Legal Mistakes Entrepreneurs Need To Avoid At All Costs
I won’t lie, this area has always been like a foreign language-Which is why I usually just let the accountant or lawyer handle this stuff when it comes down to the nitty gritty.
Being a Gemini, I do like finding out basic information about a ton of areas. And being in entertainment and entrepreneurship, it’s best that I have a basic knowledge of what’s going on.
Note: I’m not a lawyer or a law firm and I do not provide legal, business or tax advice. As I stated above, the accountant or lawyer handles this stuff for me. Here’s the advice I’ve learned from entrepreneurs and gave me about the legal side of entrepreneurship.
1. Separate Your Personal Assets From Your Business Assets. Sue-Happy People Exist.
In other words, if you have money, and someone wants to sue you just to get money, it’s very very possible.
Want to take the cheap way out and keep your personal and business assets together? DON’T DO IT.
Let me tell you a quick story. I was with some real estate people, and they told me about this guy who bought an apartment complex in his name. It turned out to be a nightmare. Turns out that one of his renters got injured in the apartment and sued. Now the person who was injured owns the apartment complex.
Flag #1: Repeat after me. DO NOT MIX PERSONAL ASSETS WITH BUSINESS ASSETS.
- Get you an LLC or an S corporation for tax purposes. If you don’t, Uncle Sam is going to get you with taxes. Look at this article as to why Warren Buffet pays less than his secretary. Or google “How Warren Buffett pays less taxes than his secretary.” Not only do you end up paying significantly less in taxes than you would at a job, you end up paying way less in taxes than if you would filed for taxes using your social security number (or as a sole proprietor). You might think you are bootstrapping and saving money by mixing personal assets and business assets, but no you are not. Save yourself 10,000’s and 100,000’s of dollars by getting an accountant and getting a corporation.
- By mixing the two, you lose legal protections that come from incorporating your business.
- Signing a contract in your personal name without making it clear that it’s on behalf of your company? Yikes.
- If you pay for business expenses from a personal bank account? (Meaning no tax id number?) Your company’s protections go out the window!
- If some meanie from my past tries to sue me personally, my ventures will be good.
2. Piercing The Corporate Veil Doggone It!
Forming a corporation or an LLC is a business must, just like I said above. The corporation or LLC is considered a separate entity (unlike partnerships and sole proprietorships). The people who own and run the corporation or LLC cannot usually be held personally responsible (have limited personal liability) for the debts of the business.
Piercing The Corporate Veil- When courts can ignore the limited liability status of a corporation or LLC and hold its officers, directors, and shareholders or members personally liable for its debts.
When can the courts pierce the corporate veil? When there is no real separation between the owners and company. If the owners fail to maintain a formal legal separation between their business and their personal finances , a court could find that the corporation or LLC is really just a front. and that the owners are personally operating the business as if the corporation or LLC didn’t exist. For example, if the owner pays personal bills from the business checking account or ignores the legal formalities.
More details are here and here.
SO DON’T MIX PERSONAL ASSETS WITH BUSINESS ASSETS. I put it in capital caps so you don’t forget!
3. Have A Contract
There’s something about having a contract that makes people do the right thing. Get it in writing between you and the company you are doing business with.
Speaking of priorities, you always want to have an agreement between yourself and the other party that you are doing business with.
“According to Brian Evan’s article, The problem with not having things in writing is that often business deals involve a lot of negotiation and conversation. Some of what was discussed may not be included in the actual deal. And, unless you have the final terms of the deal, specifically in black and white, it can be really confusing for both sides and lead to conflict. Ultimately this is the very point of a contract, to make sure that the deal is spelled out clearly and there can be no confusion as to what was agreed upon.
Getting outside of business, every time I set foot on an project for film, a contract is there-One for me to not say anything about the details of the project. The second one is the amount I’ll receive for payment. By doing this, you CYA (Cover Your A**). For my next big film gig, I have a contract.
In entrepreneurship and everything I’m professionally into, we have an agreement in place.
4. Have A Lawyer Look Over Your Contract Before You Present It/Sign It
It might cost you some change, but would you rather do pay a lawyer to look over things or be caught up in court paying out thousands of dollars. Exactly.
Make sure that the contact that you are presenting to the party isn’t benefiting the other party more than you.
For example (I have a lot of these example).
One time, a person I know who is really really smart wrote up a contract for a client without a lawyer (mistake). In the contract, she basically gave the client rights that “they” should have: If I break the contract, you are allowed to do this to me. NIGHTMARE. If you don’t know what you are doing, it can f*ck you over. It’s not worth the headache, get a lawyer to look over it.
On the other hand, if you have a contract that you need to sign that you don’t understand, get a lawyer to look over it.
5. Read The Fine Print.
- Don’t sign a contract without crossing your T’s, dotting your I’s and reading the fine print.
- If you don’t understand it or don’t read it at all, you can be signing your life away and you have no clue. Imagine how much money or time it will take to fix the situation? Read my #3.
- I usually get 2nd and 3rd opinions on my contracts. I rather be safe than sorry.
- I know in real estate and entrepreneurship, deals have a tendency to move quickly, and if you wait 20 years, you will miss out on opportunities. But it’s worth it to not rush into or feeling pressure to signing a contract.
6. Trust No One To Keep Their “Word”
What happens if someone gets angry at someone else?
Just imagine going into business with family, and someone has a disagreement, it turns a nasty world war, it gets personal, and it goes south.
Protect yourself by having agreements with everyone involved (employees, co-founders, contractors). When you have agreements in place, it protects everyone.
I’m not saying go through life trusting no one. Because after all, you do go into business and work with people you know, like and trust. But have the trust with the contracts hand in hand with each other.
If you read this and take it to heart, you could protect yourself more than many entrepreneurs out there. Why have legal issues destroy your business when it doesn’t have to?
Entrepreneurs are usually great at getting down to business and putting the peddle to the medal. Often that comes at the cost of glazing over some important legal aspects. It’s not worth putting yourself or your company in harm’s way to avoid doing a bit of basic legal research. If you mess up the legal side, it could seriously hurt you or your business.-Brian Evans
Note that I’m not a lawyer, but learned these basics through research.
Hello! I’m Alesha! I’m a musician, actress, entrepreneur and writer and recent hospital patient (I still can’t believe that is real). Follow on Twitter. If you like what I’m writing, give me a heart and share! :) I like hearts. Let me know what you want me to write! Click here!
