I’ve been a business and litigation lawyer in the District of Columbia, Maryland, and Virginia for over 25 years, working primarily with women-owned businesses. I focus on women-owned companies for two main reasons. I recognized a pattern in my cases that I wanted to break. Generally, a woman went into business with a man, a friend of a friend. The partner was someone they trusted because of his connection to someone else the woman trusted. Then, the “trusted” business partner took financial advantage of the woman-business-owner. Often, these women were left with crushing debt and massive self-esteem loss while their former male business partners had just opened new businesses. I questioned what was different about a woman-owned business and why did so many intelligent women, myself include, sometimes make bad business deals?
There is a fundamental difference between the fabric of a woman-owned business and a male-owned business. In my experience, women-owned businesses are often started because the owner finds a community she wants to serve. Do homeless shelters desperately need intimate apparel and feminine hygiene products? Great! Let’s start a charity to provide these products. “Visit I Support the Girls for more information.” Our focus is often less on making money and more on how we can help. The fabric, the very heart, of a woman-owned business is relationships.
Men focus on money. They also tend not to treat a setback as a personal failure. That’s not to say male-owned businesses are soulless or aren’t service-driven. But your average woman worries more about the long-term relationship than the short-term “deal.” This is a big reason why female-owned law firms are so successful.
Women excel at creating and maintaining relationships. And relationships, whether for a female-owned law firm or any other business, are what make us powerhouses. They can also be our greatest weakness. You wouldn’t lay out an elaborate picnic using fine china and silver on a moth-eaten blanket. However, we do to our businesses when we prioritize relationships over protection. We put our business and our future at unnecessary risk. We unintentionally leave our companies open to driving over legal landmines. It’s time we patch the holes in the fabric of our business to become whole women with whole companies.
Whether you are just starting your business or have been in business for decades, here are some common mistakes that blow holes in the fabric of your business and how to avoid them.
MISTAKE #1: Operating As A Sole Proprietorship
When you are a sole proprietorship, the business is just you. Creditors look to your assets to pay the business’s debt. Joan didn’t form a company when she started her editing business because she didn’t think she needed the protection. Then she ran into the client from hell. After a series of nasty events, the client wanted Joan’s social security number (SSN) to issue 1099 for the small amount of work he paid for. Joan didn’t want to give him the number because she was rightly concerned about how he would use it. I helped Joan incorporate “Joan’s Editing Services LLC” and get a Federal Employer Identification Number (FEIN) for it. Joan then gave the client the company’s FEIN instead of her SSN. Even if you are part of a multi-level marketing company, if your business gets sued, it’s you who get sued as a sole proprietorship. Incorporating is the easiest and cheapest way to protect your assets from your business (and the clients from hell you can’t avoid).
Incorporate Your Business As Either A Corporation Or LLC.
MISTAKE # 2: Not Getting It In Writing
Handshake deals or verbal agreements are problematic. How problematic depends on how meaningful the relationship and understanding are. Not getting it in writing with co-owners can rip the fabric of your business apart. Not getting it in writing with a client can lead to litigation and revenue loss.
I’ll sometimes hear that hiring a lawyer is “too expensive” or get asked why to spend the money on written agreements when you are uncertain the business will succeed. Let’s debunk both these arguments.
Getting a written contract doesn’t have to break the bank.
There are significant legal resources available to business owners. I’m not a fan of forms bank services (the ones where you pay a small fee to download a contract template) because using an incomplete or wrong form for your business can create a false sense of security or different problems. However, if it’s what you need to do when you’re starting, spend the money to buy a short hour-long consultation with an attorney to ensure you pick the correct form for your business. I strongly suggest working with a lawyer rather than a bank.
Not all legal services are billed at hourly rates. I often draft a client’s initial business documents on a flat fee basis, so they know what the expense will be, and if needed, we can agree to a payment plan. Also, working with a lawyer and spending a few thousand dollars on getting your business correctly set up is a whole lot cheaper than litigation or the failure of that business because you didn’t get it in writing. In these worst-case scenarios, you could be facing legal bills of tens or hundreds of thousands of dollars or the loss of your business. Invest in yourself and your business. You’re worth it, and when problems arise, you’ll be glad you did.
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When’s the “best” time to get it in writing?
At the start of the relationship.
That’s the honeymoon stage. The intentions behind starting the business are fresh in everyone’s mind. Also, legal work goes into the “important but not urgent” file once the company starts operating. “You’ll get around to it.” Even if you don’t run into problems, getting everyone to agree to terms is generally more difficult once the business has had success than when you’re just starting.
I had one client where two of the shareholders wanted a shareholders’ agreement addressing what happened to a shareholder’s ownership when certain events (like being fired) happened. The third shareholder, Leslie, didn’t want to be forced to sell her stock to the company at a fair value if she was fired for cause. They never reached an agreement. When Leslie started acting against the company’s interests, the other shareholders couldn’t end Leslie’s ownership, even when she was hurting its business, other than going to Court. This put the company at risk of closing and everyone, including the company’s thirty employees, losing everything. You can avoid this risk by planning for it before the problem arises.
Even with written agreements, there can be disputes.
