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Legal Corner: Is Your Small Business Putting a Target on Your Back?

A business entity will not protect its owners from personal liability if the business is set up or run incorrectly.

Welcome to the first edition of Clearwater Patch's weekly column on legal issues.

Each week, we discuss relevant legal issues in your community; the latest legal developments that affect those communities; or answer questions directly from readers.

This column is for you, and therefore your comments and questions are highly encouraged. Please send specific legal questions to jts@simonslawfirm.com for potential publication.  

This week’s column discusses small businesses and some tips on how to protect yours, whether it’s merely an entrepreneur’s great idea or an already-established business.  

As a small business owner myself, I have constant concerns on how to increase profit, control costs, and limit the exposure to events that will put me out of business. Like most businesses, mine includes costs for an accountant, networking groups, advertising and professional fees and dues.

However, in my experience as a business, contract and litigation attorney, most businesses fail to account for the most important part of running a business - a strong relationship with an attorney.   

Business owners, ask yourself: 

  • Are you incorporated as a corporation, established as a limited liability company (LLC) and do you know the difference?

  • If you are not incorporated as a corporation or established as an LLC, do you know how liability works in a partnership?

  • Do you have bylaws, a membership agreement or an operating agreement?

  • Did you buy your corporate documents from a printing company with a nice leather-bound book but have not yet opened it?

  • Did you fill out any of the documents necessary to create corporate entity protection?  In other words, is that nice leather-bound book simply collecting dust?

  • Do you call and conduct annual meetings?

  • Did you actually issue your stock certificates or membership certificates?

  • Do you pay your personal bills with your business account?

  • Do you have a business bank account?

  • Did an attorney write your contracts between you and your customers, vendors, contractors and shareholders?

  • Who do you call when you have legal problems or any business-related questions?

Most businesses fail to secure corporate protection at the inception of the business. In fact, it seems most small business owners I encounter file their articles of incorporation, obtain an employer identification number (EIN) from the IRS, open a bank account and they are off and running. But, without taking the time to secure the protections which are the whole point of incorporation or establishment as an LLC, the problems may be significant in the future.

Now, I am not suggesting that legal liability is an everyday occurrence.  It is usually only a once-in-a-business event. However, if your corporate structure is questioned, it can be catastrophic.  To offer an analogy, most serious problems with a company are similar to a tornado or hurricane.  When the corporate structure is attacked and you are personally exposed, it is what Billy Bob Thorton's character in Armageddon called a “global killer.”  

If a customer, business partner, or even a spouse in a divorce question whether the company is actually a recognized company or what lawyers call an “alter ego” of yourself, there can be serious consequences. The entire purpose of setting up a company is to protect you personally: your house, your car, your investments, your personal bank accounts, and so on and so on. If you do not set up your company correctly, all of your personal assets can be exposed to creditors.  

When clients come to my office and ask for assistance in setting up their company, I quote them a price that may, depending on their business needs, have two or three zeros. In contrast, when clients come to me after a lawsuit has been filed—and the other party is trying to show that the corporation was not set up correctly and now the client is in fear of personal exposure to creditors—I am forced to quote a possible retainer of three, four, sometimes five zeros to defend the case.  

In other words, an ounce of prevention is worth a lot of zeros.

I encourage all small business owners to review their business’s needs, as well as its corporate documents and contracts. In essence—without a properly set-up company—your accountant, networking groups, advertisements, goodwill, and even a perfect product or service cannot do the community any good when the business is distracted shelling out all those zeros to defend its owner’s personal assets.

 

Looking to start a small business:

Clearwater Economic Development

112 S. Osceola Ave

(727) 562-4054

Clearwater Regional Chamber of Commerce

401 Cleveland St

(727) 461-0011

Services Corps of Retired Executives

4707 140th Ave N, Suite 311

(727) 532-6800

Jeremy T. Simons, Esq. April 11, 2011 at 09:43 PM
I can promise you that this article is by attorneys, for the community, and we hope for your comments and suggestions and questions. Jeremy T. Simons.

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