Thursday, July 7, 2011

Avoid These Ten Common Legal Pitfalls for Women Business Owners

Renea I. Saade

The number of women owning business is on the rise. According to the 2007 U.S. Economic Census, women-owned businesses grew by nearly 20% nationally from 1997 through 2002, while overall business growth was only about seven percent.

However, women-owned businesses are still failing at an alarming rate. According to an August 2010 report issued by the SBA’s Office of Advocacy in collaboration with the National Women’s Business Council and the U.S. Census Bureau, the average four-year survival rate for women owned business was 66%. In other words, 34% of women owned business fail within their first four years. Male owned businesses have a higher rate of survival with a reported success rate of 72%.

There are, of course, a number of theories and reports that attempt to explain the reasons for this high rate of failure and the discrepancies in success rates between the genders. In general, the most common challenges blamed are: difficulties accessing capital and credit; gender bias; and the often present dual-role that women must juggle as business owners and primary caregivers to their children and/or aging family members.

According to the US Women's Chamber of Commerce, women-owned businesses have not captured a fair share of federal and corporate contracts, accounting for just 3.4% of federal contracting dollars, for example. While willing and able to supply corporations with goods and services, women-owned businesses are often pigeonholed in diversity programs and not considered as mainstream sources.

Another significant contributing factor to the failure of women-owned businesses is that they are commonly caught off guard by a number of legal pitfalls that could have easily been avoided with a little foresight and planning.

Of course, all business owners are encouraged to consult with a trusted legal advisor to adequately review the legal issues and needs specific to their business since each business is unique and the laws applicable to the business vary by state and industry. But, in general here are ten common legal pitfalls:

Selecting Wrong Corporate Entity. There are many choices for creating a corporate entity such as an “S Corp.”, limited liability company, limited liability partnership, general partnership, etc. The decision can have significant tax consequences and determine whether the owner will have certain legal protections from business debts or other liabilities.

Failing to Distinguish Assets & Liabilities. Most business owners start their business or keep their business afloat during lean times using their own funds. It is imperative that business owners document capital investments and address in writing how and when they will be repaid.

Misclassifying Workers. As a business begins to operate and eventually grow, an owner must make the difficult decision whether to hire employees or independent contractors. Improper classification of workers can lead to thousands of dollars in wage assessments, civil fines, and disbarment from government programs.

Overlooking Intellectual Property. To avoid unpleasant events, a business owner should determine the availability of a proposed business name before using it, immediate register a name once it is chosen, and use non-disclosure and confidentiality agreements to protect its intellectual property.

Not Using/Enforcing Non-Competes. These types of legal agreements are critical for the same reasons non-disclosure and confidentiality agreements are critical.

Failing To Implement Appropriate Vendor & Client Contracts. Despite everyone’s familiarity with the advice, “get it in writing,” many business owners fail to implement written vendor and client contracts or ensure that the contracts they do use have all the necessary terms.

Hiring Friends/Family. Hiring friends and family or appointing them to serve on their board of directors can be very advantageous for some business owners. Appointments to officer or board positions must be for substantive reasons and not just in name only.

Being Caught Off Guard When Conflict Arises With Partner/Investor. Like any relationship, one with a partner or investor has its ups and downs and can unexpectedly come to an end. Having a well documented relationship that plans ahead for the “what ifs” that inevitably arise will better enable a business owner to continue to operate despite the termination or change of one of these relationships.

Not Negotiating Commercial Leases. Most business owners view the search for a commercial space as positive as a trip to the dentist. Don’t forget that it is still a renter’s market. Negotiate.

Failing To Plan For Collection Matters. Cash flow problems can kill the best businesses. Owners are wise to ensure their transactions are well documented and establish a plan for taking non-paying customers to small claims court or for working with a collection agency.

By taking steps to avoid, or at least plan for these legal pitfalls, women business owners can continue to blaze the trail ahead.

No comments:

Post a Comment