By Noëlle Bernard
The failure to understand the legal system is a major cause of the short lifespan of many small businesses in the United States.
In order to help small businesses avoid becoming one of the 660,000 firms that close each year, the Small Business Administration (SBA) offers free counseling through the nonprofit association SCORE. SCORE employs 13,000 volunteers in more than 350 chapters nationwide.
Being proactive, however, and investing in an attorney can be a major contributing factor to the success of a small business.
“Our whole concept that we’re here to help you,” says Bern Lefson, a SCORE mentor from the Northern California chapter with nineteen years of business experience. “If you want to be in business or you are in business and you’re looking for information, we want to give you good, honest, unbiased information so that you’re successful.”
SCORE mentors recommend that entrepreneurs devote time researching all the state and federal laws and regulations specific to their particular entity and find a specialized lawyer.
“Do as much research as possible on your own so when you go in to see your attorney it’s not a tremendous learning process,” advises Jack Bernard, a SCORE mentor with thirty-five years of experience in the healthcare field.
Practicing attorney at the ICG Law Firm in Houston, Texas and SCORE volunteer Ingeuneal Gray says many small businesses only hire lawyers after a problem develops because of budgetary constraints.
“For some business owners the proper legal resources are just another expense placed on a long list of other expenses,” Gray says. “Being proactive, however, and investing in an attorney can be a major contributing factor to the success of a small business. Avoiding legal services until they are involved in a legal dispute, violation,
or lawsuit can be detrimental.”
Barbara Weltman, an attorney and small business advocate, says the fear of cost is not a worthy excuse. Investing in an attorney is a moneysaver, she says.
“[Small businesses] don’t communicate with the professionals before there’s a problem,” Weltman says. “They should always recognize that paying a little bit in professional fees upfront can always save thousands of dollars and hours of headache down the road.”
5 Areas a Small Business Owner Should Master
1. Establish a well-written business plan
Business owners need to formulate a formal plan that defines the purpose and goals of the company. The plan should also serve as a resource to help entrepreneurs stay focused on why a company formed and where it is headed.
“The business plan is basically a tool,” says Phil Grisolia, a SCORE mentor and marketing consultant with twenty-five years of business experience. “It’s a road map to get you from where you’re starting to where you want to be. At the same time it’s a historical document so you can compare where you are supposed to be with where you actually
“The biggest stumbling block for a lot of small businesses quite honestly is managing their time,” Lefson says. “They’re so busy that they forget they have to stop and check. That’s why a business plan is important.”
2. Understand entity requirements
In the beginning, business owners have the option to choose if they want to be defined as a corporation, Limited Liability Company (LLC), S corporation, partnership, or a sole proprietor. Each type of entity has its own sets of requirements and tax standards. Business owners need to know what works to protect their assets.
“That will impact a lot of tax issues,” Weltman says. “It will determine which forms they have to file, when they have to file, or whether they have to pay estimated taxes or self-employment taxes.”
3. Create an operating agreement
An operating agreement is a contract between the owners of the company. It establishes the structure of the company and who will handle operational decisions.
“[An operating agreement] is laying out the laws and the regulations to set the structure of your company,” Gray says. “Setting up the structure makes it more formal and official.”
4. Understand business contracts
Commercial and government contracts offer revenue for small businesses. Entrepreneurs need to know the details of every contract because once signed the business is obligated to complete the job.
“A lot of small businesses are going after government contracts,” Gray says. “If they’re getting involved with the government they need to make sure they can follow through with everything that contract entails.”
5. Distinguish between employee and independent contractors
Small business owners need to be aware of all employee benefit laws in order to avoid litigations. Employees struggling financially often opt to hire independent contractors instead of employees. Hiring independent contractors allows businesses to not pay taxes on the hire, as well as maintain the “fewer than 500 employee” threshold. However, it can also lead to problems.
“A lot of businesses classify their employees as independent contractors,” Gray says. “They still can be held liable for any penalties if the government or IRS finds out that they have employees classified as independent contractors.”
Small business owners can avoid legal problems if they remember to rely on good marketing, a solid business
plan, and well-trained people working on their team, says Gray.
“If you lay the proper foundation in the beginning, your business will go far on the road to success.”
For more information on small business requirements contact a local SCORE chapter, visit SBA.gov, state business resources, or government websites such as IRS.gov.