time researching to make sure that your type of business doesn't require any additional licenses.
Usually the most overlooked license is a sales tax license. If your business is going to sell products, then you will probably be required to collect sales tax for any products that you sell to consumers in your state. In many states, you are not required to collect sales tax on services. However, you should check with your state's Department of Revenue in order to determine what exactly you have to collect sales taxes on, if anything.
4. Utilize The Proper Written Agreements with Contractors and Employees
The absolute most important practice you should put implement for your business is to use the proper written agreements with the employees and contractors who you work with.
If you disregard this step, you may not even acquire ownership/title to the very thing you paid someone else to create for you, and you may even end up owing that person royalties later. Or worse case yet, you could end up in a disagreement with the other party because of unclear terms.
The agreements do not need to be complicated because there are tons of products that you can purchase that have simple agreement templates you can utilize with employees and contractors, such as our BizShield product.
The reason you should always get a written agreement with contractors and employees is because of the way the intellectual property laws are. It's a bit complex, but the simple version is the contractor/creator owns the copyright in the work that you pay them to produce, unless they transfer that copyright over to you in a written agreement.
So in plain English, this means that a web developer or graphic designer or other type of contractor who you engage shall keep the copyright ownership in the work you compensate them to produce, unless you get a signature from them in an agreement transferring those rights over to you. This may sound backwards, but that is the way the copyright laws are.
With your employees, you do automatically own the copyright interests in the work you pay them for. But, you do not automatically obtain their patentable ideas. Thus, you should always get a written agreement with your employees.
Here are the most essential terms that you should include in your contracts with employees and contractors.
This is a tactic that you do NOT want to ignore. It can shield you from a lot of common causes of lawsuits and damages later in your business.
5. Follow Established Accounting Principles To Keep Your Business In Good Standing
This accounting guideline is one that many never like to follow, but is just as important to highlight as the others discussed so far.
It is extremely important that you follow established accounting principles to maintain your business in good standing. Outlined below are some examples of what those established accounting procedures include:
1. Do not commingle your business records with your personal records.
2. Never pay personal bills from your business checking account. An example of this is making a house payment from your corporate checking account.
3. If you buy something personally that is for your business and pay for it with cash or on a personal credit card, then submit an expense report to your company, attaching the receipts, to get reimbursed.
4. If possible, use an electronic accounting system to type in your income and expenses throughout the year as you move forward. This will make preparation of your taxes less time consuming, in addition to it will be easier for you to put together financial statements for your bankers whenever you are requesting loans, etc.
Below are the most common consequences that can arise if this is not done correctly:
1. By mixing your personal and business funds together, you may lose the shield offered by your limited liability company (assuming you formed one).
2. If you fail to follow good accounting practices, it will take a lot more of your time to prepare your tax returns and financial statements for your bankers. With an electronic accounting system, it would take minutes versus possibly taking several days or even weeks.
Preferably, you should work with a bookkeeper or CPA to take care of the accounting tasks for you. It doesn't cost as much as you might think.
But some business owners elect to do the accounting internally, and that's OK too. Regardless, please just make sure you follow the proper accounting principles that are set forth above.
So that's it. Those are the 5 most critical steps you should take to set up a solid foundation for your new business. And if you put into practice these in your business, you will save yourself from some of the biggest pitfalls that could have caused you major problems.
About the Author:
To learn more about business growth and starting a business, download my free 47 page "Business Thrival Blueprint". BusinessThrival.com is a site dedicated to helping business owners achieve a thriving business and life.
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