In today’s economic and business climate it seems that the only way to get ahead is to go into business for oneself. While this proposition seems straightforward at first glance, the truth is that founding one’s own business and handling its legal and financial aspects is a full-time job in itself. You know that your business will work the best when you can focus on doing and promoting what you love and not spending your time and energy handling legal filings, regulatory concerns, and taxes.
Though, as unappealing as these tasks can be, they are often essential to a well-functioning business that can withstand the test of time. By contrast businesses that fail to account for legal, financial and tax concerns often place themselves and their owners into difficult or impossible positions. These businesses have a much greater likelihood of folding or otherwise causing adverse consequences. The attorneys of the Hoffman Law Offices have prepared a brief article highlighting some of the mistakes commonly made by small businesses and the potential consequences of the error.
The failure to insulate personal assets from business liabilities
From the moment you open your doors and sometimes prior, the pressure to secure and grow income and funding is present. All too often this pressure can cause the business owner to lose sight of essential considerations for business entity formation. While a sole proprietorship might be sufficient for the smallest of businesses or for a personal side project, their low cost of administration can quickly be overcome by other less advantageous features of the entity. Perhaps the largest disadvantage of a sole proprietorship is that it commingles personal and business assets. This means, absent sufficient insurance coverage, that business liabilities can affect your personal property and assets. A corporation, LLC, or other form will insulate your home and personal assets from a business setback. In short, you won’t lose everything you have worked for due to a injury at the business or other business debts.
Failure to draft a shareholder’s agreement or other documents handling corporate governance
When business is booming and company founders are fully invested in a project, complaints are typically few and far between. But when there is a slow down or some key company members want to shift their focus, disputes and hard feelings may emerge. While all conflict cannot be avoided, a good deal of non-productive disputes can be eliminated through the establishment of clear policies and procedures for corporate governance. A well-drafted and clearly defined shareholder’s agreement, certificate of incorporation or other document defining each members’ rights and responsibilities can provide a roadmap for difficult and stressful periods of change.
Failure to properly handle payroll taxes and trust fund taxes
As business owners quickly discover, there’s a lot to get done and only so many hours during the day to complete it. For most businesses this means that hiring employees will soon be an essential step in ensuring continued growth. However with employees comes the obligation for the business to handle employee trust fund taxes. Most recognizably, this means that businesses must withhold employee payroll deductions. They must then hold the funds until it is time to turn them over to the government.
The reason this provision often lands business owners in particularly tough situations is because the withheld funds belong to the government. By failing to turn over the funds to the government, the business owner has essentially stolen from the US government. Failing to account and pay over these taxes can lead to civil or criminal charges. Civil liability is imposed by § 6672(a) of the US Tax Code and makes an individual or individuals that are responsible for payroll taxes personally liable for taxex that should have been paid over but were not.
Criminal liability is imposed by § 6672 of the US Tax Code and involves situation where the failure to deduct, hold and turnover was or was perceived to be willful. Willful acts are those that involve a voluntary or intentional disregard of a known legal duty. Upon conviction of a willful violation, an individual can be punished by a prison sentence of up to 5 years and a fine of $10,000 for each violation. A convicted individual is also liable for the restitution and the costs of prosecution.Rely on us for your small business legal and tax concerns
Forming a small business and getting it off the ground can be extremely difficult without trusted and experienced guidance. Take the first steps towards eliminating the anxiety involved in handling the tax and legal aspects of your company by calling the Hoffman Law Office at (800) 897-3915 today or contact us online.