There is no question it costs more to operate legally. The transition is costly but necessary to growth. Being smart about how you make the transition can save you money in the long run and enable your business to grow without major problems.

Here are some examples of common problems experienced by businesses going mainstream.

Scrambling to Get a Big Order
A software business being run from the basement using neighborhood kids to fill orders after school, had to really scramble to get that “big order.” In order to get a contract from a large company, they had to quickly arrange outsourced manufacturing and quality control procedures. They had to demonstrate that they owned the intellectual property in the software and that their business and employment practices would satisfy their major customer’s “audit” procedures.

Cash Crisis because of Higher Overhead
A popular baking business found itself in a cash crisis when it expanded to a (legal) commercial kitchen and discovered that its prices were too low to cover its increased overhead. Doubling prices caused a dramatic decline in orders.

Employee Issues
To pursue commercial opportunities, a cleaning business found itself with a slew of legal problems related to its workers. They had to set up procedures for each worker, including filling out the I-9 (immigration form) that requires viewing documents that establish both the identity and the employment eligibility of the employee. They had to set up a payroll service to handle payroll tax withholdings, get worker’s compensation insurance and liability insurance. The increased costs required that they increase their rates significantly.

Payroll & Sales Tax Penalties
Failure to pay payroll and sales taxes in a timely manner resulted in the tax authorities “levying” on the personal and business bank accounts of a business owner. This caused major problems, disrupting business and personal activities and costing many thousands of dollars in penalties, interest and legal fees.

To “Get Legal” requires different things for different businesses.

At a minimum you need to:

• Operate in compliance with local zoning and regulations (check with your town hall)
• Document business relationships (with customers and suppliers)
• Protect your confidential information (customer lists, ways of doing business)
• Not pay people “under the table”
• Set up a payroll service to handle employee withholdings
• Get worker’s compensation insurance if you have employees
• Collect and remit sales tax (if your products/services are taxable)
• Separate business and personal expenses
• Keep good business records
• Pay taxes

To successfully transition your business to the mainstream, and avoid the legal pitfalls, be pro-active:

Take Advantage of Legal Protections:

• Incorporation (S-Corp, C-Corp, LLC) (protect your personal assets from business liabilities)
• Homestead Declaration (protect your home from creditors)
• Registering Your Name (and your domain name)

Establish Consistent Workplace Practices:

• Employees or Contractors
• Document Policies
• Provide Training and Feedback
• Deal with Problems
• Stay Up to Date with your profession/industry practices
• Use Non-Compete, Non-Solicitation Agreements

Use Good Bookkeeping & Accounting Practices:

• Keep Good Records
• Pay Estimated Taxes

Be Cautious in Forming Business Partnerships

Business partnerships are like marriages. They are much easier to get into to than to get out of. So, be sure to put your agreement in writing.

In conclusion, “getting legal” is an important step in growing your business. And, an ounce of prevention is worth tons of cure.

Jean D. Sifleet
Attorney & CPA
120 South Meadow Road
Clinton, MA 01510

t. 978-368-6104
f. 978-368-6105
jean@smartfast.com

eNews Subscribe:
To subscribe, please fill out the form below.

Your email:

Jean Sifleet, business attorney, CPA and three-time entrepreneur, is pleased to announce the release of her new book, Advantage “IP”: Profit from Your Great Ideas. Visit the Smartfast Bookstore for details, and to order the book.