Ignoring Details Can Be Costly

Posted: October 12, 1998 by Sutton Landry in Operations

[Editor’s Note: This was the inaugural column published in the Cincinnati Post!]

Entrepreneurs aren’t known for their patience or for their attention to pesky details. They are known for their abilities to recognize market opportunities, muster resources and act quickly to take advantage of those opportunities. As a result, many new businesses are launched with little attention to the tedious but important formalities required by all levels of government.

If you are one of these entrepreneurs, you need to put your house in order, right now. The longer you wait, the more difficulties you are likely to encounter.

How difficult will it be to do this? That depends on such things as what state you are in, what name you choose, what type of operating entity you select, whether you have employees, whether you need to collect sales tax, whether you are leasing space for your business, whether you have investors or partners, whether you have borrowed money, and how long you have been conducting business outside the law. Let’s look at two examples.

Meet Jane Jones, a college student in the Greater Cincinnati area living at home in Anderson Township, Ohio. Her parents bought her a computer when she was 6 and she has become quite the cyber expert. A family friend approaches Jane about designing a Web site for his business, they negotiate a price and delivery schedule, and Jane starts to work. She is now in business for herself. She decides to take a basic approach to her business name and chooses ”Jane Jones, Web Designer.” In this specific case, she doesn’t need to do anything else except pay her taxes at year-end as a sole proprietor.

If we move Jane and her business across the river to Kentucky, to Florence for example, she is going to need at least two business or occupational licenses, one from the city of Florence and one from Boone County. In either state, if Jane changes the name of her business to ”Ether Graphics,” she must register with the secretary of state for using a fictitious or assumed name and pay an annual fee.

In a case like Jane’s, involving a home-based sole proprietorship that sells services, it is very easy to catch up on the few legal requirements that exist. In other cases, it is much more difficult.

Jane’s cousin Jeff has decided to capitalize on the growth of the Northern Kentucky riverfront by opening a restaurant.

With investment dollars from two close friends, personal savings, and a bank loan, Jeff signs a lease, buys equipment, and contracts to have the space remodeled. Two days into the remodeling, a local building inspector notices the activity and stops to see what is going on. He asks to see a building permit and discovers that one has not been issued. He asks the contractors for their business license and learns that they don’t have one. (They are friends of Jeff’s who are moonlighting and getting paid ”under the table” in cash coming from Jeff’s personal checking account, where he has deposited all the funds for the business venture.)

The building inspector orders everyone to stop working and escorts Jeff to city hall, where he discovers the building he has leased isn’t even zoned for a restaurant! Needless to say, this is an incredible mess.

In a more complex case like Jeff’s, it is best to attend to all the necessary details up front. Trying to sort them out later is a nightmare.

Here is what should have happened: Jeff and his friends should have hired a licensed attorney to create either a corporation or a limited liability company as a vehicle to efficiently share ownership and limit personal liability. That entity should have secured a federal tax ID number (EIN) and then opened a business bank account, an appropriate and legally required vehicle for managing the firm’s funds.

Before signing the lease, Jeff, acting as an agent of the firm, should have checked with the zoning department to make sure he could operate a restaurant there.

The ultimate responsibility lies with Jeff, so he needs to make sure that the contractor is licensed, carries workers’ compensation, and has secured the necessary permits for the job. Before opening for business, Jeff will also need to secure a variety of other local and state licenses and contract for workers’ compensation.

How do you know what licenses you need and what steps you should follow? Unfortunately, there is no ”one size fits all” list, but there is help.

Your best starting point is one of the following sources: a licensed Ohio or Kentucky attorney specializing in business, a certified public accountant, or your nearest Small Business Development Center. Any of these resources can explain what you need to do and help you design a checklist for your situation.

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