As an estate planning attorney, I’m constantly amazed at how many people are in business for themselves but don’t pay attention to the best way to organize their business or keep it running as a proper business entity. Of course, litigation lawyers, auditors and the IRS really love it if you’ve not done some of your business actions properly. They win at lawsuits, pile on accounting fees, and even disallow what could have been proper business tax deductions.
Over the years I’ve compiled a list of what I have come to call “The Five Fatal Mistakes Business Owners Make.”
1. Not having a limited liability company (LLC) to conduct your business.
Any business owner should have an appropriate separate entity (an entity that has an independent, separate and distinct existence from the business owner) from which to conduct all business. Business structures to consider are a limited liability company, a corporation, a Subchapter S corporation or a limited partnership—but not a sole proprietorship.
2. Not treating your business like a business.
Be proud of your entity’s separate existence. Use your corporate or company name on all your business materials. You must have separate business bank accounts, business credit cards, business letterhead, business cards, and business promotional materials. Be sure to have your annual meetings and keep your minutes up to date. Yes, even if you are organized as an LLC you need to have annual business meetings and records or minutes of such meetings, even though others may say they are not required.
3. Comingling your money.
It’s great to be earning money, but always be vigilant to use it in the proper manner. Use your personal funds for personal expenses and use your business funds for all business expenses. You are not identical to your business. Don’t pay your personal bills out of your business bank account or vice versa.
4. Not having a living trust to hold your business entity.
Don’t let your business be interrupted by your death or incapacity. If your business entity isn’t owned correctly, it may be subject to probate. If you own a network marketing business, you or your company are an independent marketing associate of the parent company.
Network marketing companies typically teach their associates that the business they build can be passed on to their families or heirs under their will or trust. Link your business with your estate plan. Avoid an interruption in your business in the event of your death or incapacity. Use a living trust to own your LLC membership interest or corporate stock. This will eliminate the probate of your estate. Then, upon your death or incapacity, your network marketing company will not be tied up in the expensive, time-consuming and public process of judicial interference called probate. You want to do all you can to create a seamless transfer of your business upon your death. This is what a living trust will accomplish for you.
How great would it be if all those who entered into a business associate agreement with any multilevel marketing company would take a moment to consider what would happen to their business if they for some reason were suddenly not there? Who would take over? How would it happen? How expensive and time-consuming would it be for those who are left behind? And above all, what can business owners do to make sure things go the way they intend! Make estate planning a part of your business plan.
5. Not taking advantage of your business tax deductions.
Do you track your business deductions? Do you take full advantage of the business deductions to which you are legitimately entitled? Many people who own a home-based business (whether large or small) are educated taxpayers. They see gargantuan reductions in their tax load, thanks to the number of allowed deductions for business owners.
Learn to think differently. Always ask yourself, “Is there a business purpose for this exercise?” You will find there is a business purpose for many activities.
Businesses have many tax deductions that wage-earners don’t have access to. Under our tax system, business may deduct costs for transportation, health care, meals, home offices, home gyms, child care, and other items business owners would have to buy for personal use if they weren’t used in their business. And as sad as it may sound, you should never take a vacation. Find a business purpose for every trip. Learn the basic rules of tax deductions and give yourself a raise!
Now that you’ve reviewed the five fatal mistakes business owners make, I’m sure you’ll want to eliminate each and every one of these possible mistakes from your own business.
Make certain that your business is conducted through the proper business entity. If you don’t have one already, create a limited liability company.
Always remember to keep the proper business records. Have at least an annual meeting and keep minutes of actions taken at this meeting. Have a company record book.
Take care to pay personal expenses out of personal bank accounts. Always pay business expenses from the business bank accounts. Never comingle these funds.
Keep in mind that your revocable living trust will be the foundation of your estate plan. It will provide you with protection for both your personal and business assets.
Take full advantage of the business benefits Congress has so generously provided you with. These include asset protection, business deductions and company organization.
Don’t wait another day to eliminate any fatal mistakes business owners make.
STEVEN W. ALLEN, ESQ.has been an Estate Planning attorney
for over thirty years. He is a member of the Arizona Bar Association,
National Lawyers Association, National Academy of Elder Law
Attorneys and National Speakers Association. He is author of
You Can’t Take It with You … So How Will You Leave It Behind?