Everyone tells you what to do to succeed in business;  you also need to know what not to do if you don’t want to fail.

Running your own business is the classic American dream.  It’s romantic and heroic.

The romance of self determination, market recognition, and profit obscures the fact that the overwhelming percentage of small businesses fail within 5 years.

I love entrepreneurs.  They are creative, determined, skillful, and incredibly  hard working.  And still they fail.

Those failures represent not only dashed dreams, but financial pain.  That financial pain is personal pain as well.

In thirty seven years as a bankruptcy lawyer, I’ve found themes in why they failed.  Here is my list of five behaviors tied to business failures.

They plan only for success

The business plan assumes steady straightline movement toward growth and profit.  A typical plan may start small and project growth.  But it doesn’t plan for setbacks.

• What if it takes twice as long to get a toe hold in your market?
• What if capital costs more than you think?
• What if your pricing model  craters?

Before you take the self employment plunge, you need to assess your ability to survive if your rosy plan for success is off by 25%.

The entrepreneur loves the craft, but not the business

If you’re a great carpenter, a great cook, or a great lawyer as an employee, it’s tempting to set out to ply those skills for your own benefit.  Run your own business, the way you think it should be run, and make more money doing what you do well.

When you go into business, you wear two hats:  the skilled professional AND the business manager.

Many business failures are grounded in the entrepreneur spending all his time on the craft, and less than the bare minimum on management.

Employment laws are ignored, bank accounts aren’t balanced, taxes are postponed.

To be a success in business, you need to attend to business, or to partner with someone who loves the business side of things.

They pay too much for existing business

Buying an existing business seems like the answer to all the start up difficulties.  It’s a turn key operation, often coming with some transitional help from the seller.

And, all too often, too good to be true.

The first question to ask is why the business is for sale.

Frequently, it’s because it isn’t really making it.  It may be paying the expenses of operation, but it isn’t actually supporting the owner who works there.  The hours are too long, the challenges larger than the rewards, and the owner wants out.

Ask yourself, why you want in under those circumstances?

Ask, too: are the books up to date?  Reliable?

Another motivation for sale is that the sellers want to retire and they see the business as their retirement plan.  To substitute for retirement savings, the selling price needs to be generous.

Is the business priced at what the sellers need, or what the business as constituted is worth?

No profit if financed on credit cards

Credit cards are associated with consumers and household budgets.  But all too often, new businesses are started on the owner’s credit cards.

The myth of the business credit card

Plastic is pitched to small business owners as either a convenience, a status item, or the bedrock of business operations.

It’s really hard to make a profit if your seed capital requires interest payments at 22%.

Also, far from simplifying business bookkeeping, credit cards obscure the fact that the debt service you pay on the credit card this month is really paying for a fraction of last month’s costs of operation.

Credit card payments become their own line item in the budget rather than simply a means of paying for inventory or services required last month.

They gamble their retirement on business success

When your retirement account  is the only hoard of money you’ve set aside and you want to go into business, the temptation to draw on your retirement to make it happen is almost irresistible.

You tell yourself you are making an investment in your future.

When you do that, you break one of the basic rules of investing:  diversification.  You have put all of your retirement “eggs” in the business basket.

If the business fails, you have neither a livelihood nor a nest egg for old age.

The phenomenon is not confined to those just starting in business.  Too many folks in my bankruptcy office to deal with a dying business tell me that the business was their retirement plan.

Instead of setting aside earnings for retirement, they plowed their money back into the business.

They expected to sell it to retire.

And now there’s nothing to sell.

Make a better business plan

Give some thought to the  business side of your craft.  Make a plan and go for it.  You can be great.

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How to sign the corporation’s name to business deals

Your business needs a prenup

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Image: Pixabay

It isn’t just marriage that can get you roped in to a bankruptcy case that isn’t your own.

Own community property and a bankruptcy filing by your spouse or your soon-to-be ex can drag you into a bankruptcy court.

But the issue is broader:  joint ownership of any kind of asset in any state, community property or not,  exposes you to a loss of control of your property if your co owner files bankruptcy.

The bankruptcy court has the power to force the sale your property or require you to buy out your co owner.  On a timeline not of your choosing.

Co owners at risk

If your partner in a business or a piece of real property files bankruptcy, the partner’s interest may be sold for the benefit of your partner’s creditors.

