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2 min read

Failure to Obtain a Seller's Permit (Rel)

By Chris Daming, J.D., LL.M. on January 16 2018

What does this mean?

This is a permit that allows you to collect and pay sales tax.

Does this apply to me?

If you are in the business of selling to and from states that collect sales tax, then probably. Note however that you will need to do this for several states where you have presence or “nexus.”

Why is making this mistake going to harm my business?

Without a seller’s permit, you won’t be able to collect sales tax where states require that you do. However, if the state won’t let you collect sales tax, you will still be liable to pay them. As a result, you actually be paying sales tax out of your own pocket.

Failure to pay sales tax on the other hand may result in fines and penalties, and sometimes even criminal prosecution.  Check out Avoidable Mistake 32 for more info on how to tell if you have nexus, and what happens if you fail to pay sales tax.

You could avoid this by:

Conducting a dedicated survey of of the sales tax rules of every state where you have transactions to see if you need to get a seller’s permit. You won’t need to in states that don’t impose sales tax and in those where you don’t have nexus.


Example:

Will sells novelty hats online. He organized his company in Delaware because he heard that there is no sales tax there. But his goods ship from San Francisco, where his office and warehouse is.

Will created a viral video about why he decided to start selling his hats, and the company became very popular, particularly in San Francisco and entrepreneurs in Silicon Valley.

He was a bit overwhelmed with the sudden exponential increase in demand. To cope, he just focused on meeting every order as soon as possible. He made more than a million dollars from this sudden spike in interest over his hats. And since he was in Delaware, he didn’t collect sales tax on any of the sales.

A year later, he received notices from San Francisco and California telling him to pay sales taxes on the sales he made in San Francisco and California. Unfortunately, since he actually had a presence in those areas, he was supposed to collect and pay sales taxes for those sales. And what’s worse--since his customers had already paid and the sales were already complete, he couldn’t go back and tack the sales tax price onto their purchases. So he had to foot the bill himself, which put his company out of business since he operated on such low margins.

Will could’ve avoided this by having a better understanding of sales taxes and by collecting the sales taxes at the point of sale.

Topics: Running Your Business
2 min read

Why NDAs are important when dealing with other parties

By Chris Daming, J.D., LL.M. on January 16 2018

What does this mean?

If you’re sharing confidential information, you need to have make the receiver sign an NDA before sharing it. We cover everything about NDAs here, but it’s important to understand the distinction between confidential and not confidential.

Chances are your idea is not confidential. But if you have a business plan or process on how to execute your idea, that could be confidential.

And if you share confidential information (think: a customer list) with someone without getting their consent to keep it confidential, then you just lost all the value of what you shared.

In other words, if you shared that customer list with a possible buyer without an NDA, it’s no longer a trade secret, which makes it worth nothing.

Does it apply to me?

If you have confidential information and you’re sharing it, yes. If you don’t have confidential information or you’re not sharing it with anyone, then no.

Note: The sexy thing to say here is, “You just have an idea, and any investor or prospective buyer would balk if you told them they had to sign an NDA before you shared it with them. You’d get laughed out of the room!”

But - that’s only half true. If your information is part of your pitch that you’re doing to everyone, then of course that’s not confidential. But if your information is something actually valuable that a competitor could do something with, then NDAs make a lot more sense.

Why is making this mistake going to destroy my business?

The biggest reason is that you’ll lose all the value that the confidential information might’ve had. Unless your information is patented, odds are its protections and value stem from it being a trade secret. To be a trade secret, you have to (1) have information that’s actually confidential and worth something and (2) take steps to keep it confidential. If you share the information with even one person, that by itself could cause you to lose all the value that information had.

You could avoid all this by:

Making anyone who you’re sharing the information with sign an NDA. Download our NDA template which you can tailor to your specific needs, if you don’t already have one.

For more info you can check out our blog on the effects of failure to protect confidential info.


Example:

Will hired a contractor to manage his social media accounts for his online business. They didn’t sign any contracts, and the contractor had access to Will’s company’s Google Drive, which contained all their contact information.

The contractor disappeared and Will found out months later that the contractor got an offer to work with a competitor who created a similar product as Will’s. Will knew that the contractor had stolen all Will’s confidential information, including his customer list, because he saw the similarities in the products and he found out that the competitor was stealing Will’s customers.

Will would have little recourse here because the “confidential information” wasn’t confidential if it was shared with someone who didn’t sign an NDA. This means that the confidential information wouldn't be a trade secret because to be a trade secret, one of the requirements is that your information is “confidential.” So technically the contractor wasn’t stealing anything.

Topics: Running Your Business
1 min read

Why do I need an EIN?

