7 SINS COMMITTED WHILE RUNNING A BUSINESS AND MAKING INVESTMENTS
It is obvious that in business – as in life – it is best to learn from someone else’s mistakes, although in practice it is rarely possible. After all, it is worth trying, because it often turns out that many failures could have been avoided if we had analysed the analogous situation of another entrepreneur in advance and attentively (or more precisely the reasons for their failure).
In our work, we observe on a daily basis the tendency to duplicate the same – erroneous! – models by entrepreneurs, both running small businesses and large-scale operations. What kind of mistakes are we talking about? At first glance, they may seem unbelievable, banal, even obvious, and in reality, they turn into a plague…
1. Accounting acting as a Legal Department
It is impossible to count how often we encounter a situation when an accountant in a given structure deals not only with the issues from their field, but (in the opinion of the entrepreneur) they are also supposed to be an expert on taxes and, of course, legal matters. Numerous companies function in such arrangement on the market, ranging from businesses conducted in the form of sole proprietorship, through smaller entities (partnerships or limited liability companies) to entities with far-reaching impact and economic potential. Why is this the case? That’s the issue we still cannot understand.
When conducting audits at clients’ premises, we can see what tasks are delegated to the “accounting department”, which in fact often turns out to be… yes – one person. All sorts of the so-called “paperwork” (with an emphasis on “all”) related to the current operations land on their desk, completely disregarding the fact that accounting does not specialize in fiscal matters (obligations, notifications, reliefs, exemptions) nor in legal matters.
It seems obvious that an accountant cannot be required to be proficient (or even knowledgeable) in terms of certain provisions or exemptions, performing a risk analysis, choosing the safest – in legal and tax terms – solutions or verifying compliance with statutory requirements. Why? Generally, for the simple reason that it ends up in one big mess of the documentation, failure to comply with registration obligations on time or failure to comply with these obligations at all, too hasty (read – not preceded by analysis) investment/business decision. And there’s no need to convince anyone that all of these result in financial or image losses.
2. Unreliable cash flow planning
How should we understand this? Avoidance of performing accurate calculations of the tax burden and costs to be incurred in a given accounting period. To put it in plain English – the issue here is simply the lack of the client’s awareness of the funds which they can actually dispose of, that is, what amount from the client’s account can actually be used by them.
In practice, there are situations where an entrepreneur contributes a specific financial envelope, and then it turns out that they did not take into account the burdens by which this envelope ought to be reduced. It is unnecessary to persuade anyone that this generates huge difficulties in organizing settlements and the cash flows already disbursed. Interestingly, such situations are not incidental at all. Every entrepreneur running a business will at some point find that cash flow is the basis of business and planning the cash flow cycle (including tax burdens) is the foundation of a healthy business.
3. Excessive concentration of decision-making
A very common phenomenon consisting in an overly strict formulation of provisions in the articles of association or partnership agreement regarding the concentration of decision-making in the hands of a given person/body. This is manifested by the dependence of most matters (frequently trivial ones too) on whether a specific person/persons take the stance or give their consent. And in writing, on top of all that! In such an arrangement – when the majority of undertakings must be preceded by a written approval, e.g., of the management board, or when the agenda requiring the adoption of a resolution by the shareholders is excessively extended – it is impossible to ensure proper and rational control of business operations.
Despite the intention to maintain effective supervision over the business, its functioning is often blocked as a result of such activities, leading to an effect being opposite to the intended one. The introduction of excessive and, let us face it, frequently unnecessary, corporate requirements in almost all types of cases conducted by a given entity, often ends up in a blockade of activity or suspension of investments. And so, instead of seeing the company develop, we just face a stalemate.
4. Disregard for registration obligations
We come to a seemingly obvious thread, i.e., a situation when we make some changes related to the company’s operations. As is well-known from practice, these may refer to, for example, the shareholding structure, the amount of the share capital or the composition of the governing bodies. And they do not have to be all that complicated. So, let us skip to the stage where the minutes of the shareholders’ meeting are prepared, resolutions adopted, the form of actions retained – it would seem that everything has already been covered without the need to involve lawyers from external law firms. Work done, costs saved, but after some time it turns out that… no one has notified the National Court Register of this change.
At this point, I ignore the fact that the legislator provides for a deadline of 7 days from the date of the change (performing an action resulting in such a change) for the notification of changes to the register of entrepreneurs. In practice, compliance with this deadline varies. However, the real problem arises when a resolution has been adopted, e.g., on the amendment of the articles of association (in the form of a notarial deed – remember that it is a binding obligation), but this change has not been notified within 6 months since the date of its adoption. What to do in that situation? After all, the deadline is stringent, so failure to meet it causes the resolution to be nullified! Yes – it is deemed to be… non-existent. This is nothing more than losing the possibility to register this change on the basis of the adopted resolution, and in order to meet the registration requirements it is necessary to adopt the resolution anew, which, as we know, is also connected with the necessity of bearing the notarial costs yet again. This is not the end of the “surprises” which entrepreneurs may stumble upon, as failure to comply with registration obligations carries the risk of compulsory proceedings being initiated by the registration court and may even lead to imposing a fine.
