5 Avoidable Mistakes Utah Businesses Make Everyday
Running a business is not easy. It requires drive, discipline and the ability to identify and provide a product or service that people truly need. Utah business owners can take steps to avoid complicated legal problems and ensure future peace of mind by avoiding these five common mistakes:
1. Undercapitalizing
Corporation law has paved the way for individuals to invest their savings in large, risky businesses while enjoying limited liability and avoiding management responsibilities. Most who jump through the hoops to organize a corporation or limited liability company (LLC) wrongly assume that this protection is absolute.
Certain circumstances may lead a court to decide that it would be unjust and unreasonable to recognize the limited liability generally granted by a corporation or LLC. When this occurs, creditors can satisfy their judgments against a corporation or LLC through the owner’s personal assets. Holding shareholders and members personally responsible for the debts of the business entity is a process known as “piercing the corporate veil”.
One of the more common mistakes leading a court to find personal liability is undercapitalization. A creditor may be able to attach your personal assets to satisfy the corporation’s debt if your company does not have the assets necessary to pay a creditor’s claims, the financial insufficiency existed at the time the debt was incurred, and the insufficiency was so severe that it constituted gross undercapitalization.
2. Co-mingling Funds and Ignoring Formalities
Another easily avoidable instance where the court may pierce the corporate veil is when a shareholder has used corporate assets as if they were his own. The defining feature of a corporation is its independence from the people who create it. If you are ignoring the separateness of your business entity, why should the rest of the world? For this reason, it is important to keep personal funds in your own pocket, keep business funds separate, and make sure that you’ve satisfied all the requisite formalities of your particular business entity.
3. Hiring an Inexperienced Accountant
In an attempt to save money or time, small business owners may try to take on accounting themselves. They may also turn to Aunt Mildred or an old high school football buddy that took an accounting class decades ago. This is a bad idea. It is important to hand over important fiscal responsibilities to a trained accountant, CPA, or tax attorney. Look for an accountant that has had other small business clients and is knowledgeable about business tax preparation.
4. Inadequately Protecting Intellectual Property or Infringing on the Rights of Others
Many businesses may not think that their logo, product or services warrant legal protection. It is important to make sure that something as simple as your company name isn’t trademarked. Clearing up issues regarding trademarks, patents and copyrights ahead of time is important; as it can become more difficult to protect them down the road if a third-party starts doing something similar.
5. Drafting Faulty Contracts
Failing to find a skilled contract attorney can lead to a transaction blunder that costs big money. Business owners may enter into a contract without having a clear understanding of their rights and obligations, and breaching a contract may lead to mediation or litigation that is stressful and time consuming. Cutting corners by finding online contract forms can also be unwise. Contract forms may be out of date or lack important language. For these reasons, it is important to hire a lawyer to draw up contracts, especially if these contracts make up the foundation of your business.
Derek Coulter
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