The Top 5 Ways To Building A Business With The Right Foundation
Did you ever think that nothing could go wrong with your life or business? Then it happens. Life throws you a curve ball. One day, without warning, you are being sued, or even a personal disaster such as your house being burned down.
To protect yourself in business from the most common causes of failure, fines, or lawsuits, there are a number of things you can do in advance. Over the years, I've seen a common theme among clients, and in the reasons that prompted them to engage my legal services to assist them.
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. Create a Company With Limited Liability Protection
Before running to incorporate a new business, you first should vet your ideas to determine whether they are worth pursuing. Based upon the assumption that you have already confirmed that your business is worth pursuing, it is a good idea to operate the business under some type of limited liability shield so you can protect your personal assets.
Examples of business forms that provide limited liability protection are LLC's and corporations.
No matter what you do, you should really think before you ever operate as a sole proprietor, because that opens you up to endless personal liability. For example, when you operate as a sole proprietor and your business ever does something wrong or gets sued, a creditor could attempt to seize your personal home, savings, car, or other personal assets.
However if you operate your business under a limited liability shield, such as a corporation or LLC, then the only assets the creditor could seize 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.
This means that any time you decide on a company name, product name, or slogan, it is critical that you do some initial research to make sure that someone else is not already using that name or a very similar derivative of it in a way that would cause consumers to be puzzled as to the difference between your two companies.
It is usually okay for companies in two totally different industries to have the same name, because most individuals 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 to another company who has a superior interest in that name, they could file a lawsuit against you for trademark infringement and possibly obtain significant money damages.
The United States Patent and Trademark Office trademark database is always a great place to look when you first start your research. Another great place is to search Internet search engines to see if you discover if anyone else is already using your desired name or a similar name in a similar industry.
To designate that you are claiming an interest in the brand/name, you will want to mark your trademarks with (TM) (the TM sign). If you then later obtain an actual federal trademark registration, you will want to use (R) (the circle R designation).
3. Secure the Necessary Licenses
Another consideration in creating your new business is whether you need to secure any special licenses in order to operate.
Some businesses require a special license to operate, such as a daycare, insurance agency, law firm, or doctor's office. If you are a business that requires a special license, you are more than likely already aware of that through the licensing process that you already went through in order to obtain that specialty. You definitely should spend a few minutes to do extra research to double check that your type of business doesn't require any additional licenses.
The sales tax license is the most commonly overlooked license. For example, if your business is going to sell products, then you are more than likely required to collect sales tax for any of those products that you sell to consumers in your state. Many states do not require you to collect sales tax on services. Nonetheless, you should always check with your state's Department of Revenue to verify what exactly you are required to collect sales taxes on, if anything.
4. Utilize The Proper Written Agreements with Contractors and Employees
The number one most important practice you should apply in your business is to use the appropriate and proper written agreements with the employees and contractors who you deal with.
If you pay no attention to this step, you may not even obtain ownership/title to the very thing you paid another person to create for you, and could even owe that person royalties later. Or worse yet, you could wind up in a dispute with the other party because you the agreement didn't have clear 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.
It is so important that you get a written agreement with contractors and employees because of the way the intellectual property laws work. It's a little complex, but to put it simply, the contractor/creator owns the copyright in the work that you compensate them to produce, unless they transfer that copyright over to you in a written agreement.
So simply put, this means that a web developer or graphic designer or other type of contractor who you engage will retain the copyright ownership in the work you compensate them to create, unless they execute an agreement transferring those rights over to you. This may sound backwards, but that is the way the copyright laws work.
With your employees, you automatically own the copyright interests in the work you pay them for, but not their patentable ideas. So that's why it is important that you also 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 the approach that you do NOT want to ignore. It can safeguard you against the most common reasons of lawsuits and damages later in your business.
5. Follow Solid and Proper 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 critically important that you follow solid and proper accounting procedures to keep your business in good standing. Below are a few examples of what those accounting procedures include:
1. Separate your business records from your personal records.
2. By no means ever pay personal bills from your business checking account. For example, you should never pay for house payment from a 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. When possible, use an electronic accounting system to enter your income and expenses during the year as you go along. This will make preparation of your taxes less time consuming, and also will make it easy for you to prepare financial statements for your bankers if you are requesting loans, etc.
For instance, some of the most common consequences that can arise if this is not done correctly are:
1. You may lose the protection offered by your limited liability company (assuming you established one), if you mix your personal and business funds together.
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.
To learn more about business growth and how to increase sales, download my free 47 page "Business Thrival Blueprint". BusinessThrival.com is a site dedicated to helping business owners achieve a thriving business and life.