5 Things To Watch Out For In Your Business

Starting or running a business is hard. But you've got this! Here are five areas to pay attention to, so that you remain strong and viable:

1. Understanding the difference between contractors and employees. For many startups, when the work becomes too much for the founder, they don’t have the cash flow for a full-time employee. Instead, they hire a contractor on an as-needed basis. There is a huge body of law between the IRS and the Department of Labor defining an employee. It isn’t dependent on the number of hours, but on the level of control, you exert over your worker. If you hand someone an assignment, a price, and a due date, they are probably a contractor. If you require them to work specific hours, wear a uniform or follow your dress code, complete tasks in a certain sequence, or use your tools/supplies in your office, they are probably an employee. For employees, you have to withhold payroll taxes and hold them in trust for the government. If you misclassify, the penalty is double the amount you didn’t withhold, and you can be personally liable even if you have a corporation or LLC.

2. Understanding what taxes are due and when. Small businesses pay different taxes than individuals and may need to pay some throughout the year. Make sure you understand what is due and when. Some taxes, like payroll taxes, will be owed personally by the business owners and officers, even if there is a corporation or LLC. If you get behind, hire a CPA, accountant or enrolled agent to negotiate on your behalf with the IRS or the NC Department of Revenue. They can and will padlock your business for non-payment. We can negotiate with most other creditors, but the Department of Revenue is particularly merciless.

3. Monitoring the Budget. When you started your business, you probably wrote a business plan where you figured out how much your startup costs were and how long it would take you to earn those back. Many business owners make the mistake of updating your initial static document that sits on a shelf gathering dust after they start up. Nothing could be further from the truth. Especially with supply chain issues and inflation, it is essential for a smart business owner to stay on top of rising business costs. As you run an ongoing business, this is the budgeting process. I saw several potential sales not go through last year because labor costs and fuel rose, and the business owner didn't realize that was eating into profits.

4. Avoid Commingling. Generally speaking, if an entity is properly formed, properly maintained and properly capitalized, the founders of a corporation or LLC (an entity) risk only their initial capital contribution. Also generally speaking, “piercing the corporate veil” to defeat limited liability and sue the owners of an entity individually is as rare and severe as a lightning strike. In North Carolina, a business entity can be disregarded (and the owners sued personally) when the corporation is operated as a “mere instrumentality” or “alter ego” of a sole or dominant shareholder.

This happens most often when there is an allegation of fraud or other deliberate and deceptive acts in commerce where the company has few assets. The plaintiff claims there is no true separation between the company and its owners, and therefore the owners should be personally liable for the wrongdoing. Courts will analyze (1) inadequate capitalization; (2) non-compliance with corporate formalities; (3) complete domination and control of the corporation so that it has no independent identity; and (4) excessive fragmentation of a single enterprise into separate corporations.

The way to avoid this is to treat your company like you work for AT&T. No cash or other funds should come out of your business unless there is a paper trail. You can't reach into your virtual cash register to take out $20 to fill the gas tank for errands. There needs to be documentation on what budget category goes with that expense and why you're paying it.

5. What Should You Be Delegating? I'm horrible at accounting and tax forms. I hate doing it and it takes me forever. These are tasks that I delegated as soon as possible after starting Legal Direction. It is much more efficient for me to spend my time giving legal advice and drafting legal documents than it is to figure out bookkeeping. The same holds true for your business. Maximize your time where you can earn the most money and delegate the rest.