Read also: Beliefs about lawyers versus the realities of business
5. Insufficient attention to compliance with formal requirements
Let us not deceive ourselves – in business, when a great opportunity arises, the temptation to act quickly overshadows the need to comply with formal and legal requirements and, as a rule, the so-called “red lights” that should be lit before striking a deal are ignored. When negotiations with a counterparty go exceptionally smoothly or an investor suddenly appears – someone for whom the client has been waiting for a long time – enthusiasm makes the client want to finalise the transaction and obtain the funds as quickly as possible, while fitting the arrangements within a legal framework seems an unnecessary delay.
In order to skip the legal consultation stage, there have been many contracts drawn hastily “on the spur of the moment” and then executed. It was only after some time that they turned out to be, for various reasons, invalid or did not safeguard key arrangements. For example (horror of horrors), the mandatory written form required for the validity of transferring author’s economic rights to the work(s) in question or the notarial authentication of the signatures affixed to a contract for the sale of shares in a limited liability company are forgotten. We have also had cases of share issues rendered invalid due to a misunderstanding of the possibility of increasing the share capital without amending the articles of association (and carrying it out despite the fact that this was not possible in a given factual state) or of making a declaration on taking up shares and joining the company without adhering to the format of a notarised deed.
Mandatory corporate approvals for certain share transactions are also forgotten, as well as the fact that provisions in the company’s articles of association or corporate charter may shape certain requirements of the Commercial Companies Code differently. We should remember that using universal templates found on the Internet without comparing them with the structure of a given entity and its internal regulations may do way more harm than good.
6. Overregulation i.e., excessive regulating of internal documents
This mistake is often the result of using available templates without considering whether the solutions they provide are appropriate to our situation and whether they will make our life miserable or hamper the business. The unjustified introduction of special privileges into the company’s articles of association or the corporate charter or making the conduct of almost any action conditional on its prior approval by the governing body, can, in practice, jam up the structure wholesale. Not to mention the level of irritation felt by e.g., President of the Management Board, on whose countersignature most (even minor) decisions ☺ depend. This often leads to a horrific mess and blocking decision-making processes due to constraints introduced to internal documents without due consideration.
Analogous remarks will apply to reserving the unanimity of the shareholders for every action taken – sooner or later a deadlock in the decision-making process is guaranteed. And not only that, because such exaggerated internal formalism delays settling a deal or even results in an investment opportunity slipping out of our grip. Entrepreneurs seem to forget that well-ordered corporate governance does not necessarily equate a proliferation of restrictions and stringent requirements. It should be individualised, tailored to the company’s profile, the type of operational activity and then you can actually reduce the risk of business paralysis.
7. Forgetting that contracts are executed for bad times
In business, while striking a deal, it is, of course, important to bear in mind the benefits it brings and the rate of investment growth. It often requires demonstrating rapid responsiveness, searching for opportunities and taking advantage of them, as well as the proverbial “keeping your finger on the pulse”, but… Exactly – BUT only with simultaneous vigilance! Vigilance is to be understood here as the ability to anticipate unfavourable scenarios which may occur. This translates into executing contracts with counterparties.
And here we encounter some dissonance – clients (not all, but a fair share!), having the deal almost landed, want to sign the contract as soon as possible, treating it a bit like an insignificant piece of paper which requires signature because that is the way things are done. They do not think that this “piece of paper” will be of great importance if anything goes contrary to their plans and designs. For this very reason, it should be formulated precisely, taking into account the nature of the cooperation/transaction/relationship between the parties, and, above all, it should define the mechanisms protecting the client in the event that the other party fails to meet the agreed conditions. Although we emphasise this at every turn – in our professional life we are notoriously confronted with cases in which a “quick-fix” contract is simply the above-mentioned piece of paper – drawn up in such a way that it might as well not exist at all, because from the point of view of securing the client’s interests it would turn out to be just as much. Unfortunately.
Summary
As you can see – the most common mistakes made by entrepreneurs seem to be relatively obvious and can certainly be avoided with ease. We encourage you to analyse them in the context of your business and implement these lessons in advance to avoid the situations described. We guarantee that the risk of unnecessary costs and upsets (which arise as a result of these mistakes) – will be significantly reduced. In business, as in life, prevention costs less than the subsequent treatment of the effects.
Blog edited by dr Anna Maria Panasiuk
Founder and Managing Partner of Panasiuk & Partners, with many years of expertise in wealth management.
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