Don’t get me wrong. A written document won’t make your business bullet-proof. There are always disputes. A well-written paper helps you avoid some disputes, and if the clear language of the agreement can’t resolve the dispute, it puts some borders on what’s at issue. A business coach’s contract had a disclaimer that she could not guarantee results because those depended on the client’s actions. A month after her coaching session, Pria demanded a partial refund because the business’s sales hadn’t increased. I represented the coach in responding to Pria’s demands, her Better Business Bureau complaint, and her attorney’s demand for a full refund. I referenced the contract language that said Pria was solely responsible for her results each time. Without that written disclaimer, the coach likely would have refunded the total amount of Pria’s coaching, not because the coach did anything wrong, but because the cost of fighting the dispute would have been more than what she was paid. Instead, the coach spent a couple of hundred dollars to resolve the issue. Getting it in writing saved her thousands of dollars.
SOLUTION: Get It In Writing, Every Time, with Everyone.
MISTAKE #3: Misclassifying Workers for Wage Purposes
I once overheard a business coach tell her clients that the company should hire its first employee as an independent contractor to save on taxes and reduce the cost of that initial hire. I interrupted this horrible advice to set the record straight. You can’t pay just anyone as an independent contractor. The penalties for doing so improperly are hefty. There are so many misconceptions about when a worker is an independent contractor.
What makes a worker a valid independent contractor?
Control, control, and control. The more power you have over the worker rather than the end product, the more likely that worker is an employee. Generally, having the worker come to your office and perform work on your equipment is a good indication that the worker is an employee. But now? In post-COVID-19, work-at-home days, is that worker still an employee? If only the location of the work changed, then probably yes. Keep in mind that independent contractors work for more than one employer. They may even work for business competitors. After all, what does it matter if the bookkeeping company I hired works for another law firm? If your“independent contractor only works for your business, that worker is likely an employee.
Know when overtime pay is owed.
The other area where I see a lot of unintentional misclassifications is overtime pay. An employee is entitled to overtime pay or not. As simple as that tip sounds, the test for who isn’t allowed to work overtime isn’t easy. And despite your best efforts to correctly classify an employee, you may get it wrong. Like with the independent contractor’s misclassification, the penalties for mistakes are hefty. I once had a client who didn’t pay his workers overtime because “no one in the industry did.” Needless to say, when those workers complained to the Department of Labor, his understanding of the industry standard didn’t matter. He owed significant backpay. We negotiated a payment schedule and a reduced penalty so his business survived.
Misclassification can be a business-killing mistake.
Don’t fall into the trap of misclassifying workers because you think you’re saving money (you’re not) or because no one pays that way. The common wisdom is often wrong on these issues. Even innocent mistakes in classification can be costly. Having a written legal opinion as to why you classified your work the way you did will help reduce what you owe in the case of mistaken misclassification.
SOLUTION: Get help classifying workers. It’s tricky to get this right. Having a legal or another opinion on classification may help your business avoid some of the penalties and legal fees if, ultimately, your classifications are wrong.
MISTAKE # 4: Not Keeping Up With Compliance Paperwork.
We’ve all been there. The re-registration comes from the state, and the deadline for submitting the paperwork is over a month away. The registration documents go in the “important but not urgent” pile. The problem with that? Many businesses run from one fire to another. How often do you look at the “not urgent” pile? Generally, when you have a relatively slow minute. Then it’s an “oh, right, I have to do that,” but before you do it, you’re off on another issue.
Don’t make this mistake.
Most states will deny you access to their courts if your business isn’t validly incorporated. While you may say, “well, I’m not planning on suing anyone, so why do I care?” you need to care. You never know when a big client isn’t going to pay or when your business will be sued, and you’ll need to file a counterclaim.
Allowing your company to lapse or go out of “good standing” may prevent you from collecting what you are owed or delay getting a needed business loan.
Even if you keep your company registered, there may be other registration and licensing deadlines that can harm your business if they lapse. For example, suppose you are in a regulated industry like construction and your contractors’ license lapses. In that case, you might be working illegally, and you won’t be able to enforce your contracts and collect what you are owed.
SOLUTION: Maintain a calendar of critical compliance deadlines and ensure someone is responsible for ensuring the proper paperwork is timely completed and filed.
MISTAKE #5: Not Trusting Yourself and Not Celebrating Successes.
Women are tough on themselves.
At a Peace Conference in Canada in 2009, the Dalai Lama said, “the Western woman will save the world.” Women inherently bring a greater focus on nurturing and connection. I don’t think the Western woman will be alone in saving the world. No, she’ll reach out to her sisters all over
the globe and form the connections in business and life that bring people closer together and build them up rather than tear them apart. Still, the Dalai Lama had the right idea.
Before we can save the world, we need to value, protect and nurture ourselves and our businesses.
Study after study shows that women rank themselves lower than men when asked to rate their performance or confidence. Women are less likely to apply for a position unless they match all the qualifications, while a man might use it if he reaches 25% of the capabilities. Men tend to move on from “failure” quicker than women do. Emerging studies show women were hurt more socially and financially by the COVID-19 quarantines than men.
Should we throw our hands up in despair and give up?
There are obstacles on the road to success. Society puts some of them there, and we put some in front of ourselves. Yet, the businesses we create are diverse and vital. Relationships are our strength. These relationships and being “busy” shouldn’t blind you to the steps you need to take to protect your business. Navigating the most common legal landmines will allow your business to start on a stable foundation for growth. We owe it to ourselves and our communities to build strong business and add depth and color to the tapestry of life.
As 2021 turns into 2022, remember to CELEBRATE.