Running a business is not a simple task. Running a successful and profitable business year-after-year in the face of changing circumstances and emerging challenges can feel downright impossible. This isn’t even considering the fact that the problems your company will face, and hopefully overcome, may require different backgrounds and training to identify and solve. For instance, one week your company may face cash flow issues best explained and addressed by an accountant. The next week supply-chain issues may require the perspective of a project manager consultant with a strong background in logistics.
You business’ tax and legal concerns are no exception to this rule. However, far too many business owners make the judgment that legal and tax guidance is outside of the company’s means without considering the importance of the issue. Many companies end up making fatal mistakes that could have been avoided had they consulted with a tax and business planning lawyer.
Mistake 1: The Small Business Fails to Satisfy its Payroll Tax Obligation
The failure to account for, collect, hold, and pay over payroll taxes is a serious error that is made all too often by small business owners. The IRS knows that small businesses are more likely than large corporations to have issues of this type because the small company lacks the resources of big business. Thus, the IRS pursues small businesses aggressively for potential payroll tax issues. Furthermore, in the State of California, the Economic Development Department is charged with administering the state portion of the payroll employment tax.
Payroll tax problems can be particularly damaging because responsibility for the unpaid payroll tax can be imposed onto an individual third-party. In some cases the third-party may be the accountant or employee responsible for the business’ payroll tax obligation. In other circumstances the business owners can be held liable for the unpaid tax. An unsatisfied payroll tax obligation can not only sink a business, it can also saddle the business’ principals with a significant debt burden that makes a second attempt difficult or impossible.
Mistake 2: The Owners Fail to Incorporate or Form an Appropriate Business Entity
Business owners who fail to take any action regarding the form of their business place themselves in a precarious legal position. While it is true that a sole proprietorship has low costs of administration and require little to no paperwork, these advantages are outweighed by the fact that the entity commingles personal and business assets and liabilities. That means that significant business losses can bleed into your personal finances and can result in the loss of a family home or other assets. By contrast an LLC or a corporate structure can shield your personal assets from business losses meaning that if your business goes under, you won’t lose everything.
Business owners who fail to take action to protect their personal assets take a big risk. A lawsuit or other large unforeseen liability can result in crushing personal debt that necessitates a personal bankruptcy or other drastic action.
Mistake 3: Failure to Draft a Shareholder’s Agreement or Other Governing Document
When a business is first established it is likely that the shareholder’s or principal’s goals are closely aligned. However, as time goes on, those same individuals may find themselves pulled in different directions or wanting to pursue different opportunities. If the parties wait until a partner or other individual wants to dissolve the entity, serious disagreements can arise. In some circumstances these disagreements can develop into expensive and time-consuming litigation that puts your ability to grow and develop the company on hold.
An experienced attorney would advise the owners of a new business to draft a shareholder’s agreement or other governing document at the outset of the arrangement. By working out at the start what will happen should a key member decide to leave, business owners can often avoid uncertainty and discord in their company.
Rely on Our Tax and Business Experience in LA
Small business owners in Los Angeles and all of California must protect themselves from not only the IRS, but also the California taxing agencies like the EDD and Franchise Tax Board. Working with an experienced and dedicated tax and business development attorney can provide your company with the solid foundation it needs to grow and thrive. To schedule a free and confidential tax consultation at the Hoffman Tax Law Offices call us at 800-897-3915 or contact us online today.