There’s no doubt that Bill Wiseacre has had a rough start getting his new business off the ground. With his recent run-in with the Google legal team regarding his purchase of GoogleComputerConsulting.com and the discovery that his web developer, Slightly Shady, had created his site so it looked just like all its other clients’ (including the text in some cases!), Bill no doubt needed a break.
After much consideration, Bill decided to call his business “Uh Oh Enterprises,” inspired by his rocky start. Making sure not to repeat the same mistake twice, Bill checked the United States Patent & Trademark Office (PTO) website to confirm that no one would be able to claim rights to the name. He was pleased to learn no one else had. It was time to get rolling. For real this time.
Getting up and running seemed pretty easy to Bill. He filed for a trade name in Maryland and found some “good” forms on the Internet to use for his client agreements. Now he just had to wait for the clients to beat a path to his door!
That, however, proved to be an issue. The phone wasn’t ringing off the hook and there was no worn out path leading to his front door. Thus, Bill began to struggle with cashflow. After years of receiving a regular paycheck Bill wasn’t used to managing his own accounting system where he not only had to worry about his personal bills, but also his (mounting) business expenses.
As a result and unfortunately for him, Bill wasn’t able to pay his new web developer, Strictly Business Web Design (“Strictly Business”), for the design and build of UhOhEnterprises.com on time. He wasn’t particularly concerned since Strictly Business was owned by a friend of a friend, so he felt like he had a bit of leeway. However, that friend of a friend also has a business to operate and Strictly Business’ cashflow model relies upon it getting paid promptly. He knew he’d pay them when he starting making money, which he repeatedly told them.
Strictly Business wasn’t willing to wait. Strictly Business sued Bill for the total amount of the project, an additional 50% of the design and development cost because payment had been so late, and legal fees (which the web design agreement provided for). Bill panicked and called his friend for help. Unfortunately, all that did was cause strain on both the relationship between Bill and his friend and Bill’s friend and the owner of Strictly Business.
Bill, once again found himself with a mess on his hands. He barely had enough personal savings to pay his personal expenses for the next month or two. He certainly didn’t have enough money to pay the original bill let alone all of the additional costs. In fact, since he was a consulting company of one, his business didn’t even have that much money in total assets. Adding to his troubles is the fact that Bill never established Uh Oh Enterprises as a legal entity – in an effort to save money, he had operated as a sole proprietor. So, since there was no legal entity to shield Bill, he was being sued personally.
The Momentum Law Group Perspective
Choosing the most advantageous type of legal entity for a business is not easy for someone who hasn’t been through it before. However, if he had taken the time to do his due diligence or if he’d obtained advice from someone with experience in such issues, Bill would have learned about the ramifications of being a sole proprietorship and likely would have selected a different type of entity that would have (likely) allowed him to shelter/protect his personal assets.
Bill should have worked with an accountant to do a cashflow projection and they could have created a budget taking into consideration income and expenses. Had he done this, he could have prepared better, thereby potentially avoiding all of the strain he placed on the personal relationships by and among himself, his friend and the owner of Strictly Business.
What would you have done in Bill’s situation?
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