Some Practical Tips for New Businesses

It is not uncommon to have clients that are self-employed, but in need of filing bankruptcy. Their business has not thrived, and they are in need of not only managing their personal debts (including guarantees on business obligations), but of wrapping up their businesses as well. I am happy to do so, and this almost never requires filing a bankruptcy for the business, as a business dissolution is something that is handled well by state law.

By OSTFlorida (Own work) [CC BY-SA 3.0 (http://creativecommons.org/licenses/by-sa/3.0)], via Wikimedia Commons

By OSTFlorida (Own work) [CC BY-SA 3.0 (http://creativecommons.org/licenses/by-sa/3.0)], via Wikimedia Commons

There are some key common themes in those businesses that have failed (though some just are at their logical end through no fault of their owners), that if understood in advance, might have allowed the business to survive, or at least end with less damage to the owner.  None of these are, by themselves, a replacement for hard work, a good idea and just some luck, but they sure do make things go more smoothly if things go sour.

Form a business organization - Anyone can start a business simply by declaring themselves a business, giving themselves a business name, and start working. This is rarely the best choice. Formation of a corporation or LLC gives at least some liability shield, plus these organizations are more equipped for expansion and the addition of partners. It is very easy for most people to form an LLC (even online) through their state Secretary of State’s office, but it is equally important to create a functional operating agreement or bylaws, so the management of the company’s business is clear and in writing.

Hire professionals - You may be a revolutionary in the world of window washing, or have designed the next mousetrap, or sliced bread, or uncovered the algorithm that will unseat Google. This is the inspiration behind opening a business - that we can do it better. But you probably aren’t an accountant, or attorney, or web designer. But you still, as a business owner, have to manage a web presence, taxes and payroll, and the law. To the extent you can, unburden yourself of these professional items, so you can concentrate on the core output of your business. Nobody makes their business more successful being in an audit.

Pay your taxes and withholding - This seems obvious at first blush, but many business will begin to not take care of the tax obligations when they begin to struggle. This is a terrible idea, because most tax debt will follow you for many years personally, because the law allows for those kinds of debt to attach to the prinicipals of the business, not just the corporation itself. If your business can’t meet all its obligations, talk to an attorney or advisor first, before deciding who to pay or not pay.

Avoid personal guarantees as you can - While a corporation or LLC will shield shareholders from liability of its debts, it will not shield you from contractual obligations you sign for. Many (most?) lenders will require personal guarantees to finance capital for a business. This can be fine, but you should pay close attention to who wants a guarantee, and whether you can find an option for some financing that does not include a personal guarantee (or heaven forbid a lien on your personal real estate). This will further protect you when you transition out of the business. And if you need to give personal liability at first, develop a plan to switch to non-guaranteed debt (or just get out of debt) as part of your growth plan for your business.

These are by no means an exhaustive list of business tips, but just a few to keep in mind to reduce risks to owners as they grow a business. Be attentive to these, and even if your business doesn’t thrive, you may personally survive to try again.