In the last 100 years or so many businesses have appeared on the American landscape and have grown to behemoth proportions. In many ways, it seemed as though they were inviolate; that nothing could undermine them and bring them down. However, in the last couple of years we have seen unprecedented corporate failures. It has become glaringly apparent that corporations, like people, have certain vulnerabilities. Even large institutions can fail spectacularly. Let’s take a look at some of the most common mistakes business people make that can tank their business overnight, and some things that can be done to avoid these catastrophes.
1. Get insurance for your business. Many people think of business insurance as a luxury. When business is tight, insurance premiums can be absorbed by more pressing corporate obligations. It is vitally important, however, that you maintain proper insurance in sufficient amounts for your business. For instance, if you have employees, Worker’s Compensation and Employer’s Liability insurance coverage is an absolute must. Your business may be hit with heavy fines by the state if your employee gets injured, and you don’t have this coverage.
Separately, businesses typically have Commercial General Liability insurance to guard against accidents and other damaging occurrences in the business place. This type of policy will be invaluable if a non-employee third party is injured on the business premises, or by your goods or service.
Additionally, professional firms like architects and attorneys often carry Error and Omissions coverage to guard against possible mistakes. Many professionals feel that they are much too careful to make mistakes that could be fatal to their business. However, to err is human. If your client’s business is worth any real money, it is possible that you could make a mistake that would be worth millions – and your client just might sue you. Without insurance such an occurrence could easily ruin your business.
There are several other types of insurance that a business may need. You should contact an insurance professional to see what type of insurance, and what coverage amounts will be right for your business.
2. Keep excellent corporate records. One of the largest benefits for a business that is organized in a formal corporate structure is the limited liability protection that the business owner enjoys. If you are an individual in business, and you interact with, or provide goods or services to the public, and a member of the public is injured or experiences some other damage or loss as a result, you could be personally sued for the full extent of the damage. However, if you were to incorporate, or form a limited liability company, or some other form of corporate entity, the maximum that you would be liable to the injured person for is an amount equal to your investment in the business. For this reason, if you are sued, the injured person can only get the cash and assets that you have invested in the company. They cannot “pierce the corporate veil” and hold you personally liable for actions you took in furtherance of your business.
Importantly, in the absence of the corporate structure, or if certain corporate formalities are not adhered to, you are completely exposed to the full extent of the injury or damages caused by your product or service. For this reason it is very important for a business owner that interacts with, or provides goods and/or services to, the public, to properly organize the business by making all of the proper corporate filings, by having letterhead and business cards so that the public knows they are doing business with an entity and not an individual, by having annual director and/or shareholder meetings as applicable, and by keeping proper minutes of those meetings. By adhering to the corporate formalities the business owner can avoid an unforeseen corporate meltdown.
3. Avoid entering into general partnerships. When friends, loved ones and acquaintances go into business they often think of forming a general partnership to govern the parties’ obligations and to structure the returns from the venture. However, it is important to know that general partnerships do not offer any limited liability in the marketplace. In fact, not only can you be held personally liable for the actions taken in the course of the general partnership, you could possibly be held liable for actions that your partner takes that are outside of the business venture.
For example, say you and your partner attend the same client Christmas party. At the end of the evening you and your partner leave. You get in your car and head east and your partner heads west. If your partner had too much to drink, and gets in an accident in the company car, the person your partner hits can sue your partner, your business venture and YOU personally for the harm caused by your partner. There is no limited liability for you, or for the business, in this instance because of the nature of the general partnership. You could lose the business, your home, and all of your personal assets in the event of litigation. For this reason, I never recommend general partnerships to my clients. If they do enter into a general partnership, I encourage them to do so via a corporate entity, which does provide the limited liability protection.
4. Conduct background checks on prospective employees. The world we live in today is often unpredictable. We are all aware that violence in schools and in the workplace is on the increase. Employers can be held liable if an employee “goes postal” and hurts someone on the job, and it is later discovered that a criminal background check would have revealed that the perpetrator had a sordid and violent past. These checks have become necessary, even if the employee doesn’t have to be bonded or insured in their position. Develop a written policy on background checks and on employee behavior. Be certain that each employee receives an employee manual that contains these policies, and that they acknowledge the receipt in writing.
5. Understand the regulatory scheme under which you are doing business. Do you produce or work with hazardous materials in your business? Do you, or does your business, require special licensing in order to properly function? If so, be extremely certain that you understand the federal, state and local rules that govern these instances, and that you are in full compliance with these laws and regulations. If you do not understand the rules, hire a consultant with the requisite education and experience to guide you.
