As a solicitor who defends directors when they get into problems with liquidators, fellow directors and shareholders, suppliers and customers, as well as government bodies, I am constantly struck about how most of these problems could have been avoided if directors hadn’t made a few basic mistakes.
So here’s my list of 6 mistakes that I’ve seen since the beginning of the year that have led to real problems, heartache and unforeseen expense for my director clients.
- Going into business with a partner, forming a limited company and each having 50% of the shares. It sounds fair but will lead to deadlock if you ever disagree over something serious where the company can’t make a decision. It can easily lead to either the collapse of the company, or being stuck in a company you can’t get out of. The solution: get a well-drafted shareholders’ agreement in place, and before you fall out.
- Paying yourself from the company without the correct paperwork in place (such as a service agreement or shareholders’ resolution). This can lead to you having to pay it all back.
- Paying yourself through an overdrawn loan account with the idea that you can declare these payments as dividends at the year-end. It’s unlawful and, if not done right, can lead to you having to pay it all back and paying extra tax too. Speak to your accountant and don’t accept his advice if he says that everyone’s doing it so you’ll be OK.
- Trying to avoid the burden of taking on employees by using self-employed contractors instead. Unless you’ve got a well-drafted contract in place, you could end up with them taking you customers, your best ideas and you paying extra tax too. The solution: get a good contractor agreement in place.
- Copying standard terms and conditions from other firms or from the web. They probably won’t fit your particular situation, could well be out-of-date (the law does change) and often parts of the wording contradict other parts. This can lead to you being involved in expensive litigation if you ever have a dispute with your customer. The solution: make sure you get your terms and conditions drafted by a solicitor who understands your business and how it works, and remember to get them reviewed every couple of years.
- Conducting business through email without having a proper email signature saying ‘[your name] on behalf of [your company name]’. These days, it’s common to reach agreements with customers and suppliers without them ever seeing your letterheads. The risk is that you can find yourself personally liable if things go wrong.