By Chris Daming, J.D., LL.M. on January 16 2018

What does this mean?

An EIN is your “Employer Identification Number.” It’s how the IRS identifies your company. What “failure to get one” means is obvious, but filling it out incorrectly means if you elect the wrong tax status on the form.

Does this apply to me?

Probably. While having employees, partners, or being a corporation would make you need one, banks want it even if you’re a sole proprietor -- so almost always, “yes,” it’ll apply to you.

How can this mistake be hurting my business?

Without an EIN, it could result in tax filing problems and penalties and interest on your tax obligation.

You could avoid this by:

Getting an EIN. It takes 5 minutes and you can get it free on the IRS website. Here’s the link.


Example:

Will set up his LLC, Salesly, but never got an EIN. WIthout the EIN, he wasn’t able to open a bank account. The bank attendant told him it took less than 5 minutes to do. Will went home and went to the IRS website and was able to get his EIN in less than 5 minutes, which he needed for the bank account and when his clients sent him W-9s because the clients had paid him money.

Topics: Running Your Business
2 min read

Why are Corporate Formalities Important?

By Chris Daming, J.D., LL.M. on January 16 2018

What does this mean?

The most common corporate formalities are

  1. Annual reports
  2. Records and minutes of annual meetings
  3. Records of votings, meetings and resolutions where the board makes decisions

They’re like a paper trail of your business’s decision-making process. Think of it it being like accountability for your business - it shows how the company was managed.

Does this apply to me?

If you are organized or registered in some way as a business, then yes. States vary on their requirements, and often LLCs aren’t required to maintain corporate formalities. However, they’re smart for everyone to do to avoid reasons like the one noted below.

Why is making this mistake going to hurt my business?

If you fail to comply with these formalities, the state can just disregard whatever entity or identity you have set up. This means the owner or owners of the company will be directly liable for whatever the company owes. So you’ll lose whatever protections you thought you had.

Not only this, a more common problem is when people make a decision that blows up in the worst way and one or more people later say they never agreed to that decision. Imagine you have 10 shareholders and the majority approve a decision to lease a space or hire a controversial employee. And the decision ultimately costs the company a lot of money.

This could be compounded by some of those shareholders later saying they never actually agreed to the decision and trying to sue the top shareholders for a breach of fiduciary duty of care--arguing that it was reckless to make that decision. This is why resolutions and minutes matter--their proof for when you need it, like in situations like this.

Finally, if you’re ever looking for investors, they’ll want to see a good paper record of the decisions you’ve been making. This can only help.

You can avoid these problems by:

You can avoid all that if you just do the paperwork. It’s not an everyday thing, some of them are even one-off things. Check out our checklists on Steps required after forming your LLC or Corporation, it also includes other things you need to take care of apart from these corporate formalities.


Example

Will sets up a Salesly, LLC with his partners, Chet and Byron. A few months into the company, they all unanimously agreed over drinks to hire a controversial marketing firm to promote their product. Nothing was in writing.

The marketing firm was a bit too controversial and ran fraudulent ads promoting Salesly overpromising everything and Salesly couldn’t deliver. Salesly was sued in a class action for fraud and Chet and “Byron the Rat,” as Will calls him now, conspired to say they never agreed to hire the marketing firm. Instead, Chet and Byron tried saying Will made that decision on his own and sued Will as well for breach of fiduciary duty of care for making such a poor decision. Will’s argument was that they all unanimously agreed but the court believed Chet and Byron more because it was a 2 against 1 and 2 people are easier to believe.

Will could’ve prevented all this by following corporate formalities and documenting this decision in a resolution.

Topics: Running Your Business
10 min read

Why Using Google for Legal Problems Will Kill Your Business

By Chris Daming, J.D., LL.M. on January 1 2018

Imagine yourself a half mile off the coast of Southern California. You want to go snorkeling, and you’re about to jump off a boat into the Pacific Ocean. You were visiting this area and did some quick research on best places to snorkel and found this lovely location as a top choice.


You can see crystal clear water and bright blue, green, and red coral beneath you. And you’re pumped to have your mind blown swimming with sea lions, sea turtles, and tropical fish you read about.


Before you jump in, let me ask you this.


What if you knew ahead of time there was an electrical short-circuit at a nearby oil rig that happened the day before? And that if you jumped in, you’d be electrocuted and eventually drown?


Of course you’d change your mind. But that’s kind of silly because how could you possibly know there was a short-circuit nearby?


You wouldn’t. Here’s why. No one would think to research something like that before going snorkeling. If you’re looking for snorkeling, you’re simply searching for a place with pleasant scenery.


You’re not going to think to look for information to confirm whether there are dangerous things in the area that could harm you.


