T. Randolph Catanese, Esq. © 1998
Creating, organizing and operating a business is, in many ways, like building a ship, manning it with a crew and then taking it on a long sea voyage. If the ship is well designed, properly built with the right materials, and manned and captained by the right people, then the ship can go far. On the other hand, if one of these essential elements is missing, chances are during the voyage, the ship will likely sink like the Titanic or get lost at sea. So too, businesses can either steer a safe passage or be doomed to failure, often times based upon the initial decisions made when the business is first started and continuing decisions made once the business is in operation. What this article addresses are ten fundamental mistakes which business owners should avoid. These mistakes can be made before, during or even after a business has been created and operated. So, these points are relevant for any business owner.
Mistake No. 1 – No Paperwork. Believe it or not, many businesses are started on a "hand shake" and operate that way with little or no difficulty until there is THE PROBLEM. Friends will meet and talk about working on a business together. Because they have known each other for a long time they will enter into an agreement to begin a business with no paperwork. This also happens when strangers meet, but in their mutual enthusiasm they ignore obvious warning signs. Not until a problem arises or when they first need to meet with an attorney do they realize that something should have been in writing to protect their respective interests. When they find that no paperwork exists, the job of undoing the relationship becomes doubly hard for all parties concerned including the attorneys who are requested to do the untangling.
When no paperwork exists, and if a court does get involved, the court will be looking to the parties to explain the purpose of the business and the relationships surrounding it. Generally speaking, in the absence of any paperwork, and if the parties share equally in the costs and expenses of the business, the court will likely treat it as a partnership. Partnerships are governed by the Uniform General Partnership Act enacted in California. That Act sets forth how partners are to be treated in the event no partnership contract exists. Also, many occasions arise were a single person will operate a business which legally is referred to as a sole proprietorship. This means that the person is operating a business individually or under a fictitious business name. Many people have the mistaken belief that if they file a fictitious business name statement they are protected personally from creditors if a problem arises. This is not true. A person who operates a business as a sole proprietorship has personal liability for the debts and obligations of the business.
Creating paperwork to establish your business entity or a contract between the persons in the business will help to avoid unintended consequences such as personal liability for business debts or the creation of a partnership which has its own set of legal nuances. Most of all, though, is the fact that good paperwork will assist all parties and any attorneys involved in resolving any dispute as quickly and efficiently as possible