Oops!

And since the sale price of just your partner’s interest in the property would probably be less than the fraction of the partner’s ownership, the Bankruptcy Code gives the bankruptcy trustee the power to sell your interest too. [Read more…]

John Hancock knew how to sign his name- so large that King George could read it without his glasses.

But most small business folks who do business as a corporation are clueless when it comes to signing contracts on behalf of their corporation.

When they sign their name, without more, on the line that says “Owner”, they may have made themselves personally liable for the obligations in the contract.

Signing just your name likely defeats the very reason that you incorporated your business.  You’ve just put yourself personally on the hook.

Why your business is a corporation

In the law, a corporation is a legal person, separate from the individuals or other entities who own its stock.  Despite how invested, financially and emotionally,  you are in your business, you and the business are really two separate entities.

The invention of the corporation made it possible for business people to limit their risk in an incorporated business to the amount they paid for their stock.  The creditors of the corporation couldn’t collect their claims from the stock holder.

That ability to limit your risk, to keep your business creditors away from your personal assets, probably figured large in your decision to incorporate.

How a corporation gets things done

Because a corporation is a “person” without any fleshy substance, it needs people to act for it.

Those people are its employees, managers, or its officers.  They can wield a pen and sign for the corporation.

A signature on a contract serves as proof that the signatories take on the benefits and burdens described in the written documents.  Physically, a real, live person has to sign.

But how do you sign for the corporation?

Acting for the corporation

Let’s assume that the document in question is an order for the design of a new website for your business and a year’s worth of maintenance.

You are the stockholder, president, and the manager of  My Business, Inc.  (For most of us small business folks, we are also the secretary, janitor, bookkeeper for the business as well.)

If this deal goes south, you don’t want the service provider suing you, liening your house, and garnishing your wages.  This is a corporate deal.

So, here’s how you sign the contract on behalf of your corporation:

MY BUSINESS, INC.

___________________

By  Your Name, President

You sign your name as you always do, but in your capacity as an agent of the corporation.  

Contracts don’t have to be signed by the president.  They can be signed by any party the corporation has authorized to act for it.  You could be, just as legally, the vice president, the CFO, or the general manager.

By adding your role in the corporation, you have signaled that the party to the agreement is the corporation, not you personally.  The entity making the promise to pay is the corporation, My Business, Inc.

Your signature as a representative of the corporation doesn’t put you personally on the hook for payment.

Good work, Mr. President!

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Write a contract without a lawyer

Essential habits for entrepreneurs

Myth of the corporate credit card

 

Fish hook image:  © johnsroad7

Usually I rant about mistakes clients made when they incorporated their ongoing business.

Come hard times for the business, those mistakes eat into our options for the owners survival when the corporation goes down.

Invariably,

• the vendor accounts remain in the name of the proprietor,
• the stock may not have been issued, and
• it’s unclear whether there was an explicit transfer of the assets to the corporation.

If the business is beyond saving, I want the incorporated business to go out of business. The business can shut down either through a bankruptcy filing or just by closing the door.

The goal is to let the corporation die without killing the owner in the process.

That requires  as much distinction between the assets and debts of the business and the assets and debts of the business owner as possible.

Yet when the incorporation was sloppily done, that line between owner and business may be murky.

Owner still needs to eat

The challenge when a small business fails is making sure that the owner has a way to make a living after the doors close. [Read more…]

Incorporate to protect yourself from the debts of your  business, shriek the ads.

That’s the theory of incorporation:  create a separate legal entity in the form of the corporation.

Let that entity incur debt and expose itself to other risks.  If it fails, the personal holdings of the owners of the corporation are safe.

But, in the real world, most big ticket debts that a corporation might incur require the guarantee of the owner.

So if both corporation and owner are liable for the business debts, what has incorporation gained you?

You’ll be surprised.

Incorporate to protect the business

Consider the same move, incorporation,  for the opposite reason.

Incorporate to protect the business from the owner’s debts.

A sole proprietor and his business are one and the same in the law.

When the proprietor has a tax problem or there’s a judgment outstanding against him, all of the business cash and assets are exposed to that debt.

The business bank account can be levied for the owner’s back child support or a judgment against the owner for unpaid magazine subscriptions. [Read more…]