5)     Prepare for the possibility of death, disability, and the likelihood that one partner or shareholder wants to be bought out.  A buy/sell agreement should be drafted to address the possibility of death, disability, and/or one person wanting their interest to be bought out.  As a business owner, you do not want to enter business with your partner’s family members.  Upon any of the above contingencies, your business must have a written contract explaining the process for buying out your partner’s interest.  This ensures a smooth business transition period.

6)     Watch out for oral contracts.  As a small business owner, you or your partners can create an oral contract without realizing it.  If another party believes there is a contract, there may be a valid contract.  Follow the advice in #1.

7)     Be careful when you hire independent contractors versus employees.  Small business owners do not want to pay payroll taxes and hire independent contractors to avoid this responsibility.  In contrast, IRS and State of Illinois may treat your independent contractor as an employee.  Therefore, IRS & Department of Revenue (State of IL) will assess interest and penalties for back owed taxes.  Speak with an attorney or CPA before hiring independent contractors or employees.

8)     Be careful about choosing to break contracts.  Small business owners will enter contracts and choose to break them.  A lot of times small business owners do not obtain the level of service and expertise that vendors promise them.  Consequently, small business owners stop paying their vendors.  Small business owners must maintain records and specific examples and correspondence with their vendors before breaching the contract.  Evidence strengthens an attorney’s negotiating power when defending your company for breach of contract.  The power of a written word is more powerful than oral communication.

9)     Hiring and firing employees should be carefully done.  Many small business owners do not provide their employees an employee handbook.  An employee handbook should be carefully drafted by an HR consultant or an attorney to ensure that costly litigation does not force your small business out of business.  Small business owners should be careful to document why an employee was fired.  Fired employees sue their former employers.

10) Do not infringe another company’s trademark.  Small business owners especially high tech companies should be careful that they do not violate another company’s trademark.  A trademark is a logo/symbol that represents another company’s good will such as a logo, name, and/or symbol.  Fore more thorough analysis, you should consult an intellectual property attorney.

11) BONUS - Follow Federal & State Securities Laws when you raise money from investors.  Small business owners must comply with Securities Act of 1933 & 1934 and state securities law.  A private placement memorandum (PPM) is required.  A PPM is similar to a business plan.  A PPM should address relevant legal issues and make full disclosures to investors.  A PPM is necessary to enable an investor to evaluate the soundness of a business investment.  When raising money from family and friends, make sure  you comply with Federal and State Securities Regulations.

Sean L. Robertson is the principal partner with Sean L. Robertson (SLR).  SLR is a tax planning boutique law practice that concentrates in business and corporate planning, tax planning, and estate planning for business owners and real estate investors.  Visit him on the web at www.SLRTaxPlanning.com.