You might see if there are sharks in the area because everyone knows about the dangers of sharks. But, there will always be other possible dangers--like jellyfish or other harmful sea creatures, oil spills, etc.--that you won’t research about ahead of time. And the reason is simple:


You’ll never look up what you don’t know you don’t know--what you never knew to search for.


This is why Google can kill your business.


But first, one major caveat: Google is really an INCREDIBLE resource. That’s Captain Obvious stuff, right there. Without Google, you wouldn’t have known where to go for the best snorkeling site in California!


And not only that -- Google is a great LEGAL resource. If you know what you’re looking for, Google can save you a ton of money vs. hiring an attorney or paying $$$ for an online contract template you could find for free with a Google search.


But putting aside the joys of Google, there are three problems Google doesn’t solve that will kill your business.

The 3 Problems That Cause Google to Kill Your Business


The problems are that:

  1. You have to know about “it.”
  2. You have to know the “why.”
  3. You have to know the pain of not following the “why.”

Google doesn’t address any of those problems. Instead, it creates a false sense of security that consistently destroys thousands of businesses each year that make avoidable legal mistakes.


Let’s start with the first problem.


1. You have to know about “it.”

The “it” is the problem itself. You have to know about the problem.


If you’re going to know you shouldn’t jump in the ocean, you first need to know there’s a problem--there’s an electrical current nearby.


In our example, you didn’t know there’s an electrical current nearby because you “didn’t know what you didn’t know.” You didn’t know you should’ve researched that issue ahead of time.


Of course, if you knew to check whether there were electrical currents in the area, Google would’ve been great! You would’ve gotten the information you needed and avoided that deadly snorkeling trip without a doubt.


But how does that apply to the legal world?


Here’s how. Let’s say you wanted to start a business in California. You might Google “starting a business in California” or something similar.

You’d do this because you need to get some information about starting a business, and you already know there are some legal formalities required.


If you did that search, here’s the top article you’d get:

 

From this, you’d know that you need to select a business structure, file for your tax IDs, and look into filing for licenses and permits.


If you continued to read other articles, chances are you’d find advice about hiring employees and contractors.


And if you were aware of other legal issues you needed to check out, then great. But most early stage companies don’t. It’s because if you “don’t know what you don’t know,” you wouldn’t have even thought to research these issues. If you never had encountered a problem before, chances are you wouldn’t know to look it up.


And no matter how much time you have to search, there’s always going to be lots of common legal problems or issues that new companies have that won’t show up in a general search for “starting a business in California.”


It’s like in our ocean example. You knew to search for the best snorkeling locations. And you might’ve known to look up “shark attacks” because everyone knows about that problem.


But, “electrical currents?” No way. Literally the only person that might look that up is someone who’d been electrocuted in a similar scenario. That’s it.


So what happens for the legal problems you don’t know to research when starting your business? Here’s a fraction of some of those issues:

  1. Failure to assign your IP to your company;
  2. Failure to require an NDA when sharing confidential information or otherwise protect it in sufficient ways to preserve the information’s trade secret status;
  3. Failure to do a trademark search when picking your business name;
  4. Failure to get the right terms of use and privacy policy on your website;
  5. Failure to require a written contract for contractors; and
  6. Failure to have the right type of operating agreement or bylaws…

And that’s just a sample. We put together a list of over 125 other common mistakes that entrepreneurs made, and there are many more than that.


So, this is the first problem. And it’s a major one. Most entrepreneurs just simply don’t know about “it” -- “it” being the dozens of legal problems or legal issues they need to take care of.


This is especially awful because it’s preventable. For almost all those problems (more than 80%), it’s stuff you can DIY. As long as you know you need to do it and have a little guidance.


But, knowing the “it” is only part of the equation for avoiding the problems Google presents.

2. You have to know the “why”--“why it’s a problem”


The “why” is just as important. Let’s say you knew there was an electrical current near your snorkeling location from an article you read. You didn’t think anything of it, though, because it’s not like you’re going to touch the oil rig! You’re over 50 feet away from the rig.


That’s where the “why” comes in. Even if you knew there was an electrical current, without knowing why the electrical current is a problem, you wouldn’t know that it’s a problem that electricity in nearby water could harm you.


The “why” is that water, especially salt water, conducts electricity.


It’s similar to someone telling you that you need to have a written agreement with contractors. You might think that’s only necessary when you don’t really know the person.


Like, let’s say you’re having a friend design your website and logo. But, he’s your friend, and written agreements aren’t needed when you guys agree on a price and agree that you’ll both be fair.


But if you knew the “why” behind needing a written contract, it’d change things. One reason: your friend will own the design of your website and logo under copyright law unless you have a written agreement indicating otherwise.


