If you are a budding entrepreneur, it sure is an exciting time. You most likely spent some time in careful consideration, deciphering that nagging feeling in the back of your mind, “Could my idea actually work?”
It’s fun to dream of clever marketing ideas, an income statement with numbers in the black, being your own boss and using your talents to pursue your passion instead of a job.
But, taking a leap of faith into entrepreneurship to pursue your idea can be scary and overwhelming.
To prepare yourself to deal with the challenges and uncertainty of entrepreneurship, you need to:
- Arm yourself with knowledge and
- Surround yourself with trusted allies such as
- coaches and business mentors
- attorneys and financial advisors
… to provide you with the expertise and guidance you need.
For example, while few people find thinking about legal affairs as “fun” (and we’ve all heard the lawyer jokes), it can be critical to the success of your business to think through legal considerations before you set-up shop.
Some important legal decisions can include:
- What structure your business should take
- How you’re planning to manage your relationship with any employees or contractors, and even
- How you’ll eventually wind up your business, including the appropriate estate planning that goes along with that.
Over the coming months, we’ll give you the “10 Common Mistakes Business Owners Make” and help dispel some common “Estate Planning Myths,” so you’re armed with the knowledge to make the appropriate decisions to make your business successful.
While these are general tips, it is important to consult with an attorney individually if you have a specific questions or concerns. The following is not intended to be legal advice.
10 Common Mistakes Business Owners Make – Part 1
Mistake # 1 – Using Oral Agreements
This is one of the most common mistakes new business owners make!
ALL business agreements should be in writing – whether it’s a contract with your employees, customer agreements, supplier contracts, or an agreement with your business partner.
A written agreement should outline all the expectations of the parties and establish rules of the relationship. For example, a customer may agree to pay you for a piece of jewelry she commissioned upon receipt of the item. However, when she comes to pick up the jewelry, her recollection is that you offered to let her pay you within 30 days and only if she is satisfied with your work.
Without a written (and signed) contract, there is no record of the initial agreement between you and your customer, and as a result, enforceability can become an issue.
Another example is an oral agreement to go into business with your friend. You both agree to split the profits and losses in proportion to the amount you invested in the company; but when it comes time to divide up the profits, your friend says she wants half of the profits even though she only invested 25% in the new company. The default rule in partnerships, unless contracted otherwise, is that partners split profits and losses evenly in a partnership. How could you argue differently without a written document?
There are a number of characteristics that allow a written agreement to be labeled as a contract:
- There must be an offer of services or goods.
- There must be “consideration” (in other words, some kind of exchange, like exchanging money for consulting services).
- The offer must be accepted.
There is a large body of law known as contract law that governs these documents and whether a contract is enforceable or if any default rules apply.
While there are a number of websites that offer contract language that you can use to get started, it can be helpful to have an attorney review any contract you draft to make sure the document does exactly what you think it does and protects you and your new business.
The mistakes of drafting your own documents can be much more costly than engaging an attorney to work with you!
Next Month: “Mistake #2 – Undefined Rules for Employees and Mistake #3 – Going it Alone”
About Leah Barteld Clague, Esq.
Leah is an attorney with McLaughlin Law Group, a boutique law firm focused on corporate (small business), estate planning, and estate and trust administration, and tax law. McLaughlin Law Group serves clients throughout Maryland. Leah started with the firm in August 2012 after completing her MBA, working as a financial analyst in both the private and public sector, and graduating from the University of Maryland, School of Law.
Leah is passionate about working with small businesses. She helped grow a program called “The York Business Academy” while a law student that provided classes on marketing, management, financing, and legal issues for small businesses and aspiring entrepreneurs. More recently, she consulted for a number of for-profit and non-profit clients and developed business plans, financial models, and marketing strategies that were presented to venture capitalists.
Leah encourages you to contact her at firstname.lastname@example.org or 410-660-2095. She’d be happy to help.