This month, we are continuing our series on 10 Common Mistake Business Owners Make. In the last three months, we discussed:

• The importance of using written and not oral contracts
• The value of defining rules for employees
• The importance of having a support network of professionals
• How to choose the right business structure

This week we’ll discuss the mistake of not keeping proper business records. 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.

Mistake # 5 – Not Keeping Proper Records

Keeping a complete and detailed set of records is good advice for both your personal and professional life. Therefore, this month’s mistake is quite simple to avoid – make sure you keep a meticulous set of records for your company! When in doubt? Document, document, document! While it is a simple mistake to avoid, the consequences of making the mistake can sometimes be severe.

We’ve already discussed the importance of having documented, written contracts; but keeping proper records also applies to other legal aspects of your business and, in particular, to the accounting and tax side of your business.

For example, if you are claiming an expense as a business expense on your taxes, make sure you have a proper receipt of the transaction. If your business involves a higher physical risk experience for your customers (e.g. – zip lining), make sure you have a proper record of signed releases of liability. Or if you are a lucky business selected for an audit of your tax records, make sure you can easily put your fingers on all of your supporting documentation.

It might be helpful to talk to an accountant about which documents need to be kept for what period of time.

Again – documentation is key!

Proper corporate records can assist you in dealing with the IRS, help you raise capital through the ability to demonstrate a clear breakdown of your financials, and decrease personal liability by proving your business was kept distinct and “unmingled” with your personal life. This last one is important.

Sometimes when you start a new business out, it seems easier to combine your business accounting with your personal accounting – maybe you haven’t taken the time to set up a business bank account or a separate business credit card yet, so you put expenses on your personal card. Or maybe you don’t have a business line of credit, so you borrow against your mortgage to fund your start up costs.

Be very wary about mingling your personal and business finances. If someone comes after your business and they can prove that your business and personal finances were commingled, they can come after not only your business assets, but your personal ones too! From the start, be sure to keep those records documented and separated.

Other important documents to keep a record of are

• Stock ledgers
• Bylaws and operating agreements
• Minutes from corporate meetings
• Employment contracts
• Permits and licenses
• Any intellectual property records

Take the time today to organize and file these documents and you will thank yourself in the future!

 

Next Month: “Mistake #6 – Not Clearly Documenting Rights of Partners”

 

About Leah Barteld Clague, Esq.

Leah Barteld Clague 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, started by L. Content McLaughlin, serves clients throughout Maryland. Leah started with the firm in August 2012 after graduating from the University of Maryland, School of Law. Prior to law school, Leah completed her MBA and worked as a financial analyst in both the private and public sector.

In addition to estate planning, Leah has a passion for working with small businesses. As a student, she helped grow a program called “The York Business Academy” that provided brief 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.  

Feel free to contact Leah at leah@mclaughlinfirm.com or 410-660-2095.