What Are the Most Common Legal Pitfalls for Businesses?

It is important to have regular meetings of the directors, or if it’s for-profit, of the shareholders. It is important to record what important decisions you made. What are the salaries? What are the fringe benefits? Did you loan money to the corporation, or did the organization loan money to you? This is important for several reasons. One, if a creditor comes by and sues you, they’re going to ask did you mix the organization and your personal assets. That’s a big problem. You have to keep them separate. If you don’t, the creditor can actually go after your personally sometimes. The whole point of incorporating is to prevent that from happening. That’s a very common problem.

People, especially for-profit, don’t keep their corporate records up to date, and I regularly have to call them and bug them, and say okay, what happened, and then we write it all out. They don’t have good bylaws. Very often, I come across an organization that has bylaws that are two or three pages long. There’s a lot missing if they’re only two or three pages. That typically will get an organization into trouble because the bylaws are the rules by which you run the organization on a day-to-day basis. It lays out the responsibilities of the directors. It lays out the responsibilities of the officers. They often don’t pay attention to those rules, and that’s what – again, that can help avoid problems.

You’d be shocked, also, how often both for-profit and not-for-profit organizations don’t file their annual reports with the Secretary of State’s office. If you don’t file, then the Secretary of State will dissolve your corporation, and you will lose the protections while you’re dissolved. If you’re dissolved for a long period of time – I’ve had two of them that have been involuntarily dissolved for 32 years. One of them actually put themselves back together for a variety of reasons, but the other one hasn’t. I won’t of course identify them, but you can get yourself into serious trouble if you don’t keep those filings up to date.

On the not-for-profit side, I’ve had a lot of organizations that don’t file the Form 990, which is the form not-for-profits have to file every year. If you don’t file it for three years in a row, you lose your tax exempt status and you get to start over again. That’s pretty expensive. It’s a lot cheaper to just do the return than it is to go back, and start over, and file all the returns. The organization that was dissolved 32 years only had to file four years worth of returns, but sometimes you have to go back and file as many as 8 or 10, and that’s very expensive. Going back to do it, catch up, can cost twice as much as doing it as you go forward. Again, prevention is a lot cheaper than trying to go back and figure out what happened 8 or 10 years ago.