Importantly, situations involving hazardous materials can arise even where someone unrelated to your business causes the pollution. If, for example, you purchase real property that has underground storage tanks, or that was previously used as, say, a munitions manufacturing plant, the soil or building you purchased may be contaminated. You may be on the hook for some major clean up costs, particularly in the event that your employees become ill or injured. For this reason, if you purchase property that has been used for commercial ventures, it is extremely important to include a phase 1 environmental survey as part of your due diligence in examining the property. If the survey shows the existence hazardous substances, you could force the seller to clean up the property before the sale will close, or cancel the sale entirely.
Alternatively, in the event that your business causes pollution, and you manage to sell it to someone that didn’t conduct this due diligence, you may not be off the hook. The environmental regulations in many states reach back through the chain of title and hold everyone that owned the property liable for some portion of the cleanup. This could easily turn into a huge, expensive regulatory and/or litigation mess.
6. Do not ignore Internet marketing opportunities. The rise of the Internet has changed the face of business. No longer will print, television and radio ads and billboards suffice for your marketing plan. If you are a highly specialized professional with little or no Internet savvy, and little desire to develop the expertise, you should consider hiring a consultant or employee to handle these functions.
Social media is quickly burgeoning into a sophisticated revenue-generating advertising medium. If that’s not enough to move you from your position, consider the fact that at the present time much of the social media marketing avenues are currently free or extremely cost effective. However, this may not be the case forever. If you are unwilling or unable to invest the time and money on Internet marketing, you will lose ground to your competition. The Internet represents a brave new world where business is instantly global. Embrace it passionately.
7. Trying to do it all yourself is pure folly. If you are like me, you like to have your hand in every aspect of your business. You pride yourself on your ability to create the superior product, perform brilliant customer service, craft winning business plans and balance the books. However, doing it all yourself almost guarantees that you will miss something important. You should seriously consider building a mastermind team of people that have skills and backgrounds that differ from yours.
Use them as your board of advisors. Engage in brainstorming exercises with them, and, above all… be coachable. Be willing to accept suggestions and to implement changes in your business. Once you open yourself up to this process, you’ll be amazed at the opportunities your mastermind team will uncover for your business, and glory at the many and varied business ideas that will take shape.
8. Honesty is still the best policy. It seems odd to include honesty in this top 10 list. However, the disintegration of companies like Arthur Andersen, and the meltdown of the California energy markets due to scandals caused by Enron and other companies and individuals still loom fresh in the minds of many baby boomers that had their retirement funds completely gutted when the markets crashed and energy prices soared.
Your reputation is all you have. Whatever your industry is, it is a finite universe. People talk. If you think you beat that person out of their hard earned money with impunity, think again. There are no shortcuts in business. Going for the fast buck can lead to your quick demise.
The Internet has developed into an open forum for discussions about the quality of goods and services. People that would have fumed or suffered in silence no longer need to do so. They can and will lambaste your character over the hot coals of public opinion. Additionally, Sarbanes Oxley and other transparent corporate reporting requirements have been developed in recent years to hold executives’ feet to the fire and to ensure honesty in the accounting process. People do business with others that they like and trust. If you want your business to be a perennial success, employ a healthy dose of honesty in all that you do.
9. File your personal and corporate tax returns when they are due. Okay, the Internal Revenue Service (IRS) does not play. I’m constantly amazed at how individuals and business owners can let one, two or even three years go by without filing their tax returns. In the event that you find yourself owing taxes that you cannot pay, file your tax returns anyway. If you owe penalty and interest payments, the failure to file will not mitigate or erase this burden. The failure to file can, however, exacerbate the problem.
Chances are that criminal penalties will not be assessed against someone that files their tax returns without the immediate ability to satisfy the debt. The result may be penalties, interest, garnished wages, or even liens against real or personal property. However, criminal penalties can result where individuals and business owners simply ignore the problem. The bottom line is, do not let the IRS come to you because you have failed to file your tax returns. That is when the real trouble begins. Enlist the help of a tax professional that specializes in dealing with delinquent taxes. Facing the issue head on is your only real chance of dealing with a delinquent tax situation successfully.
10. Failure to listen to your customers can be deadly to your business. Your customers are the best source of ideas and inspiration available to you. You should welcome their compliments and, more importantly, their criticisms. Customer criticisms can lead you to innovations that can help your business corner the market as you develop your product or deliver your service in a way that no one else in the marketplace has done. Conversely, if you continue to give products or service that customers don’t like or don’t need, they will find another company that is more responsive to their needs. It has often been said that 80% of your business comes from 20% of your customers. Be certain to listen to the vocal minority. It could literally save your business.