Common Mistakes in Starting a New Business

Starting a new business is an exciting venture, but there are several common mistakes that entrepreneurs often make in the early stages. These mistakes can hinder the growth of your business or, in some cases, lead to costly legal challenges. By addressing these issues from the beginning, you can set your business on the path to long-term success. The business attorneys at Ferikes Bleynat & Cannon are here to guide you through the process and help you avoid these common pitfalls.

Insufficient Capital
Many small businesses struggle because they do not have enough capital to sustain themselves during the startup phase or in times of economic downturn. Even with a solid business plan, it can take months or years for your cash flow to stabilize. Be realistic about how long it will take to establish your business and ensure you have enough capital to survive the initial stages.

Lack of Proper Documentation
New businesses often fail to create the necessary legal documentation to protect their interests. Key documents such as Corporate Bylaws, LLC Operating Agreements, Buy/Sell Agreements, Employment Contracts, and Promissory Notes should be properly drafted and maintained. Proper documentation can protect your business in the event of audits, disputes, or questions from state or federal authorities.

No Succession Planning
It’s not uncommon for disagreements to arise between business owners. Without proper succession planning, these disputes can escalate into expensive litigation. Drafting Buy/Sell Agreements (also known as shareholder agreements) ensures an orderly transfer of ownership and fair compensation for investors in case of retirement, resignation, or disputes. This can save your business from internal conflict.

50/50 Ownership Deadlocks
While equal ownership may seem fair when starting a business with a partner, a 50/50 split can lead to deadlocks when disagreements occur. Deadlocks can stall decision-making and harm your business. In many cases, we recommend that one partner holds slightly more than 50% ownership to prevent deadlocks in critical decisions.

Choosing the Wrong Entity
Deciding between an LLC, Subchapter S Corporation, C Corporation, Limited Partnership, or Limited Liability Partnership is crucial. Each entity type has specific tax implications, operational requirements, and liability protections. Choosing the wrong entity could result in unintended tax consequences or increased personal liability. The business attorneys at Ferikes Bleynat & Cannon can help you choose the right structure based on your business goals.

Failing to File Annual Reports with the Secretary of State
In North Carolina, business corporations are required to file annual reports with the Secretary of State. Failing to do so could result in your business’s legal status being suspended, which can lead to complications in maintaining contracts, accessing credit, and other business activities. Filing these reports is simple, and the consequences of not filing can be severe.

Not Treating Your Business as a Separate Entity
If you form an LLC or corporation, it’s critical to treat your business as a separate legal entity. This includes maintaining separate financial accounts, properly documenting transactions, and following corporate formalities. Failing to do so could expose you to personal liability, meaning creditors could go after your personal assets if the business is sued or defaults on debts.

Employment Issues
Even small businesses must comply with state and federal employment laws. Failing to have written employment policies and procedures or not properly documenting independent contractor relationships can lead to costly disputes. We can help ensure you have the proper agreements and documentation in place to protect your business from employment-related claims.

Avoid These Mistakes and Set Your Business Up for Success

Starting a business is full of challenges, but many common mistakes can be avoided with careful planning and the right legal guidance. The business attorneys at Ferikes Bleynat & Cannon have the experience to help you navigate these complexities. Contact us today to ensure your new business is built on a solid legal foundation.