Also, what happens if your friend thought he was just designing the home page? Not the blog, the FAQ, contact page, or anything else? You just said “website,” after all. What if that causes a disagreement about how much work he signed up to do.

Not having your agreement in writing just causes a lot of headaches for you because you haven’t spelled out the terms of the expected deliverables.


If you knew the “why” as to what you should do, or “why” something is a problem, you’d be a lot more likely to do it.

 

3. You have to know the “pain caused by not following the why.”


It’s the “pain of not following the why” that usually resonates best with entrepreneurs.


Back to the ocean -- and this example is a little more ridiculous, but, bear with me….


So, you know that the electrical current is in the water. You also know that the electricity could sting.


But, you don’t know the extent of the pain.


In fact, all you remember is touching an electric fence when you were a kid to test if it worked (true story from the author). And that it was a sting but no big deal.


So, you look it up on Google and you see that “yeah, if you’re within a certain amount of feet of the electrical current, it could be bad,” but after your research you decide you’re far enough away. So you touch the water just to test, and it doesn’t really sting.


So it’s a “once in lifetime thing,” you think -- you’re only out in this area once, and may as well just suck up a small, temporary sting (if any) to see all the beautiful wildlife in the sea beneath you.


What you didn’t know was that electricity could cause you to drown. It’s not necessarily going to “electrocute” you in the way everyone sees in the movies. Instead, the electrical current paralyzes your muscles, causing you to be incapable of swimming, which causes drowning.


You knew the “it” - electrical current.


You know the “why” - electrical current in water could cause electricity.


But you didn’t know the “true pain” - that it’s not from electricity, which you just tested, but from drowning.


That’s what happens in the legal world.


Like in our last example about having a written agreement with contractors. You now know that if you don’t have a written agreement, then your friend could own the design of your website and company logo. And you know that you need to specify the deliverables you’re expecting from him.


But you also need to know the pain.


What if your company takes off right when your logo is getting a lot of recognition. So you try to register your trademark before it’s too late but find out a competitor has purchased the rights to your logo from your friend.


You’d still be able to use it wherever you were doing business, but that’s it. If you wanted your business to expand, you’d have to switch logos and lose any goodwill that came with it.


Losing goodwill is a real pain.


You’ll lose customers. Your reputation could be tainted if the competitor develops a bad reputation (people will equate his mistakes to your company). Your advertising dollars won’t yield the return it used to because you’re essentially splitting the profits with your competitor.


Same thing with the design of your website--he can sell the rights to that. Then suddenly your website doesn’t have the same unique feel it used to have.


And this is just a fraction of the problems you might experience with a contractor. And contractor problems are just a fraction of the dozens, and sometimes hundreds of avoidable legal mistakes companies are making right now.


Now, bringing this all together...


So why does Google kill businesses?

It’s because people rely almost solely on a resource that can’t possibly know to provide search results for a search that never existed.


People rely on Google, which prevents them from knowing

  1. it (the problem),
  2. why (why it’s a problem), and
  3. the pain they’d incur from not understanding “why” the problem could hurt their business…


It’s because you can’t know what you never searched for.


But Google is better than nothing, right?


Sometimes, except when it’s not. If the choice is “nothing,” (that is, “no Google”) you at least still know you might be overlooking something. You might have a lingering anxiety thinking you probably should consult some professional to confirm you’re doing everything right.


This was like the pre-Google era. Then, business owners used to seek out one-on-one advice from attorneys, small business centers, mentors, etc. who were able to catch those “don’t know you don’t know” issues.


Now, at least sometimes, a Google search can make you think you have things figured out. Google has helped allay some of the anxiety people have about knowing they were probably overlooking something critical. And this could create a false sense of security.


But truly the worst part of relying on Google to solve legal problems is this: you now don’t usually research something until you know it’s a problem that needs to be solved.

 

With most other issues in a business, that’s OKAY! You might miss out on some early revenue, but waiting to be reactive to a problem usually won’t destroy the business.


That’s not the case with legal issues, though. You have to know about the possible problem before it happens. Because once it happens, especially with early stage companies that can be ruined by any minor setback, it’s too late.


So, Google is a plus for businesses in many ways. Now, entrepreneurs feel more confident about solving their own legal problems--and that’s GREAT! Because it opens the door for many more entrepreneurs to pursue starting businesses in a way that wasn’t possible before.


Just make sure you know what you’re doing before you jump in the water.

(NOTE: Learn about 62 other common avoidable mistakes you could be making so you can solve them on your own with your free Complete Legal Guide to Running Your Company).

Topics: Running Your Business