In this article, small business owners −and potential entrepreneurs− will learn five straightforward, actionable tips for building a legal foundation that will support your business as it grows, make your business stronger, and protect your company’s bottom line.
1. Completely separate your business finances from your personal finances
Most companies choose to form a legal entity –whether a limited liability company, corporation, or otherwise– to avoid personal liability to shareholders or members. That way, the personal assets of the company’s owner –including homes, cars, savings, and possessions– are not at risk for actions taken by the company.
This limited liability is often referred to as the “corporate veil” because the owners of the company are generally protected by it. And one of the best ways to prevent your corporate veil from being pierced is to maintain corporate formalities.
For example, keep a separate bank account for your business. Any payments made to the business owner from the business should be in the form of a paycheck written from the business account to the owner’s account. The owner should never simply take cash out of the business account for personal use.
Other ways to avoid personal liability arising from your limited liability business include obtaining a federal tax ID number for your business, and either having enough money in your bank account to cover expected liabilities for the business or taking out an insurance policy to cover those liabilities.
2. Protect your company’s name by registering a trademark
One of a company’s key assets is the customer good will that comes from building a reputation as a trustworthy entity that provides quality goods or services. If another company uses the same name, it could hurt that good will.
Of greater concern, however, is the possibility that your company will be sued by another claiming it owns the right to that same name.
The best way to avoid these issues is to register your company’s name as a federal trademark. As long as another company in the same industry does not currently own the same name, or a similar name, it’s likely you will be able to do so.
Once the name is trademarked, your company will have the exclusive right to use the name in every state where no one else has used it. However, if a competitor in another state claims they have been using the name longer than you −and they can prove it− you cannot operate in said state under that name.
Also, it should be noted that some trademarks, especially ones that are merely descriptive, cannot be registered for federal trademark protection. For example, a trademark for the name “The Hamburger Store” cannot be registered if the company is indeed a hamburger store. However, “The Hamburger Store” can be registered if the store sells shoes or something unrelated to hamburgers.
3. Hire a competent accountant
Specifically, hire an accountant who is familiar with your company’s industry. Your accountant will give you advice on what can and cannot be deducted and −almost as importantly− give you an idea which deductions are likely to raise red flags for Internal Revenue Service agents and lead to an audit.
While there are plenty of books explaining business tax deductions, there is a huge difference between theory (what may legally be deducted) and practice (what actually can be deducted without causing an audit nightmare). It may not be worth deducting a questionable item that will save you $500 if that deduction triggers an audit that costs $1,000.
4. Protect your company’s trade secrets with employee contracts
Every business has trade secrets of some sort. Whether it is price, products, customers, or market information, your company will learn some things the hard way. Those lessons learned, and the fruits of its labor, should be protected to ensure that a rogue employee does not use them for personal gain.
The best way to protect a company’s trade secrets is to have a non-disclosure, non-solicitation, and non-competition provision in the company’s contracts with any employees or independent contractors. Depending on the leverage of the company, a non-compete agreement can even be extended beyond an employee’s tenure.
5. Treat lawsuits seriously
A recurring problem that I see with many of my small business clients is a lack of appreciation for the severity of legal consequences stemming from an unanswered lawsuit.
In Ohio state court, you have 28 days from the date you are served with a complaint, or the document initiating a suit, to respond to it. The response usually is a document called an “answer.”
Failure to respond to a complaint results in a default judgment. Legally, a default judgment is the same as a judgment obtained by jury trial.
Many small business owners believe if they do not respond to a complaint, there will be some small consequence, or fine, or penalty. But that is simply untrue.
If a business fails to respond to a complaint −even if it is frivolous and completely unjustified− the plaintiff can get a judgment for the value they requested in the complaint.
Further, one’s business account can be executed upon, meaning money is taken out of the account −with the help of the court− and given to the plaintiff; a company can be put into receivership, meaning a court-appointed management team takes the company over and sells it; or the company can have its physical assets taken by the court and given to the plaintiff.