How to Avoid Common Business Mistakes

November 3rd, 2008

It is not uncommon for business owners to become so involved with their day-to-day operations that they overlook some important issues associated with being in business. Here are some tips to help you avoid making costly mistakes and to ensure that your business runs smoothly.

Minimize personal liability. Individuals should try to avoid putting their personal assets at risk when they enter into a business venture whether solely or with others. Many overlook or dismiss the fact that personal liability can be minimized with the proper business structure. There are several types of entity forms that afford different degrees of protection, but there is no perfect entity that will provide an all-purpose, one-size-fits-all protection. Included among the various entity options for business owners are sole proprietorships, partnerships, corporations, s-corporations, and limited liability companies. In addition to liability protection, when choosing an entity, take into account the character of the business, the business partners you have, your options for exiting the business, and your estate plan.

Consider a buy-sell agreement. When partners first go into business together, they do so with high expectations and mutual respect. A joint business venture is like a marriage, and often, it ends in a divorce. A binding buy-sell agreement is probably one of the most important documents that a business with multiple owners can have. Typically, a buy-sell agreement is entered into by the owners of a business, and possibly the business entity itself, to purchase or sell interests of the business at a preset price or formula in the event of a future occurrence that will impact the operation and continuance of the business. Such events are numerous and can include death, disability, divorce, disagreement, or retirement. Imagine your business partner passing away and his or her heirs or surviving spouse stepping in as a partner.

Hold shareholder and board meetings. “Piercing the corporate veil” is terminology we hear associated with court cases when someone is attempting to go around the liability protection provided through an entity such as a corporation. Courts can “pierce the corporate [or business] veil” and hold the business owner personally liable for failure to conduct the business properly. Failure to hold the required meetings and maintain a minutes book is one indicator that a business is not being run as a corporation but rather by an individual or group of individuals. Bottom line…Hold the required meetings and maintain the minutes book.

Plan for family business succession. Determine whether there is a desire by a family member or members to participate in the business. If family succession is anticipated, then the business should be organized in a type of entity that lends itself to transfers of entity interests to family members with little or no loss of management or control, such as family-limited partnerships, limited liability companies, and subchapter s-corporations. The main goal is to allow the donor to retain control and derive income from the entity while removing considerable estate value through gifts of interests or making gifts using the applicable exemption amount ($1 million) or the annual gift tax exclusion amount. An understanding of estate and gift tax ramifications of gifts of entity interests, such as valuation issues and available discounts, is also crucial.

Understand the tax ramifications of your actions. Just about everything that we do that is related to business, investments, and retirement has tax ramifications. Many individuals fail to consider these ramifications, and they find themselves caught in tax traps or miss out on available tax deductions and credits, at significant cost. What we do know is that Congress has not, and probably will not, let a year go by without making changes to the tax code. Before making any major decisions such as purchasing a new business, making substantial purchases for an existing business, buying equipment for an existing one, setting up a retirement plan, selling a business or investment asset, or making investments, investigate the tax ramifications beforehand so that you can structure the course of action in a way that provides the most tax benefits.

If you need assistance with any of the above, please give our office a call so that we might help you directly or refer you to someone who can assist with your